Cost Accounting III - Semester V PDF

COST ACCOUNTING - III Semester V T.Y.B.COM – Accounting & Finance COURSE CODE: BAF 501 KSD’S Model College (Autonomous) Notes by Dr. Laksha Ailani (M.Com, UGC-NET, MAHA-SET, PH.D) SECOND EDITION-2022 For p...

COST ACCOUNTING - III Semester V T.Y.B.COM – Accounting & Finance COURSE CODE: BAF 501 KSD’S Model College (Autonomous) Notes by Dr. Laksha Ailani (M.Com, UGC-NET, MAHA-SET, PH.D) SECOND EDITION-2022 For private circulation only TYBAF CA BAF 501 SEM-V Syllabus: Description Page No. 1. Uniform costing and Inter–Firm Comparison Uniform costing, Meaning of and need for Uniform costing, 3 Essentials for success of Uniform costing, Advantages and limitations of Uniform costing, Areas of Uniformity, Uniform cost manual, Inter Firm Comparison, Pre-requisites of inter firm comparison; Advantages and limitations, Practical problems 2. Integrated System and Non- integrated System of Accounts 11 Integrated System Meaning; Features, Advantages and Disadvantages Journal Entries and Preparing Integrated Ledgers. Practical problems Non-Integrated system Meaning; Features, Advantages and disadvantages Journal entries and Preparing Cost Control Accounts Practical problems 3. Operating Costing Meaning of operating costing; Determination of per unit 30 cost; Pricing of services, Collection of costing data Note-Practical problems based on costing of hospitals, hotels, goods and passengers transport service 4. Process costing Meaning of process costing, features, advantages and 44 disadvantages, Process loss, Abnormal gains and losses, Practical problems on Process Costing 5. Process costing ( Inter process profit & Equivalent units) 53 Valuation of Work in progress and Equivalent production (FIFO Method and Weighted Average Method)) Inter Process transfer at Profit Practical problems Note: This study material is compiled from various sources and meant only for students of KSD’s Model college. 2 TYBAF CA BAF 501 SEM-V Chapter 1 Uniform Costing Concept: It is a system adopted commonly by firms in an industry as regards to costing principles, practices and methods. Uniform costing is not a particular method of costing. It is adoption of common accounting principles and in some cases common methods by member companies in the same industry so that their cost figures may be comparable. Definition: Uniform costing can be defined as the ‘use by several undertakings of the same costing principle and practices. -Institute of Cost and Works Accountants of England In other words, it is a technique of costing by which different firms of a field or industry apply similar costing system so as to produce cost data which have maximum comparability. Objectives/ need: 1. It provides reliable data for making inter-unit comparisons of cost performances. 2. It helps to arrive at the cost of production for the industry as a whole on a common basis acceptable to all individual units or firm of the industry. 3. It provides data to compare the cost of production and the production efficiencies between one firm and others. 4. It ensures that the product selling prices are based on authentic costing data. 5. It helps in using common procedures regarding cost ascertainment and cost control. Features: 1. Mutual agreement: all the participating firms/companies 2. Share information: all the participating firms 3. Leader/parent firm: generally, one large organisation 4. Member firm: many firms who follow leader firms 5. Common selling Price 6. Common practices 7. Helpful to member firms: leader firm provide information 8. Comparison 9. Cost manual : document 3 TYBAF CA BAF 501 SEM-V Advantages:  For member firms: a) Fixation of selling prices: Accumulation of cost data on sound principles helps in determining Selling prices on a uniform basis to suit the requirements of the participating firms. b) Healthy competition: Removal of rivalries/unhealthy competition, enmities. It inculcates a spirit of healthy competition. c) Improvement in efficiency: Areas of inefficiencies are located and thus efforts for improving efficiencies can be made. d) Cost consciousness: The member firms realize the importance of controlling cost. This feeling of cost consciousness brings reduction in cost. e) Benefit to weaker units: Those participants, who do not have expert knowledge of products, can have it from others. Research and development division of large concerns provide useful information to small concerns f) Management control: Cost comparison helps the management in knowing the points of their weakness and thus enables them to exercise better control over operations of the business. g) Profitability measurement: Unprofitable ventures are disclosed, the levels below which the firms shall operate at a cost are known. Thus, uniform costing serves as an insurer of profits. h) Economy: The concerns can appoint a cost expert or consultant jointly and share such cost on a common basis. Thus, it economizes the cost of obtaining experts about cost.  For parent organisation: If the member units are under a common control either through a holding company or through a trade association, the member units as well as the parent organization are benefited by uniform costing in the following manner:- a) Representation easy: The association can present the problems of member-firms to the government in a better way when it has with it the data about cost of all the firms. It helps in obtaining grant or subsidy, import- export license, etc. b) Better sales: Sales in home and foreign market can be promoted by making a joint effort at the association level.  For Government: a) Data availability: Costing data can easily be available to the government through the trade association and government can expeditiously decide the policy matters regarding granting of subsidy, import license, etc. b) Minimum wages: On the basis of cost and profit data the „minimum‟ and „fair‟ wages can be fixed by the government through minimum wages act /wage board. 4 TYBAF CA BAF 501 SEM-V c) Effective price control: The government can regulate prices and check the genuineness of the uniform prices fixed by the association. It can also implement control system if necessary. d) Comparative assessment: The government can compare the relative efficiency or otherwise of private and public sectors and take important policy decisions in this regard.  FOR WORKERS: a) Better wages: Workers can be paid at better rates and bonus schemes may be introduced for common benefit of all. b) Better facilities: Recreational facilities or fringe or non-monetary benefits can be arranged in a better way on a common basis. c) Stability: Labour turnover is reduced due to more uniformity in rewarding workers by member firms. This brings stability in workers, which improves their earnings as well as the earnings of the concern.  FOR CONSUMERS: a) Better goods: Better quality goods are available to consumers at cheaper rates. b) Confidence: Reasonable prices are charged from consumers. This brings a feeling of confidence in customers regarding member-firms.  Disadvantages/ limitations: The drawbacks can be summarized as follows:- 1. Common principles and procedures: Uniform costing requires laying down of uniform principles and procedures. Since the individual circumstances of each concern varies to a great extent, bringing uniformity in procedures, practices, etc., poses serious problems. 2. Lack of trust and confidence: The member-units, particularly when independently managed, may not have the feeling of mutual trust and confidence. Thus, the system may not operate successfully. 3. Non-disclosure of technical or cost information: The member concerns usually do not provide total information regarding cost and technical procedures. Thus, the system may not prove to be a success. 4. Rigidity: Flexibility of approach is difficult to be maintained. The common prices fixed may not meet the requirements of all. 5. Monopoly: Member-units may fix up monopoly prices and thus exploit the consumers. Thus, in a bid to avoid cut-throat competition, cut-throat prices from the point of view of consumers may be charged. 6. High cost: A comparatively small concern may find the system expensive since the system to be adopted by all member-units has to be uniform irrespective of the size. 5 TYBAF CA BAF 501 SEM-V Areas of uniformity: The more significant areas in which uniformity is to be attained can be listed as follows - 1. Adoption and Determination of the 'cost unit', 'cost centres' and 'departments'. 2. Costing method to be employed and cost treatment of the items in the costs. 3. System of Costing. 4. Cost control methods. 5. Accounts and Cost and classification. 6. Methods of Valuation of dissimilar stocks. 7. Bases of absorption and apportionments of costs. 8. Depreciation techniques and rates. 9. Treatments of waste, defectives, spoilage, scrap. 