Advanced Cost Accounting I Cag 101 Yashwantrao Chavan Maharashtra Open University

CAG 101
ADVANCED COST ACCOUNTING -

I
YASHWANTRAO CHAVAN MAHARASHTRAOPEN UNIVERSITY

Dnyangangotri, Near Gangapur Dam, Nashik 422 222, Msharashtra
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YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
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Director (I/C), School of Commerce & Management : Dr. Prakash Deshmukh
State Level Advisory Committee
Dr. Pandit Palande Dr. Suhas Mahajan Dr. V. V.
Hon. Vice Ex-Professor Morajkar Ex-
Chancellor Ness Wadia College of Professor
Dr. B. R. Ambedkar Commerce Pune B.Y.K. College,
University Muaaffarpur, Bihar Nashik
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B.Y.K. College, Ministry of Finance
Nashik New Delhi
Dr. A. G. Dr. Madhuri Sunil Deshpande Dr. Prakash Deshmukh

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Professor Swami Ramanand Teerth Marathwada School of Commerce &
Modern University, Nanded Management Y.C.M.O.U., Nashik
College,
Shivaji
Dr. Parag
Nagar,
Saraf Dr. S. V. Kuvalekar Dr. Surendra Patole
Pune
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Dist. AhmedNagar Associate Dean School of
(Training)(Finance ) Commerce &
National Institute of Bank Management
Management , Y.C.M.O.U., Nashik
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Y.C.M.O.U., Nashik
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CONTENTS
TOPIC 1 Introduction to Cost
UNIT 1 Accounting 1-26
1.0 IntroductionCost
1.1 Concepts
Unit Objectives 1.2 Cost Concepts 1.2.1 Cost 1.2.2 Costing 1.2.3 Cost
Accounting
1.2.4 Cost Accountancy 1.3 Limitations of Financial Accounting 1.4 Nature of Cost Accounting 1.5
Objectives of Cost Accounting 1.6 Advantages of Cost Accounting 1.7 Limitations of Cost Accounting 1.8
Difference between Financial Accounting and Cost Accounting 1.9 Cost Unit and Cost Centres 1.10
Summary 1.11 Key Terms 1.12 Questions & Exercises 1.13 Further Reading
UNIT 2 Elements of Cost 27-50
2.0 Introduction 2.1 Unit Objectives 2.2 Elements of cost 2.2.1 Material, Labour and Expenses 2.2.2
Material - direct and indirect 2.2.3 Labour - direct and indirect 2.2.4 Expenses - direct and indirect 2.3
Overheads and types of overheads 2.4 Items excluded form cost 2.5 Division of costs 2.6 Classification of
costs 2.7 Methods of cost classification 2.8 Summary 2.9 Key Terms 2.10 Questions 2.11 Further Reading
UNIT 3 Cost Sheets and Quotations 51-102
3.0 Introduction 3.1 Unit Objectives 3.2 Cost Sheet 3.2.1 Purpose of Cost sheet 3.2.2 Proforma of simple
cost sheet 3.2.3 Proforma of complex cost sheet 3.3 Summary list 3.4 Illustrations 3.5 Quotations and its
preparation 3.6 Illustrations on preparation of quotation 3.7 Summary 3.8 Key Terms 3.9 Questions and
Exercises 3.10 Further Reading
TOPIC 2 Material Costing

UNIT 4 Meaning of Material and Purchasing 103-
4.0 Introduction112
4.1 Unit Objective 4.2 Meaning of materials 4.3 Types of materials 4.4 Purchase of
materials 4.4.1 Decision of purchasing 4.4.2 Centralised and de-centralised purchasing 4.5 Purchase
Requisition 4.6 Selection of supplier 4.7 Placing order with the supplier 4.8 Summary 4.9 Key Terms 4.10
Questions 4.11 Further Reading
UNIT 5 Receipt and Storage of Materials 113-126
5.0 Introduction 5.1 Unit objective 5.2 Receipt of materials 5.2.1 Checking quantity and quality of
materials received 5.2.2 Documents connected with receipt and Verification of materials received 5.3
Storage of Materials 5.3.1 Location of store 5.3.2 Organisation of stores 5.3.3 Classification and codification
of materials 5.3.4 Bins and Bin Cards 5.3.5 Recording of materials in stores 5.4 Summary 5.5 Key Terms
5.6 Questions 5.7 Further Reading
UNIT 6 Control Over Materials in stores 127-158
6.0 Introduction 6.1 Unit Objective 6.2 Control over materials in stores 6.3 Fixation of stock levels 6.4
Economic Order Quantity (EOQ) 6.5 Stock taking 6.5.1 Methods of stock taking 6.6 Discrepancies and
treatment of discrepancies 6.7 Summary 6.8 Key Terms 6.9 Questions and exercises 6.10 Further Reading
UNIT 7 Issue of Materials 159-166

7.0 Introduction 7.1 Unit Objectives 7.2 Issue of materials 7.3 Procedure for issue of materials 7.4
Documents related to issue of materials 7.5 Care to be taken while issuing materials 7.6 Summary 7.7 Key
Terms 7.8 Questions 7.9 Further Reading
UNIT 8 Pricing of Material Issued 167-220
8.0 Introduction 8.1 Unit objectives 8.2 Pricing of materials issued 8.3 Methods used for pricing of issues
8.3.1 Cost price Methods 8.3.2 Average Price Methods 8.3.3 Notional Price Methods 8.4 Important
points related to materials costing control 8.5 Summary 8.6 Key Terms 8.7 Questions and exercises 8.8
Further Reading
TOPIC 3 Labour Costing

UNIT 9 Meaning and Types of Labour 221-242
9.0 Introduction 9.1 Unit Objectives 9.2 Meaning and Importance of labour 9.3 Types of labour 9.3.1
Direct Labour 9.3.2 Indirect Labour 9.3.3 Casual Labourers 9.3.4 Out Workers 9.3.5 Types of workers on
the basis of skill 9.4 Sections / departments dealing with labour activities 9.5 Labour turnover 9.5.1
Measurement of labour turnover 9.5.2 Causes of labour turnover 9.5.3 Cost of Labour turnover 9.5.4
Illustrations on labour turnover 9.6 Summary 9.7 Key Terms 9.8 Questions and Exercises 9.9 Further
Reading
UNIT 10 Time Keeping 243-252
10.0 Introduction 10.1 Unit objectives 10.2 Time keeping 10.2.1 Meaning and importance 10.2.2 Methods
of time keeping 10.3 Summary 10.4 Key Terms 10.5 Questions 10.6 Further Reading
UNIT 11 Time Booking 253-262
11.0 Introduction 11.1 Unit Objectives 11.2 Time Booking 11.2.1 Meaning and Necessity 11.2.2 Methods of
time booking 11.3 Summary 11.4 Key Terms 11.5 Questions 11.6 Further Reading
UNIT 12 Reconciliation of Time Kept and Time Booked 263-269
12.0 Introduction 12.1 Unit Objectives 12.2 Reconciliation of time kept and time booked 12.3 Idle time
and its types 12.4 Causes of idle time 12.5 Cost and treatment of idle time cost 12.6 Summary 12.7 Key
Terms 12.8 Questions 12.9 Further Reading
INTRODUCTION
This book of self - instructional material is based on the syllabus for the
subject Advanced Cost Accounting (M.Com : ACG 101). This book is written
after taking into consideration the revised syllabus prescribed for the M.Com
students of Yashwantrao Chavan Maharashtra Open University, Nashik from
June, 2015. We hope that the book will help the students in understanding the
theory as well as the practical part related to the topics included in the syllabus
for the subject.
The information provided in this book is given in easy language to enable

the students to understand the theorotical as well as practical problems related to
the various topics. We have kept in mind the fact that the students are not able
to have constant interaction with the subject teachers and sufficient illustrations
have been provided for the benefit of these students. While giving the
theoratical information at appropriate stages, we have provided charts and
figures to enable the students to understand and remember the information
easily.
The authors welcome any valuable suggestions made by the students and
teachers.
The authors and editors are greatful to the authorities of YCMOU

guidence and co-operation provided by them.
Editor Authors
TOPIC 1 Introduction to Cost
Accounting
UNIT 1 Cost Concepts
UNIT 2 Elements of Cost
UNIT 3 Cost Sheets and Quotations

UNIT 1 Cost Concepts Cost Concepts
Structure
1. Introduction
NOTES
2. Unit Objectives
3. Cost Concepts
1. Cost
2. Costing
3. Cost Accounting
4. Cost Accountancy
4. Limitations of Financial Accounting
5. Nature of Cost Accounting
6. Objectives of Cost Accounting
7. Advantages of Cost Accounting
8. Limitations of Cost Accounting
9. Difference between Financial Accounting and Cost Accounting
10. Cost Unit and Cost Centres
11. Summary
12. Key Terms
13. Questions & Exercises
14. Further Reading
1.0 Introduction
Business enterprises all over the world are functioning in a highly
competitive environment with high degree of risk. They are required to function
more efficiently and more effectively to offer their products at comparatively
lower prices. This is necessary for achieving the objective of maximisation of
profit. Amount of profit earned depends upon the price of the product and
the cost incurred for manufacturing and selling of the product. Financial
Accounting was not able to help the management in obtaining information and
using it for decision-making, efficient management and for controlling cost.
Therefore, a new branch of accounting, viz. cost accounting come into
existence. In this unit, information is provided about some basic terms used in
costing and necessity for cost Accounting.
A
a
Cost Concepts
1.1 Unit
Objectives
After studying the information given in this unit, you should be able
to understand :
• Concepts of cost, costing, cost Accounting and cost Accountancy;

NOTES
• Limitations of Financial Accounting;
• Nature and objectives of Cost Accounting;
• Advantages and limitations of Cost Accounting; and
• Meaning of cost unit and cost centre.
1.2 COST Concept

It is necessary to understand some of the important Cost Concepts used
very often in the business world which are shown in Figure 1.1
Fig. 1.1 : Cost Concepts

1.2.1 Cost :
The concept ‘Cost’ is defined, in different ways by various authorities as
follows :
(i) ICMA London defines the term ‘Cost’ as, “the amount of expenditure
(actual or notional) incurred on or attributable to a specified thing or activity”.
(ii) According to Crowningshield ‘Cost’ represents, “an expenditure made

to secure an economic benefit, generally resources that promise to produce
revenue. The resources may have tangible substance (material or machinery) or
they may take the form of services (wages, rent, power)”.
2 Advanced Cost Accounting - I

(iii)In the words of Shillinglaw, “Cost represents the resources that must be Cost Concepts
sacrificed to attain a particular objective”.
(iv)The Committee on Cost Concepts and Standards of the American

Accounting Association defines ‘Cost’ as, “the foregoing, in monetary terms
incurred or potentially to be incurred to achieve a specific objective”.
(v)Anthony and Welsoh defines, “Cost is a measurement in monetary terms, of NOTES

the amount of resources used for some purposes”.
(vi)A.I.C.P.A. Committee on terminology defines Cost as, “the amount

measured in money or cash expended or other property transferred, capital stock
issued, services performed, or a liability incurred in consideration of goods or
services received or to be received”.
(vii)W.M. Harper defines ‘Cost’ as, “the value of economic resources used as a
result of producing or doing the thing costed”.
(viii) According to Oxford Dictionary, “Cost is the price paid for something”.
Again the general concept of Cost which is most widely used is the money
cost of production. Another concept of Cost is the real cost according to
Marshall. Again Opportunity Cost concept is there. Opportunity Cost means
the sacrifice made for not utilising the other alternatives.
From the above definitions we can conclude that Cost is the total of all
expenses incurred, whether paid or outstanding, in the manufacturing and sale of
product or those incurred in giving a service. Costs are calculated from the
point of view of management which expects costs to perform three functions i.e.
cost computation, cost control and cost analysis. Thus, concept of Costs
depends upon the purpose for which it is used, the conditions under which it is
employed and the people who intend to use this concept. From the management
point of view the Cost may be direct, indirect, prime, conversion, joint, product,
period, controllable, out of pocket, imputed, differential, marginal, standard etc.
In short, Cost is a sacrifice made to achieve something and measured in terms
of money and has always been used with some specific objective. It depends
upon many factors and it changes with the changes in factors.
1.2.2 Costing :
Costing is simply cost finding. It is the process, technique and procedure
of ascertaining the costs. It includes all the principles, rules and regulations of
calculating the costs. The concept ‘Costing’ is defined in different ways by
various authorities as follows :
i) ICMA, London defines Costing as, “the techniques and process of

ascertaining costs.”
ii) Wheldon defines Costing as follows;
“Costing is the classifying, recording and appropriate allocation of

expenditure for the determination of the costs of products or services and for the
presentation
A
d
v
a
n
c
Cost Concepts of suitably arranged data for the purposes of control and guidance of the
management. It includes the ascertainment of the cost of every order, job,
contract, process, service or unit as may be appropriate. It deals with the cost of
production, selling and distribution”.
iii) Harold James defines, “Costing is the proper allocation of expenditure

NOTES
whereby reliable cost may be ascertained and suitably presented to afford
guidance to the producers in control of their business”.
Hence, the primary functions of costing is the ascertainment of cost of

products and services. In order to ascertain costs, certain well established
techniques and procedures are to be followed. Costing, as a technique, is a body
of principles and rules which govern the procedure of ascertaining the costs. As
opined by Dobson, the technique of costing is never static nor are its
rules fixed for all time. It means, they are flexible in nature. These principles
and rules can be modified and improved in the light of the developments and
changes in the business environment.
From the above definitions we can summaries that, Costing is a technique
of ascertaining the cost. This technique is however, dynamic and changes with
the changes of time. Costing can be carried out by the process of arithmetic,
memorandum, statements, etc. The costs may be either ascertained from the
historical records i.e. after they have been incurred or by the predetermined
standards and analysis of variances between the standard and the actual or by
using the marginal costing method i.e. by differentiating the fixed and variable
costs.
1.2.3 Cost Accounting :

Cost Accounting is the process of accounting for costs. It begins with the
recording of income and expenditure and ends with the preparation of periodical
statements. The concept cost Accounting is defined in different ways by various
authorities as follows :
i) Kohler defines Cost Accounting as, “that branch of accounting dealing

with the classification, recording, allocation, summarisation and reporting of
current and prospective costs”.
ii) Wheldon defines Cost Accounting as, “the classifying, recording and
appropriate allocation of expenditure for the determination of the costs of
products or services, the relation of these costs to sales values and the
ascertainment of profitability”.
iii) Van Sickle defines, “Cost Accounting is the science of recording and
presenting business transactions pertaining to the production of goods and
services, whereby these records become a method of measurement and means of
control.”
iv) Shillinglow defines, “ Cost Accounting as a body of concepts, methods and
procedures used to measure, analyse or estimate the costs, profitability and
performance of individual products, departments and other sequences of a
4 Advanced Cost Accounting - company’s operations, for either internal or external use or both and to report
I on
these questions to the interested parties”. Cost Concepts
v) I.C.M.A. London defines Cost Accounting as, “the process of accounting

for cost from the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centres and cost units”. In its
widest usage , it embraces the preparation of statistical data, the application of
the cost control methods and the ascertainment of the profitability of activities NOTES
carried out or planned.
An analysis of the above comprehensive definition reveals some of the

important functions of Cost Accounting. Cost Accounting refers to the formal
mechanism or a systematic procedure by means of which costs of products and
services are computed. This is one of the important aspects which distinguishes
cost accounting from costing.
From the above definitions we can conclude that cost accounting is

concerned with :-
i) Cost ascertainment, ii) Cost presentation, and iii) Cost control.
i) For Cost Ascertainment purpose, costing has developed various methods

and systems like Job Costing and process Costing,
ii) For Cost Presentation different forms and statements are prepared for
efficient reporting.
For Cost control purpose, setting up of standard and comparing them

with actual to find out variation, analysing the variances and taking up
corrective actions etc.
Because, cost accounting aims at two more functions viz. application of

cost control methods, and ascertainment of profitability of company’s products,
activities, functions, etc. For the purpose of the cost control, budgetary control,
standard costing, responsibility accounting etc. may be applied. Profitability
denotes the capability, and potentiality of the company to make profit. To
ascertain the profitability various tools such as P/V Ratio, Contribution, etc.
can be used. Ascertainment of cost ( Which is the sole objective of costing), is,
therefore, only one of the objectives ( but not the only objective ) of the cost
accounting. Therefore, Cost Accounting = Costing by Formal Mechanism (+)
Application of Cost Control Methods (+) Ascertainment of Profitability.
1.2.4 Cost Accountancy :
It is the application of costing and cost accounting principles. methods

and techniques. It is also the science, art, and practice of controlling the costs
and ascertainment of profitability. Cost accountancy is mainly concerned with
the presentation of costing data to the management in a precise form so that
vital decisions can be taken by the management. The concept of cost
Accountancy is defined in different ways by various authorities as follows :
Advanced Cost Accounting - I 5

Cost Concepts i) ICMA, England has defined Cost Accountancy as,
“the application of costing and cost accounting principles, methods

and techniques to the science, art, and practice of cost control and the
ascertainment of profitability. It includes the presentation of information
derived there from for the purpose of managerial decision-making.”
NOTES
A careful observation of this definition shows that Cost Accountancy is a
comprehensive term and it includes costing and cost accounting as it aims at
both the cost ascertainment and control and ascertainment of profitability.
Further, and most importantly, it aims at serving managerial personnel in their
decision-making process by furnishing relevant cost information obtained from
the cost books of accounts. Cost Accountancy has, therefore, been viewed as
the science, art and practice of a cost accountant. It is a science in the sense
that it is a body of systematised knowledge with principles (of the nature of
fundamental truths) which a cost accountant should follow for the purpose of
discharging his duties and responsibilities properly and satisfactorily.
i) It is a science because there are certain definite principles which are

followed in cost accountancy.
ii) It is an art because it is the ability and skill of the cost accountant to apply
the principles of cost accountancy to solve the intricate and complex
problems of the management.
iii It is the practice because cost accountant has to keep his knowledge up-
) to-date to the latest developments. He has to present the data to the
management in a most up-to-date manner with latest techniques and
methods for taking various decisions.
However, by aiming at cost ascertainment, cost Accountancy serves the

purpose of costing. By aiming at controlling cost and at ascertaining
profitability, it ( i.e. cost accountancy ) serves other purposes of cost
accounting. By adding a new dimension to its function viz. providing
information for managerial decision- making. Cost Accountancy becomes
broader than both costing and cost accounting. Therefore Cost Accountancy =
Costing (+) Application of Cost Control Methods and Ascertainment of
Profitability (+) Presentation of relevant information for Managerial
Decision-making.
Cost Accountancy is a comprehensive term and includes the various

aspects such as costing, cost accounting, cost control, cost audit and budgetary
control.
6 Advanced Cost Accounting -

I
Difference between Costing, Cost Accounting and Cost Accountancy : Cost Concepts
Points of Costing Cost Accounting Cost Accountancy

Distinction
Scope It is broader in its It is narrow in its It is broadest in its scope
scope scope
Function It is concerned It is concerned with It is concerned with
NOTES
with recording of cost formulation of costing
ascertainmen principles, methods and
t of cost and techniques to be
adopted by a business
Periodicity It begins where It begins where It is a starting point
of cost accountancy costing ends
functioning ends
Persons The person The persons The persons involved are Check Your Progress
involved involved is cost involved are cost experts in the field of i) What are Cost Concepts ?
ii) Differentiate between
accountant clerks cost accountancy such as Costing, Cost Accounting
management accountant and Cost Accountancy.
1.3 Limitations of Financial Accounting

Broadly speaking, there are three main branches of accounting viz.
Financial Accounting, Cost Accounting and Management Accounting. All
these are concerned with presentation of business data to the users.
Financial Accounting is mainly concerned with recording business

transactions in the books of accounts for the purpose of presenting final
accounts to Board of Directors, Shareholders and Tax Authorities etc. The
objective of financial accounting is to present a true and fair view of company
income, financial position and funds at regular intervals.
In the modern business world, business concerns need some methods and
ways by which they can measure their performance. Financial Accounting
cannot serve this purpose at all. The indications given by Profit and Loss
Account and Balance Sheet are generally inadequate. It is just like thermometer
which only indicates the temperature of human body. Judgements can be made
only on the basis of such thermometer and a good doctor will have number of
other checks made in order to see what the patient is suffering from. The profit
shown by Profit and Loss Account should not be taken as a sign of success
because there may be a loss on certain items which might have been
compensated by the profit of certain other items. Information regarding
wastages and losses is very difficult to get from Financial Accounting and
therefore it is only Cost Accounting which makes such information available to
the management . Hence, Cost Accounting has emerged mainly because of
certain limitations of Accounting which are shown in figure 1.2

Cost Concepts
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Fig. 1.2 : Limitations of Financial Accounting

1) It shows only overall performance :
Financial Accounting provides information about profit,

loss cost, etc. of the collective activities of the business as a whole. It
does not provide data for each and every product, process, department or
operation separately.
2) It provides only historical data :
Financial Accounting is historical in nature and it provides data of past

activities. It does not provide current data which management requires for
making effective plans for future. so it is rightly said that financial
accounts provide only a post-mortem analysis of past activities.
3) It is static in nature :
Modern business is dynamic and not static. Financial Accounts do not

incorporate the changes that take place within the business.
4) It fails to provide information for price fixation :
In Financial Accounting, cost are not available by division, products,

process etc. So price fixation becomes difficult and estimates cannot be
5) It fails to control cost :
prepared.
8 Advanced Cost Accounting - Financial Accounts fail to exercise control over material, labour and other
I
expenses incurred in a business enterprise. As a result avoidable wastages Cost Concepts
and losses remains as it is under this system.
6) No proper classification of costs :
In Financial Accounting, expenses are not classified into direct and

indirect, fixed and variable and controllable and uncontrollable. These
classifications have utility of their own. NOTES
7) It does not provide proper system for performance appraisal :
In Financial Accounting there is no system of developing norms and

standards to appraise the efficiency in the use of materials, labour and
other costs by comparing the actual performance with what should have
been accomplished during a given period of time.
8) It fails to analyse losses :
Financial Accounting does not fully analyse the loss due to idle time, idle
plant capacities, inefficient labour , sub-standard material, etc.
9) It does not provide a basis of cost comparison :
Financial Accounting does not provide cost data regarding operations of

the enterprise for the purpose of comparing such data with other periods
of operations or other concerns in the industry.
10) It fails to provide adequate information for reports :
It does not provide adequate information for reports to outside agencies

like banks, government, insurance companies and trade associations.
11) It fails to provide adequate data to management :
Financial Accounting fails to supply useful data to management for

taking various decisions like replacement of labour by machines,
introduction of new products, make or buy decision, selection of the most
profitable product mix etc.
12) Possibility of manipulation of financial accounts :
Very often Financial Accounts are manipulated at the whim and fancies of
the management so as to project better image in the minds of prospective
investors. Financial Accounts may be manipulated by making under or
overvaluation of machinery, excessive or inadequate provisions for
depreciation, creation of secret reserves etc.
13) It does not make use of control techniques :
Financial Accounts fail to make use of certain important cost control

techniques, such as Budgetary Control, Standard Costing, etc. Thus,
financial accounts do not facilitate measuring the efficiency of the
business with the help of control techniques.
14) If fails to ascertain break-even point :
Financial Accounting does not help in ascertaining the break-even point. Advanced Cost Accounting - I 9
Cost Concepts i.e. the sale or output where the revenue equals the cost. Hence, the point
of no profit-no loss cannot be found out under financial accounts.
However, the importance and utility of Financial Accounting system

cannot be under rated, because, it provides voluminous data for cost books of
accounts. Further though Financial Accounting primarily aims at serving
NOTES
external parties and meeting legal requirements, it does not mean that financial
reports are not useful to management. Management also utilises the financial
reports for taking decisions but to a limited extent, because, the approach and
objective of financial accounting are different.
1.4 Nature of Cost Accounting

The industrial revolution in England presented a challenge to the
development of accounting as a tool of industrial management. Costing
techniques were developed as guides to management actions. The increasing
awareness on the part of the entrepreneurs and industrial managers for using
scientific principles of management in the wake of scientific management
movement led to the development of Cost Accounting . To take the decisions,
management needs information. Hence, the need for an accounting system.
Which serves the management. Cost Accounting is designed to serve the
management by undertaking the responsibility of a comprehensive evaluation of
each and every cost related activity and by furnishing the relevant data to take
timely and appropriate action.
Of course, Financial Accounting also takes care of the business
transactions. Because, it deals with the systematic recording of transactions that
have taken place during a period and finding out the result of the company as a
whole and also assets-liabilities position at the and of the accounting period. But,
this is mainly concerned with the reporting to the external parties in
accordance with the provisions of the Companies Act, 1956 and other Statutes.
It is mainly concerned with the keeping and maintenance of financial books of
accounts, communicating the result and the financial position to the external
parties and meeting the legal requirements. It does not undertake a
comprehensive evaluation of i) cost effectiveness and economies, ii)
performance of departments, functions, products, etc. iii) factors which influence
and which have a bearing on the managerial decisions etc. As opined by Blocker
and Weltmer, inspite of new accounting devices, improved techniques and
elaborate subsidiary records, Financial Accounting is so limited and
inaccurate in regard the information which can be supplied to management
that, during the past 30 years businessmen have been eager to adopt
supplementary accounting methods known as Cost Accounting. The scope
of financial accounting does not extent to cover cost ascertainment and analysis
of cost control and providing cost information for managerial decisions.
However, it provides abundant data to the Cost Accounting which uses them for
cost ascertainment , cost control for cost analysis for managerial decisions. L.
W. Hawkins has therefore, aptly said the ordinary trading account is a
locked store-house of most valuable information to which cost system is
10 Advanced Cost Accounting - I the key. The approach of cost accounting is different
from that of financial accounting. cost Accounting analyses them from the view Cost Concepts
point of whether they are relating to the operating activities and also the view
point of thier relevancy to the decisions under the consideration of the
management.
Thus, compared with Financial Accounting, Cost Accounting, is relatively
a recent development. In fact, Cost Accounting started as a branch of Financial
Accounting. But now, it may well be regarded as a profession in its own right. NOTES
The vital importance that Cost Accounting has acquired in the modern age is
because of the growth of complexities in modern industry.
Cost Accounting in Indian Context :
The application of Cost Accounting methods in Indian industries was felt

from the beginning of the 20th century. The following factors have accelerated
the system of Cost Accounting in our country :
i) Increased awareness of cost consciousness by Indian industries with a
view to ascertain costs more accurately for each product or job.
ii) Growing competition among manufacturers led to fixation of prices at a

lower level so as to attract more customer.
iii Government economic policy emphasizing on planned economy.

)
iv) Increased Government control over pricing led to Indian manufacturers to
give more importance to the installation of the cost accounting.
v) The establishment of National Productivity Council in 1958 and a

statutory body viz. Institute of the Cost and Works Accounting of India.
By realizing importance of Cost Accounting technique and benefits

available to the industries, Government of India has made compulsory the
maintenance of cost accounts to most of the industries in the corporate sector
For development of Cost Accounting profession in India, Government passed an
Act viz. “Cost and Works Accountants Act, 1959 and established a statutory
institute named as, “Institute of Cost and Works Accountants of India “. The
Companies Act, 1956 has been amended and provision has been made to make
it obligatory to industries to maintain the cost accounting records. Besides this
Government made ‘Cost Audit’ compulsory to these industries.
During last 50 years, cost accounting emerged as important tool to the

management for improving efficiency and the profitability of the organisation,
with increasing complexities in business for efficient management, costing data
became important and hence the importance of Cost Accounting is increasing
day-by-day.

Cost Concepts
1.5 Objectives of Cost Accounting
The important objectives of Cost Accounting are indicated in Figure 1.3
Ascertainmen
Cost
of
Stand ards
Measuring
Efficienc
t
for
y
Con
ration
of
t ro
st
ate
Co
of Co
l
Pr epa
Estim
st
D
ete Objectives of Cost Accounting
r
of min
ati
Re Cos dfeor
Se o
l
on
Pr ling n
du t
avtai
prdoo
c ti
ice
T
To t
pro uention
bas vide eq
Fr para unt
is
Ope for pre Accother
rati
Pol ng of nd o r ts
icy a e po
R
Fig. 1.3 : Objectives of C ost Accounting
i) Ascertainment of cost :
This is the primary objective of Cost accounting. For the purpose of

ascertaining the cost of a product, process or operation, it is necessary to
record the expenses incurred, classify them properly and them allocate or
apportion it amongst the respective products, processes or departments for
calculating total cost of each of these. If there is only one product, cost
per unit can be found out by dividing the total expenditure by the total
number of units produced. But if there are number of products
manufactured, then the cost is to be split up between the various
products. For this purpose various techniques may be used.
ii) Control of Cost :
Cost control aims at improving efficiency by controlling and reducing

cost. Cost control is exercised at different stages in a factory, viz.
acquisition of materials, recruiting and deployment of labour force
during production process and so on. As such, we have material cost
control, labour cost control, production control, quality control and so on.
Control over cost is exercised through the techniques of budgetary
control and standard costing. In these techniques, cost is controlled by
comparing actual cost with predetermined cost. Cost control is
becoming more and more important tool because of growing competition.
iii) Determination of Selling Price : Cost Concepts
Cost accounting provides information on the basis of which selling prices

of products or services may be fixed. Total cost of production constitutes
the basis on which selling price is fixed by adding a margin of profit.
Cost accounting furnishes both the total cost of production as well as cost
incurred at each and every stage of production. In fixation of selling price NOTES
other factors are also important such as market condition, the area of
distribution, volume of sales etc. But no doubt, cost plays the dominating
role in price fixation.
iv) To provide a basis for Operating Policy :
Cost data to a great extent helps the management in formulating the

policies of a business and in decision-making. Hence, availability of cost
data is a must for all levels of management. Some of the decisions which
are based on cost data are; make or buy decision, manufacturing by
mechanization or automation, whether to close or continue operations
inspite of losses, selling below cost decision, introduction of new
products etc.
v) Frequent preparation of Accounts and Other Reports :
Every concern relies upon the reports on cost data to know the level of
efficiency regarding purchase , production, sales and operation results.
Financial accounts provide information only at the end of the year
because value of closing stock is available at the end of the year. But cost
accounts provide the value of closing stock at frequent intervals by
adopting, “continuous stock verification “ system. Using the value of
closing stock it is possible to prepare final accounts and to know the
operating results of the business.
vi) To provide data for Cost Reduction :
For survival in the world of competition, it is necessary to keep the prices

of products or services as low as possible. It is only possible when cost of
production is less. So, the management has to make continuous efforts to
reduce the cost. To provide data for cost reduction is one of the important
objectives of the cost accounting. It helps the management in finding out
improved methods to reduce costs.
vii) Preparation of Cost Estimates :
Many times, it is required to take new jobs by the manufacturing concern

or introduce new product as per customer’s requirement. Before
manufacturing. cost estimates are to be made. Under cost accounting
system, preparation of cost estimates is possible. So preparation of cost
estimates is also one of the important objective of Cost Accounting.
viii) Standards for Measuring Efficiency :
For measuring the performance of various business activities,

management requires some base for evaluating the performance.
Standard Cost is one Advanced Cost Accounting - I 13
Cost Concepts of the means for evaluating the performance. So development of Standard
Cost is also important objective of Cost Accounting.
1.6 Advantages of Cost

NOTES Accounting
As seen earlier, Cost Accounting is a tool available with the management
for making decisions as regards sales, purchases, production, finance, inventory
control etc. If the costing system is sound, it provides the following benefits to
the management :
i)Helps in Decision-Making :
Decision-making is concerned with choosing between alternative courses

of action. An important factor involved in the choice is the financial
implication of the available alternatives. Cost accounting is a decision-
making tool. It provides suitable cost data and other related information to
enable management to evaluate alternative courses of action.
The important decisions which are influenced by, to a greater extent, the
cost reports, are :
a) Whether to diversify or not the company’s product lines;
b) Fixation and/or revision of selling price;
c) To decide about whether a part is to be manufactured internally or to be

purchased from outsiders;
d) Whether the joint and/or by-products are to be sold at split-off point or

after further processing;
e) About the profitable sales mix;
f) About the optimal level of activity;
g) To decide about the discontinuation of activities of a sales branch,

temporarily, or to drop a product, purely on temporary basis, till the
demand rises for the product;
h) To decide about scarce resource allocation, etc.
ii) Supplies detailed Cost Information :
Cost accounting classifies cost and revenue by every possible division of

the business and supplies management with detailed and regular cost
information. Such information is useful for ascertaining the cost of
product, process, department, division or unit of service.
iii) Guides in Price Fixation :
Cost is one of the most important factor to be considered while fixing

prices. It assists management in fixation of selling price both in normal
conditions and for the period of depression. With the help of costing only,
it is possible to prepare estimates, tenders and quotations.
iv) It reveals Operating Efficiency : Cost Concepts
Cost information reveals, profitable and unprofitable activities, so that

steps may be taken to reduce or eliminate wastages and inefficiencies
occurring in any form such as idle time, under utilisation of plant
capacity, spoilage of materials etc.
v) It facilitates Planning :
NOTES
It enables the management to know future costs so that appropriate plans

and decisions can be made.
vi) It reveals Idle Capacity :
A concern may not be working to full capacity due to reasons such as

shortage of demand, machine breakdown or other bottlenecks in
production. A cost accounting system can easily find out the cost of idle
capacity so that the management may take immediate steps to improve
the position.
vii) Helps in Inventory Control :
Perpetual inventory system which is an integral part cost accounting,

helps in the preparation of interim profit and loss account. Other
inventory control techniques like ABC Analysis, Level setting etc. are
also used in cost accounting.
viii) Helps in Cost Control :
Cost accounting helps in controlling costs with special techniques like

standard costing and budgetary control.
ix) Helps in Cost Reduction :
It helps in the introduction of a cost reduction program and finding out

new and improved ways to reduce costs.
x) Checks the Accuracy of Financial Accounts :
Cost accounting provides a reliable check on the accuracy of financial

accounts with the help of reconciliation between the two at the end of the
accounting period.
xi) It facilitates Cost Comparison :
Cost accounting enables management to make cost comparison of jobs,

products, departments, sales territories etc. within the same concern. It
provides inter-firm cost comparison also.
xii) It prevents Frauds and Manipulation :
It helps in preventing manipulation and frauds through cost audit system.

Thus, reliable cost data can be furnished to management and others.
This way, Cost Accounting serves the company, Further, it may be noted
here that Cost Accounting serves, directly or indirectly, all the parties in one way
A
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a
n
c
e
d
Cost Concepts or the other. Cost Accounting is primarily designed to serve the management in
its decision-making task which in turn will benefit the company and others.
Indirectly, workers, creditors, investors, customers, society and government are
benefitted by a god costing system.
NOTES
1.7 Limitations of Cost
Accounting
Besides the various advantages of Cost Accounting system, it suffers from
certain limitations which are as follows :
i) Expensive :
Highly paid cost accountants and the organisation of costing system

involves additional expenditure. However, before installing it, care must
be taken to enure that the benefits derived are more than the investment
made on this system of accounting.
ii) More Complex :
Cost Accounting system involves number of steps in ascertaining cost

such as collection and classification of expenses, allocation and
apportionment of expenses etc. These steps are considered as
complicated. Again a system requires several forms and documents in
preparing the reports. This will tend to delay in the preparation of
accounts.
iii)
Limited Applicability :
All business enterprises cannot make use of a single method and technique
of costing. It all depends upon the nature of the business and type of
product manufactured by it. If a wrong technique and method is used, it
misleads the result of the business.
iv) Not applicable to Small Concerns :
A Cost Accounting system is applicable only to a large sized business and

not suitable for small sized business because it is more expensive.
v) Lack of Uniformity :
This is the greatest limitation of Cost Accounting system. It fails to

conform any uniform procedure. It is possible that two equally
competent cost accountants may arrive at different results from the same
information. So it is said that all cost accounting results are mere
estimates. Hence, it is not reliable.
vi) Lack of Accuracy :
Accuracy in Cost Accounting is relative. Certain assumptions are always

made while ascertaining cost to suit a particular situation.
vii) Confusion regarding Non-Cost Items :
There may be confusion regarding non-cost items e.g interest on capital,

16 Advanced Cost Accounting - I cash discount etc. should be included or to be excluded from cost
accounts.
viii) Not useful for handling futuristic situations : Cost Concepts
The contribution of Cost Accounting for handling futuristic situations has

not been much. For example, cost accounting has not evolved any tool so far for
handling inflationary situation.
ix) Failure in many cases :
It is argued that the adoption of costing system failed to produce the NOTES
resultsdesired
in many cases and so it is defective.
x) It fails in considering social obligations :
Cost Accounting fails to take into account the social obligations of the
business. In other words, social accounting is outside the purview of the cost
accounts.
Cost Accounting is not an exact science. Because, though the Cost

Accounting system aims at ascertaining cost, it is impossible to ascertain the
actual cost of the goods and services. Because, in order to ascertain the cost of
goods and services, it is necessary to use a number of estimates, bases for
apportionment, etc. However, these limitations i) are, to some extent,
unavoidable. ii) do not affect much the realisation of the objectives for which
cost accounting is introduced; and
iii) are, to some extend, essential for the purpose of operation of the
system. Keeping these points in mind, it is necessary to have a look at the
limitations of the system.
1.8 Difference Between Financial Accounting and

Cost Accounting
Financial Accounting refers to recording of all money transactions on
double entry principles in a set of books with an object to prepare final accounts
of the business. Cost Accounting refers to accumulation, classification, analysis
and presentation of costs for managerial control. Both the systems of
accounting make use of same items of expenditure but in different ways to
serve their own purposes. Due to complexities of large scale production in the
modern business activities, the Financial Accounting falls short of meeting these
challenges. Hence, Cost Accounting has come into existence to solve all the
managerial problems. The following are the differences between Financial
Accounting and Cost Accounting:

Cost Concepts Points of Distinction Financial Accounting Cost Accounting
i) Coverage It covers accounts of It covers the
whole business relating transactions relating to
to all certain specific
commercial activities only e.g.
NOTES transactions. production, sales,
services etc.
ii) Purpose The purpose of The purpose of Cost

Financial Accounting Accounting is the
is external reporting internal reporting i.e.
mainly to owners, to the management of
creditors, tax every business.
authorities, Government
and
prospective investors.
iii) Statutory Requirement These accounts have to These accounts are

be prepared according generally prepared to
to the legal meet the requirements of
requirements of the management. But
Companies Act and now it has been made
Income-Tax Act. obligatory to keep cost
records under the
Companies Act.
iv) Recording of It records, classifies and It records the

transacions analyses the expenditure in an
transactions in a objective manner i.e.
subjective manner according to the
i.e. according to the purposes for which cost
nature of expenditure. are incurred.
v) Nature of costs Financial Cost Accounts record

Accounts both historical and
record only historical estimated costs.
costs.
vi) Nature of expenses In Financial Accounts In Cost Accounts, cost
incurred expenses are recorded in are expressed by proper
totals. analysis and
classification in order to
find out cost per unit.
vii) Analysis of cost and Financial Accounts Cost Accounts show the
profit disclose profit for the profitability, or otherwise
entire business as a of each product,
whole. It does not show process or operation
the figures of cost and so as to reveal the
profit for individual areas of profitability.
products, departments
and processes etc.
Cost Concepts
viii) Duration of Reporting Financial reports are Cost Accounting is a
prepared periodically, continuous process and
usually on an annual reporting may be daily,
basis. weekly, monthly etc.
ix) Contorl aspect It does not make use of It makes use of some
any control techniques. important control NOTES
It does not control techniques such as
material and labour Standard costing,
cost. Marginal costing,
Budgetary Control etc.It
exercises control over
material cost by ABC
Analysis, level setting,
EOQ etc. and over
labour cost by
minimizing idle time,
overtime etc.
x) Types of statements Financial Accounting Cost Accounting

prepared prepares general generates special
purpose statements purpose statements and
like Profit and Loss reports like Reports of
A/c and Balance Loss of Materials, Idle
Sheet. Time Reports, variance
Report etc.
xi) Pricing It fails to guide the It provides adequate

formulation of pricing data for formulating
policy. pricing policy.
xii) Valuation of Stock Stock is valued at cost Stock is always valued
price or market price, at cost price.
whichever is less.
xiii) Evaluation of Effi- The information The cost data helps in

ciency provided by Financial evaluating the efficiency
Accounts is not of the business.
sufficient to evaluate
the efficiency of the
business.
xiv) Break-up of costs Costs are not broken up The costs are analysed
according to thier nature according to thier nature
and fuctions. and functions for
further analysis and
control.
xv) Inter/Intra Firm Under Under Cost Accounting

comparison Financial Accounting it is possible to make
Inter-firm or Intra-firm Inter-firm and Intra-firm
comparison cannot be comparison. Advanced Cost Accounting - I 19
made.
Cost Concepts xvi) Classification of Costs There is no system of Since there is
classification of costs classification of costs
into into
fixed and variable or controllable
and uncontrollable
controllable
costs, the management
NOTES and
can reduce the
uncontrollable.
controllable costs.
The distinction between
fixed costs and variable
costs also helps the
management to take
vital decisions.
xvii Reference In Financial Accounting In Cost Accounting no

) reference can be made
Check Your Progress such reference is
in case of difficulty to possible. Guidance can
i) What is the nature of Cost the company law, be had only from a body
Accounting ? case decisions and to of conventions followed
ii) What are the objectives business ethics. by cost accountants.
of Cost Accounting ?
iii) How Cost Accounting has xviii Dealing of Financial Accounts deal Cost Accounts deal with
emerged ?
) Transactions with only monetary monetary as well as
iv) What are advantages and
limitations of Cost . transactions and it deals non- monetary
Accounting ? only with actual facts transactions and it
and figures. deals partly with the
facts and figures and
partly with estimates.
1.9 Cost Unit and Cost Centres
A) Cost Unit :
Cost Unit is a quantitative unit of product or service or time in relation to

which costs are ascertained or expressed. Cost Units differ from industry to
industry. The unit selected should be the most natural to the business and
accepted by all concerned. Therefore, utmost care should be taken while
selecting cost units. It should be neither too small nor too large.
If unit is too large, significant cost trends may pass unnoticed, due to
averaging of cost. If the unit is too small, it may necessitate detailed and
expensive clerical work.
Costing means measuring the costs in relation to a unit. Hence, the unit of
measurement must be clearly defined and selected. This should be done before
ascertainment of costs. For Example, in a cement factory, the cost per tonne of
cement is found out, in a cloth mill, the cost per meter is ascertained in case of
machine, the cost per machine hour is found out etc. Thus, here tonne, meter and
machine hour become the cost units. Hence, we can say that a cost unit is
nothing but a unit of measurement of cost.
In case of a service unit, it is difficult to find out and decide a suitable cost
20 Advanced Cost Accounting - I unit. For example, in case of transport undertaking, the costs may be either
related
to the distance travelled in kilometer, or the weight carried i.e. tones. While Cost Concepts
selecting proper cost unit for the transport both factors i.e distance and weight
should be considered. Hence, tonne kilometer or passenger kilometer will be a
proper unit.
A Cost Unit may be Classified into,
i) Single Cost Unit

NOTES
in which only one characteristics is used in measurement of cost e.g. per

kilometer, per litre, per passenger, etc.
ii) Composite Cost unit
in which two characteristics are used simultaneously in measurement of

cost e.g per tonne-kilometer, per passenger-kilometer, per kilowatt-hour,
per patient-bed, etc.
Each industry has a different cost units, some of which are given below:
Industry / Product Cost Unit
i) Automobile Number
ii) Bricks Thousand
iii) Cotton/Jute Bale
iv) Chemicals Litre, Gallen, K.G., Tonne
v) Electricity KW H
vi) Furniture Number
vii) Gas Cubic meter
viii) Hostel or Hospital Room per day or per bed
ix) Mines Tonne
x) Steel Tonn
xi) Shoes e
xii) Transport Pair
xiii) Utensils Tonne km/Passenger km
xiv) Cement KG/Tonne
xv) Cable Tonne
xvi) Fertilizer Meter or km
xvii) TV/Radio/VCR Tonne
xviii) Building Set
xix) Nuts and Bolts sq.ft. or sq. mtr.
xx) Sugar and Flour Gross
Mills Quintal
xxi) Timber Cubic foot
xxii) Water Supply
Thousand
Litres/ Advanced Cost Accounting - I 21
Gallon
Cost Concepts B) Cost Centre:
For the purposes of administrative control, the entire organisation is

divided into a number of sub-units which may be in the form of departments,
branches, processes for ascertaining and controlling costs. Because, the costs
incurred will be charged initially to these sub-units which are known as Cost
NOTES
Centres. A Cost Centre is therefore, a sub-unit of the organisation for which
costs may be collected separately and used for cost ascertainment and control.
CIMA, England has therefore defined cost centre as “a location, person or
item of equipment (or group of these) for which costs may be ascertained
and used for the purposes of control”. An analysis of this definition reveals
that a cost centre may be in the form of i) a location, (such as a department,
division, section or process) or ii) an item of equipments (like machine) or iii) a
person (e.g. salesman) or a group of these. However, costs incurred are
identified with the cost centres initially (for distribution later amongst cost
units). It helps to ascertain the cost centers initially (for distribution later
amongst cost units). It helps to ascertain the cost centre-wise costs.
Divisionalisation of organisation into a number of cost centres, therefore,
assumes importance. The number and size of cost centres differ from one
organisation to another depending upon the nature of production activities, size
of the organisation, managements’s informational needs, etc.
The Figure 1.4 Shows the various Types of Cost Centres.
Productio
n Cost
Process Centres Service
cost cost
centre centre
Types
of cost
Centres
Impersona Personal
l cost cost
centre Operatin centre
g cost
centre
Fig. 1.4 : Types of Cost Centres

Types of Cost Centres :
i) Production Cost Centre :
It is a cost centre connected with production i.e. machine shop, welding

shop, assembly shop etc. The manufacturing and non-manufacturing costs
are charged to product cost centres.

ii) Service Cost Centre : Cost Concepts
A Service Cost Centre is one which provides services to the other cost
centers. Only non-manufacturing costs are charged to service cost centre.
Examples of service cost centre are canteen, machinery maintenance,
office service etc.
iii) Personal Cost Central :

NOTES
Personal Cost Centre consists of a person or group of persons. Personal

Cost Centre follows the organisational structure of a factory. Under this
Check Your Progress
type of cost centre, costs are analysed and accumulated by works
manager, sales Manager, Store-keeper, Foreman etc. i) What is ‘Cost Unit’ ?
ii) How Cost Unit is
iv) Impersonal Cost Centre : determined ?
iii) What do you understand
It consists of a location or item of equipment. A Cost centre relating to by ‘Cost Cenres’ ?
location may represent a region of sales, a warehouse or storeroom. Cost
centre relating to an item of equipment could be a machine or group of
machines.
v) Operations Cost Centre :
It is a cost centre which consists of machines/ persons carrying out similar

operations i.e machines and operations engaged in welding, turning or
matching.
vii) Process Cost Centre :
It is a cost centre which consists of a specific process or continuous

sequence of operations.
Whatever may be the type of cost centre, it is determined by taking into

consideration the factors like, the volume of work to be performed, the extent of
cost control that can be exercised, responsibilities to be identified and the use of
cost centres to the cost accounting department.
1.10 Summary
In order to understand the subject of Cost Accounting it is necessary to
first know the meaning and definitions of some basic terms used in the subject
of Cost Accounting. These terms include cost, costing, cost accounting and
cost accountancy, Cost means the amount of expenditure (actual or notional)
incurred on or attributable to a specified, thing or activity. Costing means
finding the cost. The techniques and processes used for calculation or
ascertainment of cost related to a product, order, job, contract, process or a
service means costing. Cost Accounting is the process of accounting for costs.
It is a branch of accounting and it is used for ascertainment, presentation and
control of costs. Cost accounting is the application of costing and cost
accounting principles, methods and techniques to the science, art and practice of
cost control and the ascertainment of profitability. It is presentation of cost
information to the management in such a way that it
A
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v
a
n
Cost Concepts helps the managements in decision taking.
The need for Cost Accounting was realised due to the limitations of
financial accounting. Cost accounting possesses certain advantages and it also
has certain limitations. Ascertainment of cost, control of cost, determination of
selling price, to provide a basis for operating policy, help in cost reduction,
NOTES
create standards for measurement of efficiency and preparation of cost
estimates are the main objectives of cost accounting. According to the nature of
industry, the type of product and the volume of production every, enterprise has
to decide the cost unit which is nothing but the quantity for which cost is to be
calculated. Cost unit may be number, weight, square feet or square meter, etc.
Cost Centres are the sub- units of the entire organisation and the sub-units may
be sections, departments, a machine or group of machines, a person or group of
persons for which cost is collected separately so that cost ascertainment and cost
control become possible.
1.11 Key Terms

i) Cost : Cost means amount of expenditure (actual or notional) incurred.
ii) Costing : Costing means finding out the cost incurred for a product,
service, job, process, contract or an operation.
iii) Cost Accounting : Cost Accounting is the process of accounting for

costs. It includes classifying, recording and appropriate allocation of
expenditure for determing the cost of a product, process, service, etc and
to relate the costs to sales revenue and finding out the profitability.
iv) Cost Accountancy : It is the application of costing and cost accounting

principles, methods and techniques to the science, art and practice of cost
control and ascertainment of profitability. It includes the presentation of
information derived there from for the purpose of managerial decision
making.
v) Cost Unit : Cost Unit is a quantitative Unit of product or service or time

in relation to which costs are ascertained.
vi) Cost Centre : Cost Centre is a location, person or item of equipment (or
group of these) for which costs may be ascertained and used for the
purposes of control.
1.12 Questions
I) Select the most appropriate answer for the multiple choice questions
given below :
(i) The profession of the cost Accounting has gained importance when the
Government of India framed cost Accounting Record Rules, -----
24 Advanced Cost Accounting - I (a) 1956, (b) 1959, (c) 1965, (d)
1968
(ii The cost journals and cost ledgers are recorded and maintained on the Cost Concepts
) basis of -------
(a) single entry principle, (b) Cost Accounting Record Rules, (c) Cost
accounting standards, (d) double entry principle
(iii Cost Accounting provides a basis for formulating ----policies.

