ACCOUNTING FOR BUSINESS II

CHAPTER 1
COST SHEET

Meaning And Scope of Cost Accountancy

The term cost accountancy is wider than the term cost accounting. According to the Terminology
of Management and Financial Accountancy Published by the Chartered Institute of Management
Accountants, London, cost accountancy means, “the application of costing and cost accounting
principles, methods and techniques to the science, art and practice of cost control. It includes the
presentation of information derived there from for the purpose of managerial decision making.

Cost Accounting

Cost accounting is the process of accounting for costs. It embraces the accounting procedures
relating to recording of all income and expenditure and the preparation of periodical statements
and reports with the object of ascertaining and controlling costs. It is thus the formal mechanism
by means of which costs of products or services are ascertained and controlled.

Costing

Costing is “the technique and process of ascertaining costs.” Cost accounting is different from
costing in the sense that the former provides only the basis and information for ascertainment of
cost. Once the information is made available the costing can be carried out arithmetically by
means of memorandum statements or by method of integral accounting.

However, the two terms costing and cost accounting are often used interchangeably. No such
distinction has also been observed for the purpose of this book. Wheldon has given an exhaustive
definition of costing after expanding the ideas contained in the definitions of the terms ‘costing
and cost accounting’. According to him costing is, “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”.

Cost Control

According to the Institute of Cost and Works Accountants of India, cost control means “The act of
power of controlling or regulating or dominating or commanding costs through the application of
management tools and techniques to the performance of any operation to most predetermined
objectives of quality, quantity, value and time oat an optimum outlay”.

Objectives of Cost Accounting

The main objectives of cost accounting can be summarized as follows:-

 1. Ascertaining Costs: - The first and foremost objective of cost accounting is to find out
cost of a product, process or service. The other objectives which have been mentioned
hereafter scan be achieved only when the costs have been ascertained.
2. Determining Selling Price: - Business enterprises are run on a profit – making basis. It
is thus necessary that the revenue should be greater than the costs incurred in producing
goods and services from which the revenue is to be derived. Cost accounting provides
information regarding the cost to make and sell such products or services.
3. Measuring and Increasing Efficiency: - Cost accounting involvers a study of the
various operations used in manufacturing a product or providing a services. The study
facilitates measuring of the efficiency of the organisation as a whole as well as of the
departments besides devising means of increasing the efficiency.
4. Cost Control and Cost Reduction : - Cost accounting assists in cost control it uses
techniques such as budgetary control, standard costing etc. for controlling costs. Budgets
are prepared will in advance. The standards for each item of cost are determined, the
actual costs are compared with the standard costs and variances are found out as to their
causes. This greatly increases the operating efficiency of the enterprise. Besides it, cost is
required to be reduced also constant research and development activities help in reduction
of costs without compromising with the quality of goods or services.
5. Cost Management: - The term ‘Cost Management’ includes the activities of managers in
short-run and long-run planning and control of costs. Cost management has a broad focus. It
includes both cost control and lost reduction. As a matter of fact cost management is often
invariably linked with revenue and profit planning. For instance, to enhance revenue and
profits, the management often deliberately incurs additional costs for advertising and
product modifications.
6. Ascertaining Profits: - Cost accounting also aims at ascertaining the profits of each and
every activity. It produces statements at such intervals as the management may require.
The financial statements prepared under financial accounting, generally once a year or half
– year, are spaced too far apart in time to meet the needs of the management. In order to
operate the business at a high level of efficiency, it is essential for the management to have
a frequent review of production, sales and operating results. Cost accounting provides
daily, weekly or monthly volumes of units produced, accumulated costs together with
appropriate analysis so that quantum of profit and profitability is known.
7. Providing Basis for Managerial Decision – Making : - Costs accounting helps the
management in formulation operative policies. These policies may relate to any of the
following matters:-
(i) Determination of cost – volume – profit relationship.
(ii) Shutting down or operating at a loss.
(iii) Making or buying from outside supplies.
(iv) Continuing with the existing plant and machinery or replacing them by improved
and economical means.