10. Costing period and reporting periods. 11. Treatment of interest on long-term and capital loans. 12. Cost treatment of holiday pay, overtime, etc. items of Labour cost. 13. Treatment of R & D costs. 14. Formats of the cost reports and statements. 15. Codification of cost accounts and reports, statements, etc. The dissimilar areas to be covered are relies on requirement of uniformity in the reporting and accuracy of the comparison needed through the various units participated in the uniform costing system. Essentials/ pre-requisites: following are pre-requisites of uniform costing: a) Firms or units adopting uniform costing must be ready to provide and share accounting and costing information freely. b) They should adopt a common system of costing regarding classification, distribution and absorption of costs. They must agree on a common technique of costing e.g., absorption costing, standard costing or marginal costing. c) The firms must use a common terminology and procedure for cost ascertainment and cost control. d) A central body (leader firm) or proper organisation must be set up for preparing comparative statistics (MIS) for the use of member units participating in the uniform costing. e) Large firms should take lead towards sharing their experience & know how (technical support) with the smaller firms. f) Above all, the most important is that units or firms must have mutual trust, confidence and cooperation. 6 TYBAF CA BAF 501 SEM-V Uniform cost manual: Uniform cost manual is a document which lays down the general accounting principles, guidelines and methods and procedures for the ascertainment and control of cost. It is a written document, which may be in a form of a booklet or bulletin, containing the principles, methods and procedures for ascertainment and control of cost under uniform costing. The circulations of this manual provide the guidelines to the organisation to formulate their system of accounting in such a way that the principles of uniform costing can be uniformly and correctly applied. It is necessary for the successful operations of uniform costing system. In order to implement the system of uniform costing successfully it is necessary to have a Uniform Cost Manual. The manual is nothing but a booklet containing detailed instructions to be followed by different firms in an industry, adopting uniform costing, with regard to cost determination and cost control. It explains the nature and scope of the plan to be adopted and lays down the procedure for implementing it. It guides the member firms to operate their accounts on a uniform basis. A typical uniform cost manual contains the following information: 1. Introduction: i. Statement of objectives and purposes of the cost plan. ii. Educating the management and people about uniform costing. iii. Scope of the system 2. Organisation: i. Organisation for developing and operating uniform costing. ii. Stages in which the system has to be introduced. iii. Management of the organisation by Trade Association. 3. Accounting System: i. Principles of accounting to be followed. ii. Terminology to be followed. iii. Details of coding system. iv. Classification and description of accounts. v. Reconciliation between financial accounts and cost accounts. vi. Accounting period of the cost plan. 4. Method of Costing: i. Unit of production. ii. Costing periods (e.g., monthly, quarterly, half-yearly or annual). iii. Expenses to be consider iv. Methods to be used for inter-unit transfer pricing. v. Classification of departments (Production department, service department, etc.). 7 TYBAF CA BAF 501 SEM-V vi. Material cost—direct and indirect, treatment of losses, scrap, spoilage, pricing of materials, stock valuation. vii. Labour cost—direct and indirect, treatment of idle time, treatment of fringe benefits, overtime, production bonus. viii. Overhead—classification, collection, apportionment and allocation. Method of depreciation to be used, research and development expenditure, Method of allocation, apportionment of service dept. costs to production departments. 5. Reporting: i. Periodicity of reports. ii. Levels for whom the reports have to be sent. iii. Cost statements. iv. Ratios—cost as well as financial. v. Other data. INTER FIRM COMPARISION: Technique of Evaluating PERFORMANCE, EFFICIENCY,COSTS & PROFITS of Firms in the Industry. Consists of Voluntary exchange of Information/data relating to COST, PRICE, PRODUCTIVITY & overall Efficiency among firms. Meaning: Inter-firm comparison implies comparison of the results of the different firms so that efficiencies or inefficiencies may be located and profitability may be judged. Thus, inter-firm comparison is a yardstick of performance evaluation and cost benefit analysis of firms in same industry. Inter-firm comparison implies comparison of the results of different firms inter se so that efficiencies or inefficiencies are located and profitability may be judged. Thus, inter-firm comparison is a yardstick of performance evaluation and cost-benefit analysis. The accumulated data regarding costs, prices, profits etc. of different concerns are put in the form of consolidated statements and are made available to all the member- units so that they can make a comparative assessment of their achievements and weaknesses with those of others. Such a type of comparison is possible only when uniform costing is applied by all the concerns. Thus, uniform costing is the foundation stone over which inter- firm comparison is developed and applied in a wider field. Objectives of Inter-Firm Comparison: Following are the objectives of inter-firm comparison. The objectives are inter- linked with each other. 8 TYBAF CA BAF 501 SEM-V 1. Improvement in efficiency – Each member-unit can try to improve its efficiency when on comparison with other member-firms it comes to know about its weak points. 2. Effecting economy – The weaknesses or ineconomies are located and economy may be effected by eliminating them. 3. Maximising profits – The adequacy of profits may be measured and action can be taken to improve profitability position. Essential Requisites of Inter-Firm Comparison System: The success of an inter-firm comparison scheme depends on the successful operation of uniform costing system. If uniformity cannot be brought about in costing principles and procedures, the comparison would be farce and futile. However, the following additional points should be kept in mind while implementing the scheme of inter-firm comparison: 1. Information Needed: The type of information and the extent to which information is required to be collected for inter-firm comparison has to be determined. As a matter of fact much depends on the needs of management and the purpose of comparison. Though no standard list of such information required can be given, the following can be the general matters on which the information may be collected: (i) Costs and cost structure. (ii) Consumption and wastage of raw materials. (iii) Machine efficiency and machine utilisation. (iv) Labour efficiency and labour utilisation. (v) Inventory levels (vi) Capital employed and Return on capital employed. (vii) Liquidity of the organisation. (viii) Reserves and appropriations of profits. (ix) Accounts receivable and accounts payable. (x) Production methods and technical aspects. 2. Centre for Inter-Firm Comparison: A central body should be created to collect and analyse data received from members of the scheme of inter-firm comparison. It will perform the following functions: (i) Data collection from member units; (ii) Dissemination of results of study to them; (iii) Undertaking activities of research and development for the benefit of member units, individually and collectively; (iv) Organisation of training programmes; and (v) Publication of relevant information through magazines or newsletters etc., so that Information becomes known to all concerned immediately. 9 TYBAF CA BAF 501 SEM-V 3. Membership: The firms should seek membership of the above central body, otherwise the very purpose of its setting up shall be defeated. The centre can make inter-firm comparisons also, only when firms participate. It does not matter whether firms are of different sizes. But the mutual responsibility—responsibility of providing information on the part of member unit on one hand and responsibility of carrying out the above- mentioned tasks entrusted to the Apex Body (as listed under point no. 2) on the other, must be fulfilled for the success of the system. 