) NOTES
(a) administrative, (b) financial , (c) operating, (d) environmental
(iv) Financial Accounting is meant for-----reporting, whereas Cost Accounting

is meant for ----- reporting.
(a) external - internal, (b) managerial - administrative, (c) administrative -

managerial (d) internal -external
(v) Acost which will still be incurred although a plant is closed down
temporarily, is termed as----cost,
(a) engineered , (b) shut-down, (c) common, (d) joint-product
(vi) The cost per unit which remains constant is -----cost,
(a) fixed, (b) semi-fixed, (c) variable, (d) semi- variable
[Answers : (i) - (d), (ii) - (d), (iii) - (c), (iv) - (a), (v) - (b), (vi) - (c).
II) Theory Questions :
1) Define the term ‘cost’. Differentiate between costing, Cost Accounting

and Cost Accountancy.
2) “Cost Accounting has been developed out of the limitations of financial

Accounting”, Discuss.
3) Define ‘Cost Accounting’. State the nature and objectives of cost

Accounting.
4) “Cost Accounting begins where Financial Accounting ends”. Comment.
5) What is ‘Cost Accounting’? State the advantages and limitations of Cost

Accounting.
6) “Costing system has become an essential tool in the hands of

management”. Discuss.
7) Explain the concept ‘Cost Accounting’ and differentiate Cost Accounting

from Financial Accounting.
8) What is ‘Cost Unit’? State the unit of cost used at least in five
manufacturing companies.
9) What is ‘Cost Centre’? Explain various types of Cost Centres.

Cost Concepts
III) Multiple Choice Questions :
(1) Cost Accounting has been developed out of the limitations of ---------
Accounting.
(a) management
NOTES
(b) personal
(c) financial
(d) assets
(2) Milk used in dairy products is the example of ----------- material.
(a) direct
(b) indirect
(c) essential
(d) secondary
(3) A cost ----------- is a sub unit of organisation for which costs may be
collected separately for cost ascertainment and control.
(a) accounting
(b) centre
(c) department
(d) section
(4) Which statement is “wrong”.
(a) Costing is concerned with ascertainment of cost
(b) Cost Accounting is concerned with recording of cost
(c) Cost Accountancy is concerned with formulation of costing principles,

methods and techniques.
(d)Costing is concerned with preparation final accounts.
Ans. : (1 - c), (2 - a), (3 - b), (4 - d)
1.13 Further Reading

1) ‘Advanced Cost Accounting’ - Nigam and Sharma Published by
Himalaya Publishing House.
2) ‘Theory and Practice of Cost Accounting’ - M. L. Agrawal. Published by

Sahitya Bhavan, Agra.
3) ‘Cost Accounting’ - Principles and Practice - N. K. Prasad.

UNIT 2 Elements of Cost Elements of Cost
Structure
1. Introduction
2. Unit Objectives NOTES
3. Elements of cost
1. Material, Labour and Expenses
2. Material - direct and indirect
3. Labour - direct and indirect
4. Expenses - direct and indirect
4. Overheads and types of overheads
5. Items excluded form cost
6. Division of costs
7. Classification of costs
8. Methods of cost classification
9. Summary
10. Key Terms
11. Questions
12. Further Reading
13. Introduction
After studying the information about cost concepts in the unit 1, in this
unit you will be studying information about elements of cost. There are three
elements of cost - material cost, labour cost and expenses. Each element of cost
is divided into direct and indirect and how these direct and indirect elements of
cost are decided and how classification of costs according to the different
methods is done is also explained in this Unit. Clear and proper understanding
of costs classification is important since cost collection and presentation of
cost-data is possible only when costs classification is fully understood.
14. Unit Objectives

After studying the information provided in this Unit, you should be able to :
• Understand three main elements of cost;
Elements of Cost • Decide how each element is divided into direct and indirect;
• Know why classification of costs is necessary; and
• Understand classification of costs according to different methods.
NOTES
2. Elements of Cost
The costituent elements which build up the cost of a unit are materials,
labour, energy and equipments. These elements are broadly divided into three
major groups of materials, labour, and expenses. These three elements of cost or
cost factors could then be further classified in to direct and indirect categories.
The term ‘materials’ refer to all commodities supplied to an undertaking. Labour
is an essential factor of production. It is a human resource and participates in
the process of production. labour cost is a significant element of cost of a
product or service. All costs other than material costs other than material costs
and labour costs are termed as expenses. Direct expenditure is one which is
identifiable as belonging exclusively to a particular process .product, unitary
service. Indirect expenditure is one which , while still being part of the
production ,is not incurred exclusively for a particular part of the job and must ,
therefore, be spread over the whole.
1. Material, Labour And Expenses
On the basis of the nature or elements of costs, costs may be classified

into three broad categories as material cost, labour cost and other expenses.
Material cost denotes the cost of raw materials consumed in the process of
manufacturing and marketing a commodity. Labour cost represents the wages,
salaries, etc. payable to the employees of a corporate entity. Expenses refer to
the costs other than material and labour costs ( but including notional costs of
the use of owned assets) of other services. provided and used in manufacturing
and marketing the goods and services of the company. Elementwise
classification is important for the purpose of ascertaining the costs of different
elements of total cost of a product manufactured or services generated. Further,
it also helps to ascertain the relative share and importance of each of the
elements of total cost of goods and services.
For the management it is not sufficient to have knowledge of total cost

control only, but for effective control and decision-making the management must
know further analysis and classification of costs. Hence, the total cost is
analysed according to the elements of cost. There are basically three elements of
cost viz. material, labour and other expenses. Again they are further analysed
into different elements i.e. direct and indirect material, direct and indirect labour
and direct and indirect expenses. Indirect expenses are termed as overheads or
on cost. The overheads are factory overheads, office and administrative
overheads and selling and distribution overheads.

The Figure 2.1 indicates the different Elements of Cost. Elements of Cost
Total Cost
NOTES
Elements
Material Labour Expenses

Identifiability
Direct Indirect Direct Indirect Direct Indirect
Prime Cost Overhead

Functiona
l
Selling and
Production Administration
Distributio
n
Fig. 2.1 : Elements of Cost
Thus, elements of cost are the different items or components of cost which
are added to get the total cost of any product or service. According to ICMA,
London, Elements of Cost means, “the primary classification of costs according
to the factors upon which expenditure is incurred viz. material cost, labour cost
and expenses”.
Analysis and classification of costs facilitates cost ascertainment, render it

possible to make valid comparisons of the operating efficiency of various
departments and assist in locating the responsibility for off-standard
performance.
The total cost of a product consists of various elements of cost. These

elements are as under.
2.2.2 Material - Direct and Indirect

According to ICMA London - Material Cost is, “the cost of commodities
supplied to an undertaking”. Material Cost is divided into the following :
(A) Direct Material :
Direct Materials are those which can be identified in the product and can
be measured. They can also be charged to the product directly. Thus, direct
materials enter the product and form a part of finished product. For example
cotton used in a textile mill, timber used in furniture making, pig-iron in
foundry
Elements of Cost are treated as direct materials. The cost of direct material is termed as the direct
material cost.
But sometimes, even if some materials go directly into the production,
they are not treated as direct materials, for example, thread in dress making,
nails in shoe making, glue in binding etc. The reason for this is that the value of
NOTES these materials is very less and the quantity used is also negligible. Hence,
attempt is not made to analyse their costs which will otherwise be time
consuming and will add to extra cost because of spending more time on them,
while their value being negligible. Thus, such materials should conveniently be
treated as indirect materials.
B) Indirect Materials :
Indirect material are those which do not form part of the finished
products. It is defined as, “ materials which cannot be allocated, but which can
be apportioned to or absorbed by cost centres or cost units . For example
lubricants, oils, cotton wastes, small tools etc. Thus , materials which cannot be
conveniently identified with individual cost units are termed as indirect
materials. These are minor in importance. But sometimes, the cost of small
items which have less value like the nails in furniture , thread in the dress
manufacturing, paper used in polishing, etc. are treated as indirect materials
though they go directly into production. The cost of these indirect materials is
termed as indirect material cost.
Generally, the materials are purchased from market or directly from
manufacturers. The materials purchased have to be brought to the factory for
converting them into finished product. So all the expenses which will be
incurred for bringing the materials to the place of production will have to be
considered for ascertaining the cost of materials. Materials purchased are stored
in godowns therefrom they are issued for production. The valuation of material
issued for consumption is done by Costing Department. This value of materials
consumed is charged as ‘Material cost’.
Following are the points of differences between Direct Material
Direct Materials Indirect Materials
and Indirect Materials :
i) It is that which can be i) These are those materials
conveniently identified with and which cannot be conveniently
allocated to cost units. identified with individual cost
units.
ii) It generally becomes a part of the ii) These are minor in importance,
finished product. e.g. cotton
such as (i) small and relatively,
used in a textile mill. Clay in
inexpensive items which may
bricks, leather in shoes, timber
become a part of finished
in furniture, etc.
product
e.g. pins, screws, nuts, and
bolts, thread, etc. (ii) those
items which do not physically
become a part of the finished
products
iii) It directly enters the product e.g. coal, lubrication oil and
and they form part of the greece, sand paper ,etc.
finished product. iii) The costs which relate to the
factory form part of the factory
overhead.
2.2.3. Labour : Elements of Cost
According to ICMA London, Labour Cost is defined as, “the cost of

remuneration (wages, salaries, commissions, bonus etc. ) of the employees of an
undertaking “. Generally worker’s efforts are necessary for producing any
particular thing or giving any service. In spite of computerisation and
automation, the importance of labour force in manufacturing product or giving NOTES
service is increasing day-by-day. The expenses incurred for obtaining the
services of human being are labour cost of a job. Labour Cost is divided into the
following:
(A) Direct Labour :
All the workers who are directly engaged in manufacturing activity such
as operating machines, doing assembly work etc. are direct workers and wages
paid to them are known as direct labour cost. These wages can be conveniently
identified with a particular product, job or process. For ascertaining direct labour
cost, it is necessary to know how much and what work has been done by
individual worker. For this purpose various records should be maintained by the
management. Wages of skilled and unskilled Labour may be included in this
item. Examples of direct labour are : Baker, Shoemaker, Carpenter, Weaver,
Tailor, Bus Drivers and Conductors etc.
(B) Indirect Labour :
It is of a general character and cannot be conveniently identified with a
particular cost unit. In other words, indirect labour is not directly engaged in the
production operations but only to assist or help in production operations. Thus,
the wages which cannot be allocated but which can be apportioned or absorbed
by cost centres or cost unit is known as indirect labour. Examples of indirect
labour are : salaries and wages paid to foreman, supervisors, chargeman,
inspectors, clerical staff etc., working in production department, overtime and
night shift allowance paid and any other benefits paid to them.
Following are the points of differences between Direct Labour and
Indirect Labour :
Direct Labour Indirect Labour
i) It controls of wages paid to i) It is not directly engaged in the

workers directly engaged in production operations but only
converting raw materials into to assist or help in production
finished products. operations.
ii) These wages can be conveniently ii) It is of general character and can-
identified with particular product, not be conveniently identified with
job or process. a particular cost unit.
iii) Wages paid to Baker, Shoe-maker, iii) Wages paid to Supervisor,
Carpenter, Weaver and Tailor are Inspector, Cleaner, Clerk, Peon,
the examples of Direct Labour. Watchman are the examples of
Indirect Labour.
Elements of Cost iv) All labour expended in altering iv) The wages which cannot be
the construction, allocated but which can be
composition, confirmation or apportioned to or absorbed by
condition of the product is cost centres or cost units is known as
NOTES known as Direct Labour. Indirect Labour.
2.2.4 Expenses
All costs other than material and labour are termed as other expenses.
According to ICMA, London, Expenses is defined as, “the cost of services
provided to an undertaking and the notional cost of the use of owned assets”.
Expenses are divided into the following :
(A) Direct Expenses :
Direct Expenses include all types of expenses other than direct materials
and direct labour which are incurred specifically for a particular product or
process. It is defined as “expenses which can be identified with and allocated to
cost centres and cost units”. Direct expenses are also known as chargeable
expenses. Direct expenses form a part of the Prime Cost, e.g. chargeable
expenses, Hire of special plant, Royalties, Cost of patents and patterns,
Engineer’s Fees, Cost of special drawings, Designs and layouts, Architect’s
fees, Direct expenses payable, Surveyor’s fees, Productive expenses
outstanding, Consultant’s fees, Process expenses due but not paid, Prime cost
expenses etc.
Check Your Progress (B) Indirect Expenses :
i) Which are the All indirect costs other than indirect material and indirect labour costs are
‘elements of cost’ ?
termed as Indirect Expenses. These expenses are not charged directly to
ii) How each element of
cost is further divided ? production. Indirect expenses cannot be allocated but they can be apportioned
iii) Explain the to or absorbed by cost centres or cost units. Examples of indirect expenses are :
differences between : rent, rates and taxes, salary of general manager, staff welfare expenses,
a) Direct Materials and
canteen expenses, telephone expenses, lighting, power, fuel, depreciation,
Indirect Materials
b) Direct Labour and insurance, bank charges and interest paid, etc.
Indirect Labour The aggregate of direct material cost, direct labour cost and direct
c) Direct Expensess and expenses is termed as “Prime Cost” while the aggregate of indirect material
Indirect Expenses. cost, indirect labour cost and indirect expenses is termed as “Overheads”.
Following are the points of differences between Direct Expenses

and Indirect Expenses :
Direct Expenses Indirect Expenses
i) “Expenses which can be identi- i) “All indirect costs other than ind-
fied with and allocated to cost direct materials and indirect labour
centres and cost unit” are known costs, are termed as Indirect
as Direct Expenses. Expenses.
ii) These are those expenses which ii) These cannot be directly Elements of Cost
are specifically incurred in con- identified with a particular job,

nection with a particular job or process
cost unit. or work order and are common
iii) These are also known as “cha- to cost units and cost centres.
NOTES
rgeable” expenses. iii) These are also known as non-
iv) These form a part of the Prime Chargeable expenses or oncosts.
Cost. iv) It forms a part of the overheads.
v) Cost of Drawings and Patterns v) Rent and Rates, Depreciation,
Carriage Inward, Royalty paid, Light and Power, Advertising,
Excise Duty, Architect Fees Insurance, Carriage Outward are
are the examples of Direct the examples of Indirect Expenses.
Expenses.
2.3 Overheads and Types of Overheads

Overhead costs are the operating costs of a business enterprise which
cannot be identified with particular units of output. Overheads consists of all
expenses incurred for in connection with the general organisation of the entire
concern or a part of it, i.e. cost of operating supplies and services used by the
undertaking. It also include maintenance of capital assets. There are four main
types of overheads as below :
i) Factory or Production or Works or Manufacturing Overheads :

These are the overheads which are concerned with the production
function.
It includes indirect materials, indirect wages and indirect expenses in
producing goods or services. Thus, overhead covers all types of indirect
expenses incurred by a concern right from the receipt of an order to the final
delivery of goods to the customer or for storing the finished goods in the
godowns. Examples of factory overheads are : depreciation of plant and
machinery, depreciation of factory buildings, insurance charges and repairs on
plant and machinery and factory building, power consumption, coal and other
fuel charges, wages of indirect workers, welfare services etc.
ii) Office or Administration or Management or Establishment Overheads:
These are the indirect expenditures incurred in general administrative

function i.e. in formulating policies, planning and controlling the function,
directing and motivating the personnel of an organisation in the attainment of
its objectives. Examples of office and administration overheads are : Office
rent, rates and taxes, salaries of office staff, postage, telegrams and telephone,
printing and stationery, office lighting, repairs and depreciation of office building
and equipments, legal expenses, audit fees director’s fees, bank charges and
interest paid, etc.
iii) Selling Overheads :
Selling overhead is the cost of promoting sales and retaining customers. It

A
v
Elements of Cost is the skill of any business to attract new customers by offering extra facilities
and services by giving them free samples etc. so that they get attracted to the
company. Similarly, the existing customer should be retained by providing the
best services for which certain expenses are necessary. Thus, if a concern wants
to expand its business it must incur selling expenses which cannot be avoided.
NOTES Examples of selling overheads are : salaries of the sales manager and sales staff,
commission paid to salesman and selling agents, advertising charges, packing
charges, free catalogues, pamphlets and price lists, mail order house expenses,
showroom expenses, bad debts, after sales service expenses, travelling expenses
etc.
iv) Distribution Overheads :
Distribution overheads are the expenses incurred in moving the goods

from the company’s godowns to the customers premises. It means that
distribution overhead starts with all indirect material, indirect wages and
indirect expenses incurred upto the point of packing the product for making
available for despatch and ends with making the re-conditioned returned empty
packages and tins available for reuse. The actual definition of distribution
expenses is “the cost of the sequence of operations, which begins with making
the packed product available for despatch and ends with making the re-
conditioned returned empty package, if any available for reuse”. Examples of
distribution overheads are : warehouse rent and insurance, salary of warehouse
keeper and other cost of transportation of goods, insurance of goods in transit,
cost of maintenance of vehicles, loading expenses, carriage outward, special
packing expenses, cost of repairing and re-conditioned of empty packages etc.
2.4 Items Excluded From

Cost
The following is the list of items which are to be excluded from the
computation of total cost or Non cost Items.
i) Financial Incomes :
Capital Profits, Dividend Received, Brokerage and Commission Received,

Share Transfer Fees Received, Interest on Investments, Interest on Bank
Deposits, Rent Received, Bad Debts Recovery, Interest on Loan given.
ii) Financial Charges :
Capital Losses, Cash Discount, Trade Discount, Penalties and Fines,

Share Transfer Fees Paid, Interest on Bank Loan, Interest on
Debentures, Preliminary Expenses, Underwriting Commission, Discount
on Issue of Shares and Debentures, Loss on Investments, Capital
Expenses, Interest on Capitals, Salary or Commission paid to Partners.
Income Tax, Wealth Tax, Interest on Debentures, Reconstruction
Expenses, Development Expenses.

iii) Appropriations : Elements of Cost
Bad Debts Reserve, Dividends Paid, Charitable Donations, Transfer to

Reserves, Sinking Fund, Debenture Redemption Fund, Machinery
Replacement Fund, Investment Fluctuation Fund, etc.
iv) Abnormals :
NOTES
Abnormal Wastage, Abnormal Idle Time, Loss by fire, Loss by Theft,
Loss of Stock, Insurance Premium, etc.
2.5 Division of Costs

The division of costs are obtained with the help of Elements of Cost. The
following are the various divisions of costs of an article or a product.
i) Prime Cost :
This is the total of Direct material, Direct labour and Direct Expenses.
Prime Cost = Direct Material + Direct Wages + Direct Expenses.
ii) Works Cost :
This consist of Prime cost plus Works Expenses.
Works Cost = Prime Cost + Works Overheads
iii) Cost of Production :
This is made up of Works Cost plus Office and Administrative

Overheads. Cost of production is termed as “Gross Cost”.
Cost of Production = Works Cost + Office and Administration Overheads.
iv) Total Cost / Cost of Sales :
This is Cost of production plus selling and distribution overheads. In

other words, it is the total expenditure incidental to production,
administration, selling and distribution of commodities manufactured.
Total Cost / Cost of Sales = Cost of Production + Selling and Distribution

Overheads.
v) Selling Price =
Total Cost / Cost of Sales + Profit (or - Loss).

Elements of Cost The Division of Costs may be shown in the following chart indicated in Figure
2.2
Division of Costs
NOTES
Works on Cost
Direct Material or
Factory Overheads
(+) Direct Labour Add or
(+ Direct Expenses (+) Manufacturing Expenses
)
Prime Cost / Direct Cost / Basic Cost / Operating

Cost / First Cost / Flat Cost / Original Cost
Add
(+)
Factory Cost / Works Cost / Manufacturing Cost
Add
(+)
Office Overheads or Administration

on Cost or Management Expenses
Cost of Production / Gross

Cost / Office Cost
Add
(+)
Selli
ng
and
Dist
Cost Price / Total Cost / Cost of Sales / Cost of Turnover /
ribu
Sales Cost / Net tion
Cost / Turnove Cost
AddOve
/ Less
rhea
(+)
ds
(-)
Profit / Loss
Inflated Price/Invoice Price/Selling Price/Sales/
Market Price/Value of Sales/Value of Turnover/Loaded
Price
Fig. 2.2 : Division of Costs

2.6 Classification of Elements of Cost
Costs
MeaningCostand Definition : means grouping of costs according to their common
Classification
characteristics. It is the process of grouping the items together which are alike.
According to Dickey, “Classification is the process of grouping like facts NOTES
under a common designation on the basis of similarities of nature, attributes or
relations”.
The Committee on National Association of Accounts defines

Classification as, “The identification of each item and the systematic placement
of like items together according to their common features”. Items grouped
together under common heads are further defined according to their fundamental
differences. Suitable classification of costs is of utmost important, so that these
costs can be identified with the cost centres or cost units.
Need for Cost Classification :
The need for cost classification arises having to use cost data for a variety
of purposes. For different purposes different kinds of cost informations are
required. Therefore, costs must be arranged and classified in such a manner that
they can be combined in different ways to serve different purposes. Generally,
Cost Classification is required for the attainment of the following purpose shown
in Figure 2.3
In Budgeting Controllin Pricing

and g of Costs Policie
Planning (iii) s (iv)
Process
(ii)
Current
Ascertainmen
Application
t of Profits
of Plans and
Periodically
Policies
(i)
(v)
Need for cost

Classificatio
n
Fig. 2.3 : Need for Cost Classification

Elements of Cost
2.7 Methods of Cost
Classification
Costs are classified in different ways according to their elements i.e.
material, labour and expenses. Other basis of cost classification are function,
variability, controllability, normality, period, investment etc. The costs may be
NOTES the same, but the classification of costs are made in different ways depending
upon the specific requirement and the purpose to be achieved in a particular
organisation. The Figure 2.4 shows the graphical presentation of Classification
of Costs.
Irrelevant
y (10)
Relevanc
Relevant
Revenue
Investmen
t (9)
Pre-determined
Period
Capital
Associatio
n (8)
Uncontrollable
Product
Historical
(7)
Tim
Controllable
e
Abnormal
Fig. 2.4 : Classification of Costs
Cost classification
y (6)
Normalit
Normal
development
Research
Semi-variable
Controllabil
ity (5)
and
s
Behaviou
r (4)
distributio
Selling
Variabl
Indirect
and
n
e
ity (3)
Identifiabil
Direct
Administration
Fixed
Function
s (2)
Expenses
Labour
Factory
Material
s (1)
Element

1) Elements : Elements of Cost
The cost elements of a product are, Material, Labour and Expenses.
a) Materials :
The ICMA, London defines material cost as, “the cost of commodities,
other than fixed assets, introduced into products or consumed in the operation of NOTES
an organisation. Material cost may be either direct material cost or indirect
material cost.
Direct Material Cost is defined as “the cost of materials entering into and
becoming constituent element of a product or saleable service”. Thus, materials
which can be identified with the production of a product or which can be traced
to the finished product are known as direct materials. Examples of direct
materials are cotton in cotton textile, timber in furniture making industries,
leather in shoe making industries etc.
Indirect Material Cost has been defined as, “material cost other than
direct materials cost”. In other words, material cost which cannot be identified
with a product, job or process or traceable to the same, is known as indirect
material cost. Examples of indirect materials are consumable stores such as oil,
cotton waste, small tools, works stationery etc.
But in some cases, even direct materials which can be traced to the
product concerned may be treated as indirect materials because of time and
labour involved in ascertaining their cost for the purposes of a direct charges.
For example, thread, buttons, nails, gum, metal strips etc. which are used in
production are treated as indirect although they are direct in nature.
b) Labour :
Labour is the physical or mental efforts expended in production. The

remuneration for such efforts is known as wages . Labour cost may be either
direct labour cost or indirect labour cost.
Direct Labour Cost is defined as, “the cost of remuneration for

employee’s efforts and skills applied directly to a product or saleable service”.
Indirect Labour Cost is defined as, “labour cost other than direct labour
cost”. Thus, indirect labour is not directly engaged in the production operations,
but only to assist or help in production operations. Examples of indirect labour
are
: salaries and wages paid to foreman, supervisors, chargeman,
inspectors, maintenance workers, clerical staff etc. working in production
department, overtime and night shift allowance paid and any other benefit paid.
c) Expenses :
The term ‘Expenses’ denotes the cost of services provided to an

undertaking. Expenses may be direct or indirect.
ICMA, defines Direct Expenses as “ Costs other than materials or wages
which are incurred for a specific product or a saleable service”. Direct
expenses
Elements of Cost form a part of Prime Cost. Example of direct expenses are : Cost of drawings
and patterns, Repairs and maintenance of plant and equipment taken on hire,
Architect’s fees, Research expenditure, Excise duty, Royalty etc.
Indirect Expenses are “expenses other than direct expenses”. These

expenses are not charged directly to production. Examples of indirect expenses :
NOTES
Rent and rates, Salary of General Manager, Staff welfare expenses, Canteen
expenses, Lighting, Telephone expenses etc.
2) Functions :
Costs may be classified on the basis of business functions like

manufacturing, administration, selling and distribution, research and
development etc. Ascertainment of costs for all these functions is necessary
and hence they are classified as follows :
a) Factory Cost :
This is the cost which is incurred for the series of operations i.e. right
from the supply of materials, labour and expenses incurred till the completion
of production. Thus, materials, labour and expenses, both direct and indirect,
constitute production cost. Examples of manufacturing cost are : material,
labour, factory rent rates and taxes, depreciation on factory building and plant
and machinery, factory lighting and power , store keeping expenses, insurance
of factory building etc.
b) Administration Cost :
This is the cost running a concern i.e. for framing the policies, directing
and controlling all the activities of the organisation other than manufacturing
and selling distribution expenses. According to ICMA it defines as, “the sum of
these costs of general and management and of secretarial, accounting and
administrative services which cannot be directly related to production,
marketing, research and development function of the enterprise”. Examples of
administration cost are : Director’s fees and allowances, Salaries of office staff,
Audit fees, Legal expenses, Office rent and taxes, Office lighting , Expenses of
secretarial and accounting department, Postage and telegram, Printing and
stationery etc.
c) Selling and Distribution Cost :
Selling costs are those costs which are incurred for attracting the potential
customers and retaining the existing customers. Thus, demand is created in the
market through advertisement and publicity so that new orders can be secured.
Selling Costs include : Advertisement, Hoarding / Neon signs etc.

Salaries and commission to salesman and sales staff, Costs of free sample /
brochures etc. Showroom expenses, Travelling expenses of salesman etc.
Distribution Expenses are incurred for despatching the products which
are ready after packing. These expenses include : Carriage outward, Warehouse
expenses , Packing costs, Running and maintenance cost of delivery van, Salary
of the godown staff etc.
d) Research and Development Cost : Elements of Cost
Research cost is defined as, “the cost of seeking new or improved

products, applications of material or methods”. Development cost is defined as,
“the cost of process which begins with the implementation of the decision to
produce or new or improved methods and ends with the commencement of
formal production of that product or by that method. NOTES
3) Identifiability :
According to the identifiability with the cost units, jobs or processes the
costs are classified into direct and indirect. In costing, Direct and Indirect costs
have much significance.
a) Direct Cost :
All the costs which can be conveniently allocated to cost unit or cost
centre is known as direct cost. For example the cost of cotton in case of textile
industries, the cost of timber in furniture industries etc.
b) Indirect Cost :
It is a cost which is of general character and which cannot be identified

with a particular unit of cost. These cost cannot be allocated but can be
apportioned to cost unit or cost centre. The terms ‘direct’ and ‘indirect’ relate to
the methods of allocating them because it depends upon whether the same cost
should be treated as direct or indirect. Thus, same item may be treated as a
direct cost in one case and indirect cost in another case. This bifurcation
depends upon the nature of business and also cost unit decided by the
management. For example, we can treat depreciation as a direct cost, if there is
only one machine or cost centre but if there are many cost units it becomes
difficult to allocate the cost accurately. In this case, it is treated as an indirect
cost, e.g. in cost of construction sites, the depreciation of machinery etc. is
taken as direct cost while in case of a factory where there are many
departments which use the same machine it is treated as an indirect cost.
This type of classification is important because of the following

reasons,
i) it facilitates accurate ascertainment of cost.
ii) it facilitates controlling of costs.
iii) it enables in fixing the responsibility to the

executives.
Difference between Direct and Indirect Costs :

Direct costs are those costs which are incurred for and may easily and
conveniently be identified with a particular cost unit or cost centre. Direct costs
include direct material cost, direct labour cost and other direct expenses.
Indirect costs, on the other hand, represent the costs which are of general
nature and which cannot easily and conveniently be identified with a particular
cost unit or cost centre.They include indirect material cost, indirect labour cost
and other indirect expenses. The indirect costs are therefore called Overhead
expenses.
Elements of Cost These indirect or overhead expenses can further be divided into three sub-
categories as factory overhead expenses, administration overhead expenses, and
selling and distribution overhead expenses (on the basis of the functions). The
Classification of Costs on the basis of Traceability Elements and Functions is
shown in figure 2.5.
NOTES
Direct material cost
Direct cost Elementwise
or classification Direct labour cost
Prime cost
Direct expenses
Classification On the
of basis of
costs traceabilit
y
Indirec Production
t
materia overhead
Indirect costs l cost expenses
or Elementwise Indirec
Overhead classification t Functional Administrati
Expenses labour classification ve
cost overhead
Indirect expenses
expense Selling &
s distribution
overhead
expenses
Fig. 2.5 : Classification of Costs on the basis of Traceability,
Elements and Functions
4) Behavior :
On the basis of this characteristic, costs are classified according to their

nature/behavior in relation to changes in the level of activities or volume of
production. On the basis of variability, costs are classified as under :
a) Fixed Cost :
According to ICMA London-Fixed cost is defined as, “ a cost which

accrues in relation to the passage of time and which within certain output or
turnover limits tends to be unaffected by fluctuations in volume of output or
turnover”. In other words, fixed costs remain fixed in total amount and do not
increase or decrease with volume of production. But the fixed cost per unit
increase when volume of production decreases, and decreases when the volume
of production increases. Thus, fixed costs are constant in total amount but
fluctuate per unit as production changes. The characteristics of fixed cost are :
i) fixed total amount within a relevant output range. Elements of Cost
ii) increase or decrease in per unit fixed cost when volume of production
changes.
iii) fixed costs can are apportioned to departments on some equitable basis.
iv) fixed cost can be controlled mostly by the top level management.
NOTES
Examples of fixed cost are, Rent, Rates, Taxes, Insurance of factory
Manager’s salary, Office staff salaries, Municipal taxes etc.
building,
The following is the graph indicating the Behavior of fixed cost in figure 2.6.
Y
Cost ( ` )
Total Fixed Cost
Fixed Cost per unit
0 Volume of Production X
(Units)
Fig. 2.6 : Behavior of Fixed
Cost
b) Variable Costs :
ICMA, London-defines variable Cost as, “a cost which in aggregate tends

to vary in direct proportions to changes in the volume of output or turnover”. In
other words, when volume of output increases, total variable cost also increases
and vice-versa, when volume of output decreases, total variable cost also
decreases. But the variable cost per unit remains fixed.
The following is the graph indicating the Behavior of Variable Cost

2.7 in Figure
Y
Cost ( ` )
st
e Co
bl
aria
V
tal
To
Variable Cost per unit
0 Volume of Production (Units) X
Fig. 2.7 : Behavior of Variable Cost
Thus, Variable Costs, in general , indicate the following characteristics. Advanced Cost Accounting - I 43
Elements of Cost i) They vary in direct proportion to volume of output or
turnover.
ii) The variable cost per unit of product remains constant.
iii It is easy for allocation and apportionment to departments.

)
NOTES iv) Such costs can be controlled by departmental heads.
Example of variable costs are : direct material cost , direct labour cost, direct
expenses, power, repairs, royalties, commission of salesman, normal spoilage
etc.
c) Semi-variable or Semi-fixed Costs :
ICMA, London-defines Semi-Variable Cost as, “a cost containing both

fixed and variable elements, which is therefore partly affected by fluctuations in
the volume of output or turnover”. Thus, these costs are partly fixed and partly
variable. A semi-variable cost has often a fixed element below which it will not
fall in any level of output. The variable element in semi-variable costs changes
either at a constant rate or in lump-sum. For example, if there is additional shift
in the factory, it will require additional supervisors and certain costs will
increase in lump-sum. In case of telephone charges, there is a minimum rent
and after a specified number of calls, the charges are according to the number of
calls made. Thus, there is no fixed pattern of behavior of semi-variable costs.
The following is the graph indicating the Behavior of Semi-Variable Cost in
Figure 2.8
Y Y
Semi-variable Cost
Cost ( ` )
Semi-
Cost ( ` )
variable Cost
Volume of Production (Units) X

0 X 0 Volume of Production (Units)
Fig. 2.8 : Behaviors of Semi-Variable Cost
Following is the graph indicating the Behavior of Fixed, Variable and
Semi- Variable Costs in Figure 2.9
Y
C
B
A
Cost ( ` )
A = Fixed Cost
B = Semi-variable cost
C= = Variable cost
0 Volume of Production (Units) X
Fig. 2.9 : Behaviour of Fixed, Variable and Semi-Variable Costs
44 Advanced Cost Accounting - I Examples of semi-variable costs are : Telephone charges, depreciation,
repairs and maintenance of plant and machinery, building, supervision, Elements of Cost
compensation for accidents, light and power etc.
5) Controllability :
On this basis costs are classified into two types viz. Controllable Costs
and
Uncontrollable Costs.
NOTES
a) Controllable Costs :
ICMA, London defines-Controllable Costs as, “ a cost chargeable to a

cost centre, which can be influenced by the actions of the person in whom
control of the centre is vested”. In other words, these are the costs which may be
directly regulated at a given level of management authority. Variable costs are
generally controllable by department heads. Practically, all variable costs are
controllable cost.
b) Uncontrollable costs :
ICMA, London-defines Uncontrollable Cost as, “a cost chargeable to a

cost centre, which cannot be influenced by the actions of the person in whom
control of the centre is vested”. In other words, these are those costs which
cannot be influenced by the action of the specified member of an enterprise. It
means these costs are not within the control of management. Practically all fixed
costs are uncontrollable.
6) Normality :
Under this method, costs are classified according to whether these costs
are normally incurred at a given level of output in the condition in which that
level of activity is normally attained. On the basis costs are classified into
Normal Cost and Abnormal Cost.
a) Normal Cost :
Normal Cost is defined as, “a cost which is normally incurred to a given

level of output in the condition in which that level of output is normally
attained”. It is a part of cost of production.
b) Abnormal Cost :
It is defined as, “cost which is not normally incurred at a given level of

output in the condition in which that level of output is normally attained”. It is
not a part of cost of production and charged to Costing Profit and Loss
Account.
7) Time :
On this basis costs are classified into Historical Cost and Predetermined
Cost.
a) Historical Cost :
It is defined as, “the costs which are ascertained after these have been
incurred”. Thus, such costs are available only when the production of a
particular
A
d
v
a
Elements of Cost thing has already been done. Such costs are only of historical value and not
useful for cost control purposes. The characteristics of such costs are :
i) they are based on recorded facts,
ii) these costs may be verified with the help of supported documents,
NOTES
iii) these are objectives in nature because they relate to the past events.
b) Pre-determined Cost :
It is defined as, “the costs which are ascertained in advance of production

on the basis of a specification of all factors affecting cost”. These costs are set
up from analysis and forecast made before the event and thus, represent not
what has happened, but what is expected to happen. Pre-determined cost
determined on scientific basis becomes standard cost. Such costs when
compared with actual costs we can know the reasons of variance. Thus, by
these costs, management can fix the responsibility and can take remedial action
to avoid its recurrence in future. Predetermined costs may be in various forms
like budgeted cost, estimated cost, standard cost and so on.
8) Association :
On this basis costs are classified into Product Cost and Period Cost.
a) Product Costs :
It is described as the costs which are directly associated with the product.
Thus, unit product is sold, these costs provide no benefit. When the products are
sold, the total product costs are recovered as an expense. This expense is called
the cost goods sold. Examples of product costs are : Direct material, Direct
labour and Factory overheads.
b) Period Costs :
It is described as the costs which are associated with a particular

accounting period. These are not related with the products delivered to the
customers. Such costs are charged to Profit and Loss Account of the period.
Examples of period costs are : Rent, salaries of office staff, travelling expenses
etc. These costs are inventoried i.e. these are not included in the value of
closing stocks.
This classification is important for ascertainment of profit. Product cost

can be carried forward to the next accounting period as a part of unsold finished
stock whereas period cost is written off in the accounting period in which it is
incurred.
9) Basis of Investment :
On this basis costs are classified into Capital Cost and Revenue Cost.
a) Capital Costs :
It is defined as, “a cost which is intended to benefit in future period”.
Capital cost is treated as purchase of an asset. Examples of capital cost are
purchase of
premises, plant and machinery, furniture etc. Elements of Cost
b) Revenue Costs :
It is defined as, “a cost which is incurred to benefit the current period”.

Revenue cost is treated as an expense. Examples of revenue costs are :
salaries,
postage, printing and stationery, rent, rates and taxes, insurance etc.
NOTES
10) Basis of Relevancy :
On the basis of whether the cost items are relevant or irrelevant to the
decisions under the consideration of the management, costs may broadly be
classified into two categories as relevant costs and irrelevant costs. Check Your Progress
a) Relevant Costs : i)Show division of Costs

from Prime Cost to Sales
or Selling Price.
These are those costs which have a bearing, or which have an effort on the ii) What is meant by
decisions under the consideration of the management. That means, they are the classification of costs ?
iii) Mention the methods of
most pertinent costs and therefore their efforts are to be reckoned before taking classification of costs
a decision. iv) State how costs are
classified under:
a) Functional
b) Irrelevant Costs : Classification
b) Behavioural
It represent the costs which have no effect on the decisions under the Classification
c) Normality
consideration of the management. For instance, marginal cost is an example to Classification
relevant costs. It may be noted here that the marginal costs represents the extra
cost for an additional unit. On the other hand, sunk cost is a good example to
irrelevant costs. Because, sunk cost represents the costs incurred in the past.
They are therefore called past costs. Since they represent the costs which have
already been incurred, no present or future decision is able to alter them. Hence,
they are irrelevant.
2.8 Summary
There are three elements of cost - material, labour and expenses. Element
of material consists of all raw materials, components, semi-finished, and finished
parts which are used in manufacturing of products or for providing services
required by the customers. The second element of cost is labour cost and it is the
amount of wages, fees and remuneration paid to the employees working in the
enterprise. Labour is provided by the employees in the form of physical labour,
intelligence, and skills required to convert the materials into a finished product
by heating, mixing, cutting, moulding, and other processes used for production.
The third element of cost is expenses and it includes all expenditure incurred -
actual or notional - excluding material cost and labour cost.
Each element of cost is divided in two parts - direct and indirect. So there
is direct material cost and indirect material cost, direct labour cost and indirect
labour cost and direct expenses and indirect expenses. When material, labour
and expenses can be easily related to the product manufactured and they form
a major or substantial part of the total cost of a product, they are recorded as
‘direct’,
A
d
v
a
n
Elements of Cost while when they form an insignificant portion of the total cost of a product and
relationship between them and the finished product cannot be easily established,
they are regarded as the ‘indirect’ materials, labour and expenses.
Classification of costs is the process of locating costs with similar features

and putting them in a particular group. This makes possible reporting cost
NOTES
information in a certain format as well as in controlling costs. There are various
methods of classifying the costs; e.g. they may be classified on the basis of
elements, functions, behavior, nature, controllability, etc.
2.9 Key Terms

i)Costs Classification : Identification of each item of cost and systematic
placement of like items together according to their common features.
ii)Prime Cost : Aggregate of Direct Material Cost, Direct Labour Cost and
Direct Expensess.
iii)Factory Cost / Works Cost : Prime Cost plus Manufacturing / Factory /

Works Overheads.
iv)Cost of Production / Office Cost / Gross Cost : Factory Cost plus Office
overheads / Administration overheads / General Overheads.
v)Cost of Sales / Total Cost / Cost of Turnover : Cost of Production plus

Selling and Distribution Overheads.
vi) Selling Price / Sales : Cost of Sales plus Profit / minus Loss.
2.10 Questions
(I) Select the most appropriate answer for the following multiple choice
questions
(i) Lubricants used in factory workshop is the example of ----- material
(a) Direct
(b) Indirect
(c) Prime
(d) Essential
(ii Wages paid to factory supervision is the example of ----- labour.

)
(a) direct
(b) fixed
(c) variabl
e
48 Advanced Cost Accounting - I (d) indirect
(iii Carriage on purchases is a part of direct ----cost. Elements of Cost
)
(a) labour
(b) material
(c) overhead
NOTES
(d) normal
Ans : (1 - b), (2 - d), (3 - b),
(iv) Match the pairs.
Group I Group II
(a) Direct-Material (i) Supply of material

Cost
(b) Research & Development Cost (ii) Skills applies to a
product
(c) Administration (iii) Framing the policies
Cost
(d) Direct Labour Cost (iv) Improved products
(v) Constituent element of a

product
Ans : (a) - (v) ; (b) - (iv) ; (c) - (iii) ; (d) - (ii).
(II) Theory Questions
1) What is ‘cost’? State the various elements of cost with suitable

examples.
2) What is ‘cost classification’? Explain the need for cost classification.
3) State the various methods of cost classification with suitable examples.
4) “Fixed costs are variable per units while variable costs are fixed per unit”.
Comment.
5) Distinguish between direct labour costs and indirect labour costs.

i) ‘Advanced Cost Accounting’ - Nigam and Sharma published by Himalaya
Publishing House.
ii) ‘Cost Accounting’ - Jawahar Lal - Publisher : Total Mc Graw Hill

Publishing Co. Ltd., New Delhi.
iii ‘Cost Accounting’ - Principles and Practicee’ - N. K. Prasad.

)

UNIT 3 Cost Sheet and Quotations Cost Sheet & Quotations
Structure
1. Introduction
2. Unit Objectives
NOTES
3. Cost Sheet
1. Purpose of Cost sheet
2. Proforma of simple cost sheet
3. Proforma of complex cost sheet
4. Summary list
5. Illustrations
6. Quotations and its preparation
7. Illustrations on preparation of quotation
8. Summary
9. Key Terms
10. Questions and Exercises
11. Further Reading
12. Introduction
Cost information becomes useful only when it is arranged and presented
to the management in a systematic manner which can be grasped by the
management easily and in a very short time. Then only persons doing the
management can use it for cost controlling and for taking decisions. Cost sheet
is the first such statement which is prepared to give step-by-step information
about costs incurred by the enterprise for a certain period. In this Unit
information is provided related to preparation of a cost sheet and based on its
information, how a quotation is prepared.
13. Unit Objectives

After studying the information provided in this unit, you should be able to :
• Understand format of a simple cost sheet;
• Understand format to be used for preparing a complex cost sheet; and
• Prepare quotation for a job or service to be provided to a customer.

Cost Sheet & Quotations
3.2 Cost
Sheet
A cost sheet is a statement prepared for a certain period such as a quarter
of a year, for half-year or a year giving information about costs incurred for
different elements of cost by an enterprise. In cost sheet costs are recorded in a
NOTES step-by- step way in order to provide ‘total cost’, sales effected in that period
and profit earned or loss suffered in that period. Cost sheet has columns for
recording ‘total costs’ as well as ‘per unit costs’ and sometimes it also has
additional columns for recording total costs as well as per unit cost for the
previous period. Such additional columns help instant comparison of present
period costs with costs of the pervious period.
3.2.1 Purpose of Cost Sheet
A cost sheet not only shows the total cost but also the various components
of total cost. Total cost is the total cost incurred on various elements for
manufacturing and selling a product or total cost incurred for production and
sale of a certain quantity of a product or for completion of a job, order or
process. A cost sheet serves the following purposes :
i) It discloses the cost per unit as well as the total cost of output.
ii) It discloses the various elements of cost.
iii It is useful for preparation of tender price or submission of quotations for

) job to be accepted or an order to be fulfilled.
iv) It helps management to find out the causes of variations and take steps to
eliminate or control the factors which are responsible for increasing total
cost. It becomes possible by making comparative study of the current
costs with the past results and standard costs.
v) It enables manufacturer to keep a close watch and control over the cost of
production.
vi) It helps the management in formulating a definite and useful production

policy.
A cost sheet, including sale and profit is also known as Production

Account. Like expanded form of cost sheet, the Production Account consists of
two parts. The first part shows the cost of production in total and break-up
costs and the second part known as the ‘Statement of Profit’ shows sales and
profit.