Cost Accounting Versus Financial Accounting

Accounting may broadly be classified into two categories:-

(a) Financial Accounting and
(b) Management Accounting

Financial Accounting is concerned with recording, classifying and summarizing financial

transactions and preparing statements relating to the business in accordance with generally
accepted accounting concepts and conventions. It is mainly meant to serve all parties external to
the operating responsibility of the firm such as shareholders and creditors of the firm besides
providing information about the overall operational results of the business while management
accounting is concerned with accounting information which is useful for the management it is the
presentation of accounting information in such as way as to assist “the management in the creation
of policy and day to day operation of the undertaking.

IMPORTANCE OF COST ACCOUNTING

1. Costing helps in periods of trade depression and trade competition :-

In periods of trade depression the business cannot afford to have leakages which pass
unchecked. The management should know where economies may be sought, waste eliminated
and efficiency increased. The business has to wage a wax for its survival. The management
should know the actual cost of their products before embarking on any scheme of reducing the
prices on giving tenders. Adequate costing facilitates this.

2. Aids in price fixation:-

Though economic law & supply and demand and activities of the competitors, to a great extent,
determine the price of the article, cost to the producer does play an important part. The
producer can take necessary guidance from his costing records.

3. Helps in estimate:-
Adequate costing records provide a reliable basis upon which tenders and estimates may be
prepared. The chances of losing a contract on account of over – rating or losing in the
execution of a contract due to under – rating can be minimized. Thus, “ascertained costs
provide a measure for estimates, a guide to policy, and a control over current production”.

4. Helps in channeling production on right lines:-

Costing makes possible for the management to distinguish between profitable and non-
profitable activities profit can be maximized by concentrating on profitable operations and
eliminating non-profitable ones.

5. Wastages are eliminated:-

As it is possible to know the cost of the article at every stage, it becomes possible to chock
various forms of waste, such as time, expenses etc. or in the use of machine, equipment and
tools.

6. Costing makes comparison possible:-

If the costing records are regularly kept, comparative cost data for different periods and various
volumes of production will be available. It will help the management in forming future lines of
action.

7. Provides data for periodical profit and loss accounts:-

Adequate costing records supply to the management such data as may be necessary for
preparation of profit and loss account and balance sheet, at such intervals as may be desired by
the management.
It also explains in detail the sources of profit or loss revealed by the financial accounts thus
helps in presentation of better information before the management.
8. Aids in determining and enhancing efficiency :-
Losses due to wastage of material, idle time of workers, poor supervision etc., will be disclosed
if the various operations involved in manufacturing a product are studied by a cost accountant.
The efficiency can be measured and costs controlled and through it various devices can be
framed to increase the efficiency.

9. Helps in inventory control:-

Costing furnishes control which management requires in respect of stock of materials, work-in-
progress and finished goods. (This has been explained in detail under the chapter “Materials”)

10. Helps in cost reduction:-

Costs can be reduced in the long run when alternatives are tried. This is particularly important
ion the present day context of global competition cost accounting has assumed special
significance beyond cost control this way.

11. Assists in increasing productivity

Productivity of material and labour is required to be increased to have growth and more
profitability in the organisation costing renders great assistance in measuring productivity and
suggesting ways to improve it.

ELEMENTS OF COST

There are three broad elements of cost:-

(a) Material
(b) Labour
(c) Expenses

(a) Material: - The substance from which the product is made is known as material. It may
be in a raw or a manufactured state. It can be direct as well as indirect.

Direct Material: - All material which becomes an integral part of the finished product and
which can be conveniently assigned to specific physical units is termed as “Direct
Material”.
Following are some of the examples of direct material:-
(i) All material or components specifically purchased produced or requisitioned from
stores.
(ii) Primary packing material (e.g. – cartoon, wrapping, cardboard, boxes etc.)
(iii) Purchased or partly produced components.

Direct material is also described as raw-material, process material, prime material,

production material, stores material, constructional material etc.

Indirect Material: - All material which is used for purposes ancillary to the business and
which cannot be conveniently assigned to specific physical units is termed as “Indirect
Material”.

Consumable stores, oil and waste, printing and stationery etc. are a few examples of
indirect material
Indirect material may be used in the factory the office or the selling and distribution
division.
(b) Labour: - For conversion of materials into finished goods, human effort is needed such
human effort is called labour. Labour can be direct as well as indirect.

Direct labour: - Labour which takes an active and direct part in the production of a
particular commodity is called labour. Direct labour costs are, therefore specially and
conveniently traceable to specific products.
Direct labour is also described as process labour, productive labour, operating labour,
manufacturing labour, direct wages etc.