4. Method of Collection and Presentation of Information: The time by which and the form in which the information has to be submitted by the member units are required to be determined. The various statistical techniques can be used for collection of data, its editing, classification, presentation, drawing conclusions and making interpretations. Ratio analysis may be adopted for measuring profitability, efficiency and productivity etc. The various important management ratios used for inter-firm comparison can be put in the form of the “Pyramid structure”. The task of collection of information is performed by the centre at regular intervals in the manner prescribed. A questionnaire can also be mailed and information desired may be filled in by the respondents which after receipt of the duly filled-in questionnaire back from the firms, may be properly classified and tabulated. These are the days of Information Technology and computers can also be used for analytical purposes the information called for at the initial stage may be asked in such a manner so as to be capable of analysis through computers. Reports can then be prepared and sent even to non-members. Advantages: 1. Stability – Inter-firm comparison removes disparities and brings stability in the cost structure and presentation of information. 2. Cost consciousness – Cost consciousness is created among the participating firms and they are cautious at every level. 3. Cost control – Inter-firm comparison helps management to control the costs; efforts are made to reduce them if they exceed in the firm in comparison to the other firms. 4. Productivity – Productivity is improved when the spheres of weaknesses or uneconomies are located. 5. Proper reporting – Efficient reporting system is developed and information is presented in standardised forms. 6. Fair competition – Firms try to avoid unfair competition. Harmonisation and synchronisation of activities take place. 7. Regulation of prices – The Government can regulate prices by obtaining data about different firms. 10 TYBAF CA BAF 501 SEM-V 8. Up-to-date information – The concern has to keep up-to-date information about the results for providing it to the association and thus the recording system is improved. Limitations: 1. Misleading conclusions – If the data are not properly collected the results arrived at would be misleading. Decisions cannot be based on such conclusions. 2. Unreliable information – Information supplied by members may not be reliable. They may feel hesitant in disclosing the correct information about costs. 3. Unscientific system – In case the cost accounting system adopted by a concern is not suitable and adequate, the costing data supplied shall not be reliable. 4. Improper handling – The association which manages the comparison scheme should have qualities of effective leadership without which the scheme cannot be a success. 5. Timely-co-operation and co-ordination – The cooperation of all the participants for submission of cost data and their coordination is a must, otherwise the inter-firm comparison scheme cannot be implemented with effective results. Ratios for inter-firm comparison: The center for inter-firm comparison, a body established by British Institute of Management and the British Productivity Council, uses the pyramid structure of ratios. It shows the order of importance: Return on capital Profit Margin Productivity of capital Turnover Ratios 11 TYBAF CA BAF 501 SEM-V Fill in the blanks: 1. uniform costing is adoption of common accounting principles and in some cases common methods by member companies in the same industry. 2. uniform costing provides reliable data for making inter-unit comparisons of cost performances. 3. uniform costing inculcates a spirit of healthy competition. 4. inter-firm comparison is a yardstick of performance evaluation and cost benefit analysis. 5. Cost manual is a written document, containing the principles, methods and procedures for ascertainment and control of cost under uniform costing. 6. Circulation of cost manual is necessary for the successful operations of uniform costing system. 7. Interfirm comparison is technique of evolution of preformation of firms in an industry 8. Interfirm comparison is one of the aim of uniform costing. 9. Uniform costing helps individual firm in cost control and cost reduction. 10. Cost manual is a written document, which may be in a form of a booklet or bulletin, containing principles and methods used under uniform costing. 12 TYBAF CA BAF 501 SEM-V MCQs: 1. _________is not a drawback of uniform costing. a. Complex in nature b. Lack of trust and confidence c. monopoly d. non-disclosure of information by member firms 2. The object of uniform costing is to provides reliable data for making ____of cost performances. a. inter-unit comparisons b. analysis c. reporting d. publication 3. Firms or units adopting uniform costing must be ready to provide and share ________information freely. a. accounting and costing b. product range and product line c. marketing strategy d. capital investment 4. ________is not essentials for inter-firm comparison. a. Firms from same industry b. Common accounting practices c. Like minded d. same scale of level of production 5. ________is not a content of Uniform cost manual: a. Names of directors of leader firm b. Organization c. Cost Accounting System d. Presentation of Information 6. Inter-firm comparison is possible only if there is a practice of ________ among the firms within an industry. a. Standard Costing b. Maintaining Joint books c. uniform costing system d. Reconciliation of costing and financial records. 7. __________helps in determining Selling prices on a uniform basis to suit the requirements of the participating firms. a. process costing b. uniform costing 13 TYBAF CA BAF 501 SEM-V c. contract costing d. job costing 8. ________is an important ratio used for inter-firm comparison a. Return on capital b. current ratio c. liquid ratio d. stock to working capital ratio 9. Uniform costing inculcates a spirit of __________. a. Healthy competition b. Team sprit c. Cooperation d. None of the above 10. _______is not a content of Uniform cost manual. a. Share capital of leader firm b. Organization c. Cost Accounting System d. Presentation of Information 11. ________is not a drawback of uniform costing. a. time consuming b. Lack of trust and confidence c. monopoly of leader firm d. non-disclosure of information by member firms 12. _________is not essentials for inter-firm comparison. a. Firms from same industry b. Common accounting practices c. Like minded d. same scale of level of production 13. ________is technique of evolution of preformation of firms in an industry a. Inter-firm comparison b. Trend analysis c. Comparative analysis d. Industry comparison 14 TYBAF CA BAF 501 SEM-V Chapter 2 Integrated and non-integrated system of Accounting Integral System: Integral or Integrated system is a system of accounting under which only one set of account books is maintained to record both the Cost and Financial transactions. The system implies the merger of both cost and financial accounts in one set of books. The two sets of account books merge into a composite system. Definition: CIMA, London defines Integral system as “a system in which the financial and cost accounts are interlocked to ensure that all relevant expenditure is absorbed into the cost accounts.” Advantages: The system of accounting has the following advantages: i) There is no need for reconciliation because there will be only one figure of profit or loss as there is only one set of books. ii) This system is economical because it avoids duplication of recording the transactions in two separate set of books. iii) Accounting information is readily available and the correctness of the data is automatically checked. iv) It enables the introduction of mechanised accounting. v) A better understanding exists among the staff. Basic Features of Integral System: i) There is no need for cost ledger because all control accounts are maintained in the financial ledger and both the aspects (i.e., debit and credit) of all transactions are recorded in respective accounts. ii) Subsidiary ledgers i.e., Stores Ledger, Work-in-Progress Ledger and Finished goods ledger are maintained as is done in non-integrated accounting. iii) In addition, a Sales Ledger (containing personal accounts for each customer) and a Purchase Ledger (containing personal accounts for each supplier) are also maintained. iv) Overhead ledger is maintained to contain separate accounts for factory, administration and selling and distribution overhead. v) A control account for each subsidiary ledger is maintained in the general ledger. The important control accounts are as follows: (i) Stores Ledger Control Account; (ii) Work-in-Progress Ledger Control Account; (iii) Finished Goods Ledger Control Account; 15 TYBAF CA BAF 501 SEM-V (iv) Wages Control Account; (v) Factory Overhead Control Account; (vi) Administrative Overhead Control Account; (vii) Selling and Distribution Overhead Control Account; (viii) Sales Ledger Control Account; (ix) Purchase Ledger Control Account. Accounting procedure: i) The balances of overheads Control Accounts