3.2.2 Proforma of Simple Cost Sheet Cost Sheet & Quotations
In the books of a Company

Cost Sheet for the period ended ............
Name of the Product .......... Units Produced ......... Units Sold .........
Particulars Total Cost Unit Cost NOTES
` `
Direct Materials - -
Add: Direct Labour (+) - -
Add: Direct Expenses (+) - -
 Prime Cost (1) - -
Add: Factory Overheads (+) - -
 Factory Cost (2) - -
Add: Office Overheads (+) - -
 Cost of Production (3) - -
Add: Selling and Distribution Overheads (+) - -
 Total Cost (4) - -
Add: Profit / (5) (+) - -
Less Loss (-) - -
- -
Sales - -
3.3.3 Proforma of Complex Cost Sheet
(Cost Sheet with Stock Adjustments)

In the books of a Company
Cost Sheet for the period ended ............
Name of the Product .......... Units Produced ........ Units Sold .........
Particulars Total Cost Unit Cost
` `
Opening Stock of Raw Materials - -
Add: Purchases of Raw Materials (+) - -
Add: Expenses on Purchases of Raw Materials (+) - -
- -
Less : Closing Stock of Raw Materials (-) - -
Less : Purchases Returns (-) - -
Less : Sale of Scrap or Defectives of Raw
Materials (-) - -
 Cost of Materials Consumed (1) - -

Cost Sheet & Quotations Add: Direct Labour (+ - -
) - -
Add: Direct Expenses
(+
 Prime Cost - -
)
Add: Factory Overheads - -
(2)
Add: Opening Stock of Work-in- - -
NOTES (+
Progress - -
)
Less : Closing Stock of Work-in-Progress (+ - -
(-) ) - -
Less : Sale of scrap or Defectives of Work-in-progress (-) - -
 Factory Cost (3)
Add: Office (+ - -
)
Overheads - -
(4) - -
 Cost of
Production (+ - -
)
Add: Opening Stock - -
Less : Closing Stock of Finished Goods (-)
of Finished Goods
 Cost of Goods Sold (5) - -
Add: Selling and Distribution (+) - -
Overheads - -
(6)
 Total Cost - -
(7) (+)
 Add Profit / - -
(-)
Less Loss - -
Sales - -
3.3
Summar
y List
Following is the summary list of various items of cost included in the
major group of cost and the synonymous terms used for the same in the
simplified preparation of a Cost Sheet Tender, Quotation and Estimates.
(DM) Direct Materials :
Viz. Direct Materials Cost , Prime Cost Materials, Cost of

Materials Consumed, Process Materials, Cost of Materials,
Purchased, Operating Materials, Value of Raw Materials Used, Basic
Materials, Productive Materials Cost.
e
Add : Purchases
.g. of Materials
Add : Primary
O Packing Charges
pen
Add : Expenses for Purchases of Raw Materials, e.g. Carriage Inward,
ing
Freight Inward, Carriage and Cartage, Octroi, Duty and Customs,
Sto
54 Advanced Cost Accounting - I Excise
ck Duty, Dock Charges, Clearing charges, Forwarding Charges,
Loading
of
Ra
w
Ma
and Unloading, Transaction Charges, etc. Cost Sheet & Quotations
Less : Closing Stock of Raw Materials
Less : Sale of Scrap or Defectives of Raw Materials
Less : Returns Outward or Purchases Returns or Returns to Suppliers or

Defective Materials Returned to Creditors. NOTES
(DL) Direct Labour :
Viz. Direct Labour Cost, Prime Cost Labour, Direct Wages, Process
Labour, Operating Labour, Basic Labour, Productive Labour
e.g. Productive Wages, Wages paid to direct workers, Outstanding
Wages, etc.
(DE) Direct Expenses :

Viz. Chargeable expesses, Prime Cost Expenses, Productive Expenses,
Basic Expenses.
e.g. Royalty, Hire of Special Plant, Cost of Patterns, Layout, designs
or Drawings, Architects Fees, Engineers Fees, Surveyors Fees,
Licence Fees, Outstanding Direct Expenses, etc.
(PC) Prime Cost :
viz. Direct Cost, Basic Cost, Operating Cost, First Cost, Productive
Cost, Flat Cost.
(F) Factory Overheads :
Viz. Works on Cost, Manufacturing Expenses, Factory Burden.

e.g. Indirect Materials, Factory Lighting, Expenses, Materials, Motive
Power, On Cost Materials, Factory Rent, Rates, Taxes and Insurance,
Indirect Labour, Property Tax on Factory Premises, On cost Wages,
Electric Power, Indirect Expenses, Rent of Raw Materials Stores, On
Cost Expenses, Workshop Rent, Heating and Lighting, Coal and Coke,
Steam, Gas and Water, Power and Fuel, Wages to Indirect Labours i.e.
Shop Floor Helpers, Supervisors, Cleaners, Oilers, etc. Remuneration
to Watch and Ward Staff, Instructors, Factory Clerical Staff, Works
Manager, Production Engineer, etc Technical Directors Fees, Labour
Welfare and Amenities to Production Staff, Expenses on Workers
Canteen, Entertainment Room, Creches etc. Consumable Stores,
Cotton, Oil and Wastes, Haulage, Lubricants, Expenses of Testing
Labs., Laboratory Expenses, Drawing Office Salaries,
Repairs, Maintenance,Renewals and Depreciation on Plant and
Machinery, Tools and Equipments, Fixtures and Patterns, Factory
Building etc. Cost of Factory Supervision, General Works
Overheads, Sundry Factory expenses, Other Manufacturing on Cost,
Factory Cleaning Charges, Storekeeping Expenses, Upkeep of Raw
Materials Stores, Time-keeping Expenses, Time Office Expenses,
Normal Wastage and Spoilage, Miscellaneous Production
Expenses, Works Stationary, Idle Time
A
d
v
a
n
Cost Sheet & Quotations Wages, Subscirption of Technical Journals and Magazines, Works
Office Expenses, Internal Transport, Materials Handling Charges,
Unproductive Wages, Wages and Salaries, Power and lighting, etc.
(FC) Factory Cost :

NOTES Viz. Works Cost, Manufacturing Cost, Production Cost.
(O) Office Overheads :

Viz. Administration Expenses, Management on Cost, Establishment
Overheads.
e.g. Indirect Materials, Indirect Labour and Indirect Expenses of
Administrative Office, Office Rent, Rates, Taxes, Insurance, Lighting,
etc. Property Tax on Office Premises, Office Salaries, Salaries and
Wages, Directors Fees, General Managers, Salaries and Allowances,
Counting House Salaries, Directors Travelling Expenses, General
Office Overheads, Electric Lighting, Electricity and Lighting Charges,
General on Cost, Sundry Expenses, Other Administrative Charges,
Miscellaneous Office Expenses, Expenses of Management, Branch
office Expenses, Office Cleaning Charges, Repairs, Maintenance,
Renewals and Depreciation on Office Furniture, Office Building,
Office Equipments, Office Appliances, etc. Renovation of
Administrative Office, Lighting and Power, Salaries and Wages,
Printing and Stationery, Postage and Telegrams, Telephone Charges,
Legal Fees, Audit Fees, Accountancy Charges, Office Conveyance,
General Fees, Air-conditioning to Administrative Office, Office
Supplies and Expenses, Bank Charges, General Establishment
Charges, Office Lighting, Subscription of Trade Journals, Public
Relation Expenses, etc.
(COP)
Cost of Production :
viz. Gross Cost, Office Cost.
(S) Selling and Distribution Overheads :
viz. Selling Expenses, Distribution on Cost, Marketing Overheads.

e.g. Indirect Materials, Indirect Labour and Indirect Expenses of Sales
Office, Salaries and Allowances to Sales Manager, Marketing
Executive, Publicity Officer, Travelling Salesmen, Sales Office Staff,
etc. ; Travelling Salesmen Salaries and Commission, Selling Agents
Salaries and Commission, Carriage on Sales, Commission on Sales,
Travelling Expenses, Carriage and Cartage Outward, Freight
Outward, Loading and Unloading of Finished Goods, Recurring
Expenses of Delivery Vans, Show-room Expenses, Sales Branches
and Sales Depot Expenses, Packing Charges, Secondary Packing
Charges, Advertisement, Publicity Charges, Cost of Special
Advertisement, After Sales Service Expenses, Distribution of free
Samples and Gifts, Diaries and Calenders, Gift Articles and Folders,
etc. Bad Debts, Debts Collection Charges, Cash Discount Allowed,
Catalogue Expenses, Tendering Expenses, Repairs, Maintenance,
Renewals and Depreciation on Delivery Vans, Sales
Depots, Show-rooms, Sales Premises, etc. Delivery Van Running Cost Sheet & Quotations
Expenses, Upkeep of Delivery Vans, Warehouse Expenses, Sales

Promotion Expenses, Rent, Rates, Taxes, Insurance and Lighting of
Sales Office, Selling on Cost, Warehouse Labour Charges, Other
Expensess for handling of Finished Goods in Stores, Sales Printing
and Stationery, Market Research Expenses, Estimating
Expenses, Demonstration Expenses, Loading and Unloading of NOTES
Finished Goods, Price List, Catalogue, Banners, Hand Bills, Posters,
etc. Export Duty, Drivers, Conductors, Cleaners Salaries and Wages,
Cost of Mailing Literature, Sales Promotion Expenses, etc.
(TC) Total Cost : Check Your Progress
Viz. Cost of Sales, Cost Price, Cost of Turnover, Sales Cost, Turnover i) How Prime Cost is
Cost, Net Cost. Calculated while preparing
Cost Sheet ?
(P) Profit : ii) Mention the major cost
heads shown in Cost Sheet.
Viz. Net Margin iii) Enumerate the items of

costs included in :
a) Factory Overheads
(L) Loss :
b) Office Overheads, and
(S) Sales : c) Selling and Distribution

Overheads.
Viz. Selling Price, Value of Sales, Market Price, Value of Turnover,

Invoice Price, Inflated Price, Loaded Price.
3.4 Illustrations
ILLUSTRATION 1
The expenditure incurred in the manufacturing and selling of product X’

for the three months ended 31-3-2012 is as given below :
`
Direct Material Cost 30,000
Engineers Fees 1,000
Power and Fuel 7,000
Wages Payable 2,000
Office Salary 5,000
Trade Discount 500
Chargeable Expenses 4,000
Haulage 3,000
General Expenses on Cost 1,000
Catalogue Expenses 1,500
Process and Operating Wages 13,000
Time-keeping Expenses 2,000
Electricity Charges 2,000
Donations for Educational Fund 1,000
Tendering Expenses 1,000
Cost Sheet & Quotations Commission on Sales 2,50
0
Tonnes manufactured and sold -1000
Prepare a Cost-Sheet of Benzene Manufacturers, Malad, showing the cost
of each element, the total cost per ton and the profits if the sales are made at `
100 per ton.
NOTES
SOLUTION
In the books of Benzene manufacturers, Malad
Cost-Sheet for Product X’ for the three months ended 31-3-2012
Units Produced -1,000 Tons

Units Sold -1,000 Tons
Particulars TotalCost UnitCost

` `
Direct Material Cost 30,000 30
Add: Direct Labour :
(1) Process and Operating Wages 13,000
(2) Wages Payable (+) 2,000 15,000 15
Add: Direct Expenses :
(1) Engineers Fees 1,000
(2) Chargeable Expenses (+) 4,000 5,000 5
(+)
 Prime Cost (1) 50,000 50
Add: Factory Overheads 12,000 12
(1) :
7,000
(2) Power and
(3) Fuel Haulage 3,000
(+)
Time-keeping 2,000
Expenses (+)
(2)
Add: 62,000 62
(1)  Factory 8,000 8
(2) Cost Office 5,000
(3) Overheads : 1,000
(+)
Office Salary 2,000
General on Cost
(3) (+)
Electricity Charges
Add: 70,000 70
(1) 5,000 5
(2)  Cost of
Production 1,500
(3) 1,000
Selling and (+)
Distribution 2,500
Overheads : (+)
(4)
Add Catalogue Expenses
(5) 75,000 75
: Tendering Expenses
(+) 25,000 25
Sales : Commission on Sales
1,00,000 100
 Total
Working Notes : Cost
Profits for the
(i) Trade Discount
Period and
(1,000 Donations
tons x for Educational Fund are the items to be
58 Advanced Cost Accounting - I excluded
` 100) from cost.
ILLUSTRATION 2 Cost Sheet & Quotations
From the following particulars relating to M/s Rajchand Rayon

manufacturers Chinchwad, prepare a Simple Cost-Sheet showing.
(a) Prime Cost, (b) Works Cost, (c) Cost of Production, (d) Cost of
Sales,
(e) Profit or Loss for the period, for six months ended 31-3-2012 NOTES
`
Cost of Materials Consumed 40,000
Oil and Waste 100
Operating Labour 9,000
Wages of Foreman 1,000
Direct Expenses 2,000
Store keepers Wages 500
Sales - Cash and Credit 1,00,000
Commission paid to the partner, Mr.Chandmal 350
Electric Power 200
Salary paid to the partner, Mr. Rajmal 650
Consumable Stores 1,000
Direct Wages Payable 1,000
Lighting :
(i) Factory Plant 500
(ii) Office Establishment 200
Carriage Outward 150
Rent :
(i) Administrative Office 1,000
(ii) Workshop 2,000
Warehouse Charges 200
Repairs and Renewals :
(i) Factory Plant 500
(ii) Machinery 1,000
(iii) Office Premises 200
(iv) Warehouse 100
Interest on Bank Overdraft 340
Advertising 400
Depreciation :
(i) Office Buildings 500
(ii) Machinery 200
Travelling Expenses 200
Office Manager’s Salary 2,250
Salesmen’s Commission and Salaries 500
Director’s Fees 500
Printing and Stationery 200
Telephone Charges 50
Postage 100
Bad Debts 450

Cost Sheet & Quotations SOLUTION
In the books of M/s Rajchand manufacturers, Chinchwad
Cost-Sheet for the six months ended 31-3-2012
Particulars Amount Amount

NOTES ` `
Cost of Materials Consumed 40,000
Add: Direct Labour : 10,000
(1) Operating Labour 9,000
(2) Direct Wages Payable (+) 1,000
Add: Direct Expenses (+) 2,000
 Prime Cost (a) 52,000 52,000
Add : Factory Overheads : 7,000

(1) Oil and Waste 100
(2) Wages of Foreman 1,000
(3) Store keepers wages 500
(4) Electric power 200
(5) Consumable Stores 1,000
(6) Lighting - Factory plant 500
(7) Rent- Workshop 2,000
(8) Repairs and Renewals- Factory Plant 500
(9) Repairs and Renewals- Machinery 1,000
(10) Depreciation-Machinery 200
(+)
(+)
 Works Cost (b) 59,000 59,000

Add: Office Overheads : 5,000
(1) Lighting-Office Establishment 200
(2) Rent-Administrative Office 1,000
(3) Repairs and Renewals- Office Premises 200
(4) Depreciation-Office Building 500
(5) Office Manager’s Salary 2,250
(6) Director’s Fees 500
(7) Printing and Stationery 200
(8) Telephone Charges 50
(9) Postage 100
(+)
(+)
 Cost of Production (C) 64,000 64,000
60 Advanced Cost Accounting - I Add: Selling and Distribution Overheads : 2,000 2,000
(1) Carriage Outward 150
(2) Warehouse Charges 200
(3) Repairs and Renewals-Warehouse 100 Cost Sheet & Quotations
(4) Advertising 400

(5) Travelling Expenses 200
(6) Salesmen’s Commission and Salaries 500
(7) Bad Debts (+) 450
(+) NOTES
 Cost of Sales (d) 66,000 66,000

Add: Profit for the Period (e) (+) 34,000 34,000
Sales-Cash and Credit 1,00,000 1,00,000
Working Notes :
(1) Commission paid to the partner Mr. Chandmal, salary paid to the partner
Mr. Rajmal and Interest on Bank Overdraft are the items to be excluded
from cost.
ILLUSTRATION 3
The Cost of sale of product ‘Butanol’ is made up as follows ;
`
Royalties 1,000
Materials used in Production -Direct 12,000
Carriage on Sales 1,250
Materials used in Primary Packing 9,000
Carriage on Purchases 5,000
Materials used in Secondary Packing 1,500
Bad Debts 3,250
Materials used in Factory Workshop 750
Coal and Coke 1,750
Materials used in Administrative Office 1,250
Administration on Cost 750
Labour required in Manufacturing-Direct 9,500
General Overheads 1,000
Purchases of Raw Materials 44,000
Labour required for Works Supervision 2,500
Motive Power 1,000
Productive Wages Payable 500
Chargeable Expenses 4,000
Assuming that all products manufactured in Peterson Chemicals Ltd.

Bhosari are sold, what should be the Invoice Price to obtain a profit of 20% on
Selling Price?

In the books of Peterson Chemicals Ltd., Bhosari
Cost Sheet for the period ended......
Name of the Product : Butanol
NOTES
` `
Direct Materials : 70,000
(i) Materials used in Production- Direct 12,00
(ii) Materials used in Primary Packing 0
9,000
(iii) Purchases of Raw Materials
44,00
(iv) Carriage on Purchases
0
(+)
5,000
Add: Direct Labour :
(v) Labour required inManufacturing-Direct (+) 10,000
9,500
(vi) Productive Wages Payable
(+) 500
Add: Direct Expenses : (+) 5,000
(vii) Royalties 1,000
(viii) Chargeable Expenses 4,000
(+)
(1) 85,000 85,000
 Prime
6,000
Cost Add : Factory
Overheads : 750
(ix) Materials 1,750

used in 2,500
Factory
Workshop 1,000
(x) Coal and (+)
Coke
(2) 91,000 91,000
(xi) Labour
required for
Works 1,250
Supervision
750
(xii) Motive
Power 1,000
(+) (+)
(3) 94,000
 Factory Cost 6,000

(xiii) Materials used in 1,500
Administrative
3,250
Office
(xiv) Administration on
Cost
(xv) General Overheads
(+)
 Cost of
Production
Add: Selling and Distribution
Overheads
Working Notes : Cost Sheet & Quotations
(1) Calculation of Profit i.e. 20% on Selling

Price Selling Price = Total Cost +
Profit
100If 80 TC = 20 P 80
20 NOTES
 ` 1,00,000 TC = ?
` 1,00,000 X 20
=
80
= ` 25,000
ILLUSTRATION 4
Prepare a Statement of Cost from the following information relating to

Cotton Textiles Ltd. Mumbai, for the year ended 31-3-2012
`
Cost of Direct Materials 2,00,000
Sales 4,00,000
Direct Wages 1,00,000
Office Indirect Materials 5,000
Cost of Special Patterns 40,000
Postage and Telegram 2,000
Bad Debts and Recovered 250
Factory Rent and Insurance 5,000
Outstanding Chargeable Expenses 2,000
Carriage Outward 2,500
Interest on Loan 2,150
Printing and Stationery 500
Factory Indirect Wages 3,000
Selling on Cost 4,000
Travelling Salesman’s Salary 4,000
Works Indirect Materials 1,000
Royalties 8,000
Genral Works Overheads 2,000
Bad Debts written-off 1,000
Also calculate the percentage of profits earned to sales.

In the books of Cotton Textiles Ltd., Mumbai
Statement of Cost for the year ended 31-3-2012
Particulars Amount
NOTES Amount
` `
Cost of Direct Materials 2,00,000
Add : Direct Wages (+)
1,00,000
Add : Direct Expenses :
50,000
(i) Cost of Special Patterns 40,00
0
(ii) Outstanding Chargeable Expenses
2,00
(iii Royalties
0
)
(+)
(+)
 Prime Cost 8,000 (1) 3,50,000
3,50,000
Add : Factory Overheads
: 11,00
(i) Factory Rent and Insurance 5,00
0
0
(ii) Factory Indirect Wages
3,00
(iii) Works Indirect Material
0
(iv Genral Works Overheads
1,00
)
(+)0
 Factory (2)
(+) 3,61,000
Cost 3,61,000
Add : Office Overheads
2,00
: 7,50
(i) Office Indirect Materials 5,0000
0
(ii) Postage and Telegram 2,000
(iii printing and Stationery (+)
) 500
(+)
 Cost of (3) 3,68,500
Production 3,68,500
Add : Selling and Distribution
Overheads: 11,50
(i) Carriage 2,500
0
(ii) Outward Selling 4,000
(iii) on Cost 4,000
(iv Travelling Salesman’s Salary (+)
) 1,000
Bad Debts written-off (+)
 Total Cost (4) 3,80,00 3,80,00
0 0
Add : Profits for the (5) (+)
20,000 20,000
years Sales 4,00,000 4,00,000
Working Notes :
(1) Calculation of percentages of profits earned to sales
If ` 4,00,000 Sales = ` 20,000 profit
 100 =?
100 X ` 20,000 Cost Sheet & Quotations
=
` 4,00,000
= 5%
(2) Bad Debts recovered and Interest on Loan are the items to be excluded
from cost.
NOTES
ILLUSTRATION 5
Majestic Furnitures Ltd. Manmad, manufactures Cots, Tables, Chairs and

Cupboards. The following are the cost details available for the year ended 31st
March, 2012.
Particulars Prime Cost ProcessLabour Productiv Value of
Materials e
` ` Expenses Turnove
Cots 50,000 30,000 16,00
` r
1,50,000
0
Tables 45,000 20,000 `
1,20,000
19,00
Chairs 70,000 40,000 2,00,000
0
Cupboards 28,000 50,000 1,30,000
18,00
Total 1,93,00 1,40,00 0 6,00,000
0 0
Additional Information : 2,00
0
• Works on Cost.....80% of Direct Wages 55,00
0
• Bad Debts Provision ... ` 600
• Administrative Overheads ... ` 15,00

0
• Bad Debts Recovery ... ` 250
• Selling and Distribution ... ` 12,00

Expenses ... ` 0
• Book Debts 41,00
Allocate Management on Cost on the basis of Works Cost and 0Selling
and Distribution Overheads on the basis of Actual Sales.
You are required to prepare a Simple Cost Statement showing the

following in case of each of the product in the columnar form.
(a) Direct Cost,
(b) Factory Cost,
(c) Cost of Production,
(d) Cost of Sales,
(e) Profit or Loss for the year.

In the books of Majestic Furniture Ltd., Manmad
Cost Statement for the year ended 31st March, 2012
Particulars Cots Tables Chairs Cupboard Total
` ` ` s `
NOTES
`
Prime Cost Materials 50,000 45,000 70,000 28,000 1,93,000
Add : Process Labour 30,000 20,000 40,000 50,000 1,40,000
Add : Productive Expenses (+) 16,000 19,000 18,000 2,000 55,000
 Direct Cost 96,000 84,000 1,28,000 80,000 3,88,000
(a)
Add : Works on Cost
(80% of Direct
Wages 24,000 16,000 32,000 40,000 1,12,000
i.e. Process Labour) 1,20,000 1,00,000 1,60,000 1,20,000 5,00,000
(+)
3,600 3,000 4,800 3,600 15,000
 Factory Cost (b)
1,23,600 1,03,000 1,64,800 1,23,600 5,15,000
Add :Administrative
Overheads
3,000 2,400 4,000 2,600 12,000
(+)
1,26,600 1,05,400 1,68,800 1,26,200 5,27,000
 Cost of Production (c)
Add : Selling and
23,400 14,600 31,200 3,800 73,000
Distribution Expenses
(+) 1,50,000 1,20,000 2,00,000 1,30,000 6,00,000
 Cost of Sales
Working
(d) Notes :
(1)Add Allocation
: Profits for of
theManagement on Cost (i.e. Administrative Overheads) on the
year of Works Cost (i.e. Factory Cost).
basis
(e)
Particulars
(+) Cots Tables Chairs Cupboards
Value of Cost
Factory Turnover ` 1,20,000 1,00,000 1,60,00 1,20,000
0
 Ratio 6 5 6
8
Allocation of Administrative
Overheads 3,600 3,000 3,600
4,800
(2)` Allocation of Selling and Distribution Overheads (i.e. Selling and

(` 15,000 X 6 : 5 : 8Expenses)
Distribution : 6) on the basis of Actual Sales (i.e. Value of
Turnover).
Particulars Cots Tables Chairs Cupboard
s
Value of Turnover ` 1,50,000 1,20,000 2,00,000 1,30,000
 Ratio 15 12 20 13
Allocation of Selling
and Distribution
66 Advanced Cost Accounting - I Expenses
(` 12,000 X 15 : 12 : 20 : 13) ` 3,000 2,400 4,000 2,600
(3) Bad Debts Provision, Bad Debts Recovery and Book Debts are the items Cost Sheet & Quotations
to be excluded from cost.
ILLUSTRATION 6
Sudarshan Chemicals ltd., Satana, produces a standard product, the cost

data relating to the same for April, 2012 is given below. You are required to
prepare a Cost Sheet showing separately
NOTES
(a) Cost of Materials Consumed, (b) Prime Cost, (c) Works Cost,
(d) Cost of Production (e) Total Cost, (f) Net Profit and (g) Market Price.
`
Purchases of Materials-Cash 4,000
Establishment Overheads : 20% of Factory Cost
Wages Payable 800
Purchases of Materials-Credit 12,000
Works Overheads : 80% of Direct Wages
Cost of Special Designs 850
Clearing charges on Purchases 1,200
Productive Wages 3,200
Selling on Cost : ` 4 per unit sold
Chargeable Expenses Payable 150
Defective Materials Retuned 400
Distribution Overheads : ` 1 per unit dispatched
Trade Discount 785
During the month of April, 2012 units sold and dispatched were 1,300
units only. Also find out the market price per unit on the basis that profit mark-
up is uniformly made to yield a profit of 4% on Cost of Sales.

In the books of Sudershan Chemicals Ltd. Satana
Cost Sheet for the month ended 30th April, 2012
Units Produced - 1,300

NOTES Units Sold -
Particulars
1,300
Amount Amount
` `
Purchases of Materials 16,000
(i) Cash 4,000 16,800 16,800
(ii) Credit (+) 12,000 4,000
Add : Clearing Charges on Purchases (+) 1,200
17,200
Less : Defective Materials Returned (-) 400
1,000
 Cost of Materials Consumed (a)
Add: Direct Labour : (+
(iii) Wages Payable )
(iv) Productive Wages 80
0 21,800 21,800
Add : Direct Expenses :
(v) Cost of Special Designs (+) 3,200
3,200
(vi) Chargeable Expenses
Payable 850 25,000 25,000
(+) 150
 Prime (+) 5,000
Cost Add : Works (b) 30,000 30,000
Overheads :
(80% of (+) 5,200
Direct Wages i.e. `
4,000) (c)
 Works Cost 1,300
Add: Establishment (+)
Overheads :
(20% of Factory Cost
i.e. ` 25,000) 36,500 36,500
(+)
 Cost of
Production
1,460 1,460
Add: Selling and (+)
Distribution Overheads : 37,960 37,960
(vii) Selling on Cost

(` 4 x Units Sold - (e
1,300 i.e. ` 5,200) )
(ii) Distribution (f
Overheads - )
( ` 1 x Units (+
Dispatched- 1,300 i.e. )
68 Advanced Cost Accounting - I ` 1,300) (g
 Total )
Cost Add: Net Profit

(4% on Cost of
Sales i.e. ` 36,500)
Working Notes : Cost Sheet & Quotations
(1) Calculation of Net Profit i.e. 4% on Cost of Sales.

= 4% of ` 36,500 i.e. Cost of Sales
= ` 1,460
(2) Calculation of Market Price per unit.
NOTES
Market Price
=
Number of Units Sold
` 37,960
=
Units 1,300
= ` 29.20 per unit.
ILLUSTRATION 7
The following data have been extracted from the books of M/s Sunshine
Industries Ltd., Sholapur, for the calender year 2011-2012
`
Opening Stock of Process Materials 25,000
Wages - Direct 70,000
Rent and Taxes 5,500
(Factory -10/11, Office - 1/11)

Freight on purchases of Raw Materials 5,000
Indirect Materials 500
Sales Promotion 2,000
Interest on Debentures 5,200
Depreciation :
(i) Plant and Machinery 1,500
(ii) Office Equipments 1,000
Closing Stock of Process Materials 35,000
Wages - Indirect 10,000
Cost of Designs and Drawings 12,000
Salaries :
(i) Office Staff 2,500
(ii) Travelling Salesmen 2,000
Productive Expenses 3,000
Defective materials returned -Process Material 5,000
Other Works on Cost 5,700
Office Overheads 4,900
Manager’s Remuneration :
(i) Works 2,300
Cost Sheet & Quotations (ii) Office 6,100
Productive Wages due but not paid 5,000
Irrecoverable Debts 1,000
Sales 2,50,000
NOTES Debt Collection Charges 1,100

Advance payment of Income Tax 2,000
Selling on Cost 3,900
Prepare a Statement of Cost showing profits earned during the year 2011-2012.
SOLUTION
In the books of M/s Sunshine Industries Ltd. Sholapur

Statement of Cost for the calender year 2011-2012
Particulars Amount
Amount
` `
Opening Stock of Process Materials 25,00
0
Add : Purchases of Raw Materials
85,00
Add : Freight on Purchases of Raw Materials (+) 5,000
0
1,15,000
Less: Closing Stock of Process Materials (-)
35,000
Less: Defective Materials returned -
Process Materials (-) 5,00
0
 Cost of Materials Consumed (1) 75,00 75,00
0 0
Add : Direct Labour : (+
75,00
(1) Wages-Direct )
0
(2) Productive Wages due but not paid 70,00
(+)
Add : Direct 0 (+ 15,00
Expenses : 0
(1) Cost of Designs and Drawings ) 5
,000
(2) Productive Expenses (+ 12,00
)
 Prime Cost 0 (2) 1,65,000
1,65,000
Add : Factory Overheads 3
: ,000
(+)
(1) Rent and Taxes -
25,000
5,000
Factory (10/11 x ` 5,500)
500
(2) Indirect Materials
1,500
(3) Depreciation on Plant
and Machinery 10,00
0
(4) Wages -Indirect
5,700
(5) Other Works on Cost (+
) 2,300
(6)  Works Cost
Manager’s (3) 1,90,000 1,90,000
Remuneration-Works
Add : Office (+) 15,000 Cost Sheet & Quotations
Overheads :
(1) Rent and Taxes -
500
Office (1/11 x ` 5,500)
1,000
(2) Depreciation on Office
Equipments 2,500
(3) Salaries-Office staff 4,900 NOTES

(4) Office Overheads (+ 6,100
)
(5) Manager’s (4) 2,05,000 2,05,000
Remuneration-Office
Add : Selling and
 Cost of
Distribution 10,000
Production
(1) Overheads
Sales Promotion
: 2,000
(2) Salaries-Travelling Salesmen 2,000
(3) Irrecoverable Debts 1,000
(4) Debts Collection Charges 1,100
(5) Selling on Cost (+ 3,900
)
 Total Cost (5) 2,15,000 2,15,000
Add : Profits Earned (6) 35,000 35,000
(+)
Sales 2,50,000 2,50,000
Working Notes :
(1) Interest on Debentures, Advance payment of Income-Tax etc. are the

items to be excluded from cost.
ILLUSTRATION 8
The accounts of Dorabjee Manufacturers, Deolali for the year ended 31-3-
2012 show the following.
`
Stock of Raw Materials as on 1-4-2011 67,200
Bad Debts written-off 9,100
Raw Materials Purchased 2,59,000
Motive Power 320
Traveller’s Commission 10,780
Depreciation on Office Equipments 420
Carriage Inwards 720
Interest on Bank Loan 380
Factory Taxes 11,900
Productive Wages 1,76,400
Directors Travelling Expenses 8,400
Coal and Coke 560
General Overheads 4,760
Gas and Water - Factory 1,680
Packing Charges 940
Sales of Finished Goods 6,00,000
Manager’s Salary 15,000
(Factory - 2/3, Office - 1/3)

Delivery Van Expenses 4,060
Depreciation on Factory Building 18,200
Publicity Charges 2,000
Repairs to Plant 6,340
Hire Charges of Special Machinery 9,010
Office Rent 2,800
Surveyor’s Fees 590
Legal Charges 620
Prepare a Cost-Statement giving the following details for the year ended
31-3-2012
(1) Cost of Materials Consumed
(2) Prime Cost
(3) Works Cost
(4) Cost of Production
(5) Total Cost
(6) Net Profit for the year.
SOLUTION
In the books of Dorabjee Manufacturers, Deolali
Cost-Statement for the year ended 31-3-2012

` `
Add: Raw materials purchased 2,59,000
Add: Carriage inward (+ 720
3,26,920
Less: Stock of Raw Materials as on 31-3-2012 ) 87,920
 Cost of Materials (1) 2,39,000 2,39,000
Consumed Add: Productive Wages (-)
(+) 1,76,400
9,600
(1) Hire Charges of Special
Machinery 9,010
(2) Surveyor’s Fees 590
 Prime Cost (+) (2) 4,25,000 4,25,000
72 Advanced Cost Accounting - I Add: Factory Overheads : 49,000
(1) Motive Power 320 Cost Sheet & Quotations
(2) Factory Taxes 11,900
(3) Coal and Coke 560
(4) Gas and Water -Factory 1,680
(5) Manager’s Salary- Factory
(2/3 X` 15,000) 10,000
(6) Depreciation on Factory 18,200 NOTES
Buildings (+) 6,340
(7) Repairs to Plant
 Works (3) 4,74,000 4,74,000
Cost Add: Office 22,000
Overheads : 420
(8) Depreciation on 8,400
Office Equipments 4,760
(9) Director’s
Travelling
Expenses 5,000
(10) Genral Overheads 2,800
(11) Manager’s Salary- Office (+) 620
(4) 4,96,000 4,96,000
(1/3 X` 15,000)
34,000
(12) Office Rent
9,100
(13) Legal Charges
10,780
 Cost of Production
Add: Sellingand 940
DistributionOverheads 4,060
(14) Bad Debts written-off 2,000
(15) Traveller’s Commission (+) 7,120
(16) Packing Charges (5) 5,30,000 5,30,000
(17) Delivery Van Expenses (6) (+) 70,000 70,000
(18) Publicity Charges
6,00,000 6,00,000
(19) Carriage Outward
Working Notes :
 Total Cost
(1)Add: Net Profitonfor
Interest the year
Bank Loan is an item to be excluded from Cost.
Sales of Finished Goods
ILLUSTRATION 9
Following details have been obtained from the cost records of Colgate
Ltd., Kolkata for the year ended 31-3-2012
`
Stock of Operating Materials as on 1-4-2011 30,000
Wages paid to Direct Workers 55,000
Interim Dividend paid 12,000
Heating and Lighting 6,000
Counting House Salaries 20,000
Carriage and Cartage on Purchases of Raw
Materials 3,000
Commission on Sales 5,000
Wages Payable 5,000
Technical Director’s Fees 10,000
Stock of Operating Material as on 31-3-2012 40,000 Advanced Cost Accounting - I 73
Cost Sheet & Quotations Show-Room Expenses 7,000
Establishment on Cost 12,000
Share Transfer Fees 2,000
Expenses of Testing Labs. 4,000
Branch Office Expenses 8,000
After-Sales Service Expenses 8,000
NOTES
Selling Price 2,50,000
Prepare a Cost-Sheet showing :
(1) Cost of Raw Materials Consumed

(2) Prime Cost
(3) Works Cost
(4) Cost of Production
(5) Total Cost
(6) Profit or Loss
Also calculate the percentage of
(7) Factory Overheads to Direct Wages

(8) Office on Cost to Works Cost
(9) Selling and Distribution Expenses to Cost of Production.
SOLUTION
In the books of Colgate Ltd. Kolkata
Cost-Sheet for the year ended 31-3-2012
` `
Stock of Operating Material ason 1- 4 -2011 30,000

Add: Purchases of Raw Materials 87,000
Add: Carriage and Cartage on Purchases
of Raw Materials 3,000
(+)
1,20,00
Less :Stock of Operating Materialsas on 31-3-2012(-) 0
 Cost of Materials 40,000 80,000
(1) 80,000
Consumed Add: Direct Labour :
60,000
(1) Wages paid to Direct Workers
55,000
(2) Wages Payable
(+) 5,000
(+)
 Prime Cost (2) 1,40,000 1,40,000
Add: Factory Overheads : 20,000
(1) Heating and Lighting 6,000
(2) Technical Director’s Fees 10,000
(3) Expenses of Testing Labs 4,000
(+)
74 Advanced Cost Accounting - I (+)
 Works Cost (3) 1,60,000 1,60,000
Add: Office Overheads : 40,000 Cost Sheet & Quotations
(1) Counting House Salaries 20,000
(2) Establishment on Cost 12,000
(3) Branch Office Expenses (+) 8,000
(+)
 Cost of Production (4) 2,00,000 2,00,000
Add: Selling and Distribution Overheads: 20,000 NOTES
(1) Commission on Sales 5,000
(2) Show Room Expenses 7,000
(3) After Sales-Service Expenses (+) 8,000
(+)
 Total Cost (5) 2,20,000 2,20,000
Add: Profit (6)(+) 30,000 30,000
Selling 2,50,000 2,50,000
Price
Working Notes :
(1) Calculation of Percentage of Factory Overheads to Direct Wages.
If ` 60,000 D.W. = ` 20,000 F.O.

 100 = ?
100 X ` 20,000
=
` 60,000
= 33.33%
(2) Calculation of percentage of Office on Cost to Works Cost.
If ` 1,60,000 W.C. = ` 40,000 O.O.C.

 100 = ?
100 X ` . 40,000
=
` 1,60,000
= 25%
(3) Calculation of percentage of Selling and Distribution Expenses
to Cost of Production.
If ` 2,00,000 C.O.P. = ` 20,000 S. & D.E.

 100 = ?
100 X ` 20,000
=
` 2,00,000
= 10%
(4) Interim Dividend and Share Transfer Fees etc. are the items to be
excluded from Cost.

ILLUSTRATION 10
The Following is the Trading and Profit and Loss Account of Sarabhai
Chemicals Ltd. Surat, for the year ended 31-3-2012
Dr Trading and Profit and Loss Account
. Cr. for the year ended 31st March, 2012
NOTES
Particulars ` Particulars `
To Stock of Raw Materials 1-4-2011 18,000 By Sales 5,00,000

5,10,000
To Purchases of 2,52,000 2,50,000 Less :Returns Inward(-) 10,000
Raw Materials
Less: Returns Outward (-) 2,000
To Productive Wages 1,02,000 ByStock of RawMaterials
To Carriage on Purchases 25,000 on 31-3-2012 10,000
To Royalty 7,200 By Sale of Scrap Materials 1,000
To Gas and Water 19,000
To Custom and Duty 8,000
To Chargeable Expenses
due but not paid 2,800
To Wages Outstanding 8,000
To Heating and Lighting 11,000
To Gross Profit C/D 60,000
5,11,000 5,11,000
To Carriage on Sales 5,000 By Gross Profit B/D 60,000
To Underwritting Commission 4,500 By Interest on Investment 1,000
To Commission on Sales 7,600
To Sales Depot Expenses 2,400
To Salaries 16,000
To Bad Debts Provision 1,500
ToPropertyTax on OfficePremises 2,000
To Depreciation on Office
Equipments 2,000
To Net Profit C/D * 20,000
61,000 61,000
You are required to prepare a Cost Statement for the year ended 31-3-
2012 showing
(1) Cost of Materials Consumed, (2) Flat Cost, (3) Manufacturing Cost,
(4) Gross Cost, (5) Cost of Turnover, (6) Profits for the year.
Also calculate the percentage of profit on sales.

SOLUTION Cost Sheet & Quotations
In the books of Sarabhai Chemicals Ltd., Surat

Cost Statement for the year ended 31st March, 2012

` ` NOTES
Stock of Raw Materials on 1-4-2011 18,000
Add :Purchases of Raw Materials (+) 2,52,00
0
Add :Expenses on Purchases of Raw Materials :
(i) Carriage on Purchases
(+) 25,000
(ii) Custom and Duty 8,000
(+)
3,03,00
0
Less: Stockof RawMaterialson 31-3-2012 (-)
10,000
Less: Returns Outward (-)
2,000
Less: Sale of Scrap Materials (-)
1,000
 Cost of Materials Consumed 2,90,000
(1) 2,90,000
Add :Direct Labour :
1,10,000
(i) Productive Wages
(+) 1,02,00
0
(ii) Wages Outstanding
(+) 8,000
10,000
Add :Direct Expenses :
(iii) Royalty 7,200
(iv) Chargeable Expenses due but not 2,800 4,10,000
paid (+)
(2) 4,10,000
 Flat Cost
30,000
Add : Factory Overheads
19,000
:
11,000 4,40,000
(v) Gas and Water
(vi) Heating and (3) 4,40,000
Lighting 20,000
(+)
16,000
 Manufacturing
2,000
Cost Add : Office Overheads : 4,60,000
2,000
(vii) Salaries
(viii) Property Tax on Office (4) 4,60,000
Premises 15,000
(ix) Depreciation on Office 5,000
Furniture
(+) 7,600
4,75,000
2,400
 Gross 25,000
Cost
(5) 4,75,000
Add :
(6) (+) 25,000
SellingandDistributionOverheads
: Advanced Cost Accounting - I 77
5,00,000 5,00,000
(x) Carriage on Sales
(xi) Commission on Sales
(xii) Sales Depot Expenses
Cost Sheet & Quotations Working Notes :
(1) Calculation of percentages of Profit on Sales.
If ` 5,00,000 Sales = ` 25,000 Profit

 100 =?
NOTES
100 X ` 25,000
= 5%
` 5,00,000
(2) Underwriting Commission, Bad Debts Provision, and Interest on

Investment are the items to be excluded from cost.
ILLUSTRATION 11
The cost accounts of Eagle Ltd. Allahbad, for the year ended 31-3-2012
showed the following information.
Types of Stock As on 1-4-2011 As on 31-3-2012
` `
Raw Materials 65,000 50,000
Work-in-Progress 10,000 7,500
Finished Stock 15,000 5,000
`
Underwriting Commission 10,000
Purchases of Raw Materials 2,60,000
Selling Overheads 8,000
Drawing Office Salaries 12,000
Productive Labour 1,65,000
Audit Fees 7,000
Establishment on Cost 2,000
Steam, Gas and Water 1,500
Sales 5,50,000
Rent 15,000
(Factory -66 2/3 %, Office - 33 1/3%)

Architect’s Fees 10,000
Wages Outstanding 5,000
Octroi and Duty 5,000
Distribution on Cost 2,000
Prepare a Cost-Sheet showing
(a) Cost of Materials Consumed, (b) Basic Cost, (c) Works Cost,
(d) Cost of Production, (e) Cost of Turnover, (f) Profit.

In the books of Eagle Ltd., Allahabad

Particulars Amount
Amount
Stock as on 1-4-2011 Raw 65,000 ` NOTES
Add Materials Purchases of Raw (+)
`
: Materials Octroi and Duty 2,60,000
Add (+)
3,30,000
5,000
Less:
: Stock as on 31-3-
2012 Raw Materials (-) 50,00
 Cost of Materials 0 2,80,000 2,80,000
Consumed (a) 1,70,000
Add: Direct Labour 1,65,00
(1) Productive Labour (+ 0
(2)
Add: Wages
Direct Outstanding
Expenses : ) 5,000
(1) Architect’s Fees (+) 10,00
 Basic (b) 0 4,60,000
Cost Add: Factory 4,60,000
Overheads : 12,00 23,50
0 0
(1) Drawing Office
Salaries 1,50
(2)
Add: Steam,
Stock asGas
on and
1-4-2011 Works-in-Progress(+) 0 10,000
Water 10,00 4,93,500
0
Less:
(3) Stock 2/3 Works-in-Progress(-)
as on 31-3-2012
Rent-Factory(66 7,500
% i.e. 2/3
ofWorks
` 15,000)(+)
Cost (c) 4,86,000 4,86,000
(1) Audit Fees 7,000
(2) Establishment on Cost 2,000
(3) Rent-Office (33 1/3 % i.e. 1/3 of ` 15,000) (+) 5,000
 Cost of Production (d) 5,00,000 5,00,000
Add: Sellingand Distribution Overheads: 10,000
(1) Selling Overheads 8,000
(2) Distribution on Cost (+) 2,000
Add: Stock as on 1-4-2011 - Finished Stock (+) 15,000
5,25,000
Less: Stock as on 31-3-2012 - Finished Stock (-) 5,000
 Cost of Turnover (e) 5,20,000 5,20,000
Add: Profits (f) (+) 30,000 30,000
Sales 5,50,000 5,50,000
Working Notes :
(1) Underwriting Commission is an item to be excluded from

cost.

Cost Sheet & Quotations ILLUSTRATION 12
Following information of Finolex Ltd. Faizpur, relates to a commodity for

the year ending 31-3-2012
`
NOTES
Opening Stock as on 1-4-
2011
(i) Raw Materials 5,000
(ii) Work-in-Progress 1,200
(iii) Finished Goods (1,000 Tons) 4,000
Closing Stock as on 31-3-

2012
3,00
(i) Raw Materials 0
(ii) Work-in-Progress 3,20
0
(iii Finished Goods (2,000 Tons)
) 9,00
0
Prime Cost Labour 25,000
Excise Duty on purchases of Raw Materials 2,000
Administration Overheads 8,000
Cost of Factory Supervision 12,000
Income Tax 5,000
Carriage and Cartage 1,000
Management Expenses 1,000
Accountancy Charges 1,000
Preliminary Expenses 3,200
Sales of Finished Goods 1,17,500
Advertising, Bad Debts and Selling on Cost amounted to 50 paise per ton
sold. 16,000 tons of commodities were produced during the year 2011-2012.
Prepare a Cost-Sheet showing
(1) Cost of Materials Consumed, (2) Prime Cost, (3) Works Cost, (4) Cost
of Production, (5) Cost of Goods Sold, (6) Cost of Sales, (7) Profits for the
period,
(8) Profits per ton of commodity sold.

In the books of Finolex Ltd. Faizpur

Units Produced -16,000 Tons

Units Sold - 15,000 Tons
NOTES
Particulars Amount
Amount
` `
Opening Stock as on 1-4-
2011 Raw Materials 5,00
0
Add: Purchases of Raw Materials :
35,00
Add: Expensesfor Purchasesof Raw
0
Materials:
(1) Excise Duty on Purchases of
2,00
Raw Materials 0
(2 (+ 1,00
)
Carriage and Cartage ) 0
43,00
Less: Closing Stock ason 31-3-2012 Raw Materials (-)
0
 Cost of Materials Consumed (1 40,00 40,00
3,00
) 0 0
Add Prime Cost Labour 0
: (+ 25,00
 Prime Cost 65,00 65,00
) 0
0 0
Add Cost of Factory Supervision
(2)
: Opening Stock as on 1-4-2011 Work-in-
12
Progress(+)
Add: 78,20,0
0 00
Less: Closing Stock as on 31-3-2012 Work-in-Progress 3,20
(-) 3,20
1,2 0
(3) 75,00 75,00
0 00
 Works Cost 0 0
Add :Office
Overheads : 10,00
(1 Administration Overheads 8,00
0
) 0
Management Expenses
(2 1,00
Accountancy Charges (+
) 0
)
 Cost of Production (4) 85,000 85,000
(3 1,00
)Add: Opening Stock as on 1-4-2011 Finished Goods(+) 0 4,000
89,000
Less: Closing Stock as on 31-3-2012 Finished Goods(-) 9,000
 Cost of Goods Sold (5) 80,000 80,000
Add: Advertising, Bad Debts and Sellingon Cost
(50 Ps. x 15,000 Tons ) (+) 7,500
 Cost of Sales (6) 87,500 87,500

Add: Profits for the period (7) (+) 30,000 30,000
Sales of Finished Goods 1,17,500 1,17,500

(1) Calculation of Units Sold during the year 2011-

2012
Tons
Opening Stock of Finished Goods as on 1-4-2011 1,000
NOTES
Add : Production during the year (+) 16,000
17,000
Less : Closing Stock of Finished Goods as on 31-3- (-) 2,000
2012
 Units Sold 15,00
0
(2) Calculation of Profits per ton of commodity sold
-
If 15,000 Tons = Profit ` 30,000

 1 Ton = ?
1 ton x ` 30,000
=
15,000 Tons
= ` 2 per ton
(3) Income Tax, Preliminary Expenses etc. are the items to be excluded from
Cost.
ILLUSTRATION 13
The following information has been obtained from the records of Quality
Manufacturing co. Ltd., Bharatpur, for the year ended 31-3-2012
Summary of Stock Position

Types of Stock As on 1-4-2011 As on 31-3-2012
` `
Finished Goods-Stock 50,000 75,000
Raw Materials 20,000 25,000
Stock of Work-in-Progress 5,000 7,000
Additional Information `
Purchases of Raw Materials 1,30,000
Wages Outstanding 3,000
Indirect Materials 12,000
Discount on issue of Debentures 8,000
Freight Inward 15,000
Property Tax on Factory Building 8,000
Director’s Travelling Expenses 8,000
Carriage on Sales 5,000
Defective Raw Materials Returned 5,000
Direct Chargeable Expenses 2,000
Workshop Rent 7,000
Expenses for participating in Industrial Exhibition 3,000
Value of Sales 3,00,000
82 Advanced Cost Accounting - I Office Cleaning Charges 2,000

Sales Promotion Charges 6,000 Cost Sheet & Quotations
Miscellaneous Overheads 7,000
Upkeep of Delivery Vans 1,000
Motive Power 5,000
Productive Wages 60,000
Postage and Telegrams 3,000
Prepare a Statement of Cost showing : NOTES
(1) Value of Raw Materials Consumed, (2) Direct Cost, (3) Manufacturing Cost,
(4) Cost of Production, (5) Cost of Goods Sold, (6) Cost of Turnover, (7) Profit.
Also calculate the percentage of Profit on Cost Price and on Selling Price
separately.
SOLUTION
In the books of Quality Manufacturers Ltd., Bharatpur
Statement of Cost for the year ended 31-3-2012

` `
Raw materials as on 1-4- 20,000
Add 2011 Purchases of Raw 1,30,00
: Materials Freight Inward (+) 0
Add 15,000
:
1,65,00 1,35,000
Less : Raw Materials as on 31-3-2012 (-) 0 63,000
Defective Raw Materials (-) 25,000
Less : returned 5,000 1,35,000
 (1) 2,000
Add: ValueofRawMaterialsConsumed
(1) Direct Labour : (+) 60,000
(2) Productive Wages 3,000
Add: Wages Outstanding (+) 2,00,000
2,00,000
Direct Chargeable (2)
Expenses 32,000
Add:
(1)  Direct Cost 12,000
(2) Factory 8,000
(3) Overheads (+) 7,000
(4) Indirect Material 5,000
Add: 5,000
Property Tax on Factory
(+)
Building Workshop Rent
Motive Power
Work-in-Progress as on 1-4-
2011
2,37,000
Work-in-Progress as on 31-3-2012 (-) 7,000
Less :
 Manufacturing Cost (3) 2,30,000 2,30,000
Office Overheads : 20,000
Add:
(1) Director’s Travelling 8,00 Advanced Cost Accounting - I 83
Expenses Postage and 0
(2)
Telegrams Miscellaneous 3,00
(3) 0
(4) Overheads Office Cleansing (+)
Charges 7,00
0 2,50,000
Cost Sheet & Quotations Add: Finished Goods- Stock as on 1-4-2011 (+) 50,000
Less : Finished Goods- Stock as on 31-3-2012 (-) 75,000
 Cost of Goods Sold (5) 2,25,000 2,25,000
Add: Selling and Distribution Overheads: 15,000
(1) Carriage on Sales
NOTES (2) Expensesfor participating in Industrial 5,000
(3) Exhibition Upkeep of Delivery Vans 3,000
(4) Sales Promotion Charges (+) 1,000
 Cost of Turnover 6,000
Add: Profits (6) 2,40,000 2,40,000
Value of Sales (7) (+) 60,000 60,000
Working Notes : 3,00,000 3,00,000
(1) Calculation of percentage of Profit on Cost Price.