Indirect labour:- labour employed for the purpose of carrying out tasks incidental to goods
or services provided, is indirect labour such labour does not alter the construction,
composition or condition of the product. It cannot be practically traced to specific units of
output wages of store – keepers, foreman, time – keepers, directors, fees, salaries of
salesmen, etc. are all examples of indirect labour costs.
Indirect labour may relate to the factory the office or the selling and distribution division.

(c) Expenses: - Expenses may be direct or indirect.

Direct expenses: - These are expenses which can be directly, conveniently and wholly
allocated to specific cost centers or cost units. Examples of such expenses are: hire of some
special machinery required for a particular contract, cost of defective work incurred in
connection with a particular job or contract etc.
Direct expenses are sometimes also described as “chargeable expenses”.

Indirect expenses:- these are expenses which cannot be directly, conveniently and wholly
allocated to cost centers or cost units.

OVERHEADS:- It is to be noted that the term overheads has a wider meaning than the term
indirect expenses overheads include the cost of indirect material, indirect labour besides
indirect expenses.

Indirect expenses may be classified under the following three categories:-

(a) Manufacturing (works, factory or production) expenses:-

Such indirect expenses which are incurred in the factory and concerned with the running of
the factory or plant are known as manufacturing expenses. Expenses relating to production
management and administration are included there in. Following are a few items of such
expenses:
Rent, rates and insurance of factory premises, power used in factory building, plant and
machinery etc.

(b) Office and Administrative expenses

These expenses are not related to factory but they pertain to the management and
administration of business such expenses are incurred on the direction and control of an
undertaking example are :- office rent, lighting and heating, postage and telegrams,
telephones and other charges; depreciation of office building, furniture and equipment,
bank charges, legal charges, audit fee etc.

(c) Selling and Distribution Expenses:-

 Expenses incurred for marketing of a commodity, for securing orders for the articles,
dispatching goods sold, and for making efforts to find and retain customers are called selling
and distribution expenses examples are:-
Advertisement expenses cost of preparing tenders, traveling expenses, bad debts, collection
charges etc.
Warehouse charges packing and loading charges, carriage outwards, etc.

The above classification of different elements of cost can be presented in the form of the
following chart:

ELEMENTSOF
ELEMENTS OFCOST
COST

MATERIAL
MATERIAL LABOUR
LABOUR EXPENSES
EXPENSES

DIRECT
DIRECT INDIRECT
INDIRECT DIRECT
DIRECT INDIRECT
INDIRECT DIRECT INDIRECT
INDIRECT
DIRECT

FACTORY
FACTORY FACTORY
FACTORY FACTORY
FACTORY

OFFICE
OFFICE OFFICE
OFFICE OFFICE
OFFICE

SELLING
SELLING SELLING
SELLING
SELLINGDISTRIBUTION
SELLING DISTRIBUTION
DISTRIBUTION
DISTRIBUTION DISTRIBUTION
DISTRIBUTION
 OR

Elements
Elements
ofcost
of cost

DIRECTMATERIAL
DIRECT MATERIAL DIRECTLABOUR
DIRECT LABOUR DIRECTEXPENSES
DIRECT EXPENSES OVERHEADS
OVERHEADS

SELLING&&DISTRIBUTION
SELLING DISTRIBUTION
FACTORYOVERHEADS
FACTORY OVERHEADS OFFICEOVERHEADS
OFFICE OVERHEADS
OVERHEADS
OVERHEADS

INDIRECT
INDIRECT INDIRECT
INDIRECT
INDIRECTMATERIAL
INDIRECT MATERIAL MATERIAL
MATERIAL MATERIAL
MATERIAL

INDIRECT
INDIRECT INDIRECT
INDIRECT
INDIRECT
INDIRECT LABOUR
LABOUR LABOUR
LABOUR
LABOUR
LABOUR

INDIRECT
INDIRECT INDIRECT
INDIRECT
INDIRECT
INDIRECT EXPENSES
EXPENSES EXPENSES
EXPENSES
EXPENSES
EXPENSES
Items excluded from cost accounts

There are certain items which are included in financial accounts but not in cost accounts. These
items fall into three categories:-

Appropriation of profits

(i) Appropriation to sinking funds.