represent under or over absorption of overheads which are transferred to Profit and Loss Account. ii) The profit or loss as per Profit and Loss Account is transferred to Profit and Loss Appropriation Account. iii) The degree of integration must be determined in advance. Some business firms may integrate the cost and financial accounts up to the stage of prime cost or factory cost while other firms integrate the two completely. iv) A suitable coding system is generally developed to serve the purposes of both cost accounts as well as financial accounts. v) There should be an agreed accounting procedure in respect of treatment of provision for accruals, prepaid expenses and other adjustments necessary for preparing interim accounts. Essential Prerequisites for Integrated Accounting System: The essential prerequisites for integrated system include the following: a. Degree of Integration: The degree of integration of the two sets of accounts should be determined. It is the management which has to decide on full or partial integration. Full integration changes the entire accounting records. b. Suitable Coding System: A suitable coding system must be developed to serve the accounting purposes of both financial and cost accounts. c. Accounting Policy: An agreed routine with regard to the treatment of provision for accruals, pre-paid expenses, other adjustments necessary for the preparation of interim accounts. d. Co-ordination: Prefect co-ordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of various accounting documents should be ensured. 16 TYBAF CA BAF 501 SEM-V Non-Integral System: Non-integral system is a system of accounting under which two separate sets of account books are maintained—one for cost accounts and the other for financial accounts. In other words, cost accounts are maintained separately from financial accounts. Since separate ledgers are maintained for cost and financial accounts in this system, the cost accountant is responsible for recording of the cost accounting transactions and the financial accountant is responsible for financial transactions. Non-integral system of accounting is also known as non-integrated system or Inter-locking system or Cost Ledger Accounting system. Definition: CIMA, London defines non-integral system as a system in which the cost accounts are distinct from financial accounts, the two sets of accounts being kept continuously in agreement by the use of control accounts or made readily reconcilable by other means. Basic Features of Non-Integral System: i) Separate ledgers are maintained for cost and financial accounts. ii) Like financial accounting, it is also based on double entry system. iii) There are no personal accounts because cost accounts do not show relationship with outsiders. iv) Cost accounts are concerned with impersonal accounts i.e., real and nominal accounts. v) In real accounts, only stocks are shown in cost accounts. vi) Transactions affecting the nominal accounts are recorded separately in detail. Thus, cost accounting department is concerned mainly with the ascertainment of income and expenditure of business, vii) Under this system one main ledger (i.e., Cost Ledger) and various subsidiary ledgers are maintained, viii)Since the system is not properly integrated, some items may appear in financial ledgers only, while some other items appear only in cost ledger, ix) The profit or loss disclosed by the two sets of accounts for a particular period will never be the same and as such a reconciliation of costing profit or loss with that of financial accounts is essential. Ledgers under Non-Integral Accounts: (a) The principal financial ledgers are: (i) General Ledger: It contains all real, nominal and personal accounts except trade debtors and trade creditors account. 17 TYBAF CA BAF 501 SEM-V (ii) Debtors Ledger: It has personal accounts of trade debtors. (iii) Creditors Ledger: It has personal accounts of trade creditors. (b) The principal cost ledgers are: (i) Cost Ledger: It is the principal ledger in cost books which controls all other ledgers in the costing department. It contains all impersonal accounts and is similar to General Ledger of financial accounts. This account is essential to make the Cost Ledger ‘self-balancing’. All transactions of income and expenditure which originate in the Financial Accounts must be entered in the ledger for eventual transfer to Cost Accounts. The balance in this account will always be equal to the total of all the balances of the impersonal accounts. (ii) Stores Ledger: It is a subsidiary ledger. It contains all stores accounts. (iii) Work-in-Progress Ledger: It is a subsidiary ledger. It contains a separate account for each job in progress. Each such account is debited with the materials costs, wages and overheads chargeable to the jobs and credited with the cost of work completed. The balance in this account shows the cost of uncertified work. (iv) Finished Goods Ledger: It is a subsidiary ledger. It contains accounts of completely finished goods and jobs. The cost ledger is made self-balancing by opening a control account for each of the above subsidiary ledgers. Other important Control Accounts maintained in Cost Ledger are as follows: (a) Wages Control A/c (b) Production Overhead A/c/ factory oh/ manufacturing oh (c) Administration Overhead A/c/ office oh (d) Selling and Distribution Overhead A/c (e) Cost of Sales A/c (f) Costing Profit and Loss A/c The small firms are exempted to maintain detailed cost records. Many organizations prefer to maintain only Financial Accounts and the cost information will be extracted from the Financial Accounts on ad hoc basis and the requirements of the situation. The cost of maintaining two different sets of accounts will be higher and sometimes may lead to confusion. The cost ascertainment and analysis is crucial for managerial decision making at least cost. 18 TYBAF CA BAF 501 SEM-V Non-Integral System VS Integral System Non-Integral System Integral System 1. Two separate sets of account 1. Only one set of account books books are maintained—one to is maintained to record both record cost transactions and the cost transactions and the other to record financial financial transactions transactions. 2. Cost Ledger is not 2. Cost Ledger is maintained. maintained. 3. Control Accounts are opened 3. Control Accounts are opened in the Cost Ledger. in the General Ledger. 4. There are two figures of profit 4. There is only one figure of or loss—one as per cost profit or loss because only one accounts and another as per set of account books is main- financial accounts. tained. 5. There is need for reconciliation 5. There is no need for recon- of cost accounts and financial ciliation because there will be accounts because there are only one figure of profit or loss two figures of profit or loss as as there is only one set of there are two sets of account account books. books. 6. Balances of Overhead Control 6. Balances of Overheads Control Accounts which represent Accounts which represent under- or over-absorption of under or over absorption of overheads are transferred to overheads are transferred to Profit and Loss Account costing Profit & Loss Account. 7. It is economical because it 7. There is duplication of recor- avoids the duplication of re- ding the transactions in two cording the transactions in sets of account books. two sets of account books. 8. It requires more manpower, 8. Time, money and man power time and money. can be saved 9. Traditional approach 9. Modern approach Fill in the blanks: 1. General ledger adjustment account makes the cost ledger self-balancing. 2. Issue of material is credited to stores ledger control account 3. separate ledgers for cost accounts and financial accounts are maintained under non-integrated accounting 4. the object of general ledger adjustment account is to complete the double entry in cost ledger. 5. Under integrated system, loss of raw material is debited to profit and loss account. 6. Under non-integrated system, purchase of raw material is credited to cost ledger control account. 7. Maintenance of integrated accounts avoid reconciliation statement. 8. In cost accounts, no personal accounts are kept but the transaction affecting the nominal accounts are recorded. 19 TYBAF CA BAF 501 SEM-V True/ false 1. control accounts provide basis for reconciliation(true) 2. General ledger adjustment account shows real accounts (true) 3. Cost ledger contains all the impersonal accounts (true) 4. Integral accounts eliminate the necessity of operating cost ledger control accounts. (true) 5. Work in progress ledger contains accounts of individual jobs/ jobs under execution (true) 6. Two set of books are not maintained under non integral system (false) 7. Integral system is also known as inter locking system (false) 8. Loss on sale of capital asset is not included in accounts under integral system. (false) MCQs: 1. Integral accounts eliminate the necessity of opening_________. a. Cost Ledger Control account b. Stores Ledger Control Account c. Overhead Adjustment Account d. Costing profit and loss account 2. Under non-integrated system, for direct materials purchased, _________ account is debited. a. WIP ledger control account b. Cost ledger control account c. Stores ledger control account d. Factory overheads control account. 