If ` . 2,40,000 CP = ` 60,000 P
 100 = ?
100 X ` 60,000
=
` 2,40,000
= 25%
(2) Calculation of percentage of Profit on Sales.
If ` . 3,00,000 SP = ` 60,000 P
 100 = ?
100 X ` 60,000
=
` 3,00,000
= 20%
(3) Discount on issue of Debentures is an item to be excluded from cost.
ILLUSTRATION 14
Jindal Cables and Conductors Ltd. Jalgaon, provides the following cost
data relating to the manufacture of a standard product during the month of
May, 2012
`
Carriage and Cartage
200
Units Sold -900 units @ ` 40 per unit
Raw Materials Stock as on 31st May, 2012 2,850
Monthly Production- 1,000 units

Sale of Raw Materials scrap 150
Selling and Distribution on Cost : ` 3.60 per unit
Operating Wages Payable 600
Operation of Machine Hours - 1,600
Stock of Raw Materials as on 1st May, 2012 1,200
84 Advanced Cost Accounting - I Administration Overheads: 10% of Works Cost

Hire of Special 1,500 Cost Sheet & Quotations
Machinery Machine 2.50

Hour Rate 14,60
0
Raw Materials Purchases
4,400
Productive Wages
500
Costare
You of required
Layout to prepare a Cost-Sheet showing Total Cost Unit and NOTES
Cost for the month ended 31st May, 2012. Also calculate Profit earned for the
month and Profit per unit sold.
SOLUTION
In the books of Jindal Cables and Conductors Ltd. Jalgaon
Cost-Sheet for the month ended 31st May, 2012
Units Produced - 1,000 units
Units Sold -
Particulars 900 units
Total Cost Unit Cost
` `
Stock of Raw materials as on 1-5-2012 1,200
Add: Raw Materials Purchases 14,60
Add : Carriage and Cartage 0 (+)
200
Less : RawMaterials-Stock as on 31-5-2012 16,000
Less : Sale of Raw Materials Scrap (-)
2,850
 Cost of Materials 13,000 13.00
(-) 150
Consumed Add: Direct Labour :
(1) 5,000 5.00
(i) Operating Wages Payable
(ii) Productive Wages
600
(+) 4,400 2,000 2.00
(iii) Hire of Special Machinery
(iv) Cost of Layout
1,500
(+) 500
 Prime Cost
(+) 20,000 20.00
Add: Factory Overheads :
(2)
 Works Cost 4,000 4.00
(+)
Add: Administration Overheads : 24,000 24.00
(3)
 Cost of Production 2,400 2.40
(+)
Add: Stock of Finished Goods on 26,400 26.40
(4)
1-5-2012 -
(
Less : Stock of Finished Goods on 31-5- 2,640 -
2012 +)
(-) 23,760
 Cost of Goods sold
Add: Selling and Distribution on Cost (5)
(900 Units x ` 3.60) 3,240 3.60
 Total Cost (+) 27,000 30.00

Add: Profits for the month (6) 9,000 10.00
Sales (900 Units x ` 40) (7) (+) 36,000 40.00
(1) Calculation of Factory Overheads :

Operation of Machine Hour Factory
Machine Hours X Rate = Overheads
NOTES 1,600 Hrs. ` 2.50 ` 4,000
(2) Calculation of Administration Overheads i.e. 10% of Works Cost :

= 10% of ` 24,000
= ` 2,400
(3) Valuation of Closing Stock of Finished Goods on the basis of Cost of
Production :
Units
Monthly Production 1,000
Less : Units Sold (-) 900
 Closing Stock 100
If 1,000 = ` 26,400 Cost of Production
Units
 100 Units = ?
100 Units x ` 26,400
=
1,000 Units
= ` 2,640
ILLUSTRATION 15
Mafatlal Cotton Textiles Ltd. Bhandup, submits the following information

for the year ended 31st March, 2012.
`
Inventories as on 31 March, 2011 :
st
• Raw Materials 12,50

• Work-in-Progress 0
• Finished Goods 16,40
0
Inventories as on 31st March, 2012 : 17,30
• Raw Materials 9,30
0
• Work-in-Progress 0
• Finished Goods 6,40
0
Additional
Information 5,30
Special: Trade Discount 275
0
Annual Turnover :
(i) Cash 45,000
(ii) Credit 1,55,000
Excise Duty on Purchases 3,200
Defective Materials Returned 1,400
Materials Inventory Purchases 62,700
Prime Cost Labour 29,400
86 Advanced Cost Accounting - I Raw Materials Scrap Sold 200

Hire of Cutting Machinery 10,600 Cost Sheet & Quotations
Dock Charges 1,400
Carriage Inward 1,100
Productive Wages Payable 10,600
Preliminary Expenses 1,300
Cost of Patterns 5,200
Productive Expenses 4,000 NOTES
Factory Overheads - 50% of Basic Wages
Management on Cost - 5% of Sales Value
Selling Expenses - 3% of Invoice Price
Distribution Overheads- 1% of Loaded Price
You are required to prepare a Statement of Cost showing-
(a) Cost of Raw Materials Consumed, (b) Prime Cost,
(c) Works Cost, (d) Cost of Production,

(e) Cost of Goods Sold, (f) Cost of Sales and (g) Profits for
the year.
SOLUTION
In the books of Mafatlal Cotton Textiles Ltd., Bhandup
Statement of Cost for the year ended 31st March, 2012
Particulars Amount
Amount
Inventories of Raw Materials as on 1-4-2011 12,50 ` `

Add: Materials Inventories Purchases 0
Add: Expenses for Purchasesof Raw 62,70
0
Materials 3,20
(i) Excise Duty on Purchases 0
(ii) Dock Charges (+ 1,40
) 0
(iii)Carriage Inward 80,90
1,100
Less : Inventories of Raw Materials as on 31-3-
0
Less : 2012 Defective Materials Returned 9,300
Raw Materials Scrap Sold 1,400
Cost
Less of (-) Materials
: Raw 200
(a) 70,00 70,00
Consumed Add: Direct Labour : (+ 0 0
(i) Prime Cost Labour ) 40,00
0
(ii) Productive Wages 29,40
Payable :
Add: Direct Expenses (+)
0
(i) Hire of Cutting 10,800 20,000
(+
Machinery 5,200 )
(ii) Cost of Patterns (+) 4,000
10,60
(iii) Productive Expenses (+)0
 Prime Cost (b) 1,30,000
Add: Factory Overheads 1,30,000
(50% (+)
Basic Wages 20,000
(+)
i.e. Direct 16,400
Labour ` Advanced Cost Accounting - I 87
40,000)
Add:
Inventories of Work-in-
Progress as on 1-4-2011
Cost Sheet & Quotations 1,66,400
Less : Inventories of Work-in-Progress as on 31-3-2012 (-) 6,400
 Works Cost (c) 1,60,000 1,60,000
Add: Management on Cost (+) 10,000
(5% of Sales Value i.e. Annual Turnover ` 2,00,000)
NOTES  Cost of Production 1,70,000 1,70,000
(d) 17,300
Add: Inventories of Finished Goods as on 1-4-2011 1,87,300
(+) 5,300
Less : Inventories of Finished Goods as on 31-3-2012 1,82,000 1,82,000
(-)
 Cost of Goods sold (e) 8,000
Add: Seeling and Distribution Overheads :
(i) Selling Expenses
6,000
(3%ofInvoicePricei.e.AnnualTurnover` 2,00,000)
(ii) Distribution Overheads 1,90,000 1,90,000
(1%ofLoadedPricei.e.AnnualTurnover ` 2,00,000) 10,000
(+)2,000 2,00,000 2,00,000
 Cost of Sales (f)
Add : Profits for the year (g)(+)
Working Notes :
Annual Turnover
(1) Special Trade
( Cash Discount,
` 45,000 + CreditPreliminary
` 1,55,000) Expenses etc. are the items to be
excluded from cost.
3.5 Quotation and it’s preparation

When a customer or a concern wishes to get a certain job done or wish to
purchase a certain type of product in a certain quantity at a competitive price an
advertisement is published in the newspaper inviting offers from interested
parties. Such offer may be in the form of a quotation or a tender. In each
quotation a price is mentioned at which the party submitting the quotation is
willing to perform the expected work. By Comparing the prices mentioned in all
the quotations received and other terms and conditions mentioned in them the
party selects a particular quotation beneficial to it and places order with the
particular manufacturer or manufacturing concern.
In order to obtain the order, the manufacturing concern has to prepare the
quotation in a proper way and the price mentioned in it should be a competitive
price. While preparing a quotation, the concern has to take into consideration
many factors such as the nature of work involved, the volume of work to be
completed and the type, quality and quantity of materials which will have to be
used and also the type of labour, number of workers whose services will have to
be used and labour cost to be incurred according to the rates of wages applicable
to the workers. For calculation of amount of overheads, the concern relies upon
the information about overheads available from cost sheet prepared for the
previous period. The overheads to be incurred are calculated by considering
thier relations with certain item appearing in the cost sheet. Once the total cost
88 Advanced Cost Accounting - I or cost of production is estimated for the work to be performed, the concern
adds to it the
profit amount desired by it and the price to be quoted is Cost Sheet & Quotations
finalized.
For preparation of quotation for a specific job direct materials cost, direct
labour cost and direct expenses, if any, are first determined and total of these
amounts is taken as a prime cost of the job for which the quotation is being
prepared. To the prime cost amount of Factory Overheads is added. Factory
Overheads are estimated as a certain percentage of direct labour cost and this NOTES
percentage is decided on the basis of direct labour cost and factory overheads
from the cost sheet of the previous cost sheet. When the estimated amount of the
factory overheads is added to the prime cost, the estimated amount of ‘Factory
Cost’ of the proposed job becomes available. To the factory cost amount the Check Your Progress
estimated office and administration overheads is added. Estimation of the office
i) What is meant by
and administration overheads is generally done as a percentage of office and Quotation ? Why it is
administration overheads to the factory cost of the previous period cost sheet. prepared ?
ii) Enumerate the process of
After adding the estimated amount of office and administration overheads to the preparation of quotation.
factory cost the amount of cost of production of the proposed job becomes
known. Amount of desired profit (which may be a certain percentage of the
estimated cost of production or a certain percentage of the quotation price of the
job) is added to the estimated cost of production and the total so obtained is
shown as the price to be quoted to the customer who has invited the quotations
for the job.
A specimen of quotation for a job is given below :
------------------& company
Quotation for Job No.-------
`
Direct Materials Cost ----
-
Add: Direct Labour Cost
----
Add: Direct Expenses
-
Prime Cost ----
----
-
Add: Factory Overheads -
(at --% on Direct Labour ----
-
cost) Factory Cost/Works ----
-
Cost
Add: Office and Administration Overheads ----
-
(at--% on Factory Cost) ----
-
Cost of Production
Add: Profit (at --% on cost of Production ----
-
or -- % on Price Quoted) ----
-
Price to be quoted for the job

3.6 Illustrations on Preparation of
Quotation
(1) From the following information provided by Modern manufacturing Company
for a period of 3 months ending on 31st March, 2014, prepare a cost sheet
for that period showing a) Prime Cost, b) Factory Cost, c) Cost of
NOTES Production, d) Total Cost, and e) Profit or Loss for the period :
`
Direct Materials Consumed 4,80,000
Direct Wages 6,00,000
Direct Expenses 20,000
Office & Administration Overheads 50,000
Factory Overheads 1,50,000
Selling Overheads 1,45,000
Sales 17,80,000
The company intends to submit a quotation for supplying a machinery in

the month of May, 2014. The Costing Department of the Company has
estimated that materials costing ` 35,000, direct wages of ` 50,000 and direct
expenses amounting to ` 5,000 will be needed for the machinery. Factory
Overheads as a percentage of direct wages and Office Overheads as a
percentage of Factory cost is to be charged using the costs as a basis as
appearing in the cost sheet for the period ending on 31st March, 2014. The
company desires to earn a profit of 25% on the cost of production from the
Quotation.
Calculate price to be quoted for the machinery.

SOLUTION
Modern Manufacturing Company
Cost Sheet
For 3 months ending 31st March, 2014
`
Direct Materials Consumed 4,80,000
Add: Direct Wages 6,00,000
Add: Direct Expenses 20,000
Prime Cost 11,00,000
Add: Factory Overheads 1,50,000
Factory Cost 12,50,000
Add: Office & Administration Overheads 50,000
Cost of Production 13,00,000
Add: Selling Overheads 1,45,000
Total Cost 14,45,000
Add: Profit for the period 3,35,000
Sales 17,80,000

Preparation of Quotation for the Machinery Cost Sheet & Quotations
`
Direct Materials Cost 35,000
Add: Direct Wages 50, 000
Add: Direct Expenses 5,000
Prime Cost 90,000
Add: Factory Overheads 12,500 NOTES
(at 25% on Direct Wages)
Factory Cost 1,02,500
Add: Office & Administration Overheads 4,100
(at 4% on Factory Cost)
Cost of Production 1,06,600
Add: Profit 26,650
(at 25% on Cost of Production)
Price to be quoted for the machinery 1,33,250
Working Notes :
i) Calculation of % of Factory Overheads to Direct Wages :
Direct Wages ` 6,00,000 = Factory O.H. ` 1,50,000
 Direct Wages 100 = Factory O.H.
1,50,000 X
= 100
6,00,000
= 25%
In the Quotation Direct Wages are estimated as ` 50,000
 Factory Overheads are :
50,000 x 25
= ` 12,500
100
ii) Calculation of % of Office & Adm. O.H. to Factory
Cost : Factory Cost ` 12,50,000 and Office & Adm. O.H. `
50,000 50,000 x
= 4%
100
12,50,000
Estimated Factory Cost is ` 1,02,500 in the Quotation
1,02,500 x 4
 In the Quotation 4% of ` 1,02,500 =
100
` 4,100 is the amount of Office & Adm. Overheads
iii) Calculation of Profit in the Quotation :
The company desires a profit of 25% of cost of production of the

machinery.
As cost of machinery is estimated as ` . 1,06,600, the profit calculated is
` 1,06,600 x 25
= ` 26,650
100 Advanced Cost Accounting - I 91
Cost Sheet & Quotations 2) From the following particulars you are required to prepare a cost sheet
showing i) Cost of materials consumed, ii) Prime Cost, iii) Works Cost, iv) Cost
of Production, v) Cost of goods sold, vi) Profit or Loss for the period, vii)
Percentage of works overheads to direct wages and viii) Percentage of office
overheads to works cost :
NOTES
Stock on 1-1-2013 :
Raw Materials ` 32,000, Finished Goods ` 34,500
Stock on 30-6-2013 :
Raw Materials ` 30,000, Finished Goods ` 48,000

Purchases of Raw Materials ` 2,08,000
Direct Wages ` 1,50,000
Works Overheads ` 45,000
Office Overheads ` 40,500
Selling Overheads ` 55,000
Sales ` 5,82,000
The concern is to submit a tender for supply of a large plant in the month
of July, 2013. It is estimated that direct materials of ` 20,500 and direct
wages of
` 15,000 will have to be incurred for the plant. Assuming that the percentages of
works cost to direct wages and office overheads to works cost calculates in
the
cost sheet for the period ended 30th June, 2013 will remain unchanged and the
profit desired by the concern is 20% of the tender price, calculate the price to
be
quoted in the tender.
SOLUTION
` `
Cost sheet of -------------
Stock of Materials on 1-1-2013 32,000
Add: For the
Purchase of Materials period of six months ending 30-6-2013
2,08,000
2,40,000
Less: Stock of Materials on 30-6-2013 30,000
Cost of Materials Consumed 2,10,000
Add: Direct Wages 1,50,000
Prime Cost
Add: Works Overheads 3,60,000
45,000
Works Cost
4,05,000
Add: Office Overheads
40,500
Cost of Production
Add: Stock of Finished Good 4,45,500
on 1-1-2013 34,500
4,80,000
Less: Stock of Finished Goods on 30- 48,000
6-2013 4,32,000
Add: Selling Overheads 55,000 Cost Sheet & Quotations
Total Cost 4,87,000
Add: Profit 95,000
Sales 5,82,000
Calculation of Percentages :
NOTES
i) % of works overheads to Direct Wages :
Direct Wages ` 1,50,000 - Works Overheads `

45,000
 Direct Wages ` 100 - Works Overheads
45,000 x
`? = 30%
100
1,50,000
ii) % of office overheads to Works Cost :
Works Cost ` 4,05,000 - Office Overheads ` 40,500

Works Cost ` 100 - ?
40,500 x 100
= 10%
4,05,000
Preparation of Tender for the plant
`
Direct Materials Cost 20,500
Add: Direct Wages 15,000
Prime Cost (estimated) 35,500
Add: Works Overheads (30% 4,500
of Direct Wages)
Works Cost 40,000
Add: Office Overheads 4,000
(10% of works
cost) 44,000
Cost of Production 11,000
Add: Profit (at 20% on Tender
55,000
Price)
Tender Price for the plant
Working Note :
The concern desires profit at 20% on Tender Price
 Tender Price is taken as 100. Profit is 20% on Tender Price. So, Tender Price
` 100 - Profit ` 20 = ` 80 which is Cost of Production.
 If Cost of Production is ` 80 - Profit is ` 20

If Cost of Production is ` 44,000 - Profit is ?
44,000 x 20
= 11,000
80
Adding the profit of ` 11,000 to Cost of Production of ` 44,000 we get the
Tender Price as ` 55,000. The profit is 20% of ` 55,000. Advanced Cost Accounting - I 93
3.7 Summary
In this Unit, we have studied information about Cost Sheets and
Quotations. While preparing a cost sheet Costs are required to be shown under
specific heads such as Prime Cost, Factory Cost, Cost of Production, Cost of
NOTES Sales and by comparing the Cost of Sales / Total Cost with Sales Value profit or
loss for the Cost Sheet period is required to be calculated. While preparing a
Cost Sheet a specific format is required to be used and various items of costs
are required to be grouped under specific heads. Certain items of costs are not
included in Cost Sheet and such items should be carefully remembered.
While preparing a Quotation for supplying a product or service or

performing a job, process or operation for a prospective customer, it is necessary
to calculate the direct materials cost, direct labour cost and direct expenses as
accurately as possible. Once the prime cost is so calculated, additions for
factory overheads, office overheads and other overheads are estimated on the
basis of present experience and total estimated cost is decided. Expected margin
of profit is added to the total cost and price to be quoted to the prospective
customer is found out. Price quoted should be competitive as the prospective
customer invites quotations from different suppliers / manufacturers and after
comparing the prices quoted by them, takes decision about placing of order.
3.8 Key Terms

i) Cost Sheet : A statement of costs prepared for a certain duration (a week,
fortnight, month, quarter of a year, half year or a year) showing costs
under certain headings and for ascertainment of profit/loss for that period
by comparing total costs with sales.
ii) Prime Cost : Direct Material Cost + Direct Labour Cost + Direct
Expenses.
iii Works / Factory Cost : Prime Cost + Works / Factory Overheads

)
iv) Cost of Production : Works / Factory Cost + Office and Administration
Overheads
v) Cost of Sales / Total Cost : Cost of Production + Selling and Distribution

Overheads.
vi) Profit : Sales - Cost of Sales
vii) Loss : Cost of Sales - Sales.

)

3.9 Questions & Exercises Cost Sheet & Quotations
I. Theory Questions :
1. What is a Cost Sheet ? Give a proforma of a Cost Sheet.
2. What is Cost Sheet ? Explain the uses of Cost Sheet.

NOTES
3. Give the meaning of the term “Tender”. What are the different types of
tenders? What points would you consider for submitting a Tender ?
4. What do you mean by Cost Sheet ? What are the purposes of a

Cost Sheet ?
5. Differentiate between Tender and Quotations.
6. Write short notes:
(i) Cost Sheet, (ii) Tender, (iii) Purposes of Cost Sheet,
(iv) Uses of Cost Sheet.
II. Practical Problems :
1. From the following information supplied by Bajaj Ltd., Jamnager prepare a

statement showing the cost of production and the goods sold for the period
from 1-1-2015 to 31-1-2015.
`
Stock of raw materials as on 1-1-2015 40,000
Raw materials purchased during the month 5,00,000
Wages paid 2,50,000
Factory Overheads 80,000
Work-in-Progress (1-1-2015) 10,000
Work-in-Progress (31-1-2015) 20,000
Closing stock of raw materials as on 31-1-2015 30,000
Opening stock of finished goods (1-1-2015) 80,000
Closing stock of finished goods (31-1-2015) 70,000
Selling and Distribution Overheads 10,000
Administrative Overheads 25,000
Sales 10,00,000
2. M/s Strong and Weak Co., Matunga manufacture plastic buckets and
furnishes you the following particulars. You are required to prepare a Cost
Sheet for the year ended 31-12-2014, showing therein the Prime Cost,
Works Cost, Cost of Production and Cost of Sales alongwith Cost per unit
and percentage of each element of cost to total cost.

Cost Sheet & Quotations `
Unit Produced -10,000
Materials consumed 1,00,000
Wages paid to workers 40,000
Power and Fuel (Factory) 20,000
NOTES Repairs to machines 8,000
Depreciation-Machinery 6,000
Depreciation- Office Furniture 1,000
Supervision expenses (Factory) 2,000
Hire charges for machines of special purposes 4,000
Wages paid to maintenance workers 20,000
Audit fees 1,500
Director’s fees 7,500
Bad Debts 2,500
Office expenses 3,500
Salaries 2,000
Rent, rates and taxes (Factory) 5,000
Sales 3,00,000
Salesman salary 8,000
Advertising expenses 2,000
Delivery van expenses 8,000
Warehouse rent 6,000
Printing and Stationery 1,000
Direct expenses 8,000
3. From the following particulars of FOX and Co. Faizpur prepare a Cost
Sheet showing :
(i) Prime Cost, (ii) Factory Cost, (iii) Total Cost of Production and (iv) Cost
of Sales for the period ended 30.6.2014.
`
Raw materials 50,000
Wages paid to workers 20,000
Direct expenses incurred for production 2,500
Consumable stores 500
Supervisor’s wages 2,000
Wages paid to floor helper 600
Electric power (Factory) 800
Electric power (Office) 500
Rent (Factory) 5,000
Rent (Office) 2,000
Repairs and Renewals on :
Plant and Machinery 5,000
Renovation of Office Building 1,000
Depreciation on Plant and Machinery 500
Depreciation on Office Building 200
Manager’s salary 3,000
Telephone charges 200
Printing and Stationery 400 Cost Sheet & Quotations
Postage and Telegrams 150
Director’s Fees 800
Advertisement 800
Travelling expenses 300
Salesmen’s salary and commission 1,000
Warehouse rent 900 NOTES
Delivery van expenses 1,000
4. M/s Favourite Industries Ltd. Faizabad produce auto parts. From the
following particulars prepare Cost Sheet for the period ended 31st
December, 2014.
`
Opening Stock of raw materials 20,000
Raw materials purchased 70,000
Closing stock of raw materials 15,000
Direct Labour Cost (20% of Factory on
Cost) Factory on Cost 30,000
Administrative Overheads (10% of Works Cost)
Selling and Distribution Expenses 10,000
Details of the finished goods are as follows :
Opening stock of finished goods 2,000 units 25,000
Finished goods produced during the period 20,000 units
Closing stock of finished goods 4,000 units
You are required to find out the profit made during the year @ 10% on the
Selling Price.
Note : (i) There was no balance of opening or closing stock of work-in-
progress.
(ii) Show the working of profit ascertained.
5. The accounts of Via Manufacturing Co., Nashik for the year ended 31st
December, 2014 shows the following :
Drawing Office Salaries `6,500

Counting-House Salaries 12,600
Cash-Discount Allowed 2,900
Carriage and Cartage Outwards 4,300
Carriage and Cartage Inwards 7,150
Bad debts written off 6,500
Repairs of Plant, Machinery and Tools 4,450
Rent, Rates, Taxes and Insurance-Factory 8,500
Rent, Rates, Taxes and Insurance- Office 2,000
Sales 4,61,100
Stock of Materials - 31st December 2014 62,800
Stock of Materials - 31st December 2013 48,000
Materials Purchased 1,85,000
Travelling Expenses 2,100
Traveller’s Salaries and Commission 7,700
Depreciation - Plant, Machinery and Tools 6,500
Cost Sheet & Quotations Depreciation-Furniture 300
Director’s Fees 6,000
Gas, and Water-Factory 1,200
Gas, and Water-Office 400
Manager’s Salary (3/4 Factory and 1/4 Office) 10,000
NOTES General Expenses 3,400

Income-Tax 1,000
Dividend 2,000
Prepare a statement giving the following information :
(i) Materials consumed; (ii) Prime cost; (iii) Factory on cost and the
percentage on wages; (iv) Factory cost; (v) Genral on cost and percentage
on Factory cost; (vi) Total Cost; (vii) Net profit.
6. Tata Ltd. Tatangar produces a standard product. The following information is

given to you from which you are required to prepare “Cost Sheet” for the
period ended 31st July 2014.
`
Opening Stock of Raw 10,000
Materials Purchases of Raw 85,000
Materials Closing stock of Raw 4,000
Materials Direct wages 20,000
Other Direct Expenses 10,000
Factory Overheads 100% of Direct
Office Overheads Labour 10% of
Selling and Works Cost
Distribution Expenses ` 2 per unit sold
Finished Products :
1000 (value ` 16,000)
In hand at the beginning of the 10,000
period Produced during the period 2,000
In hand at the end of the period
Also find our the selling price per unit on the basis that profit mark up
is uniformly made to yield a profit of 20% of the selling price. There
were no work-in-progress either at the beginning or at the end of the
period.
7. The following details have been obtained from the cost records of
Cement India Ltd., Chennai for one month.
Stock of raw materials on 1st April 2014 75,00
th
Stock of raw materials on 30 April 0
2014 Direct wages 91,50
0
Indirect wages
52,50
Sales 2,11,000
0
Work-in-progress 1st April, 2014 28,00
2,75
Work-in-progress 30th April, 2014 0
0
Purchases of raw 35,00
0
material Factory rent,
66,00
98 Advanced Cost Accounting - I rate, power
0
Depreciation on Plant
15,00
and Machinery
0
3,50
0
Expenses on Purchase 1,500 Cost Sheet & Quotations
Carriage outward 2,500
Advertising 3,500
Office rent and taxes 2,500
Travellers wages and commission 6,500
Stock of finished goods 1st April 2014 54,000
Stock of finished goods 30th April 2014 31,000 NOTES
prepare Cost-Sheet for the month ended 30 April 2014.
th
8. Following information has been obtained from the records of Quality

Manufacturing Co., Bandra.
1-1- 31-12-2014
2014
` `
Stock of Raw Materials 40,000 50,000
Stock of Finished Goods 1,00,000 1,50,000
Stock of Work-in-progress 10,000 14,000
Other Particulars :
Indirect Labour 50,000
Lubricants 10,000
Insurance on plant 3,000
Purchase of raw materials 4,00,000
Sales Commission 60,000
Salaries of Salesmen 1,00,000
Administrative Expenses 1,00,000
Power 30,000
Direct Labour 3,00,000
Depreciation on Machinery 50,000
Factory Rent 60,000
Property Tax on Factory Buildings 11,000
Sales 12,00,000
Prepare a statement of cost and profit showing :
(i) Value of Raw Materials Consumed (ii) Prime Cost

(iii) Factory Cost (iv) Cost of Production
(v) Cost of Sales (vi) Profit
9. The following information are received from the books of ABC Co. Ltd.,
Allahabad for the quarter ending 31-3-2014.
`
Stock of Materials 31-3-2009 75,000
Purchases of Material 7,95,000
Stock of Materials on 1-1-2009 1,05,000
Travelling Expenses 5,100
Cost Sheet & Quotations Carriage Inward 8,290
Labour Welfare Expenses 14,200
Depreciation on Plant 18,000
Factory Rent 11,200
NOTES Office Rent 29,100
Bad Debts 9,000
Productive wages 2,27,000
Traveller’s Salary and Commission 9,000
Expenses regarding purchase of materials 4,500
Director’s Fees 8,700
Fuel, Gas and Water 17,900
Manager’s Salary 18,000
\ (He devotes 2/3 of his time to factory)
Air conditioning charges of Office 9,000
Outstanding productive wages 33,000
Sales 14,29,500
Prepare Cost-Sheet giving :
(i) Prime Cost, (ii) Works Cost, (iii) Cost of Production, (iv) Total Cost
10. The following data have been extracted from the books of Sunshine
Industries Ltd., Surat for the year 2014.
`
Opening stock of raw materials 25,000
Purchases of raw materials 85,000
Closing stock of raw materials 40,000
Carriage Inward 5,000
Wages-Direct 75,000
Wages-Indirect 10,000
Other direct charges 15,000
Rent and Rates -
Factory 5,000
Office 500
Indirect consumption of material 500
Depreciation -
Plant and Machinery 1,500
Office Furniture 100
Salary -
Office 2,500
Salesmen 2,000
Other Factory Expenses 5,700
Other Office Expenses 900
Manager’s Remuneration 12,000
Bad debts written off 1,000
Advertisement expenses 2,000
Travelling expenses of Salesmen 1,100
Carriage and Freight outward 1,000
Sales2,50,000 Cost Sheet & Quotations
Advance income tax paid 15,000
Cash discount 5,000
The manager has the overall charge of the company and his remuneration
is to be allocated at ` 4,000 to factory, ` 2,000 to office and ` 6,000 to
the
selling expenses.
NOTES
From the above particulars prepare a statement showing :
(i) Prime Cost, (ii) Factory Cost, (iii) Cost of Production, (iv) Cost of
Sales, and (v) Net Profit.
11. The accounts of Machine Manufacturing Co., Mahim disclose the

following information for the six weeks ending 31st December 2014.
`
Materials used 1,50,000
Factory Overheads Expenses 24,000
Establishment and Genral Expenses. 17,640
Prepare the Cost Sheet of the machines. The Company is about to

send a tender for a machinery. The costing department estimates that the
materials required would cost ` 1,250 and expenditure in productive
wages
` 750 and Direct expenses ` 500. The tender is to be made at a profit of
20% on selling price.
Show what the amount of tender would be if based on above

percentages.
12. Prav. Electricals Ltd., Pune provides the following information for
10,000 Materials 90,000
T.V. valves manufactured
Direct Wages during the year 2014-2015. 60,000
Power and Consumable stores `12,000
Factory and Indirect Wages 15,000
Light of a Factory 5,500
Defective Work (Cost of rectification) 3,000
Clerical Salaries and Management expenses 33,500
Selling expenses 5,500
Sales Proceeds of Scrap 2,000
Plant Repairs, Maintenance and Depreciation 11,500
The net selling price was ` 31.60 per unit and all units were sold.
As from 1st April, 2014, the selling price was reduced to ` 31 per unit
and it was estimated that production could be increased in 2014-2015 by
50% due to spare capacity. Rates of Material and Direct Wages will
increase by 10%.
Using the above data prepare Cost Sheet for the year 2013-14 and
also for the year 2014-15. Advanced Cost Accounting - I 101
Cost Sheet & Quotations III. Multiple choice questions :
(1) A document which provides for the assembly of the estimated details cost
in respect of cost centre or cost unit is known as -----
(a) Cost ledger

NOTES
(b) Cost statement
(c) Cost sheet
(d) balance sheet
(2) Match the pairs

Group I Group II
(a) Factory Overheads (i) Opening Stock
(b) Office Overheads (ii) Operating Labour
(c) Selling and Distribution (iii)Bad Debts
Overheads (iv) Establishment Overheads
(d) Direct Labour (v) Electric Power
Ans : (a) - (vi) ; (b) - (iv) ; (c) - (iii) ; (d) - (ii).
(3) Cost sheet discloses the ---- as well as the total cost of output.
(a) cost per unit
(b) gross cost
(c) net cost
(d) direct cost
(4) A cost sheet, including sale and profit is also known as ‘-----Account’
(a) Trading
(b) Profit and loss
(c) Production
(d) Realisation
Ans. : (1 - c), (3 - a), (4 - c)

i) ‘Cost Accounting’ - Jawahar Lal.
ii) ‘Cost Accounting’ - Principles and Practice - N. K. Prasad.
iii) ‘Cost Accounting’ - B. K. Bhar.
iv) ‘Advanced Cost Accounting’ - Nigam and Sharma.

Topic 2 Material Costing
Unit 4 Meaning of Material

and Purchasing
Unit 5 Receipt and Storage

of Materials
Unit 6 Control Over Materials in

Stores
Unit 7 Issue of Materials
Unit 8 Pricing of
Material Issued
Unit 4 Meaning of Material and Purchasing Meaning & Purchasing
Structure
1. Introduction
NOTES
2. Unit Objective
3. Meaning of materials
4. Types of materials
5. Purchase of materials
1. Decision of purchasing
2. Centralised and de-centralised purchasing
5. Purchase Requisition
6. Selection of supplier
7. Placing order with the supplier
8. Summary
9. Key Terms
10. Questions
11. Further Reading
12. Introduction
In Unit 2, you have studied the elements of costs and have become
familiar with the three elements of costs, viz. materials, labour and expenses. In
this Unit you shall study some basic information about the first element of cost,
viz. material. Information about the meaning of material, types of material and
purchasing of material is provided in this Unit. Since material cost forms a
major portion of total cost of a product, it must be controlled effectively and
every step right from purchasing of material needs proper understanding and
attention.
13. Unit Objectives

After completing study of information provided in this Unit, you should be
able to understand :
• Meaning of material;
• Types of material;
• How material is purchased. Advanced Cost Accounting - I 103

Meaning & Purchasing
4.2 Meaning of
Materials
The term materials refers to all commodities consumed in the process of
manufacturing. For manufacturing any product material or materials of some
specific type are needed. By processing, mixing, heating, cutting or by giving a
NOTES certain shape to the materials the workers create the products needs by
customers. For different industries different materials are required, e.g. steel
industry needs iron-ore, textile industry requires raw cotton, chemicals and
artificial fibers, automobile industry uses steel, rubber, wires and other
components.
Material is the first element of cost and materials cost is regarded as an
important cost in the cost structure of almost all the manufacturing concerns
because materials cost constitutes 30% to 75% of the total cost of production
incurred by the manufacturing concerns.
Sometimes the words ‘materials’ and ‘stores’ are used as interchangeable

words. However, there is difference in the meaning of these two words. As stated
above materials mean commodities which are used in the process of
manufacturing whereas stores mean materials, tools, equipments, items used for
repairs and maintenance work, stock of work-in-progress and finished goods.
Thus scope of stores is much wider than the scope of materials.
4.3 Types of Materials

A manufacturing concern purchases and uses various types of
materials.
These types are as under :
1) Raw materials : These materials are used by the production department for
creating different parts by conducting specific process like cutting,
melting, grinding, mixing, heating, etc. and the parts are fitted in a specific
manner to create the final product as required by the customers. Raw
cotton, leather, timber, minerals like iron-ore, silver, gold, manganise,
copper are some examples of raw materials.
2 ) Supplies : These include items like pins, paper of wooden boxes, polish
papers, cotton waste, small tools, jigs, etc. Which are used by workers for
carrying on the production processes or for storage of the parts produced
till further operation are completed on them to convert them into finished
products.
3) Indirect Materials : These are the Materials which cannot be conveniently

traced or identified with the finished products. Normally the cost of these
materials is very low and so even if they are included in the finished
products they are not regarded as raw-materials or direct materials, Nails,
pins, screws, nut and bolts, thread are examples of such materials. Some
items which are not included in the final product are also treated as
indirect materials; e.g.. lubricating oil, grease, coal, soap, sand-paper
used for polishing the parts or the final product.
4) Components / Finished parts : A manufacturing concern may not itself Meaning & Purchasing
produce each and every part used in the final product. It may purchase
some parts from outside and use them in the final product; e.g. tubes and
tires used in an automobile car may be purchased by an automobile
company from outside suppliers. In a similar way companies
manufacturing T.V. sets, refrigerators, washing machines, ratio/transistor
sets purchase a few items which are fitted in the appliances manufactured NOTES
by them.
5 ) Consumable : These are items like coal, gas, diesel, petrol, etc. Which are
needed to keep the machine and other apperatus running for carrying on
the manufacturing processes, soaps, towels, cotton-waste etc. Which are
supplied to the workers are also consumable items.
4. Purchase of Materials
In the control of materiels cost the first stage at which care is required to
be taken is purchase of materials. Efficient and effective purchasing helps in
reducing the materials cost by avoiding unnecessary purchasing, by avoiding
purchase of materials at improper prices, by doing the purchasing of the right
quantity and quality of materials, by doing the purchasing at the right time and
by doing the purchasing from the right source. Purchase of materials should be
given due attention by the management of every concern engaged in the
manufacturing filed.
1. Decision of Purchasing :
A manufacturing concern is able to carry on the activity of production

when the materials required for production are supplied to it in the required
quantity and at the required time. On the basis of quantity of materials available
in the stores department and the quantity to be supplied to the production
department as per the schedule of production, decision is taken by the
storekeeper to make purchasing of materials. Decision about purchase of
materials is also taken by the in-charge of the Research and Development
Department when some special items of materials are needed for the work of
research or development of some new products. In both these cases there is
centralised purchasing followed by the manufacturing concern. If there is
decentralised purchasing followed by the concern, the managers of functional
department take decisions about purchasing as and when they need the materials
and other items needed by their departments.
2. Centralised and Decentralised Purchasing :
In centralised purchasing there is a separate purchase department created

in organisational structure of the concern. Purchase manager also sometimes
designated as ‘buyer’ is the head of the purchase department. He, along with the
persons working in the purchase department, performs the work if purchasing
materials and other items required by all the departments in the concern. When
production or any other department needs materials, parts, equipments, tools,
A
d
v
a
Meaning & Purchasing consumable items, stationery, etc. it requests the purchase department by sending
a duly filled ‘purchases requisition’. The purchase department makes the
arrangement for obtaining the required materials and other items by selecting a
proper supplier. Since requirement of all department are pulled together and one
order is placed with the supplier, it become possible to bargain for low prices,
NOTES more discount, free delivery and the better credit facilities. Centralised
purchasing enables purchasing of materials of standardised nature, appointment
of skilled purchasers in purchase department and better control over the
materials cost.
However, when the manufacturing concerns is of small size or when the
branches of the concerns are located at different and far away places the policy
of centralised purchasing may not become possible and the branches are allowed
to make their separate purchases as per their requirements. Such decentralised
purchasing enables each branch or department to make its own purchases.
Decentralised purchasing provides the benefit of purchase of materials of the
exact type, avoides the delay in obtaining the materials and saving of
administration costs which are required to be incurred for a separate purchase
department under centralised purchasing.
4.5. Purchase Requisition

Purchase requisition is a document used for making a written request to
the purchasing authority to arrange for purchase of certain materials as
mentioned in the purchase requisition. As mentioned above most of the purchase
requisitions are received from the stores department and a few such
requisitions may be received from the Research and Development department
and the Repairs and Maintenance department. A purchase requisition provides
information about name of the department which has prepared it, the date on
which it is prepared, description and specifications of the material or materials to
be purchased, quantity to be purchased, date up to which the materials should
be made available, signatures of persons who have prepared, checked and
approved the purchase requisition. Each purchase requisition is numbered and
the purchase departments records the purchase order number when it orders the
materials by placing the order with the selected supplier. A format of purchase
requisition used by many concerns is given below :

............. Co. Ltd.
PURCHASE REQUISITION
No :------- Date :-----
Date upto which Department----
materials are required----- -
NOTES
Serial No. Particulars Quantity Remarks
(Name & specification) required
Prepared by checked by Approved by

-------------- ------------- ---------------
For use of purchase Department :
Order No.-------
Name of supplier-------
4.6 Selection of Supplier

After receiving the purchase requisition the purchase department studies it
to find out the type and specification of materials to be purchased, the period in
which the materials are to be provided, the quantity in which the materials are to
be purchased and on the basis of this information decides whether they should
be purchased from local market or central market or national market. When
quantity of material is small and they are to be obtained in a very short period,
purchasing is made from the local market; otherwise they are purchased from
district level, state level or national markets. For purchasing the materials a
suitable supplier is selected by the purchase department and such selection is
done by comparing the information in respect of terms of purchase such as
price, terms of payment, date of delivery, reliability of the supplier about quality
of materials and ability to supply the materials. For materials which are
purchased on regular basis the purchase department usually collects all this
information from the various suppliers and maintains it in its files. When some
new type of materials are to be purchased, the purchase departments invites
tenders and quotations from suppliers and prepares a comparative statement for
selecting the supplier with whom the order is to be placed. While selecting the
supplier objective of purchasing the materials at lowest price, obtaining the
materials of the right quality and quantity within the stipulated time limit and
obtaining favourable terms of delivery and payment terms are given careful
attention.

4.7 Placing Order with the
Supplier
After deciding the suppliers with whom order for purchase of materials is
to be placed, the purchase department prepares ‘purchase order’. Printed forms
are used for placing the order. There is provision for recording the information
NOTES such as order number, date of placing the order, name and address of the supplier
to whom order is given, date upto which delivery is to be given by the supplier,
reference of tender number or quotation number of the supplier. Columns are
Check Your Progress
provided for writing important information like serial number, particulars of
i) Explain the meaning of materials along with specifications, size, grade or quality, quantity being
following : purchased, price per unit, total amount, remarks, etc. Purchase order is signed
1) Materials by the purchase manager or purchase officer who is authorised to sign the
2) Purchase Requisition purchase order. Terms and conditions of purchasing are included in the purchase
3) Purchase Order order. They include delivery schedule to be followed by the supplier, size and
ii) Which Factors are type of packing, mode of transportation, place at which delivery is to be given,
considered while selecting
a supplier ?
mode and time of payment, jurisdiction and method of dispute settlement.
iii) What is the difference
between Centralised A Specimen of Purchase Order is given below :
Purchasing
and Decentralised ............. Co. Ltd.
Purchasing?
Purchase Order
Date :------------- Purchase Order No. : -----
Requisition No. : -----
Date Required : -----
Name & Address
of the supplier
Your Tender/Quotation No.------ Dated.------- has been accepted.
Please supply the following items on the terms and condition mentioned
overleaf.
Sr. No . Description and specifications Qty. Rate Amt. Remarks
of items
--------
Purchase Manager / Officer
Terms & Conditions overleaf.
A purchase order when accepted by the suppliers creates a legal contract
between the concern placing the order and the supplier. Therefore it must be
prepared very carefully and the supplier should be asked to acknowledge
acceptance of the order by signing and returning the second copy of the
purchase order to the concern placing the order. Five or more copies of the
purchase order are prepared in different colors. The first and second copy is
send to the supplier- the second copy is returned by the supplier as
108 Advanced Cost Accounting - I acknowledgments and acceptance of the order. The third copy is sent to the
stores department, fourth copy is sent to
the costing/accounting department and fifth copy is sent to the department from Meaning & Purchasing
which the purchase requisition was received. The second copy received back
from the supplier is retained by the purchase department and used for taking
follow-up action, if necessary.
4.8 Summary NOTES
In all manufacturing concern products are created by using some

materials. Material is the first element of cost. Depending upon the product to
be created different industries use different materials such as wood, iron-ore,
leather, cotton, minerals like silver, manganise, copper, gold, etc. and by
conducting necessary processes and operations the materials are a given
required shapes and the final products as required by the customers are made.
Materials which are included in the finished product and which form a major
part of the material cost of the product are known as ‘direct materials’ and
materials which do not form a part of the finished product and whose cost is
insignificant as compared to the cost of the direct materials are known as
‘indirect materials’. Raw materials, supplies, indirect materials,
components/finished parts and consumables are the types of materials.
When material is required for manufacturing and it is not available in the

required quantity in the stores, a purchase requisition is prepared and sent to the
purchase requisition is prepared and sent to the purchase department.
Purchasing may be done centrally or in a decentralised way depending upon the
policy of the concern. When a decision for purchasing is taken, tenders are
invited from supplies dealing in that type of material. Tenders or quotations
received from the suppliers, they are studied and compared with other
tenders/quotations in respect of price of material quoted and other terms and
conditions mentioned in them and selection of a supplier is done and purchase
order is sent to him. The work of selecting a proper supplier is important as it
affects the cost of material and also the proper functioning of the production
departments.
4.9 Key Terms
i) Centralised Purchasing : A separate purchase department is created in

the organisation which makes purchases for all departments which need
materials and other items for their use.
ii) Decentralised Purchasing : Authority is given to each section and

department to make the purchases of materials, tools, stationery and other items
as and when they are needed.
iii) Purchase Requisition : It is a document used for making a written request

to the purchasing authority to make arrangement for purchase of items in
quantity and as per quanlity and specifications mentioned in the document.
4.10 Questions
I. Multiple Choice Questions :
(1) A request for purchase of material is terms as -----

NOTES (a) Purchase requisition
(b) Purchase order
(c) Purchase receipt
(d) bill.
(2) A ----- is a contractual document which authorises the supplier to supply

the material
(a) purchase requisition
(b) purchase receipt
(c) purchase order
(d) store ledger
(3) Decentralised purchasing is more convenient for ----- items which are
specific to departmental.
(a) useful
(b) common
(c) uncommon
(d) day-to-day
(4) Centralised purchasing ensures ----- over purchases.
(a) less control
(b) better control
(c) no control
(d) indirect control.
Ans. : (1 - a), (2 - c), (3 - c), (4 - b)
II - Theory Quesitons :
(1) What do you understand from `Material’? State the meaning of ‘direct
materials’ and ‘indirect materials’ and give list of five items of direct and
indirect materials.
(2) What is meant by `material cost’? Explain types of materials giving

example of each type of material.
(3) How and when materials are purchased in an industrial undertaking? Meaning & Purchasing
(4) What is the difference between ‘Centralised Purchasing’ and

‘Decentralised Purchasing’ ? State briefly merits and demerits of both
types of purchasing.
(5) Explain major stages in the purchase procedure followed in a large-size
industrial concern.
NOTES
(6) What is the importance of ‘Purchase Order’? To which point careful
attention should be given while preparing a purchase order ?

i) ‘Cost Accounting’ - Jawahar Lal
ii) ‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad.
iii) ‘Cost Account’ - B. K. Bhar

Unit 5 Receipt and Storage of Materials Receipt & Storage
of Materials
Structure
1. Introduction
NOTES
2. Unit objective
3. Receipt of materials
1. Checking quantity and quality of materials received
5.2.2 Documents connected with receipt and Verification of materials

received.
3. Storage of Materials
1. Location of store
2. Organisation of stores
3. Classification and codification of materials
4. Bins and Bin Cards
5. Recording of materials in stores
4. Summary
5. Key Terms
6. Questions
7. Further Reading
8. Introduction
In the previous unit, we have studied information about meaning, types
and purchase of materials. When as per the order given to the supplier he
delivers the materials it is to be received and its quantity and quality is required
to be checked and arrangement for proper storage of the various items of
material is done by the manufacturing concern. In this unit we shall study the
work of receipt and storage of materials and how it helps in controlling the
material cost.
9. Unit Objectives
After completing study of this Units you should be able to understand :

• Arrangement made for receipt of materials;
• How checking of quantity and quality of materials received is done; Advanced Cost Accounting - I 113
Receipt & Storage • Preparation and use of documents used in connection with receipts and of
of Materials
materials;
• Organisation of stores; and
• Classification and codification of

NOTES materials.
2. Receipt of Materials
Materials are supplied by the supplier as per the purchase order received
by him. The materials and other items are packed by him as per the instructions
provided in the purchase order and they are dispatched by train or road-carriers.
In a large-scale manufacturing concern materials are received from many
suppliers and on a large-scale and so in such concerns there is a separate
‘Goods Receiving Department’ created for taking delivery of materials and other
goods. In a small size concern stores department does the work of receiving
materials. The goods receiving department is located near the entrance gate of
the premises where the work of unloading of the vehicle can be done without
causing any hindrance to other departments of the concern.
1. Checking Quantity and Quality of Materials

Received
The goods receiving department is required to weigh, count or measure the

quantity of materials received from the supplier. The necessary equipment and
facilities are provided to the goods receiving department for checking the
quantity received. The quantity is checked with the Delivery Note sent by the
supplier along with the materials and with the quantity mentioned in the
purchase order, if such a copy is provided by purchase department to it.
It also checks the condition of the materials and if there are damaged or
broken goods, they are kept separate and after consulting the purchase
department they may be returned to the supplier with a request for replacement
of them or if the damage is negligible the goods may be accepted. Any
difference between the quantity received, quantity ordered and quantity
mentioned in the delivery note of the supplier is immediately reported to the
purchase department so that it can take-up the matter with supplier.
Verification of the quality or grade of the material is done by the

Inspection Section. According to the nature of materials quality of materials is
checked by the persons working in the Inspection Section by conducting the
appropriate tests in its laboratory. If the quality is found to be within the
acceptable range, the materials are accepted and with the inspection report they
are sent to the stores or to the department which had submitted the purchase
requisition. However, if the quality is not acceptable, such materials are kept in a
separate place known as ‘quarantine area’ and the suppliers is instructed to take
back such materials and supply the proper quality materials as per the order.

5.2.2 Documents Connected with Receipt and Verification Receipt & Storage
of Materials
of Materials Received
As mentioned above, when the materials and other goods are delivered by
the suppliers they are received and checked in respect of the quantity and the
quality by the Goods Receiving Department/ Section. It is not sufficient to
merely take possession of the materials, check their quantity and quality but a NOTES
record of it must be duly maintained by the Goods Receiving Department.
Information about the supplier who has sent the materials, purchase order
number, description of materials received, quantity of materials and condition of
the materials, inspection report giving information about quality of materials
received are some of the important points covered by the information. Printed
forms are used as the goods received note and inspection report. Some concerns
use a single form with provision to record the quantity as well as the quality
inspection report, whereas some concerns use two separate forms one for
recording quantity and other for inspection report.
Generally three copies are prepared of the Goods Received Note. First
copy is sent to the Purchase Department to verify with the purchase order given
to the supplier and to take necessary steps for damaged sub-standard or shortage
of material supplied and for payment to be made to the supplier for the
materials accepted. Second copy is sent to the stores department or the which
has requested for purchase of the material along with the materials. Third copy
is retained as the office copy by the goods receiving department as a record.
Specimen form of goods received note is shown below :
------------------Co. Ltd.
Goods Received Note
Supplier------------------- No.--------
------------------- Date
received-----
------------------- Purchase
order no.----
Carriage/Vehicle No.--- Delivery Note
No.-----
Sr. No. Description Qty. No. of Remarks

Packages
Qty. checked by------
There are some materials whose quality/grade must be properly tested

before they are allowed to be used for manufacturing purpose. According to the
nature of the material the manner in which its quality should be tested and to
what extent testing should be done is decided. Quality may be tested on the
basis of hardness, strength, chemicals to examine reaction of the materials, etc.
and persons verifying the quality of materials should be qualified and Advanced Cost Accounting - I 115
experienced and they should be
Receipt & Storage qualified and experienced and they should be given the necessary facilities for
of Materials
conducting the tests. If a separate report about inspection of quality of materials
is prepared its format may be as under : -
--------------------Co. Ltd.
NOTES Quality Inspection Report
No. : ----- Reference No. of G R Note-----

Date : -----
Check Your Progress
Name of Material inspected ------------------------
i) Which are the documents Type of test conducted ------------------------
connected with receipt ------------------------
and verification of
materials received ? Quantity tested ------------------------
% of testing ------------------------
ii) Give format of the
following : Result of testing ------------------------
a) Goods Received Note
------------------------
Report about ------------------------
b) Quality Inspection
Report quality of the ------------------------
material
Tests conducted by Inspected by

---------------------- ---------------
Some concerns do not prepare and use a separate Quality Inspection

Report but include it in Good Received Note by making necessary space
provision for it.
5.3 Storage of Materials

Storage of materials means keeping the materials received from the
suppliers in a systematic and scientific manner at a place known as the stores.
Materials purchased and received from the suppliers are generally not required
in the total quantity by the production department or its different sections and so
the materials are required to be kept in the stores department in a safe way till
they are requisitioned for by the section where they are consumed or processed.
Since materials are costly they cannot be kept at any place in the open without
keeping proper records and without taking precautions. A large portion of
money is invested by the manufacturing concerns in the stock of materials and
so materials are regarded as equivalent to cash and for keeping the materials
and to protect them from natural factors like heat, humidity and damage caused
by insects, rate, etc. and also from fire, theft and factors causing adverse effects
on quality of materials, a proper arrangement at a place called store is
essential.