(ii) Dividends paid
(iii) Taxes on income and profits
(iv) Transfers to general reserves
(v) Excess provision for depreciation of buildings, plant etc. and for bad debts
(vi) Amount written off – goodwill, preliminary expenses, underwriting commission,
discount on debentures issued; expenses of capital issue etc.
(vii) Capital expenditures specifically charged to revenue
(viii) Charitable donation

Matters of pure finance

(a) Purely financial charges:-

(i) Losses on sale of investments, buildings, etc.
(ii) Expenses on transfer of company’s office
(iii) Interest on bank loan, debentures, mortgages, etc.
(iv) Damages payable
(v) Penalties and fines
(vi) Losses due to scrapping of machinery
(vii) Remuneration paid to the proprietor in excess of a fair reward for services rendered.

(b) Purely financial incomes:-

(i) Interest received on bank deposits
(ii) Profits made on the sale of investments, fixed assets, etc.
(iii) Transfer fees received
(iv) Rent receivable
(v) Interest, dividends, etc. received on investments.
(vi) Brokerage received
(vii) Discount, commission received

Abnormal gains and losses:-

(i) Losses or gains on sale of fixed assets.
(ii) Loss to business property on account of theft, fire or other natural calamities.

In addition to above abnormal items (gain and losses) may also be excluded from cost
accounts. Alternatively, these may be taken to costing profit and loss account.

Components of total cost

Prime cost: - It consists of costs of direct material, direct labour and direct expenses. It is also
known as basic, first or flat cost.
Factory cost:- It comprises of prime cost and in addition works of factory overheads which
includes costs of indirect material, indirect labour and indirect expenses of the factory. The cost is
also known as works cost, production or manufacturing cost.

Office cost: - If office and administrative overheads are added to factory cost office cost is
arrived at this is also termed as administrative cost or the total cost of production.

Total cost:- Office cost or total cost of production selling and distribution overheads are added to
the total cost of production to get the total cost or the cost of sales.
Cost of sales or total cost. The various components of total cost can be depicted through the help
of the following chart:-

Components of Total cost

Direct material plus

Direct labour plus Prime cost or Direct cost or First cost
Direct expenses

Prime cost plus works cost or factory or production cost or manufacturing Works
overheads cost

Work cost plus office and

Administrative overheads

Office cost plus selling

And distribution overheads

Adjustments for inventories

The following adjustments may have to be made for inventories of raw materials, work – in –
progress and finished goods while computing the different components of cost:

(i) Direct Opening stock Purchases of Closing stock

Material = of Direct + Direct - of Direct
Consumed material material material
(ii) Works Gross works Opening work - Closing work – in
= + __
Cost cost in – progress progress

(iii) Cost of production = cost of production + Opening stock Closing stock

of goods sold of finished _ of finished good

Illustration 1. Calculate prime cost from the following information:-

Direct material - Rs. 40,000, Direct labour - Rs. 30,000 Direct expenses - Rs. 25.000

Solution: Prime cost = Direct Material + Direct labour + Direct expenses

 = Rs. 40,000 + Rs.30, 000 + Rs. 25,000
= Rs. 95,000

Illustration 2.Calculate prime cost from the following information:-

Opening stock of raw material = Rs. 12,500
Purchased raw material = Rs. 75,000
Expenses incurred on raw material = Rs. 5,000
Closing stock of raw material = Rs. 22,500
Wages Rs. 47,600 Direct expenses Rs. 23,400

Solution: - Calculation of raw material consumed:-

Raw material consumed = Opening stock of material + purchases of Raw material
+ expenses incurred on raw material - closing stock of raw material

= Rs 12,500 + Rs 75,000 + Rs 5,000 – Rs 22,500

= Rs. 92,500 – Rs 22,500
= Rs. 70,000

Prime cost = Raw material consumed + Direct labour + Direct expenses

= Rs 70,000 + Rs 47,600 + Rs 23,400
= Rs 1, 41,000

OR

It can be shown in vertical form such as cost sheet

Particular Details (Rs) Amount (Rs)

Opening stock of raw material 12,500

Add:- Purchase 7,500
Add:- Expenses incurred on purchases 5,000
---------------
Raw material available 92,500
Less :- closing stock of raw material 22,500
---------------
Raw material consumed 70,000
Add:- Direct wages or labour 47,600
Add:- Direct expenses 23,400
--------------
Prime cost 1,41,000