3. Under __________system, only one set of account books is maintained to record both the cost transactions and financial transactions a. Integrated system b. Non-integrated system c. Process costing method d. Contract costing method 4. _____makes the cost ledger self-balancing. a. General ledger adjustment account b. Stores Ledger Control Account c. Overhead Adjustment Account d. Costing profit and loss account 5. ____________ shows the value of ongoing jobs a. WIP ledger control account b. Cost ledger control account c. Stores ledger control account d. Factory overheads control account. 6. For factory overheads paid, _________account will be credited under integrated system. 20 TYBAF CA BAF 501 SEM-V a. Bank account b. Wages control account c. Factory overheads control account d. WIP control account 7. Under __________system, cost accounts are maintained separately from financial accounts. a. Integrated system b. Non-integrated system c. Process costing method d. Contract costing method 8. Non-integrated system is also known as_________. a. inter locking system b. traditional system c. internal control system d. none of the above 9. ________ contains accounts of completely finished goods and jobs. a. Finished goods control account b. Cost ledger control account c. Stores ledger control account d. Factory overheads control account 10. Selling overheads are charged to ___________ a. Cost of sale account b. Wages control account c. Finished goods control account d. Factory overheads control account Journal entries (Integrated system): Materials: 1. Purchase of Raw materials : Stores ledger A/c---- Dr. Cash To cash / bank A/c 2. Credit Stores ledger A/c---- Dr. To sundry creditors A/c 3. Purchase of Raw materials Work in progress control A/c --- Dr. for special job To sundry creditors/ bank A/c 4. Issue of raw material for Work in progress control A/c --- Dr. production (Direct materials) To Stores ledger A/c 5. Issue of raw materials for Factory overheads control a/c---Dr. repairs and maintenance To Stores ledger A/c 6. Raw materials returned to Sundry creditors / bank A/c ----Dr. suppliers To Stores ledger A/c 7. Direct material returned to Stores ledger A/c-----Dr. stores (from shopfloor) To WIP control A/c 21 TYBAF CA BAF 501 SEM-V Wages 8. Payment of wages Wages control A/c ---Dr. Direct / indirect To Bank A/c / wages payable/ os wages a/c Generally in cash 9. Transfer ( allocation)of wages to WIP control a/c ------Dr. ( direct) respective control accounts Factory overheads control a/c --- Dr.(indirect) ( wages a/c got tally) Administration overheads a/c ----Dr. Selling and dist. Overheads a/c ----Dr. To wages control A/c Overheads 10. Overheads incurred Overheads control a/c ----Dr. To bank / creditors for expenses 11. Factory overheads absorbed / WIP control A/c recovered by work in progress To Factory overheads control a/c 12. Administration overheads Finished goods control ----Dr. absorbed / recovered by To Administration overheads control a/c finished goods 13. Selling and distribution Cost of sales A/c -----Dr. overheads absorbed by cost of To selling and distribution control A/c sales 14. Under absorption of overheads Profit and loss a/c -----dr. Loss To ----- overheads control a/c 15. over absorption of overheads ------ overheads control a/c----Dr Profit To profit and loss a/c Finished goods 16. Cost of finished goods Finished goods control a/c ---Dr produced To WIP control a/c 17. Cost of finished goods sold Cost of sale a/c ----Dr ( factory cost) To finished goods control a/c 18. Sales (Sold goods on cash or Sundry debtors / Bank / cash a/c -----dr credit ) To sales A/c Sales return 19. Sales return of credit sales / Sales a/c------dr. cash sales To debtors / bank a/c 20. Sales returned at cost Finished goods control a/c ---dr. To cost of sales Depreciation 21. Factory / office / sales (Asset) ----- overheads control a/c -----dr To asset a/c / provision for depreciation a/c Losses 22. Raw material losses Profit and loss A/c ----dr To stores control a/c 23. WIp losses Profit and loss a/c ----dr Wip control a/c 24. Finished goods losses Profit and loss a/c ----dr To finished goods control a/c Other entries 25. o/s expenses -----overheads control a/c----- dr. To outstanding exps a/c 22 TYBAF CA BAF 501 SEM-V 26. Prepaid expenses Prepaid exps a/c----Dr. To ---- overheads control a/c 27. Indirect material returned to Stores ledger control a/c ---Dr stores To factory overheads control a/c 28. Material transferred from one ------No Entry----- job to another 29. Finished goods sold Debtors a/c ----Dr. (at sales value) To cost of sale 30. Repair work -----overheads control a/c WIP control a/c 31. Capital work Assets a/c -----Dr To WIP control a/c / stores control a/c Closing entries 32. Transfer of cost of sale to Profit and loss A/c -----Dr. profit and loss a/c To Cost of sales a/c 33. Transfer of sales to Sales A/c -----dr. Profit and loss a/c To profit and loss A/c 34. Receipts from debtors Bank/ cash A/c ----Dr To debtors 35. Payment to creditors Creditors a/c ----Dr. To Bank A/c Problem 1) From the following particulars, pass journal Entries in an integrated system of accounting in the books of M/S. Aditya Ltd. (Nov 2011) Particulars Rs. Raw Materials purchased (75% on credit ) 4,90,000 Materials issued to production 3,70,000 Total Wages Paid 2,00,000 Wages charged to production 1,50,000 Factory Overheads incurred 1,55,000 Factory overheads charged to production 1,30,000 Office Overheads incurred 90,000 Office Overheads applied to finished goods 70,000 Selling and distribution Overheads incurred 38,000 Selling and distribution overheads applied to cost of sales 30,000 Finished Goods produced 4,00,000 Materials issued for Construction of Building 25,000 Problem 2) Journalise the following transactions in the books of Sonu Ltd., which follows integrated system of accounting for the year ended 31st March ,2013: Particulars Rs. Raw Materials purchased from Radha & Co. (40% on credit ) 5,00,000 Raw Materials issued to production 3,00,000 Sales (70% Credit) 10,00,000 Wages paid to worker 2,50,000 23 TYBAF CA BAF 501 SEM-V Wages charged to production 1,00,000 Factory overheads outstanding 40,000 Finished Goods at cost 6,00,000 Salaries paid 1,70,000 Factory overheads incurred 1,00,000 Machinery purchased from KR Ltd. (70% on cash ) 4,00,000 Depreciation on machinery 40,000 Payment to Radha & Co. 1,50,000 (April 2014) Problem 3) Ramdas Enterprises operates as Integral System of accounting. You are required to pass the Journal entries only for the following transactions that took place for the year ended 31st March, 2013. Particulars Rs. Materials purchased from Meetu & Co. 3,00,000 Materials issued to production 2,00,000 Wages paid to worker 80,000 Selling & Distribution expense paid to Sachin Advertising Ltd. 50,000 Wages charged to production 60,000 Factory overhead absorption rate is 150% of wages charged ---- to work-in-progress Cost of goods completed & transferred into finished goods 3,80,000 Cost of finished goods sold 4,50,000 Sales 6,00,000 Office expenses incurred 30,000 Receipt from customers/ debtors 4,00,000 Office expenses outstanding 10,000 Indirect labour incurred 1,40,000 Selling & Distribution expenses applied to cost of sales 50,000 (nov 2013) Problem 4) From the following particulars, pass journal entries in an integrated system of accounting in the books of M.K. ltd.( TYBAF oct 2010) Particulars Rs. Raw material purchased (80% on credit) 11,80,000 Material issued to production 8,90,000 Total Wages paid 5,00,000 Wages charged to production 3,60,000 Factory overheads incurred 3,80,000 Factory Overheads charged to Production 3,20,000 Office Overheads incurred 2,20,000 Office Overheads applied to Finished Goods 1,70,000 Selling and Distribution Overheads incurred 96,000 Selling and Distribution Overheads applied to cost of Sales 72,000 Finished Goods Produced 10,00,000 Material lost by fire 20,000 Material issued for Construction of Building 80,000 24 TYBAF CA BAF 501 SEM-V Problem 5) Sarex Chemicals started operation on 1st January 2004. Following Transactions took place till year ended 31st December 2004.