5.3.1 Location of store Receipt & Storage
of Materials
The location of the store or stores department is required to be decided

after considering a number of factors since the efficiency of the stores is very
much dependent upon the correct location of the stores is very much dependent
upon the correct location of the stores. Factors to be considered for deciding
location of the stores include mainly the nature of nature of manufacturing NOTES
activity- processing of materials to create the final product or assembly of
various parts for producing the finished product-, nature of materials used such
as heavy, light-in- weight, solid, liquid, inflammable, unit in which the materials
are issued, the frequency of issue of materials, convenience with which receipt
and issue of materials can be done, security arrangement for materials, distance
between place of stores and the place where the materials are consumed by the
manufacturing centers and total space available to the concern and how much
space out of it can be allocated to the stores department.
It is also necessary to decide whether the concern should follow

centralised storage or decentralised storage system. In centralised storage, there
is one central stores for all the departments as well as the head office and all the
branches. Centralised store does the work of storing all the materials and other
items required by the production, repairs and maintenance, research and
development, office and other departments of the concern and supplies the
materials to them as and when they demand them. Centralised storage is
beneficial because large orders for materials can be placed by combining the
requirements of all the departments and advantages of large orders can be
obtained, available space can be efficiently utilised for storage of different
items, limited and expert staff can be appointed in the stores department, time
and money can be saved in maintaining the stores records, security
arrangements can be made more efficiently and better and effective control on
inventory becomes possible.
The draw-backs of the centralised storage are delay in placing orders and
obtaining the materials from the suppliers, delay in movement of materials from
the store to the production of other departments especially when they are located
at a long distance from each other, purchase of materials of inexact
specifications due to not understanding the exact requirements of a particular
department and greater risk due to storage of all materials at a central place.
Due to the above limitations some concerns follow the system of

decentralised storage in which the production and other departments are
provided a separate space in their own department for storage of materials
which they need in their day-to-day working. Centralised storage is followed by
majority of the concerns due to more advantages provided by it.
5.3.2 Organisation of stores

In a centralised store a separate stores department is created in the
organisation of the concern. Storekeeper or stores manager is in charge of the
stores department and under him necessary number of assistants and store clerks
are appointed as required by the volume of the work to be done by the stores
Receipt & Storage department. The work of receiving the accepted materials, storage and
of Materials
production of the materials and issue of materials in the required quantity as
requisitioned by the production and other departments from time to time is the
main work to be performed by the stores personnel. Only authorised persons are
given entry in the stores department. According to the number of materials and
NOTES other items to be stored, the nature of the materials and the volume of materials
to be handled decision is taken as to where each type of material should be
stored and what arrangement should be storage of each material. Heavy
materials are generally kept on the floor, light materials may be kept on racks
and scares and valuable materials may be kept in cupboards under lock and key.
Instruments required for lifting, measuring, transporting and handling of
materials are required to be provided at appropriate places in the stores
department. Once the material is received in the store safeguarding the quantity
and quality of it the and issuing it when requisitioned by the consuming
department is the responsibility of the stores department. Proper lighting and
air-conditioning arrangements, provision of wooden or steel containers, drums,
paper-boxes, glass containers for storage of different types of materials,
provision of fire-fighting equipment and keeping them in usable condition and
keeping the floors clean, dry and clear for movement of materials without
causing any accident are also the matters to which due attention is required to
be given by the stores personnel. The stores personnel is also required to
maintain records for each material to show the material received, material issued
and the quantity of material in stock and verify such stock by doing physical
checking and comparing it with the quantity shown in stock as per the
documents. Information about some of the above mentioned points is provided
5.3.3
in Classification
following sub-points. and Codification of Materials
Prior to allotment of space for storage of materials it is necessary to

classify and codify the materials. A manufacturing concern uses various types
of materials and the number of such materials may run into hundreds and
thousands. These materials are, therefore, sorted into different classes or groups
and this process is termed as classification of materials. Classification enables
the storekeeper to know how many different materials are to be stored in the
store and accordingly he can allot required space for each material. In
classification, materials of similar nature are placed in the same class; e.g.
Material which form part of the finished product and which are processed by
workers for creating the finished product are the direct materials and they are
included in the class of direct materials. Materials which may form part of the
finished product but whose proportion-quantity wise as well as value wise is
very small and materials which are consumed in the manufacturing process and
are not included in the finished product are regarded as indirect materials and
placed in that group. Similarly there can be classes for fuel (coal, diesel, gas,
etc.), parts of machinery and components, packaging materials, items of
stationery and stock of work-in-process and stock of finished goods. Materials
included in one class are, generally, kept in one space allotted to that class and
items included in that class are separately kept in the space allotted to each; e.g.
screws, nails, nuts, bolts, wire are included in the class of indirect materials and
for each item a separate space is alloted. In the space a alloted for
screws, screws of different sizes, of different metal-steel, copper, brass- ,of round Receipt & Storage
of Materials
and square heads, of different strengths are kept separately from each other.
This helps in locating the exact material when it is to be issued as per material
requisition note.
Codification of materials :
Code means a symbol assigned to any item by which that item is

NOTES
identified. In the store as there are hundreds of items which are stored, it
becomes difficult to identify them by their names. Names of materials may be
lengthy and there may be materials which have only slight variation of names.
Such materials are likely to create ambiguity in the minds of store people and
may lead to wrong material being issued. Names of materials are lengthy and
difficult to remember. Therefore instead of using names of materials they are
identified by the symbols. Use of symbol avoids confusion in identifying the
material since one code represents only once specific material. Symbols are
short and easy to remember and save the time and labour spent in writing the
lengthy names of materials. Use of codes helps in maintaining secrecy about the
materials being used in manufacturing and use of code is essential when
mechanised accounting is followed in a concern.
Methods of Codification :
There are three methods which can be used for codification of materials.
These methods are :-
i) Numerical Method : In this method a number is allotted to each item of

material. For example iron are is given symbol ‘1’, Brass is given number
2, Petrol number 3 and so on. Further grade or type of the material can be
assigned a number after a decimal point; e.g. Iron are grade A denoted by
1.1, grade B 1.2 etc.
ii) Alphabetical Method : In this method each item of material is given a

particular alphabet as a symbol. Since the total alphabets are limited, they
are not sufficient for all the items of materials and so combination of
alphabets are used to overcome this difficulty; e.g A is used as a symbol
for Acid, AS is a symbol for Sulphuric Acid,
iii) Combination of Numerical and Alphabetic Methods : As suggested

by the name of the method this is a mixture of method i) and ii). As any
number of combinations can be made, this method can cover any number
of material items. In this method symbols can be allotted as A1, A2, BS1,
BS2 etc. for different items of materials.
Mnemonic codes can be used as symbols for the items at first

materials. Mnemonic code is dependent upon the first sound when the
name of the material is pronounced; e.g For wood the symbol used is W,
for steel the symbol is S, for oil symbol is O.
5.3.4 Bins and Bin Cards :
The area where the materials are stored is divided in such a way that for
Receipt & Storage storage of each item of materials there is a certain area provided as per the
of Materials
requirements. Each such area used for storage of material is called a ‘bin’. So
bin can be any container, a box, a rack, a shelf, an area in a cupboard or any
other arrangement made for storage of a certain material. Depending upon the
nature of the material, size of the material, volume in which the material is to be
NOTES stored and the value and risk attached to the material where and how it should
be stored is carefully decided. Each bin is numbered and a record of bin
numbers and materials stored in them is kept on the desk of the storekeeper for
easy reference.
For every bin a document called ‘bin card’ is prepared which provides
information about bin number, description of material stored in the bin, stores
ledger number or folio, minimum level of quantity to be maintained of the
material etc. A bin card has columns for recording receipt of material, issue of
material and balance of material. Reference number of Goods Received Note
No. and Material Requisition Note No is recorded for each transaction of receipt
and issue of material from the bin and quantity in balance is shown in the
balance column of the Bin Card after every receipt and issue transaction of the
material from the bin. When the physical verification of actual quantity in bin is
done and it is compared with the quantity shown in balance column of bin card,
the date of such verification and signature of the person doing such verification
is recorded in the bin card along with remarks.
Format of Bin Card is given below :-
------------Co. Ltd.
BIN CARD
Bin No -------- Minimum Level -----

Description ------- Re-Order Level -----
Code No. ------ Re-Order Qty
Store Ledger No. ----- -----
Date Receipts Issues Balance StockVerification

Ref. No. Quantity Ref. Quantity Quantity Dat Remar Initials
No. e ks
Reference No column under Receipts records the number of Material

Received Note and Ref. No. Column under issues records the number of
Material Requisition Note received in the stores department.
5.3.5 Recording of Materials in Stores
A proper and systematic recording of materials which are received in the

stores and which are issued from the stores is required to be maintained by
the
stores department. When material is received form the Goods Receiving Receipt & Storage
of Materials
Department/Section, it is accompanied by Goods/Material received Note and
Inspection Report. A stores clerk who receives the material checks the quantity
of material physically and compares and it with the quantity of material recorded
in the Material Received Note and the Inspection Report. If the quantity
received is correct he signs acknowledgment for it and takes the material to the
particular bin allotted for storage of the material. Freshly received material is NOTES
kept in back and previous stock of material is kept in the front part of the bin so
that old material is used for issue of material and freshly received material is
used for issue after exhausting the old stock.
Material is issued from the store on the basis of Material Requisition Note
received from the production department or other departments which need the
material. Regular type of materials required for day-to-day production are
requisitioned by the supervisor by preparing and signing the Material
Requisition Note but for special, scares and valuable materials along with the
supervisor`s signature the signature of the Assistant production Manager or
production Manager is required as approval for issue of such materials. The
store clerk checks all the details given in the Material Requisition Note and if
satisfied, takes out the quantity of material from the bin and gives it to the
person who has brought the Material Requisition Note to him.
Sometimes it happens that the quantity of materials supplied from the

store to a production department for a particular job is found in excess of the
quantity used for consumption. This may happen due to over estimation of
quantity of material for doing a job or due to reduction in the quantity of the
finished product for the job due to change in order. Thus the production
department possesses some quantity of material not used for the job. Such
excess material is required to be returned back to the store for safeguarding it
and while returning the excess material the department returning it has to
prepare a document called ‘Material Return Note’ in duplicate filling all the
necessary information in it. The colour of Material Return Note is different
from the colour of Material Received Note so that the store clerk can
distinguish it from the Material Received Note. When the store clerk receives
the returned material, he signes both copies and keeps one copy in the store and
gives the other copy to the person who has brought the material from the
production department to be kept by it as evidence of return of excess material.
The cost office is required to make the recording for the cost of material
returned to the store. On the basis of quantity of material returned and the rate of
the material, the value of the returned material is calculated and credited to the
returned material is calculated and credited to the cost of the job from which it
has been returned. Recording in the Bin Card and store ledger Account is also
made to increase the quantity and value of material in stock.
In some manufacturing concerns where two or more production

departments/sections use the same material in manufacturing process, the excess
material available with one department/section is directly transferred to another
department/section which needs that material. This is done with the objective
of Advanced Cost Accounting - I 121
Receipt & Storage avoiding delay in returning excess material by one production department to the
of Materials
store and the other production department obtaining it from the store. For such
transfer of materials from one department to another Material Transfer Note is
prepared giving details such as name of the department transferring the material,
nature and description of materials transferred, quantity of such of material, the
NOTES Job No from which it is transferred and Job No. for which the transferred
material is used, signatures of persons transferring it and receiving it, etc. The
cost office debits the cost of transferred material to the Job No for which it is
used and credits it to the Job No from which the excess material has been
Check Your Progress transferred. Use of Material Transfer Note should be allowed only in
exceptional case and in normal situation excess material should always be
i) How location for storage is
decided ? returned to the store with duly prepared Material Return Note.
ii) What is meant
Classification Specimen of Material Return Note and Material Transfer Note are
Codification of materialsby
? given below :-
and
iii) State the methods used for
codification of materials. ------------------Co. Ltd.
iv) Which documents are used Material Return Note
in stores department in
connection with storage of Department -------- No.-----------
materials ?
Credit Job No------ Date ---------
v) Give the formta of :
a) Bin Card
Quantity Unit Description Code For cost office
b) Material Returned
Note Rate Amount
c) Material Transfer
Note
Bin No ------- Received by --------

Stores Ledger No ----- Storekeeper -------- Authorised by
--------
---------------Co. Ltd
Material Transfer Note
From Job No ------- No. ---------

To Job No ---------- Date --------
From Department ------ To Department ----
Quantity Description Code For cost office

Rate Amount
Authorised Delivered Received Priced

122 Advanced Cost Accounting - I ----------- ---------- ---------- -------
5.4 Summary Receipt & Storage
of Materials
Materials Ordered with the supplier is received from him and Goods
Received Department makes the necessary arrangements for receiving the
materials, for checking the quantity and condition of the materials. Quality of the
materials received is checked by the Inspection Section. If quantity and quality
is as per the purchase order it is accepted and Goods Received Note is prepared NOTES
and along with the materials it is sent to the stores department. Stores should be
located at a proper place which is suitable to all departments which use the
materials. A concern may use centralised stores method or de-centralised stores
method. When centralised store method is followed a separate stores-department
is created. A store-keeper or a stores manager is head of the stores department
and under him some assistants and stores clerks work in this department doing
the work of receiving , storing, issuing and protecting the various materials as
per requirement. Bin Card for each separate material is prepared in which
quantity of material received, issued and balance of quantity in the bin is
recorded date wise. Material received in the store is checked with the quantity
mentioned in the Goods Received Note and issue of material is done only
against an authorised Material Requisition Note. Recording is also made in the
Bin Card when Material Return Note and Material Transfer Note is received
from the concerned departments.
5.5 Key Terms

i) Bin : A Space stores allotted for storage of a specific item of material. Bin
may be shelf, a cupboard, a specific floor area, a rack, a box, etc.
ii) Bin Card : It is Document prepared for each bin and is kept attached to
each bin. Columns provided in Bin Card are used for recording date wise
the quantity received in bin and issued from the bin and quantity in
balance column is adjusted after each receipt and issue transaction.
iii) Material Return Note : It is a document prepared for material returned

by a production section to Stores Department. Return of material may be
due to defective material or excess material not required for immediate
production.
iv) Material Transfer note : A document prepared to record transfer of

material from one section to another section. A section which has excess
material may be give it to another section which is in need of such
material. To save time, the transfer of material is allowed and to record
such transfer Material Transfer Note is prepared.

Receipt & Storage
of Materials
5.6 Questions
I. - Multiple Choice Questions :
1. Purchase control is an element of ----------- control.

NOTES (a) labour
(b) expenditure
(c) material
(d) indirect
2. Bin Card is maintained by the ----------------
(a) planning department
(b) Store Keeper
(c) cost accountant
(d) production department
3. A --------------- of materials relates to grouping of materials.
(a) classification
(b) codification
(c) centralisation
(d)decentralisation
Ans. : (1 - c), (2 - b), (3 - a)
4. Match the pairs.
Group I Group II
(a) Bin Card i) Centralised purchases
(b) Store Ledger ii) grouping of

material
(c) Codification iii assigning
) symbols
(d) classification iv) Materials & value of
material
v)
-----
II. - Theory Questions :

(1) Explain the procedure followed in store from receipt of materials to issue
of materials.
(2) What care should be taken by a store clerk while receiving materials in
store ?
Receipt & Storage
(3) What do you understand by ‘classification’ and ‘codification’ of materials
of Materials
? State the methods used for codification of materials.
(4) Why a store is necessary ? Which documents are used for recording
receipt and storage of materials ?
(5) Explain the organisation of store. Where the store should be located ?
NOTES
(6) What is meant by ‘bin’ ? Give format of ‘Bin Card’ explaining how the
information is recorded in the columns of bin card.
(7) Give specimens of ‘Material Return Note’ and ‘Material Transfer Note’.
When these Notes are used and how recording is made in these two notes
?
5.7 Further Reading
iii ‘Cost Accounting’ - B. K. Bhar

)

Unit 6 Control over Materials in Stores Control Over Materials
In Stores
Structure
1. Introduction
2. Unit Objective NOTES
3. Control over materials in stores
4. Fixation of stock levels
5. Economic Order Quantity (EOQ)
6. Stock taking
1. Methods of stock taking
7. Discrepancies and treatment of discrepancies
8. Summary
9. Key Terms
10. Questions and exercises
11. Further Reading
12. Introduction
Material cost forms 30% to 70% of the total cost of a product and so
efforts are required to be made to control material cost right from purchase of
materials to consumption of materials. When materials are being stored
precaution are required to be taken in handling of material, for protection of
materials from climate and theft and also in storing materials in particular
quantities. In this unit information is provided to you about the manner in which
control over materials is exercised when they are in the store.
13. Unit Objectives

Study of information provided in this Unit should enable you to understand :
• Different factors to which attention should be given for exercising control
over materials while they are in the store;
• How Economic Order Quantity should be calculated ;
• Which stock level are fixed and how they are fixed;
• Why stock taking is necessary and which methods can be used for fixing
stock levels;
Control Over Materials • Discrepancies in quantity of material and reasons for such discrepancies;
In Stores
and
• How discrepancies are treated.
NOTES
6.2 Control over Materials in Stores
For any business concern and especially for a manufacturing concern
material is almost equivalent to cash. A large amount of money is invested in the
stock of materials kept in the store. Material is affected by many factors such as
climate, sunshine, dust, insects and theft and its quality as will as quantity is
adversely affected and the concern is required to suffer the loss caused by this.
So it is necessary that proper control on the materials should be kept to
eliminate or minimise the loss when the materials are in the stores department.
By giving attention to the following points proper control on materials can be
kept :-
1. While receiving the materials from the Goods Receiving section at the
entrance of the stores it should be physically counted, measured or
weighed and the quantity should be verified with the quantity mentioned in
the Materials Received Note. Attention should also be given to the
condition of the materials received.
2. Materials received should be immediately taken to the bins allotted for

storage of materials. It should not be allowed to lie near the entrance of
the stores department or in the passage.
3. While keeping the material in its proper bin it should be kept in such a
way that old stock in the bin is kept ahead and newly received material is
kept in the back. This enables issue of old material first and newly
received material later on. This is necessary when quality of material is
adversely affected due to passage of time.
4. Arrangement should be made for proper inspection of materials at regular

intervals. Such inspection is helpful in noticing deterioration of quality,
shortage in quantity, slow-moving items of materials and material which
has become obsolete. The storekeeper takes appropriate action in each
case.
5. Issue of materials to production department or sections should be done by

the stores department only against Materials Requisition Note duly filled
in. The person issuing the material should issue exact quantity of
materials mentioned in the Material Requisition Note. For some special
or scarce and very valuable materials the Materials Requisition Note
should be signed by the production manager and issue of such materials
should be done by the store clerk after informing the storekeeper about
such issue.
6. Persons working in the stores department should be given necessary

training so that they can take proper care while handling the materials
and while using the weighing, measuring equipment and fire-fighting
equipment.
7. For each material maximum, minimum, re-ordering levels should be Control Over Materials
In Stores
determined and the store personnel should be given instructions to observe
these levels. This will ensure avoiding the situation of over-stocking as
well as non availability of material.
6.3 Fixation of Stock Levels NOTES
For each material the stores department has to fix certain levels. They
include Maximum Level, Minimum Level, Re-Ordering Level and Danger Level.
It is also necessary to determine how much quantity should be ordered when for
a material fresh order is to be placed. Quantity to be ordered depends upon the
maximum and minimum consumption of the material, maximum and minimum
period required for receiving the material from the supplier after an order is
placed with him, the price per unit of material, changes expected in the price and
availability of material in the near future, the discount and other facilities
offered by the supplier for different size orders and the capital available with
the concern for investment in the stock of materials. Once the order quantity is
fixed generally it remains unchanged unless some major changes in the price of
material or in the availability of the material in the market are expected to take
place. When a material is available only in a certain season and it is consumed
throughout the year quantity to be ordered will naturally be a large quantity.
6.4 Economic Order Quantity (EOQ)

Economic order quantity is that quantity of a material by ordering which
the total cost of purchasing and carrying the stock of material is kept at
optimum level. In other words at economic order quantity the cost of purchasing
and the cost of carrying the inventory are almost equal. If the quantity to be
ordered is either increased or decreased from the economic order quantity, the
total cost of purchasing and carrying the inventory will increase.
Cost of purchasing also called cost of ordering includes the cost of

stationary, cost of salary of the purchase clerk who prepares the order, postage
cost of sending the order to the supplier, proportionate cost of establishment
expenses of the purchase and goods receiving department, and cost of
advertisement if tenders are invited from suppliers by publishing an
advertisement in the newspapers or periodicals. Cost of purchasing is less if
only a single order is given for purchasing the annual requirement of the
material and cost of purchasing increases when number of orders given is more
than one.
Cost of carrying inventory which is also known as cost of storage includes
cost of warehousing, rent, salaries, printing and stationary expenses of the store
department, insurance premium, interest on amount of capital locked in the stock
of material, loss caused by spoilage, wastage or loss of material while it is kept
in the store and cost of handling the material. When quantity order is less the
cost of carrying the inventory is less and when quantity per order is more the
cost of carrying inventory is more. Advanced Cost Accounting - I 129
Control Over Materials Cost of ordering and cost of carrying inventory move in opposite
In Stores
directions. If order quantity is low there will be more number of orders to be
placed for obtaining the total quantity of annual requirement and so cost of
ordering will be more. But as the ordered quantity is less the cost of carrying
small inventory will become less. On the other hand if quantity per order is more
NOTES the cost of ordering will become less and the cost of carrying inventory will be
more due to large inventory to be carried by the store.
Economic order quantity is, therefore, such quantity per order which
balances the cost of ordering with the cost of carrying inventory. At economic
order quantity the total cost made up of cost of ordering and cost of carrying
inventory is lowest.
For calculating economic order quantity the formula used is as

follow :-
Where EOQ = Economic Order Quantity,
EOQ =
 2AB
Ci A = Annual Usage or Consumption
of the material
B = Buying cost per order or
cost of placing an order
C = Cost per unit of the material
i = Cost of carrying inventory
expressed as 0% p.a.
There is another formula for calculating EOQ which is as

under :-
Where EOQ = Economic Order Quantity A =
EOQ =
 2AB
S Annual usage of material B =
Buying cost per order
S = Storage cost per unit per annum
Economic order quantity can also be decided by using the Tabulation

Method according to which the number of orders for the annual consumption
are started from a single order and increased by one every time. Cost of buying
and cost of carrying average inventory are calculated separately and by adding
these two costs the total cost is calculated. When a single order is placed to
obtain the quantity of annual consumption, the buying cost is the minimum and
since the average inventory is more the cost of carrying the inventory is
maximum. The total cost is also maximum at this stage. With increase in the
number of orders, the buying cost increases while the carrying cost of the
inventory decreases. Total cost column shows that upto a certain stage it
decreases and after that stage it again starts increasing. The stage at which the
total cost is lowest is the stage which indicates the economic order quantity.
In order to understand calculation of EOQ by formula method and Control Over Materials
In Stores
tabulation method let us consider the following illustration :
ILLUSTRATION
Arun Co. Pvt. Ltd. manufactures a certain product and uses a particular
material in the manufacturing process. Annual consumption of this material is
20000 units. The cost price per unit is ` 2.50 and buying cost per order amounts NOTES
to ` 100. The cost of carrying the inventory is 10 % per annum.
Calculate EOQ for the material using :
i) Formula method, and
ii) Tabulation method.
SOLUTION
i) Formula method :
Where A = 20,000 unit
EOQ =
 2AB
Ci B = ` 100 per order
= ` 2.50 per unit
C = 10% p.a.
i
Therefore EOQ =
 2 X2.50
20000 X 100
X 10 %
=
4000000
.25
=
=
16000000
4000 units
Annual No. of Units Average Value of Buying cost Carrying Tota

ii)Usage
Tabulation
OrdersMethod
per : inventor average at ` 100 Cost l
(units p.a. orde y inventory per order p.a. @ Cost
) r (units) @ ` 2.50 10%
per unit
(` ) (` )
(` ) (` )
20000 1 20000 10000 25000 100 2500 2600
2 10000 5000 12500 200 1250 1450
3 6666 3333 8333.50 300 833.35 1133.35
4 5000 2500 6250 400 625 1025
* 5 4000 2000 5000 500 500 1000
6 3333 1667 4167.50 600 416.75 1016.75
7 2857 1429 3572.50 700 357.25 1057.25
8 2500 1250 3125 800 312.50 1112.50
9 2222 1111 2777.50 900 277.75 1177.75
10 2000 1000 2500 1000 250 1250 Advanced Cost Accounting - I 131
Control Over Materials * indicates EOQ as 4000 units and to obtain the quantity needed for annual
In Stores
consumption 5 orders will have to be placed during the year.
At EOQ units the total cost is ` 1000 made up of ` 500 as buying cost
and ` 500 as the carrying cost. Figures in the total column show that ` 1000 is
the lowest cost and at this economic order quantity level the buying cost and the
NOTES
carrying cost are equal. When quantity per order is more than 4000 units or less
than 4000 units the total cost is more than ` 1000.
[Additional Illustrations are given on EOQ at the end of this Unit]
Fixation of Stock Levels :
For controlling the quantity of materials stored in the storeroom the

storekeeper fixes stock levels for each material. Stock levels to be fixed include
maximum stock levels, minimum stock level, re-ordering stock level and danger
level. While fixing the stock levels for each material factors such as normal
consumption, maximum consumption and minimum consumption, minimum,
normal and maximum period taken by the supplier for delivering the material
after accepting the order and emergency period required for obtaining the
material in emergency. Situation and the economic order quantity fixed for the
material are taken into consideration.
First stock level to be fixed is the re-order level because for fixing
maximum and minimum stock level information of re-order level is needed.
Re-Order Level = Maximum Consumption x Maximum delivery period.
When stock of material in hand reaches the re-order level fixed for the
material an order is placed with the supplier. It is fixed at that level which
enables the stores department to supply the material to the production
department even if maximum consumption takes place and maximum period is
taken by the supplier to deliver the material for the order placed with him.
Stoppage of production due to non availability of material in stock is, thus,
avoided by fixation of re-order level.
Maximum level = Re-Order Level + Re-Order Quantity - (minimum

consumption x Minimum delivery period.)
Actual quantity of material in stores can be less than or equal to the

maximum level but cannot exceed the quantity fixed as the maximum level.
Minimum Level = Re-Order Level - (Normal consumption x Normal delivery

period)
Minimum level, as the name suggests, is that actual quantity in stores

which will not be below the minimum stock level. If the actual quantity of the
material falls below the minimum level fixed, there is risk of stoppage of
production and to avoid it, the storekeeper should give priority to obtain the
material from the supplier.
Danger level = Average or Normal Consumption x Maximum delivery period for

emergency purchases.
Maximum Consumption + Minimum Control Over Materials
Average Consumption = Consumption In Stores
2
When quantity of a material in store reaches the danger level fixed for that
material there is danger of stoppage of production due to non availability of the
material in the stores. When a material reaches the danger level normally all
regular issues of the material are stopped and the available material is issued NOTES
only for urgent jobs after obtaining permission from the storekeeper. The
storekeeper makes emergency arrangements for obtaining the material. The
emergency arrangement may be in the form of obtaining the material from local
supplier instead of the usual practice of obtaining it from the district /state
/national level supplier or permitting transportation of material by passenger
train, air transport or special courier service instead of the usual transportation
by truck or goods train. Since emergency purchasing results in increasing the
cost of material, maximum care should be taken to see that a material does not
reach its danger level.
Average stock level indicates the average quantity carried for a material
and such level is calculated by the following formula :-
Maximum level + Minimum level
Average stock level =
2
It is also calculated by using the alternative formula as given below :-
Average stock level = Minimum level + 1/2 (Re-Order Quantity)
ILLUSTRATION 1
Manohar & Co. uses a certain material in the manufacturing of its

product. It has asked you to fix maximum level, minimum level, re-order level
and danger level for this material and has provided following data related to the
material :-
Consumption of the material per week :
Normal 500 units
Maximum 800 units
Minimum 200 units
Re- Order Quantity 3500 units
Period for obtaining delivery from
supplier : Minimum 2 Weeks
Normal 3 Weeks
Maximum 5 Weeks
Period needed to obtain emergency delivery

1 week.
Control Over Materials SOLUTION
In Stores
Re-Order level = Maximum Consumption x Maximum delivery period
= 800 x 5
= 4000 units
NOTES
Maximum level = Re-order level + Re-Order quantity - (Minimum consumption
x
Minimum delivery period )
= 4000 + 3500 - (200 x 2)
= 7500 - 400
= 7100 units
Minimum level = Re-order level - (Normal consumption x Normal delivery

period)
= 4000 - (500 x 3)
= 4000 - 1500
= 2500 units
Danger level = Average consumption x Period for emergency delivery
= 500 x 1
= 500 units
[Note : Average consumption Period as follows :

Maximum consumption + Minimum
2
consumption
800 + 200 1000
 = = 500 units]
2 2
ILLUSTRATION 2
From the following information calculate (a) Reordering Level, (b)

Maximum Level, (c) Minimum Level, (d) Average stock Level, (e) Danger
Level.
Lead Times Average 10 days
:
Maximum 15 days
Minimum 6 days
Maximum for emergency purchases 4 days
Rate of consumption : Average 15 units per day
Maximum 20 units per
day Minimum 10 units
ordering Quantity per day
134 Advanced Cost Accounting - I : 200 units
SOLUTION Control Over Materials
In Stores
(a) Reordering level = MX.C x MX.RP
= Maximum rate of consumption per day x
Maxi mum lead times in days
= 20 units x 15 days = 300 units.
NOTES
(b) Maximum Level = RL + RQ - (MN.RP)
= Reordering Level + Ordering Quantity - (Minimum
rate of consumption per day x Minimumlead time in
days)
= 300 units + 200 units - (10 units x 6 days)
= 500 units - 60 units = 440 units.
(c) Minimum
level = RL - (A.C x A.RP)
= Reordering Level - (Average rate of consumption per
day x Average lead time in days)
= 300 units -(15 units units x10 days) = 300 units - 150
units
(d) Average Stock Level = 150
MN.L+ 1/2 RQ
units.
= Minimum Level + 1/2 of Ordering Quantity

= 150 units + 1/2 x 200 units = 150 units + 100
units
(e) Danger Level = A.C x MX . RP for EP
= 250 units.
= Average rate of consumption per day x Maximum
lead time for emergency purchases in days
= 15 units x 4 days = 60 units.
ILLUSTRATION 3
Two components ‘A’ and ‘B’ are used in Swastic Industries, Pune as follows :
Normal Usage : 150 units per week each

Minimum Usage : 75 units per week each
Maximum usage : 225 units per week each
Re-order Quantity : A - 900 units
B - 1,500
Re-order Period units
: A- 4 to 6
weeks
Calculate for each component.
: B- 2 to 4
(a) Reorder Level, (b) Maximum Level, (c) Minimum Level, (d) Average stock
weeks
Level.
A
n
Control Over Materials SOLUTION
In Stores
(a) Reorder Level = MX . C x MX . RP
= Maximum usage per week x Maximum re-order
period in weeks
NOTES Component A’ = 225 units x 6 weeks = 1,350 units
Component B’ = 225 units x 4 weeks = 900 units
(b) Maximum Level = RL + RQ - (MN . C x MN . RP)
= Reorder Level + Reorder Quantity - (Minimum
Usage per week x Minimum reorder period in
weeks)
Component A’ = 1,350 units + 900 units - (75 units x 4 weeks)
= 2,250 units - 300 units = 1,950 units
Component B’ = 900 units + 1,500 units - (75 units x 2 weeks)
= 2,400 units - 150 units = 2,250 units.
(c) Minimum Level = RL - (A.C X A.RP)
= Reorder Level - (Normal usage per week x
Normal reorder period in weeks)
Component A’ = 1,350 units - (150 units x 5 weeks)
= 1,350 units - 750 units = 600 units
Component B’ = 900 units - (150 units x 3 weeks)
= 900 units - 450 units = 450 units
(d) Average Stock Level = MN.L+1/2 of Reorder Quantity
= Minimum Level + 1/2 of Reorder Quantity

Component A’
= 600 units +1/2 x 900
Component B’ = 600 units + 450 units = 1,050 units
= 450 units + 1/2 x 1,500 units

ILLUSTRATION 4 = 450 units + 750 units = 1,200 units
The following particulars are furnished by Casio Ltd., Cochin for 12
months ended 31-03-2014.
Month in 2013-2014 Budget consumption in units

April 300
May 400
June 500
July 600
136 Advanced Cost Accounting - I August 800
Septembe 1,000 Control Over Materials
In Stores
r October 1,000
November 900
800
December 700 NOTES
January 600
February 800
March
8,400
Total Yearly Consumption
DeliveryQuantity
Reorder period : :21,000
to 4 months
units
Calculate : (1) Reorder Level, (2) Maximum Level, (4) Average Stock
Level using reorder quantity.
SOLUTION
(1) Reorder Level = MX.C x MX.RP

= Maximum rate of consumption per month x Maximum
Delivery period in months
= 1,000 units x 4 months
= 4,000 units.
(2) Maximum Level = RL + RQ - (MN.C x MN.RP)
= Recorder Level + Reorder Quantity - (Minimum rate of
consumption per month x Minimum delivery period in
months)
= 4,000 units + 1,000 units - (300 units x 2 months)
= 5,000 units + 600 units
= 4,400 units
(3) Minimum Level = RL- (A.C x A.RP)
= Reorder Level - (Average rate of consumption per month
x
Average delivery period in months)
= 4,000 units - (700 units x 3 months)
= 4,000 units - 2,100 units
= 1,900 units.
(4)Average Stock Level = MN.L+ 1/2
RQ
=
Minimum Level
+ 1/2 of Reorder
Quantity
=
Control Over Materials = 1,900 units + 500 units
In Stores
= 2,400 units.
Working Notes :
1. Calculation of rate of consumption per month

NOTES
(a) Maximum = 1,000 units (i.e. September and October)
(b) Minimum = 300 units (i.e April)
(c) Average = 700 units (i.e. 8,400 units / 12 months)
ILLUSTRATION 5
The following information is available in respect of a
material.
Economic Order Quantity : 900

units Rate of consumption per week :
1) Normal 25 units
2) Maximu 35 units
m
15 units
3) Minimum
Delivery Period :
1) Minimum 20 weeks
2) Normal 25 weeks
3) Maximu 30 weeks
m
Calculate : (i) Reorder Level, (ii) Maximum Level, (iii) Minimum level,
(iv) Average Stock Level.
SOLUTION
(1) Reorder Level = MX.C x MX.RP

= Maximum rate of consumption per week x
Maximum delivery period in weeks
= 35 units x 30 weeks = 1,050 units
(2) Maximum Level = RL + RQ - (MN.C x MN.RP)
= Reorder Level + Economic Order Quantity -
(minimum rate of consumption per week x
Minimum delivery period in week)
= 1,050 units + 900 units - (15 units x 20 weeks)

= 1,950 units - 300 units = 1,650 units.
(3) Minimum Level = RL - (A.C x A.RP)
= Reorder Level - (Normal rate of consumption per
week x Normal delivery period in weeks)
= 1,050 units - (25 units x 25 weeks ) = 1,050 units - Control Over Materials
In Stores
625 units
425 units MN.L
=
(4) Average Stock Level= +1/2 RQ
=
Minium Level + 1/2 of Economic Ordering Quantity
= 425 units + 1/2 x 900 units = 425 units + 450 NOTES
= units
ILLUSTRATION 6 875 units.
Find out Reorder Level, Maximum Level, Minimum Level and Average
Stock Level from the following particulars :
Normal Consumption : 300 units per
Maximum day
consumption : 420 units
Minimum consumption : 240 units per

day
Reorder Quantity
Minimum period for receiving the goods - 10 days
: 3,600 units.
Maximum period for receiving the goods - 15 days
Normal period for receiving the goods - 12 days.
SOLUTION
(a) Recorder Level = MX . C x MX . RP

= Maximum rate of consumption per day x Maximum
period for receiving the goods in days
= 420 units x 15 days = 6,300 units
(b) Maximum Level = RL + RQ - (MN . C x MN .RP)
= Reorder level + Reorder Quantity - (Minimum
consumption per day x Minimum period for
receiving the goods in days)
= 6,300 units + 3,600 units - (240 units x 10
days)
= 9,900 units - 2,400 units = 7,500 units
(c) Minimum
Level = RL - (A . C x A . RP)
= Reorder level - (Normal consumption per day
x
Normal period for receiving the goods in days)
= 6,300 units - (300 units x 12 days)
= 6,300 units - 3,600 units
(d) Average Stock Level== MN + 1/2 RQ
2,700. Lunits
= Minimum Level + 1/2 of Reorder Quantity
= 2,700 units + 1/2 x 3,600 units = 2,700 units + 1,800 Advanced Cost Accounting - I 139
units
= 4,500 units
Control Over Materials ILLUSTRATION 7
In Stores
(a) The availability of an imported machinery component is irregular and
consequently the consumption pattern also varies during the year. Show
how should the ‘Reorder level’ be ascertained for this component.
NOTES (b) From the following annual data, compute the ‘Average Stock Level’ for
the said component.
Particulars Consumption
(i) Maximum usage in a month 300 Nos.
(ii) Minimum usage in a month 200 Nos.
(iii) Average usage in a month 225 Nos.
Time lag for procurement of material :
(i) Maximum - 6 months
(ii) Minimum - 2 months

Reordering quantity - 750 Nos.
SOLUTION
(a) Reorder Level = MX . C x MX . RP

= Maximum usage per month x Maximum
time lag for procurement of material in
months.
= 300 Nos. x 6 months
= 1,800 Nos.
(b) Average Stock Level = MN . L + 1/2 RQ
Here, Minimum Level of Stock is not given in the problem, hence,

Minimum = RL - (A . C x A . RP)
Level
= Reorder Level - (Average usage per month x
Average time lag for procurement of
materials in months)
6+2
= 1,800 Nos. - 225 Nos. x i.e. 4
2
months
= 1,800 Nos. - 900 Nos.
= 900 Nos.
Now Average Stock Level = Minimum Level + 1/2 of Reordering Quantity
= 900 Nos. + 1/2 x 750 Nos.

= 900 Nos. + 375 Nos.
= 1,275 Nos.

ILLUSTRATION 8 Control Over Materials
In Stores
A Company uses certain raw material for a particular product for which
the following information is a available.
Usage per unit of product : 10 kgs

Reorder Quantity : 10,000 NOTES
kgs.
Delivery period in weeks
:
• Minimum
-1
• Average
-2
• Maximum
-3
The weekly production varies from 175 to 225 units averaging 200 units
of the said product. You are required to calculate, (i) Reorder Level, (ii)
Maximum Level, (iii) Minimum Level, (iv) Average Stock Level.
SOLUTION
(i) Reorder Level = MX . C x MX . RP

= Maximum usage of production per week x
Maximum delivery period in weeks
= (225 units x 10 kgs) x 3 weeks = 2,250 kgs. x 3
weeks
= 6,750 kgs.
(ii) Maximum = RL + RQ - (MN . C x MN .RP)
Level
= Reorder Level + Reorder Quantity - (Minimum
usage of production per week x Minimum
delivery period in weeks)
= 6,750 kgs + 10,000 kgs - (175 units x 10 kgs) x 1
week
= 16,750 kgs.- (1,750 kgs x 1 week)= 16,750 kgs-
1,750 kgs.
(iii) Minimum = 15,000 kgs.
Level
= RL - (A . C x A . RP)
= Reorder Level - (Average usage of production
per week x Average delivery period in weeks)
= 6,750 kgs - (200 units x 10 kgs. x 2 weeks)
= 6,750kgs. -(2,000kgsx 2weeks)= 6,750kgs. -4,000
(iv) Average Stock Level =kgs.
MN . L + MX . L / 2
= 2,750 kgs. Level + Maximum Level /2
Minimum
2,750 kgs. + 15,000 kgs. 17,750
= kgs. = = 8,875
2 2 kgs.
Control Over Materials
In Stores
6.5 Stock
Taking
Stock taking means verification of stock of all items of materials which
are kept in the store of a concern. Such verification can be done by verification
of the recording done in the bin card and stores ledger and tallying the quantity
NOTES in balance shown by these two documents. For every transaction of receipt of
material and issue of material recording is done in the bin card and store ledger
account prepared for that material and therefore the quantity in balance shown
in both these documents on a particular date is expected to be same. If there is
difference in the balance of the quantity, the reasons for such difference are
found out by comparing the recording for each transaction of receipt and issue
of material. The causes of difference may be any one or more the following :
1) Clerical errors made by the persons who have done recording in these
documents. Errors may have been committed while adding or substracting
the quantity received or issued respectively due to which quantity of
material in balance is recorded wrong.
2) A transaction recorded in one document may not be recorded in the other

document.
3) Quantity recorded as received or issued is wrong in one of the documents.
4) Recording of the quantity received or issued may have been done in wrong
column in one of the documents due to which quantity shown in balance
column of that document becomes wrong.
By finding out the reason / reasons due to which the difference in the
stock of the two documents is caused and by rectifying these errors the stock
shown in the bin card and the stores ledger account is tallied.
The stock taking mentioned above is known as perpetual inventory control

and in this only checking of the recording is done, there is no arrangement for
doing physical stock taking of the materials. For exercising proper control on
material physical verification of stock is also necessary so that quantity as well
as condition of the materials kept in store can be checked. Such arrangement is
called ‘physical stock taking’.
6.5.1 Methods of Stock Taking
For physical stock taking two methods are available as under :
1. Periodic stock taking
2. Continuous stock taking
According to the size of the concern, number of items kept in the store,
volume or quantity of each item of material, nature of the materials and the
number of transactions of receipt and issue of the materials one of the above
mentioned methods is selected and used for physical stock taking.

1. Periodic stock taking :- As the name suggests under this method all items of Control Over Materials
In Stores
material in the stores are physically checked after a certain period. Normally
such checking is done once in a year at the end of the financial year followed by
the concern and so this method is also known as ‘annual stock taking’. There is
no separate staff for the stock taking work and the work is carried on with the
help of employees from production and other departments. Generally the
working of production department is suspended for the period required for NOTES
physical stock taking of all the items of material, loose tools, spare-parts, stock
of work-in-process and stock of finished goods. By adding the quantities
actually found in the stock taking and by valuation of them, the values of assets
at the end of the financial year are found out and this information is used in the
preparation of Profit and Loss Account and Balance Sheet of the concern.
Taking into consideration the total items to be checked and the number of
persons available for doing the work of stock taking teams of the employees are
created and each team is entrusted with the items of materials to be checked by
it. Workers are assigned the work of removal of stock from the bin,
counting/measuring/weighing of material and keeping the material in its
appropriate bin. The clerks from office and other departments are given the
work of writing the information about name of material, its code, bin number,
date of checking the stock, name of persons who done the work of checking,
quantity of the material actually found on stock taking, remarks about the
condition of the material, etc. in the documents used for physical stock taking.
Supervisors, foremen and similar staff is given the responsibility of supervising
the work of certain number of teams assigned to them. During the period of
stock taking no issue of material is allowed and no receipt of material is allowed
to be kept in the bin so that whatever quantity of material was in the store at
the commencement of the stock taking remains unchanged during the period of
stock taking.
Advantages of periodic stock taking
1. Stock of all items of material, equipment, tools, etc. is verified physically

at one time and value of stock of various items can be calculated and
used for preparation of the financial statements of the concern.
2. Since no separate staff is employed for stock taking there is saving of

expenditure on remuneration and other facilities to be provided to such
staff.
3. For small organisations having a limited number of items of material,

physical stock taking done once in a year is sufficient.
4. If production activity is not to be totally stopped during the period of

stock taking, the production department can be informed to plan
production activity for urgent jobs during this period and retain the
concerned workers and supervisors required for such jobs and to obtain
quantity of material needed for such jobs in advance from the stores
department.
Disadvantages of periodic stock taking
1. When periodic stock taking method is followed the working of plant

and
A
d
v
Control Over Materials production department is required to be stopped during the period of stock
In Stores
taking because physical verification of stock and issue of materials to
production department is not possible at the same time. Stoppage of
production activity even for one day causes huge loss to the concern and
in a large size concern where stock taking may take a few days time and
NOTES during this period the loss caused is tremendous.
2. As the work of stock taking is done by workers and other employees the
result of physical stock taking may not be satisfactory and reliable.
3. As physical stock taking is done once in a year, the discrepanies in actual

quantity of stock and stock shown by bin card and store ledger account
cannot be explained easily because of long gap between the dates of
transactions and physical stock taking.
4. Slow-moving items of material and obsolete items of material are brought

to the notice of the storekeeper promptly since checking of stock is done
only once in a year. This may result in suffering loss as decisions about
these items cannot be taken by the management on timely basis.
5. Theft, misappropriation of material and adverse effects on quality of the

material stored are noticed only when the physical checking of the
materials is done at the of the year. Proper control on quantity and
quality of materials does not become possible under such situation.
6. Employees working in the stores department know that stock taking is

done only at the end of the financial year so they may become lethargic
and may not record the transactions of receipts and issues immediately
after they have taken place. The recording in bin cards and store ledger
accounts may be kept pending and may be completed a few days before
the physical stock taking begins.
Because of the above mentioned disadvantages the periodic stock taking is

not followed except in the small concerns and concerns where a limited number
of items are used and stored.
2. Continuous stock taking
In continuous stock taking method physical stock taking is done

throughout the year by a separate staff appointed and trained for the work of
stock taking. Under this method physical stock taking is done every day and a
few items of materials are verified every day. The staff is informed about the
items of materials to be checked by them when they report for the work in the
morning. This helps in maintaining an element of surprise as the staff as well as
the stores personnel do not know in advance which materials will be taken up
for stock taking on that day. Depending upon the number of items of material
and the quantity in stock of each item of material, some materials may be
checked once or more number of times during one year. The actual quantity
found in stock taking is verified with the quantity in balance in the bin card and
the store ledger account. If there is difference in these three quantities it is
144 Advanced Cost Accounting - I recorded in the document used for stock taking work and reasons for the
difference are found out and necessary adjustment
is made to eliminate the discrepancy. Control Over Materials
In Stores
Advantages of continuous stock taking
1. Physical stock taking is done by staff specifically employed and trained

for that work and so the work is efficiently done and information about
available is
stock
reliable. NOTES
2. Since physical verification of various item is done throughout the year any
discrepancy in recorded stock and the actual stock is brought to the notice
quickly and appropriate action can be taken immediately. Also attention
of the storekeeper is drawn to the slow moving or non-moving items of
material as well as the materials not being protected properly. Such items
of materials can be disposed off quickly and possible loss due to their
deteroration can be avoided or reduced.
3. When continuous stock taking method is used the working of plant and
production department is not required to be stopped for stock taking. Loss
of production due to stoppage of production work is thus avoided in this
method.
4. Person working in the stores department have to do the recording for

transactions of receipt and issue of materials immediately after the
transaction is completed and keep the recording in bin card and stores
ledger account up-to-date. Any item of material may be physically
verified on any day by the staff doing the stock taking and comparison of
the stock quantity actually found for a material is done with quantity
shown in balance in the bin card and the store ledger account. If the
quantities do not agree, the store clerk is required to give explanation for
the same and this makes the store clerks more efficient in their work.
5. Information about the total quantity in stock for all the items can be
quickly found out by adding the quantities reported by the stock takers.
Only the quantity received and quantity issued since the last date of stock
taking will have to be added and substracted respectively to the last
quantity reported and this enables the management to know the quantity
and value of materials and other items on any day the information is
needed by it.
Disadvantages of continuous stock taking
6. This method is expensive because separate staff is employed for stock

taking. Remuneration of this staff and cost of facilities to be provided to it
can be incurred only by large size concerns and so small concerns find it
difficult to use this method of stock taking.
7. Stock taking work and receipts and issues of materials take place
simultaneously and so the work of stock taking is disturbed and quantity
of material in stock cannot be exactly found out.
Whichever method is used for physical stock taking it should be
remembered that the actual quantity of material found in stock should be
compared with the quantity recorded in the bin card and the store ledger Advanced Cost Accounting - I 145
account as quantity
Control Over Materials in balance and any difference should be accounted for by finding out the
In Stores
difference.
When physical stock taking is done of a material, the information found is

recorded on a document called ‘Inventory Tag’. There are two parts of the
inventory tag with perforation in between. The inventory tag duly completed is
NOTES
tied outside the bin in which that material is stored. The lower part of the
inventory tag is torn off and all these parts are sent to the costing or accounting
department for valuation of the stock. Specimen of an inventory tag is shown
below :
Inventory Tag No. -----
Store code -------- Name of material -----
Store ledger account No. ----- Bin No. ---------
Quantity -------- Stock verified by ------
Date ---------
(cut it here)
Store code ------- Name of material -----
Quantity ------- Stock verified
Store ledger account ----- -----
Inventory Tag No. ----- Bin No. -----
6.6 Discrepancies and Treatment of Discrepancies
When physical stock taking of materials is done and the actual quantity of
the materials is found out it is compared with the quantity in balance in the bin
cards and the store ledger accounts of the particular material. If actual quantity
of material in store is not same as the quantity shown in the balance column of
the bin card and the store ledger account, the difference in the quantity is noted
down as a case of discrepancy. The cause of discrepancy is then found out and
according to the nature of it, the treatment to be given for the quantity and value
of the difference in material is decided. Discrepancy can be of two types-actual
quantity in store is less than the quantity appearing in the bin card and store
ledger account. The first type of discrepancy is known as shortage which
implies loss and the second type of the discrepancy is known as excess or
overage and it is a surplus or gain.
The causes of discrepancy may be natural (normal) or unnatural

(abnormal).
They are also known as unavoidable causes and avoidable causes.
Under unavoidable causes the following causes are

included :-
1. Evaporation of liquid materials reducing their quantity
2. Absorption of moisture which increases the weight of the materials

146 Advanced Cost Accounting - I 4.
3. Loss of material
Shrinkage which when breakage
reduces size or or cutting
weight of material
during purchased
the storage period.in bulk
is
done for issuing it in small quantity to production or other departments. Control Over Materials
In Stores
Avoidable causes of discrepancy are as under :
1. Careless handling of materials by the stores personnel resulting in damage

or breakage of material and making it unusable.
2. Theft, misappropriation or pilferage of material which results in actual NOTES

quantity being less than the quantity recorded in bin card and store ledger
account.
3. Insufficient protection provided to materials while they are stored ; e.g.

iron items not properly protected may become rusty, items affected by
changes in climate not kept in air conditioned rooms.
4. Carelessness in issue of materials resulting in issue of more or less

quantity than the quantity shown in Material Issue Note.
5. Calculation errors done by the store clerk while arriving at the quantity in
balance.
6. Recording of receipt or issue of material in the wrong column of the bin

card/ store ledger account which results in the quantity in the balance
column of the document being shown different than the actual quantity in
the bin.
Treatment of discrepancies :
Discrepancies found in the actual quantity in store and the quantity

appearing in the bin card and store ledger account should be treated as per the
cause due to which the discrepancy has taken place. The treatment given may
be as under :-
7. Difference caused due to wrong recording or omission of recording should

be adjusted by rectifying the record.
8. Difference caused by unavoidable causes is regarded as a loss and it is not

charged to material cost but it is charged to profit and loss account of the
concern.
9. Difference caused due to the fault of the stores department is transferred

to stores overhead.
10. When the stock recorded as per bin card and store ledger account is more
than the actual stock as per physical stock taking, the following entry is
passed:
Inventory adjustment A/c Dr. ............

To Materials and supplies
..........
If the shortage of stock can be divided as caused by normal reasons and
caused by abnormal reasons such as theft, misappropriation, fire, etc., the
Inventory adjustment account is debited with the loss due to normal causes,
Costing Profit and Loss Account is debited with the loss/shortage caused by
abnormal reasons and total credit is given to Material and Supplies Account.
A
In Stores
For the quantity and value of the shortages a recording is made in the
issue column of the store ledger account and quantity and value is reduced in
the balance column of the store ledger account. In the bin card also recording
for shortage quantity is made in issue column and quantity in balance column
is reduced accordingly.
NOTES
If discrepancy is of a negligible quantity and value no entries are passed
for
its treatment and the recording appearing in the bin card and store ledger
account is taken as correct.
At the end of year, the balance standing to the Inventory Adjustment

Account is calculated and the Account is closed by transferring such balance to
overhead control Account or Profit and Loss Account as per the policy followed
by the management of the concern.
Some additional Illustrations on EOQ :-

ILLUSTRATION 1
A manufacturer buys certain equipments from outside suppliers at ` 30

per unit. Total annual needs are 1,600 units. The following further data are
available
Annual return on investment:
10% Rent, Insurance, Tax per unit per year :
SOLUTION
` 1 Cost of placing an order :
` 50
EOQ =
2 CAO
where, EOQ = Economic Order Quantity
Calculate the Economic Order Quantity
A = Annual need in unit i.e.
1,600 units O = Cost of placing an order
i.e. ` 50
C = Inventory carrying cost including Rent,
Insurance, Tax per unit per year i.e. 10% of `
30

= ` 3 + `=1 =2` X41,600 units X `
10% of ` 30 + ` 1
50
=
`1,60,000
3+` 1
units
=
 1,60,000
`4
units
148 Advanced Cost Accounting - I = 

= 40,000 units
200
units
ILLUSTRATION 2 Control Over Materials
In Stores
A Company uses 10,000 units per year of an item costing ` 25 each. The
cost of processing a purchase order is ` 10 and the stock holding cost amount to
20% per year of the money value of inventory. How much should the company
buy at a time in a single order, in order to minimise the inventory cost ?
SOLUTION NOTES
EOQ =
 2 CAO
A = Annual usage in terms of units i.e.
10,000 units O= Cost of processing a purchase order
i.e. ` 10 C = Stock holding cost i.e. 20% of ` 25 =
` 5
=
2 X 10,000` 5units X ` 10
=
 2,00,000 units
` 5
=
= 40,000 units 200 units
Conclusion : The Company should buy 200 units in a single order at a time,
to minimise the inventory cost.
ILLUSTRATION 3
Given the annual consumption of material is 1,800 units, ordering cost are
` 2 per order, price per unit of material is 32 ps. and storage cost are 25% p.a. of
stock value, find the Economic Order Quantity.
SOLUTION
EOQ =
 2C
AO
A = Annual consumption of material in units i.e.
1,800 units O = Ordering cost per order i.e. ` 2
C = Storage cost per unit i.e. 25% of 32 ps. = `
0.08
=
 2 X 1,800 units X ` 2
25% of 32 ps.
=
 7,200
` 0.08
units


Control Over Materials = 7,200 units X
In Stores
100
8
=
90,000 units
NOTES
ILLUSTRATION 4= 300 units
Calculate Economic Order Quantity from the following particulars by

using Simpson’s Mathematical formula :
Annual requirement : 1,600 units

Cost of material per unit : ` 40
Cost of placing and receiving one order : ` 200
Annual carrying cost of inventory : 10% of inventory value
SOLUTION
Calculation of EOQ by Simpson’s Mathematical formula
EOQ =
 2CAO
A = Annual
requirements in units i.e. 1,600
units
O = Cost of placing and receiving one order i.e. `
200 C = Inventory carrying cost i.e. 10% of ` 40 = ` 4
=

2 X 1,600 units X ` 200
10% of ` 40
=
 6,40,000 units
` 4
= 400 units
= 1,60,000 units
ILLUSTRATION 5
From the following particulars calculate Economic Order

Quantity
Annual Demand : 4,000 units
Rate of Interest : 6% p.a.
Unit price : ` 2
Ordering Cost per order : ` 5
Storage cost : 2% p.a.