Illustration 3. Calculate works cost or factory cost from the following details:-

Raw material consumed = Rs 50,000

Direct wages = Rs20, 000
Direct expenses = Rs 10,000
Factory expenses 80% of direct wages
 Opening stock of work in progress = Rs 15,000
Closing stock of work in progress = Rs 21,000

Solution: - Calculation of factory cost

Particular Amount (Rs) Amount (Rs)

Direct material consumed 50,000

Add:- Direct wages 20,000
Add:- Direct Expenses 10,000
-------------
Prime cost 80,000

Add:- Factory expenses 16,000

--------------
Current manufacturing cost 96,000
Add:- Opening stock of work in progress 15,000
--------------
Total goods processed during the period 1,11,000
Less:- Closing sock of work in progress 21,000
--------------
Factory cost or work cost 90,000

Illustration 4. Calculate cost of production from the following information:-

Raw material purchased = Rs 42,500
Freight paid = Rs 5,000
Labour charges = Rs 12,500
Direct expenses = Rs 10,000
Factory overhead 80% of Direct labour charges
Administrative overhead = 10% of work cost

Opening stock Closing stock

Raw material 8,000 10,000
Work in progress 7,500 9,000

Solution: - Calculation of cost of production:-

Particular Amount (Rs) Amount (Rs)

Material purchased 42,500

Add:- freight 5,000
-------------
Total cost of material purchased 47,500
Add:- Opening stock of Raw material 8,000
------------
Material available for consumption 55,500
Less:- Closing stock of Raw material 10,000
------------
Raw material consumed 45,500
Add:- Direct labour charges 12,500
Add:- Direct expenses 10,000
Prime cost 68,000
Add:- Factory overhead 10,000
------------
Current manufacturing cost 78,000
Add:- Opening stock of work in progress 7,500
------------
Total goods processed during the period 85,500
Less:- Closing stock of work in progress 9,000
------------
Factory cost 76,500
Add:- Administrative overhead 7,650
------------
Cost of production 84,150

Illustration 5. Prepare cost sheet from the following particular in the book of B. M. Rehman
Raw material purchased = Rs. 1, 20,000
Paid freight charges = Rs 10,000
Wages paid to laborers = Rs 35,000
Directly chargeable expenses = Rs 25,000
Factory on cost = 20% of prime cost
General and administrative expenses = 4% of factory cost
Selling and distribution expenses = 5% of production cost
Profit 20% on sales
Opening stock Closing stock
Raw material 15,000 20,000
Work in progress 17,500 24,000
Finished goods 20,000 27,500
Solution:-
Book of B. M. Rehman
Cost sheet

Raw material purchased 1,20,000

Add:- freight charges 10,000
---------------
Total cost of raw material purchased 1,30,000
Add:- opening stock of raw material 15,000
---------------
Cash of raw material available 1,45,000
Less:- closing stock of raw material 20,000
--------------
Raw material consumed 1,25,000
Add:- wages paid to labours 35,000
Add:- Directly chargeable expenses 25,000
--------------
Prime cost 1,85,000
Add:- Factory overhead 20% of prime cost 37,000
---------------
Current manufacturing cost 2,22,000
Add:- Opening stock of work in progress 17,500
---------------
Total goods processed during the period 2,39,500
Less:- closing stock of work in progress 24,000
---------------
Factory on work cost 2,15,500
Add:- General & administrative expenses 4% of factory cost 8,620
---------------
Cost of production 2,24,120
Add:- opening stock of finished goods 20,000
--------------
Goods available for sales 2,44,120
Less:- closing stock of finished goods 27,500
--------------
Cost of goods sold 2,16,620
Add:- selling and distribution expenses 5% of production 11,206
cost --------------
Cost of sales 2,27,826
Add:- Profit 56,956.50
---------------
Sales 2,84,782.50

Illustration 6. Prepare cost sheet in the book of M. B. Rehman from the following particulars.