( April 2006) Sr.No. Particulars Amount (Rs) 1 Materials Purchased 20,80,000 2 Material issued to Production 12,00,000 3 Mateial returned to suppliers 40,000 4 Material returned from production 20,000 5 Total wages paid 26,00,000 6 Wages allocated at follows: Direct wages 24,00,000 Indirect wages 2,00,000 7 Factory overheads paid 13,20,000 8 Factory overheads allocated to production 50% of direct wages 9 Cost of goods produced 45,00,000 10 Cost of goods sold 32,00,000 11 Sales for the year 40,00,000 Prepare relevant control account and draw trial balance as on 31st Dec 2004. Problem 6) You have been asked to prepare a months cost accounts for a company which operates a batch costing system fully integrated with the financial accounts. The following relevant information is provided to you. Rs. Rs. Balance at the beginning of the month; Stores Ledger Control A/c 2,50,000 Work in progress Control A/c 2,00,000 Finished goods Control A/c 3,50,000 Prepaid production overhead b/d from the 30,000 previous year Materials Purchased on credit 7,50,000 Materials Issued: To production( direct ) 3,00,000 To Factory( indirect ) 40,000 3,40,000 Material transferred between batches 50,000 Total Wages paid: To Direct Workers 2,50,000 To Indirect Workers 50,000 3,00,000 Direct wages charged to batches 2,00,000 Recorded non-productive time of direct 50,000 workers Selling and distribution overhead incurred 60,000 Other production overhead incurred 1,20,000 Sales( assume credit sales) 10,00,000 Cost of finished goods sold 8,00,000 Cost of goods completed and transferred into finished goods during the month 6,50,000 Physical valve of WIP at the end of the month 4,00,000 25 TYBAF CA BAF 501 SEM-V The Production overhead absorption rate is 150% of direct wages charged to work in progress. Prepare the following accounts for the month: (3,00,000) (a) Stores Ledger Control A/c (b) WIP Control A/c. (c) Finished Goods Control A/c. (d) Production Overhead Control A/C. (e) Profit and loss A/c. Problem 7) From the following information of a newly commenced manufacturing unit of Royal industries Ltd., for first quarter ending March 31, 2009, prepare relevant Ledger accounts, assuming that Cost and Financial Accounts are integrated: Particulars Rs Purchase of raw materials on credit 3,00,000 Wages paid 2,00,000 Indirect wages included in the wages 20,000 Direct materials issued to production 2,40,000 Direct materials issued to special job 30,000 Factory expenses incurred 1,30,000 Factory expenses charged on production 1,30,000 Factory expenses charged to special job 25,000 Office and administrative expenses incurred 75,000 Office and administrative expenses charged to production 70,000 Office and administrative expenses charged to special job 5,000 Selling and distribution overheads incurred 60,000 Selling and distribution overheads charged to sales 55,000 Credit Sales during the period 8,00,000 Receipts from debtors 7,00,000 Paid to creditors 2,50,000 Finished product at cost 6,50,000 Closing stock of finished product 50,000 Interest paid 30,000 rd Assume that the special job is charged at a profit of 1/3 of its sale value and that over and under absorption of overheads are straight-way carried to the profit and loss account. Also , determine the profit earned during the period. Problem 8) Following information is provided of Excel Ltd. Prepare necessary ledger accounts and trial balance under integrated system: Particulars Rs. Materials purchased on credit 29,600 Wages paid 33,600 Wages productive 29,600 Wages unproductive 4,000 Materials issued To production 25,600 Works expenses incurred 13,000 Finished goods at cost 60,000 26 TYBAF CA BAF 501 SEM-V Works expenses charged to production 17,000 Administration expenses paid and charged to production 8,800 Selling overheads paid 6,000 Cash sales 85,000 Journal entries (non-Integrated system): Cost ledger control a/c …..drs/ crs/ bank /cash/ assets/ liablities Materials: Purchase of Raw materials : Stores ledger A/c---- Dr. 1. Cash To cost ledger control a/c 2. Credit Stores ledger A/c---- Dr. To cost ledger control A/c 3. Purchase of Raw materials for Work in progress control A/c --- Dr. special job To Cost ledger control a/c A/c 4. Issue of raw material for Work in progress control A/c --- Dr. production (Direct materials) To Stores ledger A/c 5. Issue of raw materials for repairs Factory overheads control a/c ---Dr. and maintenance To Stores ledger A/c 6. Raw materials returned to Cost ledger control a/c ----Dr. suppliers To Stores ledger A/c 7. Direct material returned to stores Stores ledger A/c-----Dr. (from shopfloor) To WIP control A/c Wages 8. Payment of wages Wages control A/c ---Dr. Direct / indirect To Cost ledger control a/c Generally in cash 9. Transfer (allocation)of wages to WIP control a/c ------Dr. ( direct) respective control accounts Factory overheads control a/c ---Dr.(indirect) Administration overheads a/c ----Dr. ( Wages A/c will tally) Selling and dist. Overheads a/c ----Dr. To wages control A/c Overheads 10. Overheads incurred -----Overheads control a/c ----Dr. To Cost ledger control a/c 11. Factory overheads absorbed / WIP control A/c recovered by work in progress To Factory overheads control a/c 12. Administration overheads Finished goods control ----Dr. absorbed / recovered by finished To Administration overheads control a/c goods 13. Selling and distribution overheads Cost of sales A/c -----Dr. absorbed by cost of sales To selling and distribution control A/c 14. Under absorption of overheads Costing Profit and loss a/c -----dr. Loss To ----- overheads control a/c 15. over absorption of overheads ------ overheads control a/c----dr Profit To costing profit and loss a/c Finished goods 16. Cost of finished goods produced Finished goods control a/c ---dr To WIP control a/c 27 TYBAF CA BAF 501 SEM-V 17. Cost of finished goods sold Cost of sale a/c ----Dr ( factory cost) To finished goods control a/c 18. Sales Cost ledger control a/c -----dr Sold goods on cash or credit To sales A/c Sales return 19. Sales return of credit sales / cash Sales a/c------dr. sales To Cost ledger control a/c 20. Sales returned at cost Finished goods control a/c ------ dr. To cost of sales A/c Depreciation 21. Factory / office / sales (Asset) ----- overheads control a/c -----dr To Cost ledger control a/c Losses 22. Raw material losses Costing Profit and loss A/c ----dr To stores control a/c 23. WIP losses Costing Profit and loss a/c ----dr Wip control a/c 24. Finished goods losses Costing Profit and loss a/c ----dr To finished goods control a/c Other entries 25. O/s expenses -----overheads control a/c----- dr. To Cost ledger control a/c 26. Prepaid expenses Cost ledger control a/c ----Dr. To ---- overheads control a/c 27. Indirect material returned to Stores ledger control a/c ---dr stores To factory overheads control a/c 28. Material transferred from one job ------No Entry----- to another 29. Repair work -----overheads control a/c WIP control a/c 30. Capital work Cost ledger control a/c ----dr To WIP control a/c / stores control a/c Closing entries 31. Transfer of cost of sale to Costing Profit and loss A/c -----dr. profit and loss a/c To Cost of sales a/c 32. Transfer of sales to Sales A/c -----dr. Profit and loss a/c To costing profit and loss A/c Problem 1) (april 2014) Following transactions have been extracted from the books of Chandan ltd. Pass journal entries assuming non-integrated system Purchase of material on cash 2,50,000 Stores issued 1,50,000 Carriage inward 10,000 Wages paid (productive) 2,00,000 Wages paid (unproductive) 1,00,000 Works oh incurred 60,000 28 TYBAF CA BAF 501 SEM-V Material issued for repairs 15,000 Selling expenses paid 20,000 Office exps paid 18,000 Cost of completed jobs 4,00,000 Works oh incurred 75,000 Problem 2) Following transactions have been extracted from the books of XYZ ltd. Pass journal entries assuming non-integrated system Purchase of material on credit 1,50,000 Direct Wages paid 80,000 Administration overheads paid 60,000 Selling expenses paid 40,000 Production overheads incurred 1,20,000 Stores issued for jods 70,000 Material issued to factory for repairs 20,000 Finished goods produced 2,25,000 Production overheads absorbed 1,05,000 Administration overheads absorbed 65,000 Selling overheads absorbed to sales 35,000 Cost of finished goods sold 2,50,000 Sales 3,00,000 Sales returns (at cost) 10,000 Material retuned to supplier 5,000 Material returned from jobs 4,000 Problem 3) A Ltd. follows non-integrated system of accounting. Following is the trial balance as on 1/1/09: Particulars Dr Cr Stores ledger control a/c 2,50,000 WIP control a/c 2,00,000 Finished goods control a/c 3,50,000 Financial ledger control a/c 8,00,000 8,00,000 8,00,000 The following transactions took place in January 2014: Particulars Rs Materials purchased 7,50,000 Material issued to: Production 3,00,000 Factory 40,000 Office 10,000 Total wages paid 3,00,000 Direct wages charged to production 2,50,000 Indirect wages 50,000 29 TYBAF CA BAF 501 SEM-V Office overheads paid 30,000 Office overheads applied to finished goods 38,000 Selling & Distribution overheads incurred 30,000 Selling & Distribution overheads applied to cost of 31,000 sales Factory overheads charged to production @ 35% of --- direct wages Finished goods produced 8,00,000 Cost of finished goods sold 10,00,000 Sales 12,00,000 You are required to prepare the following: 1. Stores ledger control a/c 2. WIP control a/c 3. Finished goods ledger control a/c 4. Financial ledger control a/c 5. Factory overhead control a/c 6. Office overhead control a/c 7. Selling & Distribution overhead control a/c 8. Profit & Loss a/c Problem 4) Ledger of Vivek Industries shows following balances as on 31 st march,2005. Particulars Dr. Cr. Raw material control account 50,200 Work in progress control account 12,745 Finished stock control account 25,980 General ledger control account 88,925 88,925 88,925 Following further transactions took place during the following quarter ended 30 th June,2005. Particulars Rs. Factory overheads allocated to work in progress( pay 11,786 then charge) Finished goods (at cost) 33,834 Purchases Raw material 22,422 Direct wages Allocated to work in progress 8,370 Raw materials issued to production 16,290 Cost of goods sold 41,389 Raw materials issued to production 836 Finished goods returned by customers (at cost) 2,856 Raw materials losses 1,236 Work in progress rejected (with no scrap value) 1,764 30 TYBAF CA BAF 501 SEM-V You are required to prepare above four accounts in the cost ledger and the trial balance as on 30th June,2005. (April 2008) Problem 5) On 31st March 2013, the following balances were extracted from the books of the Sundakphu Manufacturing Co. Ltd. Particulars Dr Rs. Cr Rs. Stores ledger control a/c 35,000 WIP control a/c 38,000 Finished goods control a/c 25,000 Cost ledger control a/c 98,000 98,000 98,000 The following transactions took place in April 2013: Particulars Amt Rs. Particulars Amt Rs. Raw Materials: Indirect labour 25,000 - Purchased from S & Co. 95,000 Factory overhead incurred 50,000 -Returned to suppliers 3,000 Selling & administrative 40,000 expenses -Issued to production 98,000 Cost of finished goods 2,13,000 produced -Returned to stores 3,000 Cost of goods sold 2,10,000 Productive wages 40,000 Sales 3,00,000 Factory overheads are applied to production at 150% of direct wages, any under/over absorbed overheads being carried forward for adjustment in the subsequent months. All administrative & selling expenses are treated as period costs & charged to Profit & Loss a/c of the month in which they are incurred. 1. Cost ledger control a/c 2. Stores ledger control a/c 3. WIP control a/c 4. Finished goods stock control a/c 5. Factory overhead control a/c 6. Costing Profit & Loss a/c 7. Trial balance as on 30th April 2013. (November 2013) Problem 6) Following ledger balances are taken from the books of Amar Dye Chem Ltd. as on 31.3.2010 Particulars Dr Cr Raw materials control a/c 25,418 Nominal ledger control a/c 44,780 WIP Control a/c 6,370 Finished stock control a/c 12,992 44,780 44,780 Further transactions took place upto 30th September,2010 Factory overheads 5,893 Finished goods (cost) 18,417 Raw material loss 618 Return from customer(debtors) 1,430 31 TYBAF CA BAF 501 SEM-V Rejection of WIP 880 Raw material purchase 11,211 Wages (allocated to WIP) 4,185 Cost of goods sold 20,695 Materials given for production 8,145 Raw material credited by supplier 420 Prepare: 1. Raw material control a/c 2. WIP control a/c 3. Finished stock control a/c 4. Nominal ledger control a/c 5. Trial balance on 30.9.2010. (TYBAF October 2010 exam) Problem 7) Ledger of Amit Industries shows following balances as on 1/4/03 Particulars Dr. Cr. Raw material control account 53,375 Work in progress control account 1,04,595 Finished stock control account 30,780 General ledger adjustment account 1,88,750 1,88,750 1,88,750 Transactions for the quarter ended 30-6-03 are as under: Particulars Rs. Factory overheads incurred ……fact oh to gen 95,200 Sales 2,56,000 Purchase raw material 26,700 Direct wages paid (including indirect wages rs.23,000) 77,500 Raw materials issued to production 40,000 Raw materials issued to factory repairs 900 Production overhead under absorbed & written off 3,200 Work in progress rejected (with no scrap value) 1,764 The company’s gross profit is 25% on factory cost. At the end of the quarter, WIP stock increased by Rs.7,500. Prepare the relevant control accounts, costing profit and loss account and general ledger adjustment A/c trial balance as on 30-6-03. Problem 8) Ledger of Kishore limited shows the following balances as on 1 st April 2008. Particulars Dr Cr Raw material control account 32,000 WIP control a/c 10,500 Finished goods control account 6,000 General ledger control account 48,500 48,500 48,500 st th Transactions during period 1 April 2008 to 30 September 2008 were as under: 32 TYBAF CA BAF 501 SEM-V Particulars Rs. purchased Raw materials 1,85,000 Purchase for specific jobs 8,000 Direct wages 78,000 Indirect factory wages 12,500 Administration salaries 36,000 Selling and distribution salaries 17,500 Production expenses (pay) 18,400 Administration expenses (pay) 24,000 Selling and distribution expenses(pay) 10,500 Stores issued to maintenance department 4,500 Stores issued to production 1,75,000 Stores returned to suppliers 1,500 Production overheads allocated to production 37,000 Administration overheads absorbed to finished goods 58,000 Selling and distribution absorbed to sales 26,500 Finished goods produced 2,95,000 Cost of goods sold 3,50,000 Sales 4,10,000 You are required to prepare necessary accounts 33 TYBAF CA BAF 501 SEM-V Unit 3: Operating costing /Service costing Meaning: Service costing is a method used for determining the cost per unit of service rendered. The term service costing is defined as the cost of specific services and function. Operating service is applicable when standardize service is provided either by an undertaking or by a service cost centre within an undertaking. CIMA defines Service Costing as ‘cost accounting for services or functions (e.g., canteens, maintenance, personnel). These may be referred to as service centres, departments or functions.’ Service Costing is also known as ‘operating costing’ is used for establishing costs of services rendered or services offered for sale and no items are produced. The method of costing is similar to output costing. As per CAS 5 Costs are classified into Running cost (variable) and standing cost (fixed). CAS 5 is mandatory to apply with effect from 1st April 2010. 1. Standing or Fixed Charges: These charges are included while ascertaining the cost whether or not the vehicle is operating. Insurance, tax, depreciation, part of driver wages, interest on capital, general supervision, and salary of operating managers are items which come under the category of fixed or standing charges. 2.Operating and running charges: Running costs are the cost of operations. These charges vary more or less in direct proportion to kilometres. These expenses are variable in nature because they are dependent on distance covered and trips made. Application of Service Costing: Service costing is used in service organizations like transport companies, hotels, hospitals, power generation, colleges, boiler houses etc. Service costing is applied to the operations concerned in an organization which provide services to production departments. In other words, service costing is method used for Internal or External Service. for example, Canteen for the staff, Hospital for the staff, Boiler house for supplying steam to production departments, Captive Power generation unit, operation of fleet of vehicles for transport of raw material to factory or distribution of finished goods to the market outlets, computer department services used by other departments etc. When services are offered to outside customers with a profit motive and it is the business of the organization in offering services, like Transport organization, 34 TYBAF CA BAF 501 SEM-V Hotel business, Power generation company etc., Service Costing is applied. All costs incurred during a period are collected and analyzed and then expressed in terms of a cost unit of service. Objectives of operating costing/service costing: 1. To control costs 2. To ascertain per unit cost 3. To calculate selling price 4. To reduce the inefficiency 5. To provide comparative information to management 6. To classify the expenses into fixed and variable and help management in decision making. 7. To analyze idle running time and cost Features: 1. Variable and fixed cost: (Behaviour) All costs are suitably classified under fixed and variable. 2. Total / unit cost: The cost per unit is calculated as follows: 3. Service industry: Service costing is used in service organizations like transport companies, Hotels, hospitals, airlines, theatres, power house, water supply etc. 4. Intangible & perishable: Services are intangible & perishable in nature. 5. Unique and Standard Service: The services so offered by such organizations are specialized and exclusive. 6. Internal or External Service: The service costing can be performed internally, to determine the operating cost of the supporting activities in manufacturing industries. Else, it can be carried out externally, by the companies dedicated to rendering such services. 7. Periodic or Order Wise Computation: The service costing records the overheads at regular intervals, i.e., monthly or yearly but for operating cost of vehicles like tractors and JCB machines, order wise computation is adopted. 8. No closing stock: There is no opening and closing stock in service costing. 9. Averaging of cost: Under service costing, all the costs are averaged. 10. Form of process costing 35 TYBAF CA BAF 501 SEM-V It is form of process costing. 11. Selection of proper cost unit All the variable and fixed costs are then collected, analysed and expressed in terms of appropriate cost unit. For e.g., Per passenger, per room day etc. 12. Selling Prices for services: Selling Price for the service is fixed by adding a markup(profit) to the cost per unit. The cost per unit of service is used for control of costs by comparing costs month by month or period by period etc. Cost Unit in Service Costing: To measure the cost of business operations in a service, cost parameters are to be considered while deciding a suitable unit for costing. There are two different kinds of cost unit : A) Simple Cost Unit: The cost unit, which uses only one single parameter. Examples: Nature Of Service Cost Unit Organization Water Supply Per Kiloliter of water supplied Canteen Per Meal / Per Person / Per Staff Road Maintenance Per Kilometer Street Lighting Per Lamp / Per Point Gas Per Cubic Meter / Per Kilogram Private Transport Per Kilometer/ Per Hour/ Per Trip/ Per Passenger B) Composite Cost Unit: The most commonly used cost unit in service costing is the composite cost unit. Here, the measurement of two parameters is combined to form a single cost unit. Examples: Nature Of Service Cost Unit Organization Hospital Per Bed-Day / Per Patient-Day Hotel Per Room-Day / Per Room-Night / Per Bed- Day Electricity Per Kilowatt-Hour Entertainment in Cinema or Theatre Per Ticket-Show Passenger Transport Per Passenger-Kilometer / Per Passenger- Mile Goods Transport Per Tonne-Mile / Per Quintal-Kilometer 36 TYBAF CA BAF 501 SEM-V Proforma of service costing (transport) In the books of ABC transport ltd. Service cost sheet ( ___ buses) Particulars ₹ ₹ A. Fixed/ standing charges Salaries of office staff Taxation and insurance Depreciation Interest and other expenses Total Fixed Charges (A) B. Running or Operating Charges Wages of Drivers, Cleaners, Conductors etc. Repairs and maintenance/upkeeping Tyre and tubes Diesel, petrol, Oil etc Total variable Charges (B) C. Total Operation Cost (A+B) D. Add :Profit E. Net Takings /revenue Proforma of service costing (Hotel) In the books of ________International Hotel Operating cost sheet Particulars Rs. Rs. I) Fixed charges : Building expenses Furniture repairs Permanent staff salaries Food express Sundry expresses Depreciation on building Depreciation on furniture Total variable cost (A) II)Variable charges : Temporary staff Electricity Total variable cost (B) Total costs(A+B) Add: Profit Total room tariff 37 TYBAF CA BAF 501 SEM-V Proforma of service costing (Hospital) In the books of ________hospital Operating cost sheet Particulars Rs. Rs. I) Fixed cost 1. Salaries Supervisors Nurses Ward boys 2. Rent paid 3. Repairs and maintenance 4. Cost of oxygen, x-ray etc. 5. General administration Total Fixed cost (A) II) Variable cost 1. Food 2. Janitor service charges 3. Laundry service 4. Medicine charges 5, Doctors’ fees 6. Hire charges of extra beds Total Fixed cost (B) Total cost (A+B) Add : profit ( balancing fig) Total Revenue Fill in the blanks: 1. Service costing is used in service organizations 2.The method of service costing is similar to output costing. 3. As per CAS 5, Costs are classified into Running cost and standing cost. 4. Wages paid to drivers is example of running cost. 5. Permit fees is an example of standing cost. 6. Services are intangible/ perishable in nature. 7. under service costing, classified under fixed and variable. 8. operating costing uses the method of job costing when costing a particular trip by a bus. 9. overhauling is running cost. 10. in transporting costing standing expenses will not be in direct proportion to kilometre run. 11. Tax is a standby cost. True/ False: 1. service costing is applicable for manufacturing products. (false) 2. services are tangible in nature (false) 3. there is no closing stock in service costing (true) 4. costs are classified as variable and fixed cost under CAS 5 (true) 5. in composite cost unit, measurement of two parameters is combined to form a single cost unit. 38 TYBAF CA BAF 501 SEM-V 6. depreciation is example of running cost (false) 7. operating costing and operation costing is same (false) 8. water supply service company uses number of hours pumped as cost unit (false) 9. cost classification into Running cost and standing cost is important aspect in unit costing. (false) 10. operating costing is called as service costing (true) 11. fixed and running cost is not same ( true) MCQs: 1. _________is a method used for determining the cost per unit of service rendered. a. Process costing b. Job costing c. Contract costing d. Operating costing 2. Service costing method will not be applicable in case of ________ a. Hospitals b. Hotels c. Transport d. Oil refining 3. ____________ is object of service costing. a. To control costs b. To ascertain per unit cost c. To calculate selling price d. All of the above 4. In _____, measurement of two parameters is combined to form a single cost unit. a. Simple cost unit b. Composite cost unit c. Complex cost unit d. Multiple cost unit 5. The method of service costing is similar to______. a. Output costing b. Job costing c. Process costing d. Contract costing 6. Petrol and diesel charges is example of ___________ a. Running cost. b. Standing cost c. Maintenance cost d. None of the above 39 TYBAF CA BAF 501 SEM-V 7. ______is example of fixed cost. a. Depreciation b. Tyre and tube c. Oil and grease d. Salary of driver 8. In transporting costing ________will not be in direct proportion to kilometre run. a. Standing expenses b. Running cost c. Direct cost d. Operating cost 9. If total operating cost is Rs.80,000 and effective passenger kms are 3,20,000 then rate for per passenger km will be ______. a. Rs. 0.52 b. Rs. 0.25 c. Rs. 0.42 d. Rs. 2.25 11. Services are _________in nature. a. Intangible & perishable b. Tangible & durable c. Complex d. Long lasting 12. ______is example of running cost. a. Depreciation b. Insurance c. Road licence d. Salary of driver Problem 1) Om Prabhu Shanti Transport Company operates 5 buses between two towns which are 50 kms apart. The seating capacity of each bus is 50 passengers. The following particulars were obtained from their books for the month of April 2010. Particulars Rs. Wages of drivers, conductors and cleaners V 2,40,000 Salaries of office staff F 1,00,000 Diesel and Other Oil expenses V 3,50,000 Repairs and maintenance(upkeeping) V 80,000 Taxation and insurance F 30,000 Depreciation (On Straight Line Basis) F 2,60,000 Interest and Rent of Garage F 2,00,000 Commission to Staff (based on takings) V 1,30,000 Actual passengers carried were 75% of the seating capacity. All buses ran on all 30 days of the month. Each bus made one round trip per day. Classify the Operating Costs into standing charges and Running costs, and find out the cost per passenger kilometre. ( Oct. 2010) 40 TYBAF CA BAF 501 SEM-V Problem 2) A Transport Service Company is running 5 buses between two towns which are 50 kms apart. The seating capacity of each bus is 50 passengers. The following particulars were obtained from its books for April, 2018. Particulars Rs. Wages of drivers, conductors and cleaners(per bus) V 24,000 Salaries of office staff and inspectors F 50,000 Repairs and maintenance V 40,000 Tax and insurance F 80,000 Depreciation (per bus) F 26,000 Interest F 1,00,000 Tyre and tube (per km) V 0.5 Diesel, oil and lubricants (per litre) V 45 On an average all buses give a mileage of 10 kms per litre. Actual passengers carried were 75 percent of the seating capacity. All the buses ran for 30 days. Each bus made one round trip per day. Find out how much will be the net takings per passenger km if 15% is added to the cost. ( April 2007) Problem 3) Mr. Shyam owns a fleet of buses and following information are available from records : Number of buses 10 Cost of each bus 2,00,000 Salary of manager ….F 7,000 p.m. Salary of accountant..F 5,000 p.m Salary of cleaner V 200 p.m Salary of mechanic V 400 p.m Garage rent ….F 600 p.m