SOLUTION Control Over Materials
In Stores
EOQ =
2CAO
A = Annual demand in units i.e. NOTES
4,000 units O = Ordering cost per order i.e. `
5 0.16
C = Inventory carrying cost i.e.
= 
8% of ` 22=X`4,000 units X ` 5
8% of ` 2
=  40,000 units
` 0.16
= 40,000 units X 100

16
=
2,50,000 units
=
500 units of an item is 12,000 units, each costing ` 6, every

The annual requirement
order costs ` 200 to release and inventory carrying charges are 20% of the
ILLUSTRATION 6
average inventory per annum.
Find out Economic Order Quantity.
SOLUTION
EOQ =
2
where,AO
C
EOQ = Economic Order Quantity
A = Annual requirements in units i.e.
12,000 units O = Order cost i.e. ` 200
C = Inventory carrying charges i.e. 20% 1.20
of ` 6 = `
=  2 X 12,000 units X ` 200

20% of ` 6
= 48,00,000
` 1.20
units

= 40,00,000 units
= 2,000 units
Control Over Materials ILLUSTRATION 7
In Stores
You are required to calculate Economic Order Quantity from the
following information.
Annual consumption : 15,000

NOTES kg.
Cost of placing an order :
` 48
Cost of Raw materials : ` 2 per kg.
Storage cost : 8% of average inventory
SOLUTION
EOQ =
 2CAO
A = Annual consumption in kg. i.e.
15,000 kg. O = Cost of placing an order i.e. `
48
C = Storage cost i.e. 8% of ` 2 = `
0.16=
 2 X 15,000 kg. X ` 48
8% of ` 2
=
14,40,000 kg. =14,40,000 kg. X 100
` 0.16
16
= 3,000 kg.
ILLUSTRATION 8

= 90,00,000 kg.
A Company uses annually 50,000 units of an item each costing ` 1.20.

Each order costs ` 45 and carrying cost 15% of the annual average inventory
value. Calculate Economic Order Quantity.
SOLUTION
EOQ
=
 2CAO
A = Annual usage in units i.e.
50,000 units O= Order placing cost i.e. ` 45
C = Inventory carrying cost i.e.
15% of ` 1.20 = ` 0.18
=
2 X 50,000 units X ` 45
15% of ` 1.20
152 Advanced Cost Accounting - I =
45,00,000
` 0.18
units

= 45,00,000 units X
In Stores
100
18

= 2,50,00,000 units
= 5,000
units
NOTES
7. Summary
Material is received at the entrance of the stores department and the
person receiving it should check the quantity of material with the quantity
mentioned in the Materials Received Note. Material is taken to the bin allotted
for that material. Material already in the bin is kept in the front side of the bin
and new material received in the back side of the bin so that old material is
issued first and new material remains in the bin. Personnel working in the stores
department should be given proper training for handling of the material and use
of different weighing machines correctly. For each material Maximum Level,
Re-ordering Level, Minimum Level and Danger Level are fixed by considering
the use of material, time required for obtaining material and quantity of material
purchased at one time. Economic Order Quantity is calculated for each
material. To verify the quantity and quality of material in bin stock taking
arrangement is made. Periodic stock taking and Perpetual or Continuous stock
taking are the methods which can be used for stock taking. Stock taking helps
in locating discrepancy between physical stock in the bin and quantity shown in
the Balance column of the Bin Card. Reasons for discrepanies are found out and
suitable treatment is given for the discrepancy.
8. Key Terms
EOQ : Economic Order Quantity is that quantity of a material by ordering
which the total of purchasing and carrying the the stock of material is kept at
optimum level.
I. - Multiple Choice Questions
1. Under ------------- level of stock materials are issued to important jobs

only.
(a) minimum
(b) maximum
(c) ordering
(d) danger
2. EOQ model is based on assumption of ----------
Control Over Materials (a) linearity
In Stores
(b) safety
(c) abnormit
y
NOTES (d) security
3. Recorder point is lower than the ---------- levels to avoid excess stock.
(a) minimum
(b) maximum
(c) danger
(d) stock
4. The storekeeper should initiate a purchase requisition when stock reaches

- level.
(a) re-order
(b) danger
(c) maximum
(d) minimum
Ans. : (1 - d), (2 - a), (3 - b), (4 - a).
II. - Theory Questions
(1) Why Control over materials is needed when the materials are being stored
in the stores? Which factors should be given attention while exercising
such control ?
(2) Which stock- levels are fixed for materials ? What purpose is served by
the stock-levels fixed ?
(3) Explain the concept of ‘EOQ’ .
(4) State the stock-levels which are fixed for the materials. Give formulas
used for calculating the various stock-levels.
(5) What do you understand by the term ‘stock-taking’ ? Which methods are
used for stock-taking ?
(6) Explain procedure, advantages and disadvantages of ‘periodic stock-

taking method’.
(7) Explain procedure followed, advantages and disadvantages of ‘perpetual /

continuous stock-taking method’.
(8) What you understand by the term ‘discrepancy in stock’ ? What are
154 Advanced Cost Accounting - I causes of such discrepancies ?Explain treatment given to discrepancies
in stocks.
III. - Exercises Control Over Materials
In Stores
1. From the following particulars
calculate :
a) Re-order Level, b) Minimum Level and c) Maximum Level
Normal usage 100 units per day
Minimum usage 60 units per day NOTES
Maximum usage 130 units per day
E.O.Q. 4,000 units
Re-order period 25 to 30 days
2. The components A and B are used as follows :
Re-ordering Quantity A : 3,000 units

B : 4,000 units
Re-ordering period A : 4 to 6 weeks
B : 2 to 4 weeks
Normal usage 3,000 units per week each
Minimum usage 1,500 units per week each
Maximum 4,500 units per week each
usage
You are required to calculate for each of the components :
a) Maximum Level, b) Minimum Level, c) Average stock level,
d) Re-ordering Level.
3. From the following particulars, calculate the minimum stock level,

maximum stock level and reorder level :
a) Maximum consumption 150 units per day
b) Minimum consumption 100 units per day
c) Normal consumption 120 units per day
d) Re-order quantity 1,500 units
e) Re-order period 10 - 15 days
f) Normal re-order period 12 days
4. Two components A and B are used as follows :
Normal usage 50 per week
each
Minimum usage 25 per week

each
Maximum usage 75 per week

each
Re-order quantity A : 300 ; B :

500
A
Control Over Materials Re-order period A : 4 to 6 weeks; B : 2 to 4 weeks
In Stores
Calculate for each component
a) Re-order Level
NOTES b) Minimum Level
c) Maximum Level
d) Average stock level
5. From the following data, Calculate,
a) Re-order Level,
b) Minimum stock level
c) Maximum stock level
Re-order quantity 1,500 units
Re-order period 4 to 6
weeks Maximum consumption 400
units per week Normal consumption 30 units
per week Minimum consumption 250
units per week

6. From the following particulars, Calculate,
a) Re-order Level
b) Minimum Level
c) Maximum Level and
d) Average Level
Normal usage 100

units per day
Minimum usage 60 units

per day
Maximum usage 130

units per day
E.O.Q. 5,000
units
a) Re-ordering level, b) Maximum level, c) Minimum level, d) Danger
Re-order
stock level, e)period
Average stock level 25 to 30
days
The re-ordering quantity is to be calculated from the following data :
7. You have been asked to calculate the following levels for Part No. ‘T’
from Total costs of purchasing
the following relating to the order are ` 20.
information.
No. of units to be purchased during the year is 5000. Control Over Materials
In Stores
Purchase price per unit including transportation costs is ` 50.
Annual cost of storage of one unit is ` 5.
Lead Times Rate of Consumption

Average 10 days Average 15 units per day NOTES
Maximum 15 days Maximu 20 units per
Minimum 6 days m day 10 units
Maximum for 4 days Minimum per day
emergency purchases
8. Calculate the stock levels for an item of material from the following
information
Normal usage 200 units per day

Maximum usage 250 units per
Minimum day 120 units
usage Re-order per day 5 to 15
period days
9. Economic
From Orderparticulars, calculate
the following 4,000 units
the economic order
quantity. Quantity
Annual requirements : 1,600 units
Cost of materials per units : ` 40
Cost of placing and receiving one order : ` 50
Annual carrying cost of inventory : 10% of inventory value.
10. A unit of article A costs ` 50 and the annual consumption is 2,000 units.
The cost of placing an order is ` 40 and the interest is 10% per annum.
find the economic order quantity.
11. From the following figures, you are required to calculate Economic Order
Quantity and No. of orders to be placed per year.
Total consumption of material per year 1,000 kg.

Procurement cost per order ` 5
Unit price of material ` 2
Storage and carrying cost 8%
12. If the annual usage of a component is 4,000 pieces, set up and order
processing cost ` 50, annual rate is 10% and cost of manufacturing a unit
is ` 100. Calculate the Economic Order Quantity.
13. Find out the economic order quantity from the following
particulars: Annual usage : 6,000 units

A
d
v
a
n
c
Control Over Materials Cost of materials per unit ` 20
In Stores
: Cost of placing and receiving one ` 60
order: Annual carrying cost of one unit 10% of inventory value
14. From the following information determine

NOTES E.O.Q.
:
Annual usage : 90,000 units
Cost per unit : ` 50
Buying cost per order : ` 10
Cost of carrying Inventory : 10% of cost
15. Given : Annual usage of a material 600 units, ordering costs are ` 12 per
one order, price of material is ` 20 per unit, and cost of storage is 20% of
inventory value, find out EOQ.
16. Suppose the annual consumption is 675 units, 10% is the interest and cost
of storing an article ` 30 per unit, cost of placing an order is ` 18.
Calculate the Economic Order Quantity.
17. A factory requires 15,000 units of a certain material for the year. Cost of
carrying one unit of material is calculated to be ` 20 per annum, and it is
estimated that the expenses of placing an order and receiving would
amount to ` 375. Calculate Economic Order Quantity.
18. From the following particulars determine the E.O.Q.
Cost of materials per unit `5

Demand per month 500 units
Cost of placing each order ` 15
Inventory carrying cost 20%

ii) ‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad
iii) ‘Cost Accounting’ - B. K. Bhar
iv) ‘Advance Cost Accounting’ - Nigam and Sharma

Unit 7 Issue of Materials Issue of Materials
Structure
1. Introduction
NOTES
2. Unit Objectives
3. Issue of materials
4. Procedure for issue of materials
5. Documents related to issue of materials
6. Care to be taken while issuing materials
7. Summary
8. Key Terms
9. Questions
10. Further Reading
7.0 Introduction
Materials are purchased and kept in stores because they are needed by
production departments for processing and for completing operations necessary
for manufacturing finished products. Materials demanded by production and
other departments must be issued to them by stores department so that their
work is not held up. In this Unit information related to issue of materials and
care to be taken while performing this work is provided.
7.1 Unit Objectives

After completing study of the information provided in this Unit you
should be able to understand :
• Importance of issue of materials;
• Procedure followed while issuing materials;
• Documents related to issue of materials; and
• Care to be taken while issuing materials.

Issue of Materials
7.2 Issue of
Materials
Materials of various types, qualities and specifications are stored in the
stores. These materials are used by different production departments for creation
of finished products by carrying on processes such as heating, mixing, cutting,
NOTES moulding, welding, etc. Some other departments and sections also use materials
for performing their work, e.g. repairing and maintenance department needs
materials, spare-parts and other such materials for performing repairing and
maintenance work. As materials are stored in stores department, they must be
made available to the concerned department in required quantity, of proper
quality and specifications and at the proper time. This work of providing
materials is known as the work of issuing materials. The work of issue of
materials is important because the functioning of the entire enterprise depends
on it. If material needed by production department is not issued to it at the
proper time, in the required quantity and of proper quality, the work of
production is withheld and it may not be possible for the enterprise to fulfill the
order received from customer. It will affect profit expected to be earned from the
particular order and it will also adversely affect the market reputation of the
enterprise. Due to all these factors the persons performing work of issue of
materials have to be very alert.
7.3 Procedure for Issue of

Materials
In order to do the work of issue of materials, every enterprise lays down a
Check Your Progress
procedure which is required to be followed by departments demanding the
i) What is meant by issue materials and by the persons working in the stores department. For obtaining the
of materials ? What is the
importance of issue of required materials from the stores, the department which needs the materials has
materials ? to make a written request to the storekeeper stating the items of materials, the
ii) Give, in brief, the quantity in which materials are required and the job number, order number or
procedure followed for
issue of materials process for which the materials are to be used. A document called ‘Materials
Requisition Note’ is provided in the printed form to all the departments and
section which need the materials for production or some other purposes. The
Materials Requisition Note duly filled in is signed by the foreman/supervisor
and also by the production manager or the executive of the concerned
department if the material demanded is scares and valuable. The material
requisition note is generally prepared in triplicate and all three copied are sent to
the stores department. The storekeeper or his assistant checks the details given
in the material requisition note and if the materials are available for issue, signs
all three copies giving permission to the stores clerk to issue the materials. The
stores clerk takes out the materials to be issued in the required quantity from the
appropriate bins and brings it to the stores entrance. The worker who has
brought the M R Note checks the quantity of the materials being issued and if it
is correct signs all the three copies as a proof of collection of materials. The
first copy is given to the worker who takes it to his department where it is filed
as a record of materials demanded and received. The second copy is retained by
the stores clerk and filed as a proof of materials issued and on the basis of it
recording in the bin card is made in issue column and quantity in balance
160 Advanced Cost Accounting - I column is recorded. The third copy is sent by the stores department to the
accounting/costing department for recording the quantity issued, quantity in
balance and value of material issued and value of stock in the stores ledger Issue of Materials
account maintained for the material. The accounting/costing department retains
this copy with itself for calculating materials cost to be charged to the job, order
or process for which the materials are used.
The rule of issuing any material from the stores only against valid
material requisition note should be strictly followed by the persons working in NOTES
the stores department and after issue of material recording of it in the bin card
and recording of the new balance in the balance column of the bin card should
be completed immediately by the concerned stores clerk. Similarly recording
of the issue transaction (quantity and value) in the appropriate columns of the
stores ledger account and recording of changed quantity and value of stock in
the balance column of the stores ledger account should be completed by the
accounts/costing department to avoid the possibility of omission of recording of
the transaction in the stores ledger account.
4. Documents Related to Issue of Materials
There are three documents which are related to issue of materials. They Check Your Progress
are :
i) Give Specimen of :
a) Materials Requisition
1. Materials Requisition Note, Note
b) Stores Ledger Account
2. Bin Card, and
ii) What care should be taken
while issuing materials
3. Stores Ledger Account. from the stores ?
Out of these three documents the ruling of the Bin Card has already been
provided in the previous Unit. The specimen of Material Requisition Note and
Stores Ledger Account are given below :

Issue of Materials -----------------------& Co.
Materials Requisition Note
Materials required for Job/Order No.----- No. ------
NOTES Department ----------------------- Date -----

Sr. No. Description Code Qty. For Cost Office use
Rate Amount
` `
Prepared by------ Bin No.----- Issued by-------
Sanctioned by----- Stores Ledger A/c No.---- Received by----
Storekeeper ------ Priced by------
----------------------& Co.
Stores Ledger Account
Description ----- Unit ----- Maximum level -----

Code No. ------ Location ----- Minimum -----
Bin No. ------ Re-order Qty.---- level Re-order -----
Date Receipts Issues Balance
Stock
level
verification
Ref Qty Rate Am Ref Qty Rat Amt Qty Rate Am Date Remarks
t . e t
No. & Initials
No.

Reference No. under Receipt is the Goods Received Note No. and Issue of Materials
Reference No. under Issues is the Material Requisition Note No. After recording
the receipt of material the quantity in the balance column is increased and after
recording the issue of material the quantity in balance column is reduced by
deducting the quantity issued from the preceding quantity appearing in the
balance column.
NOTES
In the stock verification column the date on which the physical stock taking
is done and any difference (shortage or surplus) found in comparison to the stock
recorded in the balance column on that date is recorded with the initials of the
person who has done the physical stock taking. Information in ‘rate’ and
‘Amount’ columns is recorded by Costing Dept.
7.5 Care to be taken while Issuing Materials

In order to ensure that issue of materials is properly done attention should
be given to following points :
i) Materials should be issued only at the entrance of the stores department.
ii) Materials should be issued only against an authorised Materials Requisition

Note. All columns should be properly filled in the Materials Requisition
Note and it should be signed by the foreman of the section which needs
the materials and it should also be signed by the in charge of the
department. In case of materials which are very costly and use of them is
required to be made in limited quantity, Material Requisition Note Should
be counter-signed by the factory or production manager. This enables
controlled use of very valuable and scarce material.
iii Store clerk who does the work of materials issue should understand the
) nature of material to be issued, code number of the material to be issued
and quantity in which material is to be issued. This enables him to issue
the exact material to be issued and issue of wrong material does not take
place.
iv) While taking out the material from the bin, the store clerk should take the
material from the old lot, keeping recently received material in the bin.
This results in issue and use of the old material and helps in avoiding
deterioration in quality of old material.
v) The store clerk should check that the weighing machine or other
instruments used for measuring quantity of material are in proper
condition and would enable him in issuing the correct quantity as
mentioned in the Material Requisition Note.
vi) Proper and careful handling of material as per its nature is another point
to which the store clerk should pay attention. This helps in avoiding
breakage and loss of material when it is being removed from the bin and
when it is being carried to the stores entrance for issue.
vii While handing over materials to the person who has brought the Materials
)
Issue of Materials Requisition Note the store clerk should instruct him to check the quantity
and condition of the materials and to sign the Note for the materials
received by him. It acts as a proof of issue of materials.
viii On the basis of M. R. Note, the store clerk should do the recording in the
) Bin Card for quantity of material issued and record the quantity in the
NOTES
balance column of the Bin Card by deducting the quantity issued from the
previous quantity recorded in the balance column.
6. Summary
Issue of materials is done by store clerks working in the stores department
to production departments and other departments which need materials for
performing their activities. For obtaining materials a written request in the form
of Material Requisition Note is required to be prepared by the section or
department which needs the material. Details such as name/number of the
section or department which is requesting issue of materials, M.R. Note
number, date, job/process/ operation for which materials are required,
description and code of material required, quantity, quality/specification, etc. are
required to be filled in and signatures of person who has prepared the M.R.
Note, who has sanctioned it and if necessary of the production or factory
manager are required to be obtained before the copies of the M.R. Note are
presented at the entrance of the stores department. For issue of materials a
procedure is laid down in each concern and it is strictly followed by the persons
involved in the activity of issue of materials. Attention is given to various
factors connected with issue of materials. Materials Requisition Note, Bin Card
and stores Ledger Account are the documents in which information is recorded
regarding issue of materials. Issue of materials is as important as the activities
of purchase of materials and storage of materials.
7. Key Terms
Materials Requisition Note : It is a document prepared by a section or a

department which needs materials for a work, stating description of materials,
quantity and quality as well as specifications of the materials, requesting the
storekeeper for issue of the materials.
8. Questions
I - Multiple Choice Questions.
1. Material Requisition Note is the document related to ------- materials.
(a) accounting of
(b) issue of
164 Advanced Cost Accounting - I (c) inspection of

(d) verification of Issue of Materials
2. The duty of a ---------- is to issue correct materials against the authorised

store requisition.
(a) supervisor
(b) material manager
NOTES
(c) works manager
(d) storekeeper
3. In store ledger account information of rates and amount columns is

recorded by
(a) accounts department

(b) store department
(c) costing department
(d) cash department
4. The material requisition note is generally prepared in --------
(a) duplicate
(b) a single copy
(c) triplicate
(d) four copies
Ans. : (1 - b), (2 - d), (3 - c), (4 - c).
II - Theory Questiions
1) Give specimen of ‘Material Requisition Note’. Who are authorised to

prepare and sign Material Requisition Notes ?
2) Explain the procedure followed in an industrial concern for issue of

materials.
3) What care should be taken while issuing materials from store ? Why such
care is necessary ?
7.9 Further Reading

iii ‘Cost Accounting’ - B. K. Bhar

)
iv) ‘Advanced Cost Accounting’ - Nigam and Sharma

Unit 8 Pricing of Material Issued Pricing of Material Issued
Structure
1. Introduction
NOTES
2. Unit objectives
3. Pricing of materials issued
4. Methods used for pricing of issues
1. Cost price Methods
2. Average Price Methods
3. Notional Price Methods
4. Important points related to materials costing control
5. Summary
6. Key Terms
7. Questions and exercises
8. Further Reading
9. Introduction
In Unit 7, we have studied information about issue of materials + stores
to various departments which use the materials. In order to calculate cost of the
materials used for jobs, operations, processes and other purposes it becomes
necessary to calculate the cost of materials used for them. Information about
work of pricing of materials issued, methods used for pricing the issue of
materials is provided in this Unit.
10. Unit Objectives

After study of information provided in this Unit, you should be able to :
• Understand who does the work of pricing of materials issued ;
• Understand methods which can be used for pricing the issue of materials ;
and
• Know the effect on material cost when a particular method of pricing the
issue is used by an enterprise.

Pricing of Material Issued
8.2 Pricing of Materials
Issued
The accounting or costing department does the work of pricing of
materials issued by using the method of pricing followed by the concern. By
adding the amounts calculated for different materials issued for a particular job,
order or process, the material cost to be charged to it can be calculated.
NOTES
8.3 Methods Used for Pricing of

Issues
Materials issued by the stores department as per the materials requisition
Check Your Progress
notes is required to be priced by the accounting or costing department in order to
i) Which are the major calculate and charge to the jobs or orders or processes as the materials cost.
methods used for pricing
of materials ? Problem arises in pricing the issue of material because the material may not be
ii) State the types of purchased in a single lot and at one price. Same material may have been
methods available under purchased on different dates, in different quantities and at different prices as
the following methods of
pricing the issues :- per the fluctuations taking place in the market conditions. In such situation it
a) Cost Price Methods becomes difficult to decide at which price the material issues should be priced.
b) Average Price Methods There are following methods out of which a method is required to be selected
c) Notional Price and used for pricing the issues of material
Methods
iii) What is the difference 8.3.1 A) Cost Price Methods
between FIFO and LIFO
Methods of pricing the
issues ? i) First In First Out ( FIFO )
iv) Briefly explain
the following :- ii) Last In First Out ( LIFO )
a) Highest In First out,
iii) Highest In First Out ( HIFO )
b) Base Stock Method,
c) Simple Average and iv) Base Stock Method
Weighted Average
d) Standard Price Method
and Inflated Price
8.3.2 B) Average Price Methods (based on cost price)
Method.
i) Simple Average
ii) Weighted Average
iii) Periodic Simple Average
iv) Periodic Weighted Average
3. C) Notional Price Method
i) Standard Price
ii) Inflated Price
According to the method selected for pricing of issues the amount charged
for the issues and the amount of quantity in balance ( closing stock value ) will
be different. Out of the above mentioned methods only FIFO, LIFO, Simple
Average, Weighted Average and Base Stock Method are the methods on which
168 Advanced Cost Accounting - I the practical problems are given below. For other methods only theoretical
information is given.
A. Cost Price Methods Pricing of Material Issued
1. First In First Out (FIFO) Method :
Under this method it is assumed that material purchased first is issued

first and material purchased last remains in stock. If the stores ledger account
opening stock at a certain rate, the first issue will be priced at the opening stock
shows
rate and only when the opening stock is fully exhausted, the subsequent issue NOTES
will be priced at the rate at which the first purchases of the period is made.
Advantages
1) Under FIFO method the pricing of issue is done at the cost price and so
there is no unrealised profit or loss.
2) Issues are priced at the old purchase price and so this method follows the
rule of old materials to be issued first and latest purchases should be kept
in stock.
3) This method is suitable when the market shows falling price trend for the
material since high prices of the earlier purchases are charged to the
production and closing stock is valued at the current price which is low.
4) FIFO method is simple to understand and easy to follow.
Disadvantages
5) FIFO method is not suitable when the material price shows a rising trend.
Material cost charged to the production is less and closing stock of
material is valued at current high price.
6) Material cost of two same jobs using the same quantity of material may be
different merely because material issued to them is from different lots
purchased at different prices. Proper comparison of the cost of two same
jobs does not become possible.
7) When purchasing is done in small quantities at different prices and a

number of times and issues are made in large quantities, for pricing of the
issues a number of prices are required to be used and this increases the
calculation work and possibility of errors increases.
ILLUSTRATION
Following information is provided by SR co. in respect of a material used

by it its manufacturing process :-
2013
July 1 Opening stock of 800 units @ ` 8 each.
4 Issue of 500 units.
7 Receipt of 600 units @ ` 9 each.

A
d
v
a
n
c
e
Pricing of Material Issued 15 Issue of 200 units.
19 Receipt of 700 units @ ` 9.50 each
24 Receipt of 400 units @ ` 10 each
NOTES 28 Issue of 800 units.
Prepare Stores Ledger Account Pricing the issues using First In First
FIFO method
S R Company

Description ----- Unit ----- Maximum level -----
Code No. ------ Location ----- Minimum level -----
Bin No. ------ Re-order Qty.---- Re-order level -----
Date Receipts Issues Balance Stockverification

Ref Qty Rate Amt. Ref. Qty Rate Amt. Qty Rate Amt. Date Remarks
No. ` ` No. ` ` ` ` & Initials
2013
July 800 8 6400
1
4 MRN 500 8 4000 300 8 2400
No.
7 GR 600 9 5400 300 8 2400

N
No. 600 9 5400
12 MRN 300 8 2400 500 9 4500
N0. 100 9 900
15 MRN 200 9 1800 300 9 2700
19 GR 700 9.50 6650 300 9 2700

N
No. 700 9.5 6650
0
24 GR 400 10 4000 300 9 2700

N
No. 700 9.50 6650
400 10 4000
28 MRN 300 9 2700 200 9.50 1900
No. 500 9.50 4750 400 10 4000

Explanation : Pricing of Material Issued
Issue on July 4 of 500 units is priced at ` 8 per unit because this issue is
made out of the opening stock of 800 units, rate being ` 8 each. Issue of 400
units made on July 12 is from the first last of 300 units @ ` 8 each and 100
units are issued from the next lot @ ` 9 each. Total cost of material issued is,
therefore, NOTES
` 3300.
Issue of 200 units on 15 July is made out of stock which is valued @ ` 9
per unit. Issue of 800 units on July 28 is made from 300 units @ ` 9 and
remaining 500 units are issued out of the lot of 700 units which was purchased
@ ` 9.50 per unit.
Closing stock of material is of 600 units consisting of 200 units @ ` 9.50

each and 400 units purchased on July 24 @ ` 10 each. The closing stock value
is
` 1900 + ` 4000 = ` 5900.
[In this illustration all columns of Stores Ledger Account are shown. In
the subsequent illustrations. Only columns related to quantity, rate and amount
will be shown to save the space.]
2. Last In First Out (LIFO) Method :
LIFO method of pricing the issues is exactly opposite to FIFO method.

When LIFO method is used it is assumed that material purchased last is used for
making issues and so the price charged for the first issue is the price at which
latest purchasing has been made. Naturally the stock is valued at the oldest price
rate of the period. For which the stores ledger account is prepared. It should be
remembered that actual quantity issued is from the oldest lot and the quantity
purchased recently remains in stock; only for pricing of issues it is assumed that
recently purchased quantity is issued first.
Advantages :
1) LIFO method is simple to understand and easy to follow.
2) Pricing of issues is done at actual cost of materials and so there is no

unrealised profit or loss caused by this method.
3) In the increasing price trend shown by the market this method is suitable
since issues are priced at the current prices which are high and high price
of material is immediately recovered by charging it to the production.
4) In the situation of rising prices the quantity in stock is valued at the old
low prices and so the closing stock value is shown less. This agrees with
the principle of valuation of closing stock to be done at cost or market
price whichever is less.
Disadvantages :
1) When there are large number of transactions of receipts and issues the
recording and calculations increase and the possibility of errors increases.
2) During the period of falling prices, the material cost of production will Advanced Cost Accounting - I 171
be
Pricing of Material Issued shown less whereas that production has been done by using the material
purchased earlier at high prices.
3) Comparison of costs of two similar jobs using same material in same quantity
may give misleading results merely because material issued to them is
from two different lots purchased at different prices.
NOTES
ILLUSTRATION
Stores Ledger Account is prepared by using the information given in the

previous illustration but using LIFO Method.
SR Company
Qty Rate Amt Qty Rate Amt Qty Rate Amt

` ` ` ` ` `
2013
July, 1 800 8 6400
4 500 8 4000
7 600 9 5400 300 8 2400

600 9 5400
12 400 9 3600 300 8 2400

200 9 1800
15 200 9 1800 300 8 2400
19 700 9.50 6650 300 8 2400
700 9.50 6650
24 400 10 4000 300 8 2400

700 9.50 6650
400 10 4000
28 400 10 4000 300 8 2400
400 9.50 3800 300 9.50 2850
Closing stock of material at the end of July, 2013 is 600 units consisting
of 300 units @ ` 8 and 300 units @ ` 9.50. The value of closing stock is ` 2400
+
` 2850 = ` 5250. Under the FIFO method of pricing the issues the value of
closing stock was ` 5900.
Under LIFO method closing stock consists of 300 units @ ` 8 each, which
are from the opening stock of 800 units.

Pricing of material received back from the production department : Pricing of Material Issued
Under FIFO method of pricing the issues material returned to stores by a

production department is recorded in the receipt section of the stores ledger
account and to differentiate it from normal receipt transactions such recording is
normally done in red ink. The recording done for pricing of material to the job
to which it was issued is considered and if such issue was done from a single NOTES
lot, the price charged for the issue is recorded as the rate at which material
returned is valued and in the balance column the quantity received back, the rate
and the value of material received back calculated at that rate is recorded as the
last lot separately. If the pricing of issue to the job is done from two or more
lots at their lot prices, the returned material is valued at the rate of the last lot
which was issued to that job and such returned material is recorded in the
balance column as explained above.
In the illustration for FIFO method which we have already considered if
we presume that on July 22 the stores department has received 20 units from the
job to which material was issued on July 12, the recording in the Receipt and
Balance sections will appear as under :-

` ` ` ` ` `
2013 20 9 180 300 9 2700
July 22 700 9.50 6650
20 9 180
Under LIFO method of pricing the recording for the above transaction will
be done on July 22 by valuing the returned material at ` 9 each because on July
12 the material was issued to the job from a single lot which was priced at ` 9
each. The recording for the transaction of return of material will, therefore,
remain same as shown for FIFO method above.
Recording for shortage of material under FIFO method is done in Issue

section of the Stores Ledger Account in red ink. The quantity of shortage is
shown in a Quantity column, the rate of the first lot of material in balance is
used for calculating the amount of loss and it is shown in the amount column of
the issue column. In the Balance section the quantity of shortage is reduced
from the first lot and remaining quantity is shown in the quantity column and
valued at the rate of the first lot.
Assuming that in the illustration, it is mentioned that on July 31 a shortage

of 10 units is found in physical stock taking of the material, 10 units will be
recorded in quantity column of the issue section and since the stock on July 28
consists of two lots (200 units @ ` 9.50 and 400 units @ ` 10 each) the shortage
will be charged at ` 9.50 each and balance column will be adjusted accordingly.
The recording on 31st July will appear in Stores Ledger Account as per FIFO
method
A
a
Pricing of Material Issued Date Receipts Issues Balance

` ` ` ` ` `
2013
NOTES
July 31 10 9.50 95 190 9.50 1805
400 10 4000
Under LIFO method of pricing the issues, the recording for shortage of 10
units will be done as under :-

` ` ` ` ` `
2013
July 31 10 9.50 95 300 8 2400
290 9.50 2755
According to LIFO method, shortage of 10 units is charged from the last

lot in stock for which the rate is ` 9.50 each and the quantity in balance for the
last lot is reduced and so stock in balance on July 31 is shown as 300 units @ `
8 and 290 units @ ` 9.50 each. The loss of ` 95 will be charged to costing profit
& Loss Account as abnormal loss.
3) Highest In First Out (HIFO) Method :
In this method the pricing of issue is done at the highest purchase price
shown in balance column upto the date of issue. When the lot having the highest
price is fully exhausted by the issues, the next highest price is used for pricing
the subsequent issue. In this method production/ jobs are charged with the
highest price of purchase of material and recovery of the material purchased at
highest price is done first and valuation of material in stock is done at low
prices. The value of closing stock is shown less than its real value and thus by
reducing the profit amount for the period a secret reserve is created by the
concern.
HIFO method of pricing the issues is not popular and a few concerns may
be using this method.
4) Base Stock Method :

In this method a fixed quantity out of stock is always held at a fixed price
and this stock is known as the base stock and it is to be held as reserve stock for
a very long period of time. Base stock is not used for making any issues unless
an emergency situation arises. This method is not an independent method and
for pricing of issues it is to be coupled with FIFO or LIFO method. This method
is generally used by those industries which have to carry on the manufacturing
174 Advanced Cost Accounting - I process for a very long period of time.
ILLUSTRATION Pricing of Material Issued
A manufacturing company uses a material in its manufacturing process

and has provided following information about the transactions that have taken
place in respect of the material :-
2013
May 1 Opening stock 600 kgs at ` 50 per kg. NOTES
3 Material issued 200 kgs.
2013
May 7 Receipt of 400 kgs @ ` 54 per kg.
12 Issue of 300 kgs.
18 Receipt of 500 kgs @ ` 55
per kg. 22 Issue of 150 kgs.
25 Issue of 400 kgs.
30 Receipt of 200 kgs @ ` 56
per kg.
The company follows Base Stock Method for pricing the issues and keeps
base stock of 200 kgs at a fixed price of ` 50 per kg. It uses FIFO method along
with the Base Stock Method.
Show the recording in the Stores Ledger Account.
SOLUTION
Stores Ledger Account (Base Stock with FIFO)
` ` ` ` ` `
2013
July,1 600 50 30000
3 200 50 10000 400 50 20000
7 400 54 21600 400 50 20000
400 54 21600
12 200 50 10000 200 50 10000
100 54 5400 300 54 16200
18 500 55 27500 200 50 10000
300 54 16200
500 55 27500
22 150 54 8100 200 50 10000
150 55 8100
500 55 27500
25 150 54 8100 200 50 10000
250 55 13750 250 55 13750
30 200 56 11200 200 50 10000
250 56 13750
200 56 11200 Advanced Cost Accounting - I 175
Pricing of Material Issued Base stock of 200 kgs @ ` 50 per kg is maintained in the Balance
column throughout the month.
B. Average Cost Methods :
i) Simple Average :-
NOTES
In this method the pricing of issues is not done at the actual cost price but
at simple average of the prices at which materials are purchased prior to the
issue date. If the quantity of the previous purchases is exhausted, then the
simple average of prices of subsequent purchases is calculated and at that
average price issue of materials is priced. For calculation of simple average
following formula is used :
Total of Prices
No of prices
If purchases have been made at ` 10. ` 12 and ` 11 per unit prior to issue
of material, the simple average of the prices will be
` 10 + ` 12 + ` 11 ` 33
=
= ` 11 and
3 3
at ` 11 per unit the quantity issued will be charged. In simple average

method only purchase prices are added and the quantity purchased is not taken
into consideration. The justification given for using simple average method is
the materials purchased in different lots and at different prices gets mixed up
when it is kept in the bin and issue of material, therefore, may not be from a
particular lot. So simple average of prices should be used for pricing the issues.
The only advantage of this method is it is simple to understand and easy

to follow.
The disadvantage of this method is that issue of material is not priced not
at the cost price but at a price which is totally different from cost price. Along
with this since quantity purchased at each price is not considered the price
charged may give an absurd result. From the following example this points
should become clear :
Feb 4 Purchase of 600 units at ` 10
each. Feb 9 Purchase of 20 units at ` 18
each. Feb 11 Issue of 300 units.

` 10 + ` 18
The simple average price = 2 = ` 14
300 units issued will be priced at the simple average price of ` 14 each
and the total material cost of issue will be 300 units x ` 14 = ` 4200. The
pricing of issue under FIFO method would have been 300 units x ` 10 = ` 3000
and under LIFO method it would be (20 units x ` 14) + (280 units x ` 10) = `
280 + ` 2800
= ` 3080. By using simple average method, there is excessive charge for
176 Advanced Cost Accounting - I material
made to the production / job. Therefore when there is too much difference
in the quantity purchased at different prices and the fluctuation in material
prices is very
wide, simple average method does not become a suitable method. Unrealised Pricing of Material Issued
profit or loss is likely to take place when simple average method is used for
pricing the issues.
ILLUSTRATION
B Ltd. uses a certain component in its finished product and purchase it

from the supplier. It follows Simple Average Method for pricing the issues. From NOTES
the following particulars prepare Stores Ledger Account :
2013, March
1 Opening stock of 250 units @ ` 20 each.
23 Issue of 200 units
27 Issue of 450 units
SOLUTION
B Ltd.
(Simple Average
Method)
` ` ` ` ` `
2013
Mar,1 250 20 5000
3 400 19 7600 250 20 5000
400 19 7600
7 500 19.50 9750 150 2850
10 700 18 12600 850 15450
12 300 20 6000 1150 21450
23 200 19 3800 950 17650
27 450 19 8550 500 9100
Calculation of simple average price for issue transactions is done as

under
On March 7 : ` 20 + ` 19
= ` 19.50
2
On March 23 : ` 19 + ` 18 + ` 20 ` 57
= = ` 19
3 3
Pricing of Material Issued Since the opening stock quantity of 250 units is exhausted in the issue of
500 units on March 7 the price of ` 20 for opening stock is not considered and
purchase prices on March 3, March 10 and March 12 are considered for
calculation of simple average.
On March 27 : ` 18 + ` 20 ` 38
NOTES = = ` 19
2 2
When 200 units are issued on March 23, the balance quantity of 150 units
out of 400 units purchased on March 3 are issued and so the purchase price
of
` 19 for purchases made on March 3 has not been considered for
calculation of
simple average price and purchase price of ` 18 and ` 20 are added and
the simple average of ` 19 is calculated and used for issue made on March 27.
It should be remembered that once the quantity in stock and quantity

purchased are used for issues made, their prices should be dropped and should
not be used in calculating of the simple average. The price of quantity in
balance and all subsequent purchase prices prior to the issue transaction are to
be considered while calculating the simple average price and the issued quantity
should be priced at this simple average price.
Value of quantity in balance column is calculated by adding to the

previous stock value the value of purchases made and by deducting from the
previous stock value the value of material issued. Rate column under Balance
section does not show any rate except the rate given for the opening stock.
ii) Weighted Average Method :
To overcome the defect of quantity purchased being ignored in the simple

average method, the Weighted Average Method has been introduced. In this
method the Weighted average is calculated as under :-
Value of material in the balance
Total quantity of material in balance
At the weighted average price the pricing of material issued is done. The
new weighted average is required to be calculated after each purchase
transaction but on issue of material new weighted average is not to be
calculated.
Advantages :
1) In this method as quantity purchased at a certain price is considered for

calculating and pricing the issues and so the weighted average price is
appropriate compared to the simple average method.
2) In this method weighted average changes only with the fresh purchases
and new weighted average is not calculated for the issue transaction. This
reduces the calculation work considerably.
3) As along with purchased price the quantity purchased at that price is also
considered the fluctuations in prices and in quantities purchased are ruled
out and the weighted average price gives a better result.
4) Valuation of stock is more realistic in this method because the extreme Pricing of Material Issued
differences in purchase prices are evened out and quantity in balance is

valued at the weighted average price.
5) In this method unrealised profit or loss is not likely to

arise.
Disadvantages : NOTES
1) For accuracy purpose, the weighted average price is required to be
calculated upto 4 or 5 decimal points and calculation at such weighted
average for pricing the issues creates difficulty.
2) If purchase transactions are frequent, the calculation of weighted average

is required to be done after every purchase transaction even though there
is no issue transaction during this period. This increases clerical work and
possibility of calculation error.
ILLUSTRATION
Texmo co. has provided following information to you.
2012 Aug.
1 Opening stock of 800 units @ ` 5 each.
4 Receipt of 700 units @ ` 4.90 each.
Assuming that the company follows Weighted Average Method for pricing
the issues, prepare Store Ledger Account.

Pricing of Material Issued SOLUTION
Weighted Average Method
Te
x
m
NOTES o
Qty Rate Amt Qty Rate C
Amt Qty Rate Amt
` ` ` `o ` `
m
2013
pa
Aug, 1 ny 800 5 4000
4 700 4.90 3430 St 1500 4.9533 7430
8 500 4.9533 or
2476.65 1000 4.9533 49533.35
es
11 400 4.9533 1981.32 600 4.9533 2972.03
Le
16 600 5.20 3120 dg 1200 5.0767 6092.03
19 300 5.30 1590 er 1500 5.1213 7682.03
Ac
22 800 5.1213 4097.04 700 5.1213 3584.99
co
25 300 5.1213 1536.39
un 400 5.1213 2048.60
28 500 5.10 2550 t 900 5.1096 4598.60
Note that weighted average is calculated after each transaction of receipt

of material and pricing of issues which take place on Aug, 8 and 11 are priced at
the same weighted average price. Also issues that have taken place on Aug, 22
and Aug, 26 are priced at the same weighted average price of ` 5.1213 per unit
since they have taken place consequatively without any new receipt in between
these transactions.
iii) Periodic Simple Average Method :
In this method simple average of the purchase prices is calculated for all
the prices for all the prices for a fixed period which may be one month or 4
months or 6 months and the periodic simple average so calculated for pricing the
issues made in the subsequent period. If the period fixed is one month, the
simple average of all receipt prices is calculated and the periodic simple
average so calculated for pricing the issues made in the next month. If period
fixed is six months, the receipt prices in the six months period are used for
calculating the periodic simple average and it is used for pricing the issues
made in the subsequent period. In this method quantity of material purchased at
different prices is totally ignored and so the disadvantages of simple average
method also become applicable to the periodic simple average method. As
periodic simple average calculated is used for pricing the issues of next period
the method does not charge the issues at the current prices.
iv) Periodic Weighted Average Method :
This method is similar to the periodic simple average method but in this
method, the periodic weighted average is calculated by considering the quantity
purchased at each price. In this method also the periodic weighted average
calculated for a fixed period is used for pricing the issues made in the subsequent Pricing of Material Issued
period.
The periodic simple average method and the periodic weighted average
method are used for pricing the issues in a very few concerns.
C. Notional Price Methods :

NOTES
In notional price method the cost price or average of cost prices are not
considered for pricing the issues but a different price which may be a standard
price or an inflated price is used for pricing the issues of material.
i) Standard Price Method :
In this method pricing of issues is not done at the cost price or average
price. For a period a standard price or a pre-estimated price is fixed and the
issues are priced at this standard price of pre-estimated price. While fixing the
standard price various factors like current price, fluctuations in price expected in
near future, quantities normally purchased, discount available with a quantity
purchased, transport and other costs related to the material, etc. are considered
and accordingly a price is fixed as a standard price. All issues made during the
period are priced at the standard price. In the balance section quantity in
balance after receipt of material and issue of material is shown and its value is
shown by adding the value of receipt and by deducting the value of issued
material to the previous stock value. The value of closing stock is more or less
as compared to the actual cost and such variance is either favourable price
variance or unfavorable price variance and treated separately.
Advantages :
1) Since pricing of issues is done at the standard price the material cost of
jobs can be compared and difference in material cost of two similar jobs
shows efficiency or inefficiency in the use of material for them.
2) Calculation of material price variance shows efficiency or otherwise of the

purchase department in making the purchases.
Disadvantages :
3) When there are wide fluctuations in the market price of material, it

becomes difficult to fix the standard price for pricing the issues.
4) Actual cost of material used for a job or production order is not shown in
the standard price method. So this method becomes suitable only when
standard costing is followed in the entire concern.
ii) Inflated Price Method :
Inflated price method is not an independent method of pricing the issues

but it is to be used in conjunction with some other method such as FIFO, LIFO,
etc. When the nature of material is such that its quantity is reduced while it is
being stored in the stores department due to some natural reason like
evaporation or climatic changes this method of pricing the issues is found
suitable. The loss in
Pricing of Material Issued quantity or weight is recovered by inflating the purchase price and the value of
purchased material is divided by the net quantity ( i.e. purchased quantity
expected loss in quantity) The inflated price so calculated for pricing the
material issued from that purchase lot. Since purchase price as well as the
quantity purchase at that price may change during the period, a new inflated
NOTES price is required to be calculated on purchase of every new lot. Supposing that
there is 10 % loss in weight for a material and 400 liters of material is
purchased at a price of ` 90 per litre, the inflated price for this lot can be
calculated as under :-
Net Weight = Gross quantity purchased - 10% loss in
quantity
= 400 - 40
= 360
Value of purchased liters = 400 x 90 = ` 36,000
material
Inflated price =
Value of material purchased
Net Weight
` 36,000
=
360 Liters
= ` 100 per litre
When 360 liters of material from this lot is issued the price will be
charged at ` 100 per litre and thus the full value of material purchased is
recovered from issue of the material and loss due to reduced quantity is fully
recovered.
[ Additional Illustrations given after 8.6 Summary ]
8.4 Important Points Related to Materials

Costing Control
With the objective of exercising proper control on materials cost attention
should be given to the following important points :-
i) Material cost depends upon the quantity, quality and price of the materials
and on proper utilisation of the materials by workers engaged in the
manufacturing process. It is, therefore, necessary to establish and maintain
close co-ordination among the purchasing, stores and production
departments. When production department gives correct information
about type of materials, their quality and specifications, the quantity in
which they are needed and the date upto which they should be made
available the stores department con find out whether the required
materials are available in stores and can be supplied at the right time to
the production departments. If they are not available, the stores
department, by preparing materials requisition note can request the
purchase department to place the order and obtain the materials at
reasonable prices within the specific time limit. Excess material is to be
properly preserved in the stores department so that loss of materials can
be minimised. The workers in the production department should use the
materials carefully and scrap, spoilage and wastage is kept to the
minimum. Thus proper co-ordination helps to a great extent in
controlling materials control.
ii) Purchasing of materials should, as far as possible, be centralised and Pricing of Material Issued
purchasing of right material, in right quantity and at proper prices from

right suppliers should be ensured. Through this cost of materials is
controlled to the maximum extent.
iii Proper procedures should be laid down for each activity connected with
) the materials. Except in emergency situation the procedures should be NOTES
strictly followed.
iv) For movements of materials standardised documents such as purchase

order, goods received note, materials requisition note, material returned
note, materials transfer note, bin card, stores ledger account, etc. should
be made available to record the relevant information. Movement and issue
of materials without proper authorisation should be strictly prohibited.
v) Sufficient space and facilities should be provided to the stores department

for storage of various materials. Arrangement should be made to protect
the material and insurance coverage should be provided to eliminate or
minimise loss of materials during the storage period.
vi) Method to be used for pricing of issues of materials should be carefully

selected so that the cost incurred for the materials can be recovered from
materials cost charged to production.
vii By making stock-taking arrangement the quantity as per records and the
) actual quantity should be compared and proper re-conciliation between
these two quantities should be made. If possible, internal audit system
should be followed for verification of materials and for detecting and
reporting any loss, damage, theft and slow-moving, obsolete and
adversely affected materials.
viii Fixation of stock levels and deciding the economic order quantity for each
) item of material also helps in controlling materials cost.
8.5 Summary
Materials issued from the stores to a particular job, order, process or
operation are required to be priced and this work is done by accounts or costing
department of the enterprise. This is necessary in order to calculate total
material cost of a job, order, process or operation. There are various methods
available for pricing the materials issued such as ‘cost price methods’, ‘average
price methods’ and ‘notional price methods’. These methods provide further
certain methods out of which a particular method is selected by the enterprise
for pricing for materials. For example, under cost price methods there are First
In First Out (FIFO), Last In First Out (LIFO), Highest In First Out (HIFO) and
Base Stock Method. Each method possesses certain advantages as well as
certain disadvantages. According to the type of material quantity in which
materials are used, and variation in the price of material over a period a
particular method of pricing the issue of materials is selected by an enterprise.
In the Stores Ledger Account the value of material Advanced Cost Accounting - I 183
Pricing of Material Issued issue is recorded and by adding the value of different materials issued for a job,
order, process or operation the total materials cost is calculated and charged to
the job, order, process or operation.
NOTES
ADDITIONAL ILLUSTRATIONS
ILLUSTRATION 1
The following particulars have been extracted in respect of Material-Bee

of Domnick Co., Durgapur for the month of March, 2014. Prepare Stores Ledger
Account pricing the material issues on the basis of Last In First Out Method.
1 st Opening stock - 100 units @ ` 1.75
5th Purchases - 150 units @ ` 1.50
8th Issues - 200 units
30th Spoilage - 10
units.
Ascertain the value of closing stock.

SOLUTION
In the books of Domnick Co.; Durgapur Maximum Level ----
Stores Ledger Account of Materials- Minimum ----
Bee For the month ended 31-03-2014 Level Reorder ----
Reorder
Level Quantity ----
14 Particulars Receipts Issues Balance

GRN Qty. units Rate Amt. MRN Qty. Units Rate Amt. Qty. units Rate Amt Remarks
No. ` ` No. ` ` ` `
Opening Stock 100 1.75 175
Purchases - 150 1.50 225 100 1.75 175
150 1.50 225
Issues - 150 1.50 225 50 1.75 87.50
50 1.75 87.50
Purchases - 300 1.60 480 50 1.75 87.50
300 1.60 480
Issues - 250 1.60 400 50 1.75 87.50
50 1.60 80.00
Purchases - 400 1.70 680 50 1.75 87.50
50 1.60 80.00
400 1.70 680
Issues - 400 1.70 680 50 1.75 87.50
50 1.60 80.00
Spoilage - 10 1.60 16 50 1.75 87.50 Spoilage
40 1.60 64.00 *
NOTES

Pricing of Material Issued Working Notes :
(i) Valuation of Closing Stock :
Closing stock is 90 units consists of two lots

viz.
NOTES i) 50 units - @ ` 1.75 - ` 87.50
ii) 40 units - @ ` 1.60 - ` 64
Hence, 90 units are valued at ` 151.50
ILLUSTRATION 2
The following are the receipts and issues of material in Akbar-Ali Co. Ltd.
Ajmer, during the month of March 2012
1 Opening stock 2,000 units @ ` 46 per unit
4 Issued 1,400 units
6 Purchased 3,500 units @ ` 45 per unit
8 Condemned due to deterioration in quantity and hence transferred to

scrap 300 units
9 Issued 800 units
31 Excess found in stock 430 units due to wrong weighing during the
month.
The maximum level fixed is 4,000 units, the minimum 750 units and the
reorder level is 1,000 units.
Show the Stores Ledger Account under Last In First Out Method.

SOLUTION
LIFO In the books of Akbar-Ali Co.,Ltd.Ajmer Maximum Level - 4,000 units
Stores Ledger Account of Material Minimum Level - 750 units
For the month ended 31-03-2012 Reorder Level - 1,000 units
Reorder -
Quantity
rticulars Receipts Issues Balance
No.
March ` ` No. ` ` ` `
pening Stock 2,000 46 92,000
sues - 1,400 46 64,400 600 46 27,600
rchases - 3,500 45 1,57,500 600 46 27,600
3,5045 1,57,500
ndemned due - 300 45 13,500 600 0 46 27,600 Scrap
to deterioration 3,200 45 1,44,000 *
sues - 800 45 36,000 600 46 27,600
2,4045 1,08,000
sues - 2,100 45 94,500 600 46 27,600
0 45 13,500
rchases - 2,000 48 96,000 600 46
300 27,600
45 13,500
2,000 48 96,000
300
46 27,600
sues - 1,200 48 57,600 600
45
300 13,500
800 48 38,400
rchases - 1,800 47 84,600 600 46 27,600
45
300 13,500
800 48 38,400
1,8047 84,600
sues - 1,800 47 84,600 600 46 27,600
48 38,400 0
800 100 45 4,500
200 45 9,000
cess in Stock - 430 47 20,210 600 46 27,600 Excess in Stock *
45
100 4,500
430 47 20,210
NOTES
Advanced Cost Accounting - I

187
(i) Excess found in stock on 31st March due to wrong weighing during the
month, is valued at ` 47 per unit as the latest purchase price.
ILLUSTRATION 3
NOTES
The stock on hand of material as on 01-01-2014 was 500 units @ ` 1 per
unit. The following purchases and issues were subsequently made. Prepare
Stores Ledger Account of Material in Ballarpur Ltd., Baroda for the three
months ended 31-03-2014 under Last In First Out Method.
Purchases :
6-1-2014 : 100 units @ ` 1.10
20-1-2014 : 700 units @ ` 1.20
27-1-2014 : 400 units @ ` 1.30
13-2-2014 : 1,000 units @ ` 1.40
20-2-2014 : 500 units @ ` 1.50
17-3-2014 : 400 units @ ` 1.60
Issues :
9-1-2014 : 500
22-1-2014 units
30-1-2014 : 500
15-2-2014 units
22-2-2014 : 500
11-3-2014 units
On 29-03-2014 the :stock500
verifier reported that there was a breakage of 15
units. units
: 500
units
: 500
units

SOLUTION
LIFO In the books of Ballapur Ltd.; Baroda Maximum Level ----
Stores Ledger Account Minimum Level ----
For the three month ended 31-03-2014 Reorder Level ----
Reorder Quantity ----
ate Particulars Receipts Issues Balance

014 GRN Qty. units Rate Amt. MRN Qty. Units Rate Amt. Qty. units Rate Amt Remarks
No. ` ` No. ` ` ` `
-1 Stock on hand - 500 1. 500
-1 Purchases - 100 1.10 110 500 1. 500
100 1.10 110
-1 Issues - 100 1.10 110 100 1. 100
400 1. 400
0-1 Purchases - 700 1.20 840 100 1. 100
700 1.20 840

2-1 Issues - 500 1.20 600 100 1. 100
200 1.20 240
7-1 Purchases - 400 1.30 520 100 1. 100
200 1.20 240
400 1.30 520
0-1 Issues - 400 1.30 520 100 1. 100
100 1.20 120 100 1.20 120
3-2 Purchases - 1,000 1.40 1,400 100 1. 100
100 1.20 120
1,000 1.40 1,400
NOTES

189
NOTES

15-1 Issues - 500 1.40 700 100 1. 100
100 1.20 120
500 1.40 700
20-2 Purchases - 500 1.50 750 100 1. 100
100 1.20 120
500 1.40 700
500 1.50 750
22-2 Issues - 500 1.50 750 100 1. 100
100 1.20 120
500 1.40 700
11-3 Issues - 500 1.40 700 100 1. 100
100 1.20 120
17-3 Purchases - 430 1.60 640 100 1. 100
100 1.20 120
400 1.60 640
29.3* Breakage - 15 1.60 24. 100 1. 100 Breakage
100 1.20 120 *
385 1.60 616
ILLUSTRATION 4 Pricing of Material Issued
The following transactions relate to purchase and issue of material, CM-

105 in Colgate Ltd. Cochin during March, 2009. Prepare a Stores Ledger
Account under Last In First Out Method of charging materials.
1st Opening balance - 500 units @ ` 25

NOTES
3rd Issues 70 units
4th Issued 100 units
8th Issued 80 units
13th Received from vendor 200 units @ ` 24
14th Refund of surplus from a work order 15 units @ ` 24
20th Received from vendor 240 units @ ` 23
25th Received from vendor 320 units @ ` 23.50
27th Refund of surplus from a work order 12 units @ ` 25
29th Received from vendor 100 units @ ` 24.
A stock verifier noted that on 15th he had found a shortage of 5 units and
on 28th a damage of 8 units.

NOTES

SOLUTION
LIFO In the books of Colgate Ltd., Cochin Maximum Level -------
Stores Ledger Account of Material CM-105 Minimum Level ------
For the month ended 31-03-2009 Reorder Level ------
Reorder Quantity -------

No. ` ` No. ` ` ` `
Opening Balance 500 25 12,500
Issues - 70 25 1,750 430 25 10,750
Issues - 100 25 2,500 330 25 8,250
Issues - 80 25 2,000 250 25 6,250
Purchases - 200 24 4,800 250 25 6,250
200 24 4,800
Refund of surplus - 15 24 360 250 25 6,250 Refund *
215 24 5,160
Shortage - 5 24 120 250 25 6,250 Shortage*
210 24 5,040
Issues - 180 24 4,320 250 25 6,250
30 24 720
Purchases - 240 23 5,520 250 25 6,250
30 24 720
240 23 5,520
24 th Issues - 240 23 5,520 216 25 5,400
30 24 720
34 25 850
25 th
Purchases - 320 23.50 7,520 216 25 5,400
320 23.50 7,520
26 th
Issues - 112 23.50 2,632 216 25 5,400
208 23.50 4,888
27 th
Refund of surplus - 12 25 300 216 25 5,400 Refund*
208 23.50 4,888
12 25 300
28 th
Damage - 8 25 200 216 25 5,400 Damage*
208 23.50 4,888
4 25 100
29 th
Purchases - 100 24 2,400 216 25 5,400
208 23.50 4,888
4 25 100
100 24 2,400
NOTES

193
Pricing of Material Issued ILLUSTRATION 5
On 1st March, 2013 the stock of a component in the stores was 500 units
@ ` 300 per hundred. During the three months the receipts and issues were as
follows:
NOTES Purchased :
Marc : 400 units @ ` 400 per hundred
h : 500 units @ ` 500 per hundred
April : 600 units @ ` 600 per hundred
May
Issued : : 300
Marc units
h : 400
When stock units
April was taken on 31st May 2013, a discrepancy of 50 units was
revealed. May : 500
units
Prepare a Stores Ledger Card under First In First Out Method in the
books of Hamam Ltd., Himmatpur.

SOLUTION
FIFO In the books of Humam Ltd., Himmatpur Maximum Level -------
Stores Ledger Card of a Component Minimum Level ------
For three months ended 31-05-2013 Reorder Level ------
Date Particulars Receipts Issues Balance

2013 GRN Qty. Rate Amt. MRN Qty. Rate Amt Qty. Rate Amt Remark
No. units ` ` No. Units ` . unit ` ` s
1-3 Opening Stock ` s 3. 1,50
1-3 Purchases - 400 4.00 1,60 500 3. 0
0 500 4. 1,50
31-3 Issues - 300 3. 900 400 3. 0
200 4. 1,60
1-4 Purchases - 500 5.00 2,50 400 3. 0
0 200 4. 600
400 5. 1,60
30-4 Issues - 200 3. 600 500 4. 0
200 4. 800 200 5. 600
1-5 Purchases - 600 6.00 3,60 500 4. 1,60
0 200 5. 0
500 6. 2,50
31-5 Issues - 200 4. 800 600 5. 0
300 5. 1,500 200 6. 800
31-5* Discrepancy - 50 5 250 600 5 2,50 Discrepancy*
150 6. 0
600 800
2,50
0
3,60
0
1,00
0
3,60
NOTES

750
3,60
195
0
Prepare a Stores Ledger Account on the basis of First In First Out

Method of pricing the issue of stores using the following information about
material G-7 of Galaxy Co., Gauhatti for March, 2009.
NOTES Date Particulars Quantity Rate per unit
2009, march units `
1st Materials on hand 300 9.70
3rd Purchases 250 9.80
11th Issues 390 -
14th Shortage 10 -
15th Purchases 300 10.05
20th Issues 210 -
25th Issues 300 -
29th Issues 210 -

SOLUTIO
N
FIFO In the books of Galaxy Co., Gauhatti Maximum Level ----------
Stores Ledger Account of Material G.7 Minimum Level ----------
For the month ended 31-03-2009 Reorder Level ----------
Reorder Quantity ----------
Date 2009 Particulars Receipts Issues Balance

March GRN Qty. Rate Amt. MRN Qty. Rate Amt. Qty. Rate Amt Remarks
No. units ` ` No. Units ` ` units ` `
1 st
Materials on hand 300 9.70 2,910
3 rd
Purchases - 250 9.80 2,450 300 9.70 2,910
250 9.80 2,450
11 th
Issues - 300 9.70 2,910 160 9.80 1,568
90 9.80 882
14 th
Shortage 10 9.80 98 150 9.80 1,470 Shortage*
15 th
Purchases - 300 10.05 3,015 150 9.80 1,470
300 10.05 3,015
18 th
Purchases - 150 9.60 1,440 150 9.80 1,470
300 10.05 3,015
150 9.60 1,440
20 th
Issues - 150 9.80 1,470 240 10.05 2,412
60 10.05 603 150 9.60 1,440
NOTES

197
NOTES

24 th
Purchases - 110 9.90 1,089 240 10.05 2,412
150 9.60 1,440
110 9.90 1,039
25 th
Issues - 240 10.05 2,412 90 9.60 864
60 9.60 576 110 9.90 1,089
28 th
Purchases - 150 10.30 1,545 90 9.60 864
110 9.90 1,089
150 10.30 1,545
29 th
Issues - 90 9.60 864 140 10.30 1,442
110 9.90 1,089
10 10.30 103
ILLUSTRATION 7 Pricing of Material Issued
The stock in hand of a Material Fox as on 1st January 2009 was 500 units
@
` 10 per unit. From the following transactions of purchases and issues of Finolex
Co. Ltd., Faizabad, prepare a Stores Ledger Account under First In First Out
Method. NOTES
Purchases :
6 th 20th
Jan. 100 units @ ` 11
Jan. 700 units @ ` 12
27th Jan. 400 units @ ` 13
Feb. 1,000 units @ ` 14
13th
Feb. 500 units @ ` 15
20th Mar. 400 units @ ` 16
17th
Jan. 500 units
Issues : Jan. 500 units
Jan. 500 units
9 th 22nd Feb. 500 units
500 units
30th
Feb. 500 units
15th Missing units
Mar 20.
22 nd .
Mar
11th .
30th

NOTES

SOLUTION
FIFO In the books of Finolex Co. Ltd., Faizabad Maximum Level ----------
Stores Ledger Account of Material Fox Minimum Level ----------
For the three month ended 31-03-2009 Reorder Level ----------
Reorder Quantity ----------

No. ` ` No. ` ` ` `
Stock on hand 500 10. 5,000
Purchases - 100 11. 1,100 500 10. 5,000
100 11. 1,100
Issues - 500 10. 5,000 100 11. 1,100
Purchases - 700 12. 8,400 100 11. 1,100
700 12. 8,400
Issues - 100 11. 1,100 300 12. 3,600
400 12. 4,800
Purchases - 400 13 5,200 300 12. 3,600
400 13. 5,200
Issues - 300 12. 3,600 200 13. 2,600
200 13. 2,600
13-2 Purchases - 1,000 14 14,000 200 13. 2,600
1,000 14. 14,000
15-2 Issues - 200 13 2,600 700 14. 9,800
300 14 4,200
20-2 Purchases - 500 15 7,500 700 14 9,800
500 15 7,500
22-2 Issues - 500 14 7,000 200 14. 2,800
500 15. 7,500
11-3 Issues - 200 14. 2,800 200 15. 3,000
300 15. 4,500
17-3 Purchases - 400 16 6,400 200 15. 3,000
400 16. 6,400
30-3 Missing - 20 15 300 180 15 2,700 Missing*
400 16 6,400
NOTES

201
Prepare a Stores Ledger Account of material E-DOM from the following

particulars adopting First-In-First-Out Method of pricing of material issues in
the books of E-light Co. Ltd. Elora for March,2009.
NOTES
1st Opening Stock - 200 pieces @ ` 2
Purchases :
5
th 100 Pieces @ ` 2.20 - Goods Received Note -7
150 Pieces @ ` 2.40 - Goods Received Note -12

th
10
180 Pieces @ ` 2.50 - Goods Received Note - 15
120 Pieces @ ` 2.30 - Goods Received Note - 24

20th
th
29 150 Pieces - Material Requisition Note - 6
Is 100 Pieces - Material Requisition Note - 10

su
100 Pieces - Material Requisition Note - 17
es
: 200 Pieces - Material Requisition Note - 23
nd
2 st
31 Defectives - 15 Pieces
th
7
th
12
28th

SOLUTION
FIFO In the books of E-light Co. Ltd. Elora Stores Maximum Level ----
Ledger Account of Material E-DOM For the Minimum Level ----
month ended 31-03-2009 Reorder Level ----
Reorder Quantity ----

No. pieces ` ` No. pieces ` ` pieces ` `
1 st
Opening Stock 200 2. 400
2 nd
Issues 6 150 2.00 300 50 2. 100
5 th
Purchases 7 100 2.20 220 50 2. 100
100 2.20 220
7 th
Issues 10 50 2 100 50 2.20 110
50 2.20 110
10 th
Purchases 12 150 2.40 360 50 2.20 110
150 2.40 360
12 th
Issues 17 50 2.20 110 100 2.40 2.40
50 2.40 120
20 th
Purchases 15 180 2.50 450 100 2.40 240
180 2.50 450
28 th
Issues 23 100 2.40 240 80 2.50 200
100 2.50 250
29 th
Purchases 24 120 2.30 276 80 2.50 200
120 2.30 276
31 st* Defectives - 15 2.50 37.50 65 2.50 162.50 Defectives*
120 2.30 276
NOTES

203
Prepare a Stores Ledger Account from the following receipts and issues of
Material Lee-45 of Liril Co. Ltd. for March, 2012 pricing it on Weighted
Average Rate Method.
NOTES Receipts :
Date Quantity P.O.No. Rate Per Unit
(Units) `
1st 1,000 8 10
15 th 1,500 12 9
500 20 8
30 th
Issues :
Date Quantit M.R.N.
y No.
(Units)
3rd 500 6
9 th 250 8
1,250 13
20 th 500 19
31 th

SOLUTION
Weighted Average In the books of Liril Co. Ltd. Maximum Level -------
Rate Method Stores Ledger Account of Material Lee-45 Minimum Level ------
Receipts Issues Balance

GRN Qty. Rate Amt. MRN Qty. Rate Amt. Qty. Rate Amt Remarks
st
chases Issues 1Purchases Issues 8 1,000 10. 10,000 1,000 10 10,000
3rd
6 500 10 5,000 500 10 5,000
8 250 10 2,500 250 10 2,500
9th 12 1,500 9 13,500 1,750 9.143 16,000
13 1,250 9.143 11,429 500 9.143 4.571
15th 20 500 8 4,000 1,000 8.571 8,571
19 500 8,571 4,285.50 500 8,571 4,285.50
20th
30th
31 st
NOTES

205
i) Calculation of Weighted Average Rate :
= (1,000 units x ` 10)

1st 1,000 units
NOTES
` 10,000
= = ` 10
1,000units
(250 unitsx ` 10) + (1,500 units x ` 9)
15th =
250 units + 1,500 units
` 2,500 + ` 13,500
=
1,750 units
=
` 16,000
= 1,750
` 9.143
units
30th = (500 units x ` 9.143) + (500 unites x ` 8)

500 units + 500 units
= ` 4,571 + ` 4.000
1,000 units
= ` 8,571
1,000 units
ILLUSTRATION
= ` 10
8.571
From the following information relating to Material- Kobra of Kalyani
Manufactures, Kanpur, Prepare a Stores Ledger Account for the month of March
2014 on the basis of Weighted Average Rate Method.
1st Purchases - 100 units @ ` 10 GRN No. 32
2nd Purchases - 200 units @ ` 10.20 - GRN No. 35
5th Issues - 250 units M.R.N. - No. 17
7th Purchases - 300 units @ ` 10.50 - G.R.N. No. 38
10th Purchases - 200 units @ ` 10.80 - G.R.N. No. 39
13th
Issues - 200 units - M.R.N. No. 19
18th Issues - 200 units - M.R.N. No. 21
20th Purchases - 100 units @ ` 11 - G.R.N. No. 42
28th Issues - 150 units - M.R.N. No. - 27

SOLUTION
Weighted Average In the books of Kalyani Manufacturers, Kanpur Maximum Level -------
Rate Method Stores Ledger Account of Material-Kobra Minimum Level ------

No. ` ` No. ` ` ` `
Purchases 32 100 10 1,000 100 10 1,000
Purchases 35 200 10.20 2,040 300 10.133 3,040
Issues 17 250 10.133 2,553.25 50 10.133 506.75
Purchases 38 300 10.50 3,150 350 10.448 3,656.75
Purchases 39 200 10.80 2,160 550 10.576 5,816.75
Issues 19 200 10.576 2,115.20 350 10.576 3,701.60
Issues 21 200 10.576 2,115.20 150 10.576 1,586.40
Purchases 42 100 11. 1,100 250 10.745 2,686.39
Issues 27 150 10.745 1,611.84 100 10.745 1,074.55
NOTES

207
i) Calculation of Weighted Average Rate :
(100 units x ` 10)

1st =
NOTES 100 units
` 1,000
=
100 units
= ` 10
(100 units x ` 10) + (200 units x ` 10.20)

2nd =
` 1,000 + ` 2,040
=
300 units
` 3,040
=
300 units
= ` 10.133
(50 units x ` 10.133) + (300 units x 10.50)

7th =
` 506.75 + ` 3,150
=
350 units
` 3,656.75
=
350 units
= ` 10.448
(350 units x ` 10.448) + (200 units x ` 10.80)

10th =
350 units + 200
units
` 3656.75 + ` 2,160
=
550 units
` 5,816.75
=
550 units
= ` 10.576
(150 units x ` 10.576) + (100 units x ` 11)

20th =
` 1,586.40 + ` 1,100 Pricing of Material Issued
=
250 units
` 2,686.40
=
250 units
NOTES
= ` 10.745
ILLUSTRATION 11
The following transactions took place in respect of Material - Jebra of

Jain Bros. Jaipur for the month March, 2014
Date Receipts Issues

2014 Quantity Rate G.R.N. Quantity M.R.N.
March (Units) ` No. Units No.
2nd 200 2. 87
10th 300 2.40 89
15th 250 67
18th
250 2.60 94
20th 200 69
24th 200 2.50 96
30th 300 70
Record the above transitions in the Stores Ledger Account on the basis of
Weighted Average Rate Method.

NOTES

SOLUTION
Weighted Average In the books of Jain Bros., Jaipur Maximum Level -------
Rate Method Stores Ledger Account of Material Jebra Minimum Level ------

2 nd
Purchases 87 200 2. 400 200 2. 400
10 th
Purchases 89 300 2.40 720 500 2.24 1,120
15 th
Issues 67 250 2.24 560 250 2.24 560
18 th
Purchases 94 250 2.60 650 500 2.42 1,210
20 th
Issues 69 200 2.42 484 300 2.42 726
24 th
Purchases 96 200 2.50 500 500 2.452 1,226
30 th
Issues 70 300 2.452 735.60 200 2.452 490.40
Working Notes : Pricing of Material Issued
(i) Calculated of weighted Average Rate :
= (200 units x `
2nd 2) 200 units
` 400
=
200 units NOTES
= ` 2
10th = (200 units x `

2) + (300 units x `
` 400 + ` 720
=
2.40)
500 units
` 1,120
=
500 units
= ` 2.24
18th =
(250 units x ` 2.24) +
(250 units x 2.60)
` 560 + ` 650
=
500 units
` 1,210
=
500 units
= ` 2.42
=
(300 units x ` 2.42) + (200 units x `
24th
2.50) 300 units + ` 200 units
` 726 + ` 500
=
500 units
=
` 1,226
= `500 units
2.452

8.6 Key
Terms
i) FIFO : It is a method of pricing the issues in which Material received first
is treated as material issued first and pricing of issues is done accordingly.
(First In First Out.)
NOTES
ii) LIFO : Last In First Out method of pricing the issues and for the issues
the price of the last material received is charged.
8.7 Questions & Exercises

I - Theory Questions
1) Explain the various methods of pricing of material issues from stores.
2) Explain briefly the various factors which are considered before adopting a
particular method of pricing of issues from stores.
3) Explain the advantages and disadvantages of First In First Out Method of

pricing of material issues.
4) Discuss the effects of rising prices and falling prices on Last In First Out
method of pricing of materials issues.
5) Explain the differences between FIFO and LIFO method of pricing of

material issues.
6) Explain in detail the Weighted Average Price Method of pricing of

material issues.
II - Exercises
1. From the following, prepare Stores Ledger Account under : (i) FIFO and
(ii) LIFO methods for the month ended 31st January, 2012
Purchases :
1st Jan. Opening 200 pieces @ ` 2 each

Stock 5th Jan. 100 pieces @ 2.20 each
Purchases ` 150 pieces 2.40 each
10th Jan. Purchases @ ` 180 2.50 each
20th Jan.| Purchases pieces @ `
Issues
2nd Jan. : Issues 150 pieces
7th Jan. Issues 100 pieces
12th Jan. Issues 100 pieces
212 Advanced Cost Accounting - I 28th Jan. Issues 200 pieces

2. The following is the record of receipts and issues of certain material in the Pricing of Material Issued
factory during a week :
April
2010
1st April Opening Stock 50 tonnes @ ` 10 per tonne
1th April Issued 30 tonnes NOTES

2ndApril Received 60 tonnes @ ` 10.20 per tonne
3rd April Issued 25 tonnes (stock verification reveals

loss of one tonne)
4th April Received from 10 tonnes (previously issued at ` 9.15 per

orders tonne)
5th April Issued 40 tonnes
6th April Received 22 tonnes @ ` 10.30 per tonne
7th April Issues 38 tonnes
At what prices will you issue the materials ? Use FIFO and LIFO methods
and show the comparative results.
3. A manufacturer used cost price as the basis for charging out the materials to
jobs. The receipt side of the stores ledger accounts shows the following
particulars :
500 articles bought at ` 3 each 700 articles
bought at ` 3.10 each
400 articles bought at ` 3.20 each 800 articles
bought at ` 3.10 each
Successive issues were made of 300, 1000 and 200 articles. At what price per
article should each of these issues be charged under FIFO method ?
4. Show the following in Stores Ledger Account on FIFO basis.
Date
Par
1-1-2009 Opening Balance 100 3.80

ticu
4-1-2009 Purchases 800 4.00

lars
15-1- Purchases 500 4.20

2009
16-1- Issues 600 -
Uni
2009
21-1- Purchases 800 4.60
t
2009
22-1- Issues 1,20 -
2009 0 Advanced Cost Accounting - I 213
Rat
e (`
)
Pricing of Material Issued 24-1- Purchases 1,40 4.40
2009 0
25-1- Received back from
2009
completed job
NOTES (Issued on 16-1-2009) -

50
27-1- Issues 900 -
2009
30-1-2009 Issues 450 -
On 20th January stock verification revealed a shortage of 20 units.
5. The following are the receipts and issues of coal in a factory during
March, 2011.
March 1 Opening stock 200 tons at ` 460 per ton
4 Issues 140 tons
6 Purchased 350 tons at ` 450 per ton
8 Condemned due to deterioration in quantity and transferred to
scrap 30 tons
9 Issues 80 tons
14 Issues 210 tons
20 Issued 210 tons
28 Issues 280 tons
31 Excess found in stock - 43 tons due to wrong weighing during
the month
The maximum level fixed is 400 tons, the minimum 75 tons and the re-
order level is 100 tons. Show the Stores Ledger Account under LIFO
system.
6. From the following records of receipts and issues of materials, write up

Stores Ledger Account for the month of January, 2013 by LIFO method.
1. Opening Balance 500 quintals @ ` 25
7. Issued 70 quintals
13. Received from vendor 200 quintals @ ` 24
14. Refund or surplus from a work order 15 quintals @ ` 24
20. Received from vendor

240 quintals @ ` 23

26. Issued 112 Pricing of Material Issued
quintals
27. Refund of surplus from a work order 12 quintals @ ` 25
A stock verifier of the factor noted that on 15th January he had found a
shortage of 5 quintals and on 28th January another shortage of 8 quintals. NOTES
7. The following particulars have been extracted in respect of “Material A’.
Prepare Stores Ledger Account pricing the material issue on the basis of
First In First Out (FIFO) method and Last In First Out (LIFO) method :
Receipts :
1-3-2012 Opening Stock 100 units at `

1.80
5-3-2012 Purchases 150 units at `

1.50

1.60

1.70
Issues :
8-3-2012 Issued 200 units
8. The following transactions took place in respect of material item.
Date Receipt Quantity Rate Issues

Quantity
2-3-2013 400 2.00 -
10-3-2013 300 2.20 -
15-3-2013 - - 250
18-3-2013 250 2.40 -
20-3-2013 - - 200
Prepare Stores Ledger Account on the basis of Weighted Average Price

Method
9. During January 2009, The Jagat Engineering Co. Ltd. effected the
purchase of a certain item of stores as under :

Pricing of Material Issued Purchases :
Date Units Total Amount in
2-1-2009 100 190

NOTES
15-1-2009 150 333
During the same period the details of the issues of the item were
under :
Issues :
Date Units
8-1-2009 50
20-1-2009 100
Besides on 1-1-2009 there was an Opening Balance of 160 units valued

for
` 200.
Enter the above transactions in the Stores Ledger under the Weighted
Average price Method.
10. The following figure relate, to Material ‘X’. Prepare Stores Ledger
Account showing receipt and issue, pricing the issue on the basis of
Weighted Average.
3-10-2009
1-1-2009 Purchases 300 units
Opening Stock@200
` 4units
per unit
@ ` 3.50 per unit
13-10-2009 Purchases 900 units @ ` 4.30 per unit
15-10-2009 Issue 600 units
23-10-2009 Purchases 600 units @ ` 3.80 per unit
25-10-2009 Issue 500 units
11. From the following information prepare Stores ledger account under Weighted
Average Price Method for the months of March 2014.
1st March : Opening Stock 300 pieces at ` 2
each Purchases :
5th March : 400 pieces at ` 2.20
each 10th March : 150 pieces at ` 2.40 each 20th
March : 180 pieces at ` 2.60 each

Issues : Pricing of Material Issued
6th March : 250 pieces
11th March : 100 pieces
21st March : 200 pieces

NOTES
On 31st March, 2014 the stock verifier reported that there was shortage of
10 pieces.
12. The following are details supplied by Modern Company Ltd., in respect
of its raw materials for the month of March 2012
Date 2012 Receipts (Issues)
March Units kg.
Units kg. Price per kg. `
1. 2,000 5.
7. 1,000 6.
10. 2,500
15. 2,000 7.
Show
31. the Stores Ledger Account under FIFO and LIFO system.
2,200
13. The stock in hand of a material as on 1-1-2014 was 500 units at ` 1 per unit.
The following purchases and issues were subsequently made. Prepare the
Stores Ledger Account under FIFO method.
Purchases Issued
6th Jan. 100 units @ ` 1.10 9th Jan.
500 units 20th Jan. 700 units @ ` 1.20 22nd Jan.
500 units 27th Jan. 400 units @ ` 1.30 30th Jan.
500 units 13th Feb. 1,000 units @ ` 1.40 14th Feb.
500 units 20th Feb. 500 units @ ` 1.50 22nd Feb.
500 units 17th March 400 units @ ` 1.60 11th
March 500 units.
III - Multiple Choice Questions
1. Under -------- method simplicity and convenience are lost when there is
too much change in the price of materials.
(a) LIFO
(b) FIFO
Pricing of Material Issued (c) Weighted average price
(d) Notional price
2. The objective of matching current costs with current revenues is not

achieved under the ---------- method of pricing material issue.
NOTES
(a) LIFO
(b) FIFO
(c) Weighted average price
(d) Notional price
3. Value of closing stock under ------- method can be well accepted for the
purpose of preparation of balance sheet.
(a) weighted average price
(b) LIFO
(c) FIFO
(d) Actual price
Ans. : (1 - c), (2 - a), (3 - a).
4. Match the pairs.
Group I Group II
(a) FIFO method i) Simple average of the price
(b) LIFO method ii) not popular method
(c) Base stock method iii) manufacturing process for long period
(d) HIFO method iv) material purchased last is used for

issues.
v) material purchased last remaining

in
stock.
Ans. : (a) - (v); (b) - (iv); (c) - (iii); (d) - (i).
8.7 Further Reading

1. ‘Advanced Cost Accounting’ - Nigam and Sharma Published by
2. ‘Cost Accounting’ - Jawahar Lal - Published by Tata Mc Graw

Hill Publishing Co. Ltd.
3. ‘Theory and Practice of Cost Accounting’ - M. L. Agrawal - Published by

218 Advanced Cost Accounting - I Sahitya Bhawan, Agra.
4. ‘Cost and Management Accounting’ - M. N. Arora - Published by
5. ‘Cost Accounting - Principles and Practice’ - N. K. Prasad
NOTES

Topic 3 Labour Costing
Unit 9 Meaning and Types of Labour
Unit 10 Time Keeping
Unit 11 Time Booking
Unit 12 Reconciliation of Time Kept and Time

Booking
Unit 9 Meaning and Types of Labour
Meaning & Types of Labour
Structure
1. Introduction
NOTES
2. Unit Objectives
3. Meaning and Importance of labour
4. Types of labour
1. Direct Labour
2. Indirect Labour
3. Casual Labourers
4. Out Workers
5. Types of workers on the basis of skill
5. Sections / departments dealing with labour activities
6. Labour turnover
1. Measurement of labour turnover
2. Causes of labour turnover
3. Cost of Labour turnover
4. Illustrations on labour turnover
7. Summary
8. Key Terms
10. Further Reading
9.0 Introduction
After studying information related to the first element of cost, viz. material
cost, we have to study information about the second element of cost, viz. labour
cost. In every manufacturing as well as service providing concern, labour is
required to be used for creating finished product from the materials or for
providing service to customers. Physical labour, skill and intelligence required for
this work is provided by human beings who are employed by the concerns. In
this unit, information about meaning and importance of labour and about types
of labour is provided.

9.1 Unit
Objectives
After studying the information given in this unit, you should
understand.
• nature and importance of labour as the second element of cost,
NOTES • different types of labour,
• organisation which deals with labour, and
• concept of labour turnover, different methods of calculating labour

turnover, causes and cost of labour turnover and treatment of labour
turnover costs.
9.2 Meaning & Importance of Labour

Labour is the contribution made by persons (workers) in creation of a
product or completion of a process or performance of an activity due to which a
work is completed. Labour is provided by human beings who are engaged by the
owners or management of a concern. Labour is the energy, knowledge and skill
provided by a worker which is required to treat, process and give the required
shape to the material so that the material is mixed, heated, cut moulded in the
required way so that the product as desired by the consumer becomes ready.
Labour cannot be separated from a labourer and it is required to be used
immediately because it cannot be stored like material. Labourer being a living
thing possesses mind, thinking power and feelings and so he should be treated
Check Your Progress properly. Labour is the second element of cost and the remuneration paid to
labourers is known as ‘labour cost’. Labour cost forms a substantial portion of
i) What is labour and why it the total cost of a job production order and in some industries which are known
is regarded as an
important factor of costs
as labour intensive industries the proportionate amount of labour cost incurred is
? more than the amount of materials cost incurred. Therefore, by treating the
ii) Distinguish between labour force property and by obtaining their willing co-operation the owners try
‘Direct Labour’ and
‘Indirect Labour’. to increase the output so that per unit labour cost is reduced.
iii) What are the types of
labour ?
iv) What sections or
departments deal with
9.3 Types of
labour activities ? Labour
All workers working in a concern provide labour but according to the
nature of their work they are classified among different types as under -
1. Direct Labourers
2. Indirect Labourers
3. Casual Labourers, and
4. Out Workers
9.3.1 Direct Labourers
222 Advanced Cost Accounting - I Direct labourers are those labourers who are engaged in the process of
manufacturing by doing the work of mixing of materials. heating the materials,
operating on machines for giving a certain shape to the processed material by
cutting, moulding and shaping and thus creating a finished product. All the
workers who are performing one or more of the above mentioned activities is
regarded as direct labour and the amount paid to them is termed as the direct
labour cost. The labour of these workers can be easily and conveniently related
NOTES
to the finished product or a component created by them.
Thus labour which can be identified with its output is regarded as direct
labour and the cost incurred for such labour is direct labour and the cost
incurred for such labour is recorded as direct labour cost. A machinist
operating a machine, a coal miner digging out the coal, a carpenter cutting and
fitting the pieces of wood for creating chairs, tables or other wooden furniture, a
worker working on a weaving machine for producing cloth, an electrician doing
the work of fitting wires and cables in a motor car are all examples of direct
labour.
2. Indirect Labourers
Those workers/employees who provide service to the direct labourers to

complete their work are known as indirect labourers. The labour provided by
the indirect labourers cannot be easily related to or identified with a particular
product, job or production order is the indirect labour and the cost incurred for
the indirect labourers is treated as indirect labour cost. Indirect labour cost is of
insignificant amount and it is incurred not for a particular job, order or product
but it is incurred as a common cost. A proportionate amount of total indirect
costs in charged to the production cost of each product, job or order. The cost
incurred on pay, allowances and for providing some statutory or voluntary
facilities is included in the total indirect labour cost. Security personnel,
employees working in purchase and stores department, workers engaged in
loading and unloading of materials and finished goods, canteen employees,
drivers and cleaners of vehicles, employees and foremen working in the factory
and other departments doing clerical type of work, etc. are some of the indirect
labourers. The cost of indirect labour is treated as factory overheads and it is
charged to the product, job order, process or an activity by using some
appropriate method.
3. Casual
Casual Labourers
labourers are not regular or permanent labourers of a concern.
They are unemployed workers in search of jobs. Before commencement of the
regular work in the factory they assembled at the gate of the factory with the
hope of getting some work for a day or two. The need for casual workers arises
when some regular and permanent workers remain absent and to replace them
for a day or more casual workers are given their work. Casual workers also
become necessary when there is sudden and temporary increase in the volume
of work. Normally, a foreman comes at the gate, makes enquiry with the persons
waiting there and selects the required number of workers who posses knowledge
of doing that work and takes them in the factory as casual workers. The casual
workers are paid remuneration on daily basis and they do not get any facilities
Meaning & Types of Labour which are provided to the permanent workers. Generally casual workers are
taken up for doing jobs of unskilled nature and their work is supervised by a
foreman or a senior worker. The casual worker is given a job card to record the
nature and amount of work done by him and payment of wages is made to him
on that basis. To avoid the risk of payment to casual or badaly workers, the
NOTES person who has selected him should not be allowed to make payment of wages
to him. This helps in controlling loss caused by payment made to dummy or
bogus workers.
4. Out Workers
In some time of production activities it is not necessary for the workers to

come to factory for carrying on production activities and the products are
completed by the workers at their homes. The owner gives them the required
quantity of raw materials and tools needed for creating the products. These
workers are known as ‘out workers’. They do the production work at home and
bring the products at the place of the concern and hand over the quantity
produced to the foreman or some authorised person and after checking those
products, payment of wages is made to them on piece-rate basis. As there is no
factory place the owner is not required to incur expenditure on rent, other
establishment charges and on facilities to be provided to the workers. However,
while receiving the products care should be taken to check the quality of the
products, to see that the materials provided to them are carefully used by them.
Services of out-workers are used in bidi industry, making products by
assembling and fitting components, preparation of potato- wafers, papads and
other eatables, etc. because they can be produced without using sophisticated
machinery.
5. Types of Workers on the Basis of Skill
Types of labour can also be stated on the basis of amount of skill

possessed by them. Accordingly, there are highly skilled workers, skilled
workers, semi- skilled workers and unskilled workers. According to the nature
of work and the amount of skill required for the work appropriate type of
workers are appointed in the factory. Highly skilled workers get more
remuneration and as the degree of skill decreases, the remuneration rate also
reduces.
9.4 Sections / Departments Dealing with Labour
Activities
In medium and large size concerns to deal with the various activities
related to the labour following sections or departments are established :
1. Personnel Department,
2. Engineering Department,
3. Time-keeping Section.
4. Remuneration and Payroll Department, and

5. Cost Accounting Department. Meaning & Types of Labour
1.Personnel Department : This department is responsible for making

available the right type of workers and other employees including managers and
executives in the right number, at the right time to the concern. It is also
responsible for preparation the volume of the work, the possibility of changes in
this volume and the category of the personnel needed. The vacancies arising due NOTES
to retirement of present employees, resignation, death and termination of
services of employees by the management. Taking into consideration when
these employees will be required, the personnel department is required to
publish advertisements in appropriate newspapers and journals inviting
applications from suitably qualified and experienced persons, arrange for their
tests and interviews. The personnel department issues appointment letters to the
selected candidates. It has to arrange for training of the fresh employees and has
to maintain record for each employee right from his appointment upto his
retirement. Matters related to promotion, demotion, disciplinary action and
facilities to be provided to the employees are also required to be conducted by
the personnel department. In present times helping to maintain good industrial
relations is also regarded as the work of the personnel department.
2.Engineering Department : Planning and scheduling of the jobs to be

performed by the workers, doing job analysis, conducting time and motion
studies and paying attention to the efficiency and safety of the workers is the
main responsibility of the engineering department.
3.Time-keeping Section : Time-keeping is the work of recording the in- coming

time and out-going time of each worker. By using suitable methods the
reporting time and the departure-time of each employee is recorded by the
persons working in the time-keeping section so that attenandance time, the time
spent by workers on different jobs, the normal time and over-time work done by
the workers and total time for which remuneration is to be paid to them can be
properly worked out. Basic data required by remuneration and payroll
department for calculating the remuneration payable to the workers is provided
by the time-keeping section.
4.Remuneration and Payroll Department : According to the time worked or

quantity produced by each worker and by taking into consideration the rate
applicable to each worker, the work of calculation of remuneration of workers is
the work performed by the remuneration and payroll department. Gross amount
of remuneration made up of basic pay, dearness and other allowances, incentive
payment, if any, is shown in the wage sheet and deductions on account of
provident fund contribution of the worker, employee’s state insurance
contribution and any recovery of loan or advance taken by the employee,
amount of fine charged to the employee and any contribution the employees’ co-
operative society are also recorded against the name of the employee/worker.
Net amount of remuneration payable to the worker is recorded and on actual
disbursement made to the worker his signature is taken on the wage sheet as a
proof of payment made to the worker. Preparation and maintenance of the
wage-sheets and payrolls is a statutory requirement of every concern.

5. Cost Accounting Department : Cost accounting data related to labour is
collected by this department along with cost data of materials, overheads to
calculate the cost of various jobs, production orders, processes, etc. Analysis of
labour cost as direct and indirect labour cost and preparing and submitting the
labour cost reports to the management for information and control of cost is also
NOTES the responsibility of the cost accounting department.
5. Labour Turnover
Labour Turnover is the loss of employment in an organisation. It is a
national problem of every nation and leads to high costs and low productivity
The extent of Labour Turnover various according to industry, structure of
employment in the country; ratio of male and female in labour force, and
infrastructure of a particular organisation. Although the cost of labour turnover
is high in these days, very little effort has been made to collect, classify and
compare the cost of labour turnover. A detailed study of the causes of labour
turnover, analysis and comparison of cost of such turnover may help in
controlling the situation.
In all business organisations, it is a common feature that some workers

leave the employment and new workers join in place of those leaving. This
change in work force is known as Labour Turnover. Labour Turnover is thus
defined as the rate of change in the composition of the labour force in the
organisation. Labour turnover varies greatly between different trades and
industries. For example, where part time and seasonal labour is employed, the
rate will be higher.
1. Measurement of Labour Turnover
To facilitate the comparisons between different periods and different

undertakings, labour turnover may be expressed in a rate. There are three
alternative methods by which this rate is computed. Once a particular method is
used, it should be consistently followed for comparative analysis. The methods
are :
1) Separation Method
Number of workers left during a period
LabourThis method
Turnover takes
Rate = into account only those workers who have left during
x 100 a
particular period. The formula is :
Average Number of workers during the period
Number of workers Number of workers
+
at in the beginning end of the
Average Number = x 100
period 2
Multiplication by 100 in the above

formula indicates rate in percentage.
2) Replacement Method
This method takes into account only

those new workers who have joined
in
place of those who have left. Its formula is : Meaning & Types of Labour
Number of workers replaced during the

Labour Turnover Rate period x 100
= Average Number of workers during the period
If new workers are engaged for expansion programme or any other such
purpose they are not considered for this computation. NOTES
3) Flux Method
This shows the total change in the composition of labour force due to
separations and additions of workers. The formula is :
Number of
workers left + workers replaced
Labour Turnover Rate = Number of x 100
Average Number of workers during the period
EXAMPLE
Bharat Foods Product Ltd., supplies you the following

information.
Number of workers on 1 April 2009 80
Number of workers on 30 April 2009 100
Number of workers resigned 07
Number of workers discharged 02
Number of replacements 08
Calculate labour turnover rate.
SOLUTION
80 + 100
Average number of workers = = 90
2
Number of workers left =7+2= 9
Number of workers left

1) Separation Rate = x 100
Average Number of workers
9
= x 100 = 10 %
90
Number of workers replaced

2) Replacement Rate = x 100
8
= x 100 = 8.8 %
90
Number of workers left +
Number of workers replaced
3) Flux Rate = x 100
9+8
NOTES = x 100 = 18.8 %
90
9.5.2 Causes of Labour Turnover
Labour turnover reports should be prepared regularly to be placed before

the management, giving a breakdown of the causes as why the workers left. The
causes may be classified in three broad categories :
i) Avoidable causes
ii) Unavoidable causes
iii) Personal causes
1) Avoidable Causes :
These include :
a) Redundancy due to seasonal fluctuations, shortage of raw materials,

contraction in market demand, Government and technological
unemployment etc.
b) Dissatisfaction with
i) low remuneration, ii) job, iii) long hours of work, iv) bad working
conditions, v) locality or environment.
c) Discrimination between one worker and another.
d) Bad relation with subordinates, fellow workers, supervisions and

management.
e) Lack of :
i) transport, ii) accommodation, iii) proper recreational facilities, iv)

proper welfare measures, v) proper training facilities, and vi) proper
promotional avenues.
f) Inadequate protection from accidents
g) Disputes between rival trade unions
2) Unavoidable Causes :
These are due to :
a) Personnel betterment,
b) Retirement,
c) Sickness, Meaning & Types of Labour
d) Accidents,
e) Death,
f) Domestic
responsibilities, NOTES
g) Pregnancy or marriage,
h) Move from locality,
i) National service,
j) Dismissal or discharge due to insubordination, negligence,

inefficiency unauthorised long absence, criminal prosecution etc.
3) Personnal Causes :
Workers may leave employment purely on personal grounds e.g.
a) Dislike for the job, locality or environments,
b) Domestic troubles and family responsibilities,
c) Personal betterment,
d) Retirement due to old age and illness,
d) Marriage of girls.
Effect of Labour Turnover :
A certain amount of labour turnover will always take place. To a limited

extent this may be welcome particularly at the lower management level in that it
creates vacancies for internal promotions and maintains the morals high for the
young and the ambitious. Moreover, new workers bring new ideas and methods
of doing work from other concerns.
Labour turnover is expensive and generally it should be minimised

because it results in increased cost of production for reasons stated below.
Labour Turnover due to avoidable causes is not only a loss to the

individual but also a loss to the organisation, industry and the nation as a
whole.
High Labour Turnover
High Labour Turnover results in increased cost of production due to the

following reasons. :
i) Increased cost of selection, training of new workers.
ii) Costs connected with new entrants such as accidents, breakage of tools,
spoilage of finished products etc.
iii Delay in production.
)
Meaning & Types of Labour iv) Efficiency of new workers becomes very low and hence productivity will
also be low.
v) Increase in cost of scrap, defective work and additional supervision

etc.
vi) Decrease in overall production due to lack of desired efficiency of new
NOTES workers and due to lack of desired efficiency of new workers and due to
time lost between the leaving of staff and recruitment of new workers. In
addition, there will be reduction in sales and loss of goodwill with
Check Your Progress customers.
Low Labour Turnover
i) What is the meaning of
‘Labour Turnover’ ?
In the senior grades of factory, employment may not be a good thing
ii) What are the causes of
labour turnover ? because there will be few possibilities of promotion for the young workers who
iii) How learn turnover can will be forced to leave the organisation for future advancement. This also
be measured under results in increased labour cost per unit of production because of high wages of
different methods ?
existing senior workmen.
iv) Explain how labour
turnover cost is
measured. 9.5.3 Cost of Labour Turnover
The cost of labour turnover may be broadly classified into two broad
categories viz. Preventive costs, and Replacement costs.
i) Preventive Costs
These costs are those which are incurred to keep the work force satisfied
and to prevent or discourage them from leaving the organisation. These include :
a) Cost of Personnel Management : Only that portion of this cost

which can be attributed to the efforts of the personnel department in
maintaining good relations between management and workers.
b) Cost of welfare activities and services, e.g. canteen, meals, co-

operative stores, educational and transport facilities, housing schemes
etc.
c) Cost of medical services.
d) Pension schemes to provide security and retirement benefits.
e) Extra bonus and other perquisities (in excess of those given by other
similar concerns) to discourage their defecting to other undertakings.
ii) Replacement Costs
These costs include all such losses and wastages arising because of the
inexperienced new labour force replacing the existing one as well as the cost of
recruitment and training of the new workers. These include :
a) Cost of recruitment and selection of new employees.
b) Cost of training of new workers.
c) Loss of output due to some time gap in obtaining new workers.

d) Loss due to inefficiency of new workers. Meaning & Types of Labour
e) Cost of accidents due to lack of experience of new workers.
f) Cost of scrap and defective work of new workers.
g) Cost of tools and machine breakdown due to faulty handling by new

workers. NOTES
Reduction and Control of Labour Turnover
Labour turnover may be reduced by taking action on the basis of
avoidable causes given earlier. The following steps may be taken in this regard
a) Divising a suitable and satisfactory wage policy.
b) Providing working conditions conductive to health and efficiency.
c) Impartial and sympathetic attitude of personnel management.
d) Introducing financial and non-financial incentive plans.
e) Providing promotional opportunities.
f) Encouraging labour participation in management.
g) Introducing an effective grievance procedure.
h) Strengthening the welfare measures.
9.5.4 Treatment of Cost Labour Turnover
The Preventive cost of labour turnover should be apportioned to various

departments on the basis of number of workers in each department.
Regarding the replacement costs, if the replacement is due to the fault of

a particular department, it should be directly charged to that department. If
labour turnover is due to the defective management policy, the replacement cost
should be apportioned to various departments on the basis of number of
workers in each department.
i) Working of Cost
The cost of labour of Labour
turnover Turnover
may be worked out as :a percentage of sales
or per worker employed as follows :
Total cost of labour turnover

x
1
0
Total cost of labour turnover
or 0
Average number of workers employed
S
a
l Advanced Cost Accounting - I 231
e
s
ii) Preventive costs should be apportioned to the different departments in
proportion to the number of employees in each department.
iii Replacement costs are to be allocated to the concerned departments on

) the basis of the number of persons engaged in that department.
NOTES
FORMULAE
Meaurement of Labour
Turnover :
1) Separation Method : NS
x 100
AW
Number of workers left in a

Labour Turnover Rate = period x 100
Average Number of workers on the payroll in the
period
2) Replacement Method : NR
x 100
AW
Number of workers replaced in a period

Labour Turnover Rate = x 100
Average number of workers on the payroll in the period
3) Flux Method : NS + NR
x 100
A W
+
left in a period replaced in a
Labour Turnover Rate = period x
100 Average Number of workers on the payroll in the period
9.5.5 Labour Turnover
ILLUSTRATION 1
The extracts from the payroll of Air Cooler Co., Ltd., Ahmedabad is as
follows :
Number of workers on 1-3-2012 150
Number of workers on 31-3-2012 200
Number of workers resigned 20
Number of workers discharged 8
Number of workers replaced due to resignations and discharges 21
Calculate the labour turnover rate during the month under different
methods.

SOLUTION
Calculation of average number of workers on the payroll in the month of March,

2012.
Number of workers on 1-3-2012 + Number of workers on 31-3-2012
=
2 NOTES
150 + 200
=
2
350
=
2
= 175 workers
Calculation of Labour Turnover Rate :
1) Separation Method :
Number of workers left in a period

28
= x 100
175
= 16 %
2) Replacement Method :

21
= x 100
175
= 12 %
3) Flux Method :
+
28 + 21
= x 100
175
= 28 %

ILLUSTRATION 2
From the following particulars supplied by the personnel department of Balaji

Co., Badalpur calculate the labour turnover.
Total number of employees on 1-6-2012

NOTES
2,007 Number of employees left and discharged during the month
120 Number of employees recruited during the month
60 Total number of employees on 30-06-2012
1,993 SOLUTION
Calculation of average number of workers on the payroll in the month of June,

2012.
Total number of Total number of
+
employees on 01-06-2012 employees on 30-06-2012
=
2
2,007 + 1,993
=
2
4,000
=
2
= 2,000 employees

Average Number of workers on the payroll in the period
120
= x 100
2,000
= 6%

60
= x 100
2,000
=3%

3) Flux Method :
+
120 + 60
= x 100 NOTES
2,000
180
= x 100
2,000
=9%
ILLUSTRATION 3
The personnel department of Duplex Co. Ltd., Dombiwali has supplied

the following information relating to its work force during the month of
January 2012.
Number of workers on 1.1.2012 900
Number of workers on 31.01.2012 1,100 During the month 15 persons
quit and 25 persons are discharged. 150

workers were engaged out of them 20 persons were appointed in the vacancy
caused. Calculate labour turnover rate during the period under different methods.
SOLUTION
Calculation of average number of workers on the payroll in the month of January,

2012.
=
Number of workers on 1.1.2012 + Number of workers on 31.1.2012
2
900 + 1,100
=
2
2,000
=
2
= 1,000 workers

Average Number of workers on the payroll in the
period
40
= x 100
1,000
= 4%

NOTES 20
= x 100
1,000
=2%
3) Flux Method :
+
40 + 20
= x 100
1,000
60
= x 100
1,000
=6%
ILLUSTRATION 4
From the following data given by personnel department of Duckback Co.

Ltd., Delhi, calculate the monthly and annual labour turnover rate by applying
different methods.
Number of workers on payroll -
i) At the beginning of the month 853
ii) At the end of the month 1,147
During the month 10 workers left, 40 workers were discharged and 150
workers were newly recruited of these 25 workers were recruited in the
vacancies of those leaving, while the rest were for an expansion scheme.
SOLUTION
Calculation of average number of workers on the payroll in the month

Number of workers at the beginning of the month +
Number of workers at the end of the month
=
2
853 + 1,147
=
2
2,000
=
2
236 Advanced Cost Accounting - I = 1,000 workers
Calculation of Labour Turnover Rate : Meaning & Types of Labour

Average number of workers on the payroll in the
period
50 NOTES
= x 100
1,000
= 5%
Monthly Labour Turnover Rate = 5%

5 x 365
Annual Labour Turnover Rate = = 60.83%
30

Average number of workers on the payroll in the
period
25
= x 100
1,000
= 2.5 %
Monthly Labour Turnover Rate = 2.5 %
2.5 x 365
30
3) Flux Method :
+
50 + 25
= x 100
1,000
75
= x 100
1,000
= 7.5 %
Monthly Labour Turnover Rate
= 7.5 x 365
30
7.5 %
ILLUSTRATION 5
During February 2012, the following information was obtained from the
personnel department of Moderate Co., Malegaon. Labour force at the beginning
of the month, 1,767 and 2,233 at the end of the month. During the month 60
NOTES persons were discharged and 20 left the company, During the month 200 workers
were engaged out of which only 40 workers were appointed against the vacancy
caused by the number of workers separated and the remaining on account of
extension programme of the company. Calculate the labour turnover rate and
equivalent annual rate under :
i) Separation method
ii) Replacement method and
iii) Flux method
SOLUTION
Calculation of average number of workers on the payroll in the month of

February, 2012.
Number of workers on 1.2.2012 + Number of workers on 29.2.2012
=
2
1,767 + 2,233
=
2
4,000
=
2
= 2,000 workers
1) Seperation Method :

80
= x 100
2,000
= 4%

366* x 4
Annual Labour Turnover Rate = =
50.48%
29
238 Advanced Cost Accounting - I Average Number of workers on the payroll in the period
40
x 100
=
2,000
=2 %

NOTES
366* x 2
29
3) Flux Method :
+
80 + 40
= x 100
2,000
120
= x 100
2,000
=6 %

366* x 6
29
* 2012 being a leap year.
9.6 Summary
Labour cost is the second element of cost. It is an important element of
cost since it forms a substantial portion of the total cost of a product. Labour is
provided by human beings who provide physical, intelligence power, skills which
are required for creating a final product from the materials. There are various
types of labour such as direct labour, indirect labour, casual labourers, out
workers and depending upon level of skill possessed by labourers skilled, semi-
skilled labour and unskilled labour. An organisation is established consisting
of personnel department, engineering department, time-keeping section,
remuneration and payroll departments and cost accounting department. Such
organisation looks after various activities related to labour. Labour turnover is a
problem faced by all industries and by all nations. Measurement of labour
turnover is done by using separation method, replacement method and flux
method. It is important to find out causes of labour turnover, cost of labour
turnover and efforts are required to be made to minimise labour turnover and its
cost.

9.7 Key
Terms
i) Labour : It is the contribution made by workers in creation of a product,
or completion of a process or performance of an activity due to which a
work is completed.
NOTES
ii) Direct Labour : Labour which can be
identified with its output easily.
iii Direct Labour Cost : Cost incurred for the direct labour.
)
iv) Indirect Labour : Labour provided by workers to direct labourers and
which cannot be easily identified with the output. Indirect labour is mostly
in the form of services provided by indirect workers to the direct
workers.
v) Indirect Labour Cost : Cost incurred for the indirect labourers. It is also
known as factory overheads.
vi) Casual Workers / Labourers : Workers who are not permanent workers
of an enterprise. According to the need of a concern, they are temporarily
taken up for doing the work, from unemployed labourers assembling
outside the gate of the concern.
vii Out Workers : Out workers do not work in the factory premises but
) perform the work assigned to them of their homes or perform it at the
customers’ homes or offices if it is a service to be provided.
viii Labour Turnover : It is the changes in the work-force of an enterprise

) during a certain period due to some workers leaving their jobs and new
workers joining the enterprise in that period.
9.8 Questions and Exercises

I - Multiple Choice Questions
(1) Disbursement of wages is the labour function of ----------- department.
(a) time keeping
(b) time booking
(c) payroll
(d) store
(2) Indirect labour costs are not ----------- with the production of specific
goods or services.
(a) identifiable
(b) negotiate
(c) recorded
240 Advanced Cost Accounting - I (d) allocated

(3) High remuneration attracts ----------- labour force. Meaning & Types of Labour
(a) highest
(b) efficien
t
(c) casual NOTES

(d) temporary
Ans. : (1 - c), (2 - a), (3 - b).
(4) Match the pairs.
Group I Group II
(a) Direct labourers (i) ‘No remuneration’
(b) Indirect labourers (ii ‘do production work at home’.

)
(c) Casual labourers (iii ‘unemployed workers’
)
(d) Out workers (iv) ‘provide services to direct
labourers.’
(v) ‘doing the work of mixing of

materials.’
Ans. : (a) - (v); (b) - (iv), (c) - (iii); (d) - (ii)
II - Theory Questions
1. Explain meaning and importance of labour cost.
2. Explain types of labour and give examples of each type of labour.
3. Distinguish between ‘direct labour’ and ‘indirect labour’.
4. What do you understand by the term ‘labour turnover’? state methods

used for calculating labour turnover ?
5. What are causes of labour turnover? What care should be taken to keep
labour turnover to minimum ?
6. Explain the cost of labour turnover. ‘Zero labour turnover should be the
target of a good industrial concern’. Do you agree with the statement ?
9.9 Further Reading

iii) ‘Cost Accounting - B. K. Bhar
A
d
v
a
n
iv) ‘Advanced Cost Accounting - Nigam and
Sharma
v) ‘Theory and Practice of Cost Accounting’ - M. L. Agrawal.
NOTES

Unit 10 Time Keeping Time Keeping
Structure
1. Introduction
NOTES
2. Unit objectives
3. Time keeping
1. Meaning and importance
2. Methods of time keeping
3. Summary
4. Key Terms
5. Questions
6. Further Reading
7. Introduction
In every manufacturing as well as service providing enterprise a
number of workers and other employees are appointed to perform certain work
assigned to them. They work in different sections and department for co-
ordinating their work and for smooth functioning of the enterprise there is a
particular time at which they are they should report for work and a certain time
upto which they should remain present. When the number of workers and
employees is a large number a separate arrangement for recording the ‘in’ time
and ‘out’ time has to be made which is known as ‘time-keeping’ arrangement. In
this Unit we shall study information related to this arrangement in detail.
8. Unit objectives
After completing study of information given in this unit, you should be

able to understand :
• Time keeping and its importance;
• Different methods - manual and mechanical of time keeping; and
• Now a particular method is selected for time keeping by an enterprise.

Time Keeping
10.2 Time Keeping
In every factory there is an arrangement made for recording the
attendance and in as well as out time of the workers working in the factory. The
section or department doing this work is called ‘time-keeping section or
NOTES department.’
10.2.1 Meaning and Importance :
Time keeping means recording in and out time of the workers. Working of a
factory is an organized activity and to carry on this activity efficiently and
smoothly, it is necessary that the workers appointed for doing different types of
work should be available in the factory. Every factory decides the time at which
the work should begin and the time upto which the work should be carried on.
According to the volume of work, the number of workers and the space of the
factory the management decides whether the factory should operate in one, two
or three shifts and fixes the working hours for each shift. While deciding the
working hours the management should follow the provisions given in the
Factories Act. Provision is also made for lunch-break and tea-break for the
workers. Hours fixed for each shift are known as ‘normal hours’ and if workers
work over and above the normal hours, the additional time worked by them is
the ‘over-time’ work done by them and for over-time wages are paid at higher
rate which may be one and half times or at double of the normal rate of wages.
Time-keeping is, thus, a systematic arrangement made by the management

to record attendance and in-coming and out-going time of the workers. Time
Keeping is important due to the following reasons:
1. It is a statutory requirement.
2. It is a basis for preparation of wage-sheets and payrolls.
3. It shows the attendance of the workers and helps in maintaining regularity

and discipline among workers.
4. Calculation of normal wages and over-time wage becomes possible on the

basis of information available from time-keeping records.
5. Certain benefits like pension and gratuity, leave with pay, provident fund
are provided by considering the continuity of service of the employees.
Also decisions regarding promotion, disciplinary action to be taken
against the employee are taken by considering regularity and punctuality
of the employees which becomes available from the time-keeping
records.
6. When overheads are to be apportioned by using the method of labour

hours or labour cost, time-keeping becomes essential. [More information is
provided about this in the unit of overheads.]
10.2.2 Methods of time-keeping :
Methods used for time-keeping can be divided into two categories as

under:
Time Keeping
A] Manual Methods, and
B] Mechanical Methods.
A) Manual Methods :
In these methods the work of recording attendance as well as recording in- NOTES
time and out-time is done either by the workers themselves or by the time-
keeper/ time clerk appointed to do that work and no mechanical device is used
for doing it. Under manual methods there are two methods available as under:-
i) Attendance Register or Muster Methods :
Under this methods a register is maintained for time-keeping. In this

register names of the workers are written as per their seniority or department
wise, columns are provided against name of each worker for recording identity
number and for recoding in-time and out-time with signature or initials of the
worker for a period of one month. The attendance register is kept on a desk near
the gate of the factory premises. When a worker reports for work, he goes to the
desk and puts his initials with the time he is reporting and then goes to his
department . When the worker is going out the same procedure is repeated by
him and thus his out-time is recorded in the register. When the workers are
allowed to leave the factory premises for lunch-break, the out-time and in-time
is required to be recorded by them. Some time recoding of in and out-time is
done by the time-clerk or time- keeper.
If the number of workers is large, instead of a single register separate

registers for each department may be kept to avoid delay in recording the in and
out time.
For a small size factory employing limited number of workers the

registers method is very suitable. Once the procedure is explained to the
workers they can easily follow it. It also does not require investment of large
amount to operate it. The recorded and completed registers can be bound
together and preserved for any time.
The method suffers from two defects. First defect is that the timings
recorded by the workers may not be accurate because the worker may write the
timings to show that he is very punctual.
The second defect of the method is that a workers may record the
attendance of on absent or late-coming worker who is his friend by imitating his
initials and detection of this is very difficult.
ii) Token or disc method :
In this method metal tokens or round metal discs are prepared. Each
worker is given an identity number and it is either painted or engraved on a
token or disc. The token or disc has a hole in it so that it can be hung from a
hook or nail. A board is prepared having sufficient nails or hooks attached to it.
The tokens or discs are hung in serial order and it is kept just inside the factory
gate. A similar
A
a
Time Keeping broad is kept near the time-keepers cabin. When a worker arrives for joining his
duty, he goes to the board, removes the token or disc bearing his number from
the board and hangs it on the board kept near the cabin of the time-keeper.
When the time allowed for reporting to the work is over, the time-keeper
removes the second board and keeps a box having a slot at its top in the place
NOTES of the board. A workers reporting late has to put his token or disc in the box or
he may be required to hand over the token or disc personally to the time-keeper
who notes down the time of reporting in the register. The tokens still hanging
from the first board indicate the workers who are absent on that day and the
time-keeper does the absence recording in the register. The tokens hanging
from the second board show the workers who have reported for the work within
the time allowed and their presence is recorded by the time-keeper. Similarly
the tokens put in the box by late-comers are removed from the box and the late-
timing is recorder in the register against the names of the workers bearing those
token numbers. The same procedure is repeated when workers go-out from the
factory. Only tokens of workers who are present for work are hung on the
second board and when the worker goes out he takes his token and hangs it on
the board kept near the gate. After the regular working hours are over, the
tokens still hanging from the second board indicate the workers who are
working over-time.
Token or disc method can be used for any number of workers by preparing
required number of tokens and by using separate boards bearing a fixed number
for each board.
This method suffers from the defect that a worker may remove his own token
and also token bearing his friend’s number and hang them on the other board
thus recording his own as well as his absent or late-coming friend’s presentee.
Strict supervision at the board will become necessary to see that each worker
takes only one token from the board.
B) Mechanical Methods :
Mechanical methods make use of some mechanical device for recording

the time of arrival and time of departure of each worker. The mechanical
methods are used by concerns of medium and large size who employ large
number of workers and who can afford to make initial investment in the
mechanical devices. The mechanical devices require a shorts time for recording
in-coming and out- going time of workers, the time is recorded automatically
and is not required to be handwritten, and this eliminates disputes between
workers and time-keeper about correctness of the time recorded by the time-
keeper and the paper or cards on which the time is printed can be used for
preparation of wage-sheets and payrolls and coping the timings does not
becomes necessary.
Mechanical methods are of following types :-

i) Time-recording Clock Method,
ii) Dial Recording Method, and
iii Key Recording Method.

246 Advanced Cost Accounting - I )
Time Keeping
i) Time-recording Clock Method
In this method each worker is given a card bearing name of the worker,
his number, name of the department in which he works. There are columns
provided for recording ‘in’, ‘out’, ‘in’, ‘out’ timings for each day. A card covers
the period of one week after which a fresh card is prepared for the worker.
These cards are serially arranged on a tray and the tray is kept on a table inside NOTES
the factory gate. When a worker enters into the gate, he picks up his card from
the ‘out tray’, inserts it inside the clock at proper place so that the clock records
his in-time for the day. The worker takes out his card, checks the time recorded
and places the card in another tray known as ‘in-tray’. Same procedure is
repeated by the worker when he wants to record his ‘out-time’ only difference
being that he takes the card from ‘in-tray’ and after the clock has recorded the
out time he places it in the ‘out-tray’. The clock has an additional feature of
recording late-timings and over- times in red ink so that these entries of timings
are immediately noticed by the time-keeper. It is necessary to keep the
recordings under the observation of the time-keeper so that every worker will
take only his card for doing the time recording and possibility of recordings of
time for a ‘dummy’ or ‘ghost’ worker is eliminated. A specimen of a time-card
or clock card is shown below.
------------ Co Ltd.
Time card
Name of the worker Department --------

----------
No. Week ending -------
-------
Day Morning Afternoon Normal Over-
time
In Out In Out
Hours Hours
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Norma Hours Rate per hour Amount ( ` )

l
Overtime --- --- -------
-
Total --- --- -------
-

Time Keeping ii) Dial Recording Method
In this method a dial recorder is used for recording in and out time of the
workers. The recorder has a dial and on the dial there are about 160 holes. Each
hole bears a number and each worker is given his identity or token number, these
numbers corresponding to the numbers given to holes on the dial. The dial
NOTES
recorder also has a dial arm at the center of the dial. The dial recorder also has a
dial arm at the centre of the dial. When a worker enters the gate of the factory
he goes to the dial recorder, moves the dial arm to the hole bearing his identity
number and presses the dial arm into that hole. When this is done, on the roll of
the paper kept inside the dial recorder the number of the worker and the time the
dial arm was pressed by the worker are automatically printed. Same procedure
is followed by the worker to record his out-time. At the end of the month the
paper roll is taken out from the dial recorder and a new paper roll is fitted in the
clock recorder. The paper roll on which the number and the in-coming and out-
going time of the workers are printed can be used for calculating the hours-
normal and overtime-of each worker and for preparation of payrolls.
Advantages :
1) It is suitable for a medium or large-scale unit employing a large number of

workers. For a group of 150 to 160 workers one dial recorder can be
provided and providing separate dial recorders, any number of workers
can be covered.
2) The method is simple to understand and easy to follow.
3) Since the timings are, automatically printed, they are accurate and
workers complaints about wrong time recorded by the time-keeper do not
take place.
4) Information about hours worked by the workers makes the work of

payroll department easy.
Disadvantages :
Check Your Progress
1) For using this method a lot of investment is needed and so small-size units
i) What is meant by ‘Time
Keeping’ ? Why it is do not use it.
regarded as important ?
ii) Which methods are used 2) Printing of timing is done on paperroll kept inside the dial recorder. So
for time-Keeping ? workers cannot see the recording to verify the correctness of the time
iii) Explain briefly following recorded.
methods of time keeping:
a) Muster / Attendance 3) If proper supervision at the dial recorded is not provided, a worker can easily
Register Method
record timing for his worker-friend who is absent or is reporting late for
b) Token or
the work.
c) Time-Recording Clock
Method
iii) Key Recording Method
d) Dial Recording Method
e) Key Recording Method It is a method similar to the dial recording method. A key recorder has
many holes on the dial of the recorder. There are many keys and each key has a
number which is same as the identity number given to a worker. When a worker
reports for work he picks up the key bearing his identity number and inserts it in
248 Advanced Cost Accounting - I the proper hole on the dial and gives it a turn. This result in recording the
number
Time Keeping
and the time at which the key was given a turn by the worker. This information
is printed on the paper roll kept inside the recorder. The worker takes out the
key and puts it in the tray kept near the recorder. Then the worker goes to the
department in which he has been appointed. When the worker leaves the factory
at lunch- break and or in the evening the out-time is recorded by following the
same procedure. On the basic of his in-time and out-time total time for which
he was present in the factory premises can be calculated. Division of the total NOTES
time in normal hours and over-time hours is shown and using the normal rate
and overtime rate applicable to the worker the pay roll department calculates
his normal wages, over-time wages and total wages payable to the worker.
Deductions to be made are shown separately and the net amount of wages to be
paid to the worker are shown.
This method has advantages and disadvantages which are similar to dial
recorder method.
3. Summary
Time keeping is an arrangement made by the enterprise to record ‘in time’
and ‘out time’ for each worker and employee. In time means the time at which a
worker enters through the gate of the enterprise and out time means the time he
goes out of the gate. In other words, the total time for which a worker was
present in the premises of the enterprise becomes available through the time
keeping record. Similarly whether a worker was present or absent on all working
days of the enterprise can also be found out by using the time keeping record. If
the enterprise operates in two or three shifts, the time keeping for workers of
each shift is required to be made. Time keeping is a statutory requirement of the
management of an enterprise.
Time keeping may be done by a time keeper or by the worker. According

to the number of workers employed in an enterprise either manual method of
time keeping or mechanical method of time keeping may be selected. Under
manual method ‘attendance register/muster method’ and ‘token or disc method’
are the two methods available while under mechanical method ‘time recording
clock method’, ‘dial recording method’ and ‘key recording method’ are the
three methods available. Each method has certain advantages and disadvantages
which should be carefully considered before selecting a particular time keeping
method by an enterprise.
4. Key Terms
i) Time Keeping : Reducing of ‘in’ and ‘out’ time of each worker present in
the factory.
ii) Time Keeping Section / Department : The Section or the Department

which is assigned the work of time-keeping.
A
d
v
a
n
c
e
Time Keeping iii) Token or Disc : Made from some metal a token or disc bears the number
alloted to a worker. The number is either painted or engraved on the token
or disc.
NOTES 10.5 Questions

1. ‘Time keeping’ is the recording of the ----------- of a worker.
(a) performance
(b) attendance
(c) efficiency
(d) job satisfaction
2. To maintain discipline and regularity in attendance is the main objective

of
---------- department.
(a) Time-keeping
(b) Time-booking
(c) Payroll
(d)Production
Ans. : (1 - b), (2 - a).
3. Match the
pairs. Group I Group II
(a) Muster Method (i) ‘Key Recording Method’
(b) Token or Disc Method (ii) ‘In-tray’ and ‘out-tray’
(c) Dial Recording Method (iii) ‘The roll of the paper’
(d) Time Recording Clock Method (iv) ‘Sufficient nails or hooks

attached’
(v) ‘Attendance Register’
Ans. : (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii).
1) What is ‘Time-keeping’? State manual and mechanical methods of time-

keeping.
2) Explain manual method of time-keeping stating merits and demerits of

them.
3) Explain mechanical method of ‘Time-keeping’. Briefly mention Time Keeping
advantages and limitations of these method.

i) ‘Cost Accounting’ - Jawahar Lal NOTES
iii) ‘Cost Accouning’ - B. K. Bhar
iv) ‘Advanced Cost Accounting - Nigam And Sharma.

Unit 11 Time Booking Time Booking
Structure
1. Introduction
NOTES
2. Unit Objectives
3. Time Booking
1. Meaning and Necessity
2. Methods of time booking
3. Summary
4. Key Terms
5. Questions
6. Further Reading
7. Introduction
In the previous Unit we have studied time keeping and methods used for
time keeping. Time keeping gives in time and out time or arrival time and
departure time of every worker. However, this information is not sufficient for
calculations for labour cost. A worker is paid remuneration of the basis of time
spent by him in doing the work assigned to him. A worker may do only one job
or he may do different jobs on one day. For calculating the labour cost of a job
the actual time spent by a worker on that job is taken into consideration.
Arrangement made for recording ‘on-time’ (starting time) and ‘off-time’ (stop
time) is called time booking arrangement. By considering actual working time
of all workers who have performed work of that job and the wage rate
applicable to each such worker, the labour cost of the job or process or
operation can be calculated.
8. Unit Objectives
• Understand meaning and need for time booking;
• Know the various methods available for doing time booking; and
After studying information given in this unit you should be able to :-
• Prepare the documents used under different methods of time booking.

Time Booking
11.2 Time Booking
Time-Booking means recording of time spent by workers on job, product
or process. It is not sufficient to do time-keeping, i.e. recording of in-coming
and out- going or arrival time and departure time. How much of the attendance
NOTES time of a worker is used by him for doing the work assigned to him is required
to be found out by the management of the concern. Workers are paid
remuneration for doing the work and not for merely remaining present in the
factory premises.
11.2.1 Meaning and Necessity :
Time- Booking is a systematic arrangement to find out how much time the
workers have used for performance of a job, activity, process or production
work. When a worker reports for work in a section or department, the supervise
or foreman of the section/department informs him which work is to be done by
the worker. It may be a particular job, process or a certain stage in the
manufacturing activity. When the worker actually starts the work, time when the
worker has started the work is recorded by him or by the foreman under whom
he is working. This time is called as ‘on-time’ or ‘starting-time’. When the
worker stops the work he was doing, that time is also recorded and is known as
‘off-time’ or ‘finish- time’. From the on-time upto the off-time the time is
calculated and recorded as the working time or productive time. If the
productive time falls within the normal working hours it is recoreded as normal
hours and if the worker has worked even after the normal working hours were
over such additional time is recorded as the over-time.
Time-Booking becomes necessary due to the following reasons :-
1. Maximum of the attendance time of workers should be utilized for doing

the work assigned to him. When wages are paid on the basis of time
worked, It is necessary on the part of management to utilise the time of
the workers to maximum extent for production work, otherwise the
workers get remuneration for wasted time also.
2. Direct labour cost of a job, a process or product manufactured can be

found out by multiplying the total hours spent by the workers who have
worked on it by the wage rates applicable to them. By doing time-booking
information about total hours spent by the direct workers on the job,
process or production of a certain quantity becomes available.
3. Measurement of efficiency of the workers can be done by the management

by comparing the actual time taken by the workers with the estimated or
budgeted time fixed for that work. Time booking provides data about
actual time taken by the workers for completing the work.
4. For calculation and control of idle time the time booked for workers is
compared with the hours for which the workers were present in the factory
premises. Through time booking the labour hours actually put in for
doing the work can be determined.
Time Booking
5. In those concerns where incentive or bonus payment is made on the basis of
time saved by the workers out of time allowed for doing a certain work,
accurate information about actual time taken by the workers is needed.
Time booking fulfills this need.
6. For absorption or charging of overheads to a job or production order direct

labour hours or direct labour cost method is used. For calculation of direct NOTES
labour hours or direct labour cost, time-booking is essential.
11.2.2 Methods of Time-Booking :
Time Booking is done by using any one of the following methods :-
1. Daily Time Sheet :
In this method a daily time sheet is prepared for each worker, when the
worker reports for the work, the foreman gives him a daily time sheet. The
information asked for in the sheet is to be filled-in by the worker himself and
when he stops the work in the evening, he is required to hand over the completed
sheet duly signed by him to the foreman. The foreman checks the recording in
the sheet and if they correct he sings the sheet and sends it to the cost
department. The cost clerk completes the recording in respect of normal hours,
over-time hours and the rates applicable and shows the total labour cost for the
worker for the day. He is also required to sign the sheet taking responsibility for
the calculations shown in it. Total number of daily time sheets will be equal to
the actual number of workers who were present for doing the work on that day.
These sheets are preserved and used for the further cost analysis.
A specimen of daily time sheet is given below :-
————————————— Company
Daily Time Sheet
Worker’s Name :—————————————

Date :———————-
Token No.:——————————————
Wor Description of
Time Department :—-————
Total Hours Rate Amount
k work done
Started Finish Normal Ove ` Normal Overtime
Orde
ed r ` `
r No.
time
Total Hrs i) Normal
ii) Over-time Worke Forema Cost clerk Advanced Cost Accounting - I 255
r n
Time Booking In the daily time sheet information is recorded by the worker on the same
day the work is performed by him and it is also verified by the foreman
immediately and so the information is more accurate.
The drawback of this method is the lot of paper work involved since for
NOTES every worker one daily time sheet has to be prepared and so this method is not
suitable where the number of workers employed is very large.
2. Weekly Time Sheet :
This method is similar to the method of daily time sheet except the time
booking is done for the days of the week. Worker is given a weekly time sheet at
the commencement of the work on the first day of the week. He records the
details such as job or production order number, the starting and finishing time of
the work, details of the work performed by him and normal and overtime hours
spent by him on the job each day. At the end of the week he signs the sheet and
gives it to the foreman who checks the entries and if found correct, certifies it so
by singing the sheet and sends it to the cost department for calculations of
normal and overtime wages and any incentive bonus if applicable to the
worker.
—————————— Company
Weekly Time Sheet
Name Of
Worker :------------------------------------------------------
Token No. :----------------------------------- Week ending on:-----------------
Department :----------------------------------
Day Job/ Order Work done On Off HoursWorked Rate Amount

No. Normal Over Rs. Normal Ove
-time r
tim
e
Mon
Tues
Wed
Thur
s Fri
Sat
Total
Signature of worker Signature of Foreman Cost Clerk

Weekly time sheet reduces the paper work considerably. When workers
are engaged on a job for a long time, weekly time sheet method proves suitable.
However, as the sheet remains with worker for a week it may get spoiled, stained
256 Advanced Cost Accounting - I or torn. Also the time booked may not be accurate as the worker may record the
details not every day but for 3-4 days at one time relying on his memory for Time Booking
filling on (starting) and off (finishing) times. This inaccuracy will cause the
calculations of labour cost to become wrong.
3. Job Card / Job Ticket :
This is another method used for time booking. Under it job card or job
NOTES
ticket can be prepared in the following ways :
a) Job card for each job,
b) Job card for each worker,
c) Combined time and job card, and
d) Piece-work card.
Brief information about each of the above four methods are given below:
a) Job card for each job :
For each job a separate job card is prepared to record the time worked on
the job by each worker and the labour cost of each stage of the job and total
labour cost of a job. Job No., Job description, the sequence in which the stages
of the job are to be completed are recorded in the job-card by the production
engineering department. The job card is given to the worker or the group of
workers who have to perform the first stage of the job. The worker/workers
record their names, the starting time and the finishing time of that stage and
total hours worked on the first stage of the job and hand over the work together
with the job-card to the foreman and the foreman give the the work to the
worker/ workers who have to do the next stage of the job work. In this way the
job card moves with the job and when the recording of the last stage of job
work is done, the total time taken for completion of the job is calculated. The
cost department calculates the direct labour cost of the job by considering the
time spent by each worker and the normal, overtime rate and any incentive
bonus amount payable to the workers.
Job card for each job provides information about the various stages
through which it has been completed, the departments and which workers from
these departments have performed these stages, the time taken by them to
complete all the stages, how many normal hours and overtime hours were
required to do the job and the labour cost incurred for the job. All this
information becomes available on a single job card or job ticket and it provides
guidance while planning a similar type of job.
A specimen of Job Card for each job is shown below :

—————————— Company
Job Card for Each Job
Job/ Order No. ----------------------------

Job Description --------------------------
Started on --------------- at ------------- Completed on --------- at ---------
Standard Hrs. allowed -------------- Actual Hrs. taken -----------------
Day Tokan Name Dept. Work done Time Hours Rate Amount
No. of of On Off Normal Over ` `
Date Worke Worker time
r
Total
Foreman Cost Clerk
b) Job Card For Each Worker :
In this method for each worker a separate job card is prepared for a
specific period, say a week or a fortnight. The job card is given to the worker at
the commencement of the period and the job number and the work he is required
to do in respect of the job is told to him. When the worker starts his work, he
records the time as ‘on time’ and when he finishes his work he records the time
as ‘off-time’. After showing the recording to the foreman who had assigned the
work to him, the worker receives instructions about another job either in the
same department or a different departments. He begins the work on the new job
and again does the recording for it in the job card with him. At the end of the
specific period he signs it and gives it to the foreman or drops it in the box
provided for it. Thus the time booked by the worker on one or more jobs during
the specific period are recorded on the job card of the worker and the
remuneration payable to him for the period can be calculated by the cost clerk.
In this method as the job is completed by a number of workers by doing

the particular work allocated to them and as the time booked is recorded by
each of them on his job card, it becomes necessary to collect all such job cards
together, find out time spent by each such worker on the particular job, and add
the direct labour cost from the job cards to find out the total direct labour cost of
the completed job.
Comparing the time booked with attendance time of the worker, becomes
258 Advanced Cost Accounting - I easy in this method.
Time Booking
c) Combined Time and Job Card :
In this method, instead of making separate arrangements for time-keeping

and time-booking they are combined in one card. For every worker a combined
time and job card is prepared for a period of one week. The name of worker, his
token number, name of the department, job number, in and out time of the
worker every day and his starting/ on time and finishing/off time for the jobs NOTES
performed by him on that day, his normal hours of work, his overtime hours,
idle time, rate of remuneration and his normal and overtime amount of
remuneration is recorded in the columns prepared in the card.
This method is useful for a small concern which employees a few workers
and on whom proper supervision can be kept to see that they report for the
work punctually and do the jobs assigned to them. Since recording of in and out
time (time-keeping) and on and off time (time-booking) of a worker is recorded
on the same card, it becomes easy to reconcile time of attendance and working
time and find out the idle time.
A format of combined time and job card is given below :-
—————————— &
Company
Combined Time and Job Card
Name of Worker ------------------------- Department ------------------

Token No. ------------------------- Week ending on ----------------
Day Job No Attendance Time Job Time Normal Overtime Idle

In Out On Off Hrs. Hrs. Time
Mon
Tues
Wed.
Thurs.
Fri.
Sat.
Wages : Normal Tota

Overtime l
Total
Signature of Worker Signature of Foreman Signature of Cost Clerk

Time Booking d) Piece - Work Card
Check Your Progress
A piece-work card is prepared when the workers are paid remuneration
i) What is the meaning of not on the basis of time worked by them but on the basis of the quantity
‘Time-Booking’ ? Why produced and accepted by concern. Such remuneration is known as piece-rate
Time Booking is
Important ? remuneration and it is stated as per unit or ` per K.g. , per dozen
ii) Give the formats of :- etc.
A piece-work card is prepared for each worker or for a group of workers
a) Daily Time Sheet
if the work is done by the group. Even though wages are paid on the basis of
b) Weekely Time Sheet
quantity produced and accepted, the recording of time taken of the production is
c) Job Card / Job Ticket for
each worker
also recorded in the card. This is necessary for charging of overheads when the
d) Combined Time and
overheads are divided on the basis of labour hours and for calculating the
Job Card amount of bonus payable to the worker on the basis of his efficiency.
e) Price- Work Card
Format of a piece-work card may be as under :-
—————————— Company
Piece - Work Card
Name of Worker ------------------------- Department ------------------

Token No. ------------------------- Week ending on ----------------
Day Job Description Time Production Rejections Accepted Initials Passed by Rate
Amount
No. of Work Take (Units) (Units) (Units) (Inspector)
` `
n Worke
Mon.
r
Tue.
Wed.
Thurs.
Fri.
Sat.
Tota
l
Worke Foreman Cost Clerk

r
11.3 Summary
Time booking means recording ‘on-time’ and ‘off-time’ of workers
performing a job, process, activity or operation assigned to them. On-time is
also known as ‘starting-time’ and ‘off-time’ is also known as ‘stop or finishing
time’.
Time booking enables the management to find out how much of
attendance
260 Advanced Cost Accounting - I time is spent by a worker for doing the work assigned to him. For
calculating wages when wages are paid on time-rate basis, for judging
efficiency of worker by comparing the actual time taken by him for doing
the work with the time
Time Booking
allowed by management for doing the work and for calculating amount of
incentive payable to a worker for the time saved by him information becomes
available from time-booking records. Total labour cost of a job, process, activity
and operation can be calculated by finding out actual time spent by workers who
have done the work and the amount of wages payable to them for such work.
Preparation of ‘daily time sheet’, ‘weekly time sheet’. ‘Job card/job ticket’ for
each worker or each job’, ‘combined time and job card’ and ‘piece-work card’ NOTES
are the methods of time- booking and depending upon nature of work and
number of workers employed a suitable method of time booking is selected and
used for time booking.
11.4 Key Terms

i) Time Booking : Time Booking means recording the time actually spent by
a worker for production work. By recording ‘On’ or ‘Starting’ time and
‘Off’ or ‘Stop’ time for each worker his time is booked.
ii) Daily Time Sheet : It is a sheet to given to each worker when he reports for
work every day. Details are filled in the columns by the worker and the
sheet is given to supervisor / foreman when the day’s work is over. The
supervisor checks the details recorded by the worker and signs the sheet
and sends it to wages section for further analysis.
iii Weekly Time Sheet : It is similar to the Daily Time Sheet with the
) difference that it is used for a week by a worker.
iv) Job Card for Each Job : It is a card used for time-booking of all the
workers who have worked on the job.
v) Job card for each worker : It is a card provided to each worker in which
he records his time booked for all the jobs which he has worked during a
specific period of time.
11.5 Questions
1) Time-booking means recording of time spent by ----------
(a) workers on job
(b) workers in premises
(c) workers for arrival
(d) workers for departure
2) Efficient time booking helps to minimise ----------
(a) working time
(b) total time Advanced Cost Accounting - I 261

Time Booking (c) idle time
(d) time given
3) When the workers are paid remuneration not on the basis of time worked
but on the basis of quality produced is known as ------- remuneration.
NOTES
(a) time rate
(b) daily rate
(c) quality rate
(d) piece-rate
4) Which of the following statement is ‘wrong’.
(a) Daily time sheet method is not suitable where number of workers
employed is very large.
(b) Weekly time sheet reduced the proper work considerably.
(c) A piece-work card is prepared when the workers are paid

remuneration not on the basis of the worked by them.
(d)Weekly time sheet increased the paper work considerably.
Ans. : (1 - a), (2 - c), (3 - d), (4 - d).
1. What is meant by ‘Time- Booking ‘? Mention various methods which can

be used for time- booking ?
2. Give the specimen of ‘Daily Time Sheet’. ‘Weekly Time Sheet’ and ‘Job
Card For Each Job’. Also mention how recording is done in these
documents.
3. What is difference between ‘Time-keeping’ and ‘Time-booking’ ? Is

arrangement necessary for time-keeping as well as time-booking ?

ii) ‘Cost Accounting’ - B. K. Bhar

Unit Reconciliation of Time Kept and Time Reconciliation of Time
Kept & Time Booked
12 Booked
Structure
NOTES
1. Introduction
2. Unit Objectives
3. Reconciliation of time kept and time booked
4. Idle time and its types
5. Causes of idle time
6. Cost and treatment of idle time cost
7. Summary
8. Key Terms
9. Questions
10. Further Reading
1. Introduction
In Unit 10 and 11, information is provided about time keeping and time
booking respectively. Attendance time is the time calculated from ‘in time’ to
‘out time’ of a worker whereas actual work-time is calculated by considering
‘on- time’ and ‘off-time’ of a worker spent by him on one or more jobs
performed by him on the same day. Time kept by a worker (attendance time) is
always more than time booked (actual working time) by him on any day. It is
important to reconcile the time kept with time booked for every worker
employed by the enterprise and minimise the difference in order to control
the labour cost. Information about the reconciliation is provided in this unit.
2. Unit Objectives
Information given in this unit should enable you to understand :
• Necessity of reconciliation between time kept and time booked;
• Meaning of idle time and its types;
• Causes of idle time; and
• Cost of idle time and how idle time is treated.

Reconciliation of Time
Kept & Time Booked
12.2 Reconciliation of Time Kept with Time Booked
Time kept is the attendance time of a worker. It is calculated from the ‘in
time’ recorded by the worker or the time keeper when the worker enters through
the gate of the factory at the beginning of the shift timings upto the ‘out time’ at
NOTES the end of the shift timings. When the remuneration is paid on time basis, it is the
attendance time for which the worker was present that his wages are calculated.
Time booked for the worker is calculated by considering the ‘starting time’ or ‘on
time’ and the ‘finishing time’ or ‘off time’ of the worker recorded for one or more
jobs performed by him on that day. The total of time booked for a worker with
his attendance time on.
12.3 Idle Time and its Types

Idle time is the difference between time kept and time booked for a worker
on a day. In other words, time for which a worker is present in the factory but not
used for any job, order, process, operation or any other activity related to
production is the idle time. It is the time for which the worker remains idle and
does not perform any production activity.
Idle time is of two types : normal idle time and abnormal idle time.
Normal idle time is caused by reasons which are of unavoidable nature, e.g. time
taken by a worker for walking from the entrance to the section or department
where he performs the work assigned to him. Similarly waiting to receive
instructions from the foreman or supervisor also results in idle time which
cannot be avoided and so it is treated as normal idle time.
When idle time is caused by avoidable reasons it is treated as abnormal

idle time. For example, when idle time is caused due to non availability of
material or tools or because of machinery is not available as it is being used by
another worker for completing his job, the idle time is regarded as abnormal idle
time. Similarly idle time caused by an accident or strike of workers is abnormal
idle time because proper planning of work and efficient administration can
eliminate these causes of the same day is compared. The attendance time is
usually more than the time booked for the worker. The difference is the time for
which the worker gets his wages but no production is obtained form him, this
time is called ‘idle time’. Thus reconciliation of time kept with time booked
shows the idle time and since the worker is paid for the idle time also the
management is interested in minimising the idle time.

12.4 Causes of Idle Time Kept & Time Booked
According to the causes due to which the idle time arises they can be
grouped under three groups as shown below :
a) Production Causes,
NOTES
b) Administration Causes, and
c) Economic Causes.
a) Production Causes :
These causes take place due to production process or production

difficulties.
They can mentioned as under :
1. Idle time caused by machine breakdown.
2. Idle time caused due to power failure.

3. Idle time caused due to gap required between completion of one job and
starting of the next job.
4. Worker waiting for the instructions from the foreman.
5. Non availability of the materials and/or tools required to do the job.
6. Time taken to overcome the effects of an accident and to continue the

production process.
7. When the production work is carried on in a certain sequence, non-

completion of previous stage causes idle time in the next stages.
b) Administration Causes :
These causes are due to the administrative decisions, they include:-
1) Non acceptance of certain demands of the workers or their trade union

leading to strike or lock-out.
2) Surplus plant capacity not decided to be used by the administration.
3) Inefficient planning and lack of co-ordination among different sections or

departments.
4) Administrative decision to go slow since the situation in the market is

widely fluctuating.
c) Economic Causes :
These are the causes due to the economic situations. They include :-
1) Condition of recession or depression existing in the economy due to which

there is fall in demand and production is reduced without termination of
any workers.
A
n
Reconciliation of Time 2) Seasonal nature of the product being manufactured by the concern.
Kept & Time Booked
During off-season period production is reduced.
3) Severe competition created by a new concern or a foreign competitor and

present production is required to be reduced. The labour is not used to the
full capacity and so idle time is increased.
NOTES
Apart from the causes mentioned above in three groups. There are some
unavoidable causes which result in creation of idle time. Mention may be made
of some causes as under :-
1) Time taken by a worker to reach his department or place of work form the
gate of the factory.
2) Time taken by the workers to take care of personal needs.
3) Rest needed by workers after doing physically heavy work.
4) Time required for re-setting of machine after completing a certain amount

of production.
5) When a job is to be performed by 4 workers working in a team, absence

or late-coming of any one of then causes the other three workers to hold-
up the starting of the job.
12.5 Cost and Treatment of Idle Time

Employer pays wages to the worker even for the idle time. In this way the
amount of wages paid to the workers for the idle time cab be regarded as the cost
Check Your Progress
of idle time. Total idle time and the cost of such idle time should be found out
by preparing a separate. Idle Time card and showing in it the reasons due to
i) Why reconcilation of which the idle time has taken place. The idle time cost should be divided
‘time kept’ with ‘time
booked’ is necessary ? between normal idle time cost and abnormal idle time cost. Normal idle time
ii) What is ‘ idle time’ ? Why cost should be further sub-divided between normal idle time cost caused by
efforts should be done to controllable causes and caused by uncontrollable causes. The cost of normal
minimise idle time ?
idle time caused by controllable reasons is treated as overheads and charged to
iii) What are causes of idle
time ? How these causes production. If it is possible to trace the normal idle time cost caused by
can be grouped ? controllable reasons to a particular production department, it should be added to
iv) How cost of idle time is the factory overheads of that department so that the production cost of other
treated ?
departments is not unnecessarily increased. Idle time of normal type caused by
v) What is the difference
between ‘normal idle uncontrollable reasons such as time taken by the workers to reach their place of
time’ and ‘abnormal idle work from the entrance gate of the factory, or machine-setting time or time lost
time’ ?
between completion of one job and commencement of the next job etc. should
be charged to the particular job as production overheads of that job or by
making use of inflated wage rate for charging direct labour cost to the job.
Efforts should be made by the management to minimise the normal idle time
cost and thereby the production cost of the department or of the job is reduced.
Abnormal idle time cost is caused by reasons which cannot be controlled.

266 Advanced Cost Accounting - I Idle time caused by fire, flood, strikes, machinery break-down or major power
failure or accident can be regarded as abnormal idle time. The cost of such Reconciliation of Time
Kept & Time Booked
abnormal idle time is not treated as cost but it is regarded as abnormal loss and
is directly debited to costing profit and loss account.
12.6 Summary
NOTES
There is a difference between time kept (attendance time) and time booked
(time used for performance of work) for a worker. It is necessary to find out how
much is the difference between these two and why the difference has taken
place. This activity is known as reconciliation of time kept and time booked.
This difference is known as ‘idle-time’. As a worker gets remuneration for the
idle time also, it is important for the management to minimise the idle time and
thereby control the labour cost. Complete elimination of idle time is not possible
because there are certain causes which are bound to create idle time, e.g. a
worker needs some time to reach his section or department where he works and
also needs time to prepare for the job by changing his clothes, receiving
instructions from his foreman about the job assigned to him, setting-up of the
machine and receiving materials with which the job is to be done. Similarly
some time is lost between completion of a job and starting of another job. Idle
time caused by such normal causes is called ‘normal idle time’. When idle time
is caused by reasons which are controllable, such idle time is called as
‘abnormal idle time’, causes of idle time can be grouped under production
causes, administration causes and economic causes. By preparing a separate
idle time card, total idle time, cost of the idle time and causes of idle time, the
cost of normal idle time and of abnormal idle time is calculated. Normal idle
time cost is treated as production/factory overheads and if such cost can be
traced to particular production departments, it is added to the production
overheads of that production department. Cost of abnormal idle time is treated
as abnormal loss and it is charged as abnormal loss to Costing Profit and Loss
Account of the enterprise.
12.7 Key Terms
i) Idle Time : It is the time difference between ‘time kept’ and ‘time booked’
by a worker. Idle time is the time not used for production work.
ii) Normal Idle Time : It is the idle time caused by reasons which cannot be
avoided.
iii Abnormal Idle Time : It is idle time which takes place due to abnormal
) reasons and available causes.

Kept & Time Booked 12.8 Questions
I - Multiple choice Questions
1. Normal idle time is caused by reasons which are of -------

nature.
NOTES (a) available
(b) unavailable
(c) suitable
(d) considerable
2. When idle time is caused by -------- reasons it is treated as abnormal idle

time.
(a) available
(b) unavailable
(c) suitable
(d) considerable
3. Idle time caused by accident of workers is -------- idle time.
(a) abnormal
(b) normal
(c) available
(d) unavailable
Ans. (1 - b), (2 - a), (3 - a).
4. Match the pairs.
Group I Group II
(a) Production causes (i) Payment for idle time
(b) Administrative causes (ii Resetting of machine after

)
completing
production
(c) Economic causes (iii Off-season period production
)
(d) Unavoidable causes (iv) Inefficient planning
(v) Machine Breakdown.
Ans. : (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii)

II - Theory Questions Reconciliation of Time
Kept & Time Booked
1) What is meant by ‘idle time’ ? What are its types ?
2) Give causes of ‘normal idle time’ ? How is cost of normal idle time treated
?
3) What are causes of ‘abnormal idle time’ ? How is cost of abnormal idle NOTES
time treated ?
4) What are causes of ‘abnormal idle time’ ? How is cost of abnormal idle
time treated ?
5) Why reconciliation of time- kept with time – booked is necessary ?

ii) ‘Cost Accounting’ - B. K. Bhar

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CAG 101

ADVANCED COST ACCOUNTING -

YASHWANTRAO CHAVAN MAHARASHTRAOPEN UNIVERSITY

All rights reserved. No part of this publication which is material

Vice-Chancellor : Dr. M. M. Salunkhe

Dr. A. G. Dr. Madhuri Sunil Deshpande Dr. Prakash Deshmukh

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

TOPIC 2 Material Costing

UNIT 7 Issue of Materials 159-166

TOPIC 3 Labour Costing

The information provided in this book is given in easy language to enable

The authors and editors are greatful to the authorities of YCMOU

UNIT 1 Cost Concepts

UNIT 2 Elements of Cost

UNIT 3 Cost Sheets and Quotations

4. Limitations of Financial Accounting

5. Nature of Cost Accounting

6. Objectives of Cost Accounting

7. Advantages of Cost Accounting

8. Limitations of Cost Accounting

9. Difference between Financial Accounting and Cost Accounting

10. Cost Unit and Cost Centres

12. Key Terms

13. Questions & Exercises

14. Further Reading

• Concepts of cost, costing, cost Accounting and cost Accountancy;

• Nature and objectives of Cost Accounting;

• Advantages and limitations of Cost Accounting; and

• Meaning of cost unit and cost centre.

1.2 COST Concept

Fig. 1.1 : Cost Concepts

(ii) According to Crowningshield ‘Cost’ represents, “an expenditure made

2 Advanced Cost Accounting - I

sacrificed to attain a particular objective”.

(iv)The Committee on Cost Concepts and Standards of the American

(v)Anthony and Welsoh defines, “Cost is a measurement in monetary terms, of NOTES

(vi)A.I.C.P.A. Committee on terminology defines Cost as, “the amount

i) ICMA, London defines Costing as, “the techniques and process of

ii) Wheldon defines Costing as follows;

“Costing is the classifying, recording and appropriate allocation of

iii) Harold James defines, “Costing is the proper allocation of expenditure

Hence, the primary functions of costing is the ascertainment of cost of

1.2.3 Cost Accounting :

i) Kohler defines Cost Accounting as, “that branch of accounting dealing

v) I.C.M.A. London defines Cost Accounting as, “the process of accounting

An analysis of the above comprehensive definition reveals some of the

From the above definitions we can conclude that cost accounting is

i) Cost ascertainment, ii) Cost presentation, and iii) Cost control.

i) For Cost Ascertainment purpose, costing has developed various methods

For Cost control purpose, setting up of standard and comparing them

Because, cost accounting aims at two more functions viz. application of

1.2.4 Cost Accountancy :

It is the application of costing and cost accounting principles. methods

Advanced Cost Accounting - I 5

“the application of costing and cost accounting principles, methods

i) It is a science because there are certain definite principles which are

However, by aiming at cost ascertainment, cost Accountancy serves the

Cost Accountancy is a comprehensive term and includes the various

6 Advanced Cost Accounting -

Points of Costing Cost Accounting Cost Accountancy

1.3 Limitations of Financial Accounting

Financial Accounting is mainly concerned with recording business

Advanced Cost Accounting - I 7