Opening stock: - Raw material = Rs 5,000

Finished goods = Rs 4,000
Closing stock: - Raw material = Rs 4,000
Finished goods = Rs 5,000
 Raw material purchased = Rs 50,000
Wages paid to laboures = Rs 20,000
Chargeable expenses = Rs 2,000
Rent and Taxes = Rs 7,400
Power = Rs 3,000
Experimental expenses = Rs 600
Sale of wastage of material = Rs 200
Office management salary = Rs 4,000
Office printing & stationery = Rs 200
Salaries to salesman = Rs 2,000
Commission to traveling agents = Rs 1,000
Sales = Rs 1, 00,000

Solution:-
Book of B. M. Rehman
Cost sheet

Particular Details (Rs) Amount (Rs)

Raw material purchased 50,000

Add:- Opening stock of raw material 5,000
---------------
Raw material for consumption 55,000
Less:- closing stock of raw material 4,000
---------------
Raw material consumed 51,000
Less:- Sale of wastage of materials 200
------------- 50,800
Add:- Direct labour 20,000
Add:- Direct chargeable expenses 2,000
--------------
Prime cost 72,800
Add:- Factory overhead
Rent & Taxes 7,400
Power 3,000
Experimental charges 600
-------------- 11,000
Factory cost 83,800
Add:- Administrative overhead:-
Office management salary 4,000
Office printing & stationery 200
--------------- 4,200
Cost of production 88,000
Add:- Opening stock of finished goods 4,000
-------------
Goods available for sales 92,000
Less:- closing stock of finished goods 5,000
-------------
Cost of goods sold 87,000
Add:- selling and distribution overhead:-
Salaries of salesman 2,000
Commission to traveling agent 1,000
-------------- 3,000
Cost of sales 90,000
Profit 10,000
--------------
Sales 1,00,000

Illustration 7. The cost of sale of production ‘A’ is made up as follows:-

Material used in manufacturing Rs 5,500

Material used in packing material Rs 1,000
Material used in selling the product Rs 150
Material used in the factory Rs 175
Material used in the office Rs 125
Labour required in production Rs 1,000
Labour required for supervision in factory Rs 200
Expenses direct factory Rs 500
Expenses indirect factory Rs 100
Expenses office Rs 125
Depreciation of office building Rs 75
Depreciation on factory plant Rs 175
Selling expenses Rs 350
Freight on material Rs 500
Advertising Rs 125

Assuming that all products manufactured and sold, what should be the selling price be fixed to
obtain a profit of 20% on selling price.
Solution
Cost Sheet

Particular Amount (Rs) Amount (Rs) Amount (Rs)

Direct material:-
Material used in manufacturing 5,500
Material used in Packing material 1,000
Freight on material 500
------------- 7,000
Direct wages:-
labour require in production 1,000
Direct expenses:- Direct factory 500
------------
Prime cost 8,500
Add:- Factory overhead
Indirect material used in factory 75
Indirect labour required for supervision 200
Indirect factory expenses 100
Depreciation factory 175
 ------------- 275
------------- 550
Factory on works cost 9050
Add:- office & administrative expenses
Indirect material 125
Indirect expenses office 125
Indirect depreciation 75
------------ 200
------------- 325
Total cost of production 9375
Add:- selling and distribution overhead:-
Indirect material 150
Indirect expenses 350
Advertisement 125
------------ 475
------------- 625
Cost of sales 10,000
Profit 2,500
-----------
Sales 12,500

Illustration 8.

Prepare a statement of cost from the following trading and P/L account for the year ending
March 31, 2008

Particular Amount (Rs) Particular Amount (Rs)

To opening stock material 12,000 By sales 2,00,000

Finished goods 40,000 By closing stock 20,000
material
To purchases 1,20,000 Finished goods 50,000
To cost of moulds 3,000
To salary of factory manger 1,000
To depreciation of machine 800
To gross profit 63,200
-------------- ---------------
2,70,000 2,70,000
-------------- -------------
To office salary 9,000 By Gross profit 63,200
To salesman salary 6,000 By interest from 800
bank
To insurance of office building 1,000 By dividend received 200
To godown expenses 800 By rent received 900
To directors fees 2,000
To telephone charges 700
To showroom expenses 1,200
To delivery van expenses 1,500
To preliminary expenses 2,000
To interest on deb. 700
To market research exp. 600
To net profit 39,000
-------------- --------------
65,100 65,100
-------------- --------------

Solution
Statement of cost
(For the year ending 31st March 2008)
Particular Details (Rs) Amount (Rs)

Direct material:-
Raw material purchased 1,20,000
Add:- opening stock of raw materials 12,000
---------------
Raw material for consumption 1,32,000
Less:- Closing sock of raw materials 20,000
---------------
Raw material consumed 1,12,000
Add:- Direct labour 30,000
---------------
Prime cost 1,42,000
Add:- Factory overhead:-
Cost of moulds 3,000
Factory manager salary 1,000
Depreciation on machinery 800
--------------- 4,800
---------------
Factory cost 1,46,800
Add:- office and administrate overhead
Salary 9,000
Insurance 1,000
Directors fees 2,000
Telephone charges 700
--------------- 12,700
-------------
Cost of production 1,59,500
Add:- Opening stock of finished goods 40,000
--------------
Goods available for sales 1,99,500
Less:- Closing stock of finished goods 50,000
--------------
Cost of goods sold 1,49,500
Add:- selling & distribution ext:-
Salesman’s salary 6,000
Insurance (godown) 800
Showroom expenses 1,200
Expenses of delivery van 1,500
Market research expenses 600
------------- 10,100
----------------
Cost of sales 1,59,600
Profit 40,400
 ----------------
Sales 2,00,000

Illustration 9.

The following inventory data relate to Nazia Ltd.

Inventories
Opening Closing
Finish goods Rs 1,100 Rs 950
Work in progress Rs 700 Rs 800
Raw materials Rs 900 Rs 950

Additional information:-
Cost of goods available for sales = Rs 6840
Total goods processed during the period = Rs 6540
Factory on cost = Rs 1670
Direct material used = Rs 1930

Requirements:-
(i) determine raw material purchase
(ii) determine the direct labour and cost incurred
(iii) determine the cost of goods sold

Solution

(i) Raw material purchased:-

Raw material consumed = opening stock + purchases – closing stock
OR Rs 1,930 = Rs 900 + Purchases – Rs 950
OR Rs 1,930 + Rs 50 = purchases
Rs 1,980 = Raw material purchased

(ii) Direct labour cost:-

Cost of goods processed during the year = Rs 6,540
Less: - Opening work in progress = Rs 700
---------------
Rs 5,840
Less: - Factory overheads = Rs 1,670
---------------
Prime cost = Rs 4,170
Less: - Raw material consumed = Rs 1930
--------------
Direct labour cost = Rs 2,240

(iii) Cost of goods sold:-

= cost of goods available for sales – closing stock finished goods
= 6840 – 950 = Rs 5890

Illustration 10.
Mr. Zia furnishes the following data related to the manufacture of a standard product during the
month of August 2008

Raw material consumed - Rs 15,000

Direct labour - Rs 5,000
Machine hours worked - Rs 900
Machine hour rate - Rs 5
Administration overheads = 20% of works cost
Selling overheads - Rs 0.50 per unit
Unit produced - Rs 17,100
Unit sold - 16,000 @ Rs 4 per unit

You are required to prepare a cost sheet from the above showing:-
(a) The cost per unit
(b) Cost per unit sold and profit for the period
Solution
Book of Zia
Cost sheet
(For the month of August 31, 2008)

Particular Amount (Rs) Amount (Rs)

Direct material consumed 15,000 0.878

Direct labour 5,000 0.292
Direct expenses 4,000 0.233
-------------- --------------
Prime cost 24,000 1.403
Factory overheads
(900 hours @ Rs 5 per hour) 4,500 0.263
-------------- ---------------
Work cost 28,500 1.666
Administrative overheads
@ 20% of works cost 5,700 0.333
-------------- ---------------
Cost of production 34,200 2,000
Less:- closing stock on August 31, 2008
(1100 units @ Rs 2 per unit) 2,200 -----
----------- --------------
Cost of goods sold 32,000 2.000
Selling overheads @ Rs 0.50 per unit for 16000 8,000 0.50
----------- -------------
Cost of sales 40,000 2.50
Profit 24,000 1.50
------------ ------------
Sales (1600 unit) 64,000 4.00

* Closing stock = unit produced - units sold

= 17100-16000
= 1100 units
Exercise Questions.

Theoretical Questions:-

1) Explain the meaning of cost accountancy

2) Define
a) Direct materials
b) Direct wages
c) Direct expenses

3) What is cost accounting? Discuss briefly its important functions in a business firm
4) Explain the important objectives of cost accounting?
5) Distinguish between:-
a) Direct expenses and indirect expenses?
b) Direct labour and indirect labour?
c) Direct materials and indirect materials?
6) Distinguish between ‘costing’ and ‘cost accounting’
7) What is financial accounting? How it is different from cost-accounting?
8) Mention the elements of cost
9) Explain the classification of direct labour
10)How the overheads are different from the expenses?
11)State at least five each type of overheads
a) Factory overheads
b) Administrative overheads
c) Selling and distribution overheads
12)What are the components of direct cost?
13) Write the formula of calculating the raw material consumed
14)Explain the meaning of cost of goods sold and cost of sales
15)Explain the meaning of
a) First cost
b) Works cost and works on cost
c) Cost of production and goods available for sales

Practical problems (Short Answers)

1. Opening stock of raw material - Rs 15,000

Closing stock of raw material - Rs 20,000
Material purchased - Rs 1, 20,000
Find raw material consumed
(Ans. 1, 15,000)

2. Raw material consumed - Rs 1, 02,000

Raw material for consumption - Rs 1, 10,000
Raw material purchased - Rs 1, 00,000
Find opening & closing stock of raw material (Ans. Rs 10,000 and Rs 8,000)
3. Prime cost - Rs 1, 85,000
Current manufacturing cost - Rs 2, 22,000
Total goods processed during the period - Rs 2, 39,500
Works cost - Rs 2, 15,000
Find factory overheads, opening and closing stock of work in progress
(Ans. Rs 37,000, Rs 17,500 and Rs 24,000)
4. Cost of production - Rs 11,206
Goods available for sales - Rs 12,206
Cost of goods sold - Rs 10,831
Cost of Sales - Rs 11, 391
Sales - Rs 12,000
Find opening and closing stock of finished goods, selling expenses and profit or loss (Ans. Rs
1,000, Rs 1,375, Rs 560 and Rs 609 profit)

5. Direct material consumed - Rs 60,000

Direct labour 50% of material consumed
Direct expenses - 33¹/³% of direct labour
Factory overheads - 40% of direct labour
Office overheads - on cost 66²/³% of works
Find office cost (Ans. Rs 1, 20,000)

PRACTICAL PROBLEMS (long answers)

1. From the following particulars prepare a cost sheet showing the total cost per tone for the
period ended 31st December 1998

Rs Rs

Raw material 33,000 Director’s fees (office) 2,000

Productive wages 35,000 Factory cleaning 500
Direct expenses 3,000 Sundry office expenses 200
Unproductive wages 10,500 Estimating 800
Factory rent and terms 7,500 Factory stationery 750
Factory lighting 2,200 Office stationery 900
Factory heating 1,500 Factory insurance 1,100
Motive power 4,400 Office insurance 500
Haulage 3,000 Legal expenses 400
Director’s fees (works) 1,000 Rent of warehouse 300
Depreciation of Unkeeping of delivery vans 700
- plant and machinery 2,000 Bank charges 50
- office building 1,000 Commission on sales 1,500
- delivery vans 200 Loose tools written off 600
Bad debts 100 Rent and taxes (office) 500
Advertising 300 Water supply 1,200
Sales department 1,500
salaries

The total output for the period has been 10,000 tones.

(Ans. Prime cost Rs 71,000 works cost Rs 1,08,050 office cost Rs 1,13,600 total cost Rs 1,18,200
cost per tone Rs 11.82)

2. Prepare a cost sheet to show the total cost of production and cost per unit of goods
manufactured by a company for the month of July 1994. Also find out the cost of sales.

Rs Rs
Stock of raw materials 3,000 Factory rent & rates 3,000
1-7-1994
Raw materials purchased 28,000 Office rent 500
Stock of raw materials 4,500 General expenses 400
31-7-1994
Manufacturing wages 7,000 Discount on sales 300
Depreciation on plant 1,500 Advertisement 600
Loss on sale of a part of 300 Expenses to be charged fully 2,000
plant income tax paid

The number of units produced during July 1994 was 3,000

The stock of finished goods was 200 and 400 units on 1-7-1994 and 31-7-1994 respectively. The
total cost of units on hand on 1-7-1994 was Rs 2,800. All these had been sold during the month.

(Ans. Prime cost Rs 33,500 factory cost Rs 38,000 cost of production Rs 38,900 cost of sales Rs
37416)

3. The following particulars relating to the year 1994 have been taken from the books of a
chemical works manufacturing and selling a chemical mixture:

Rs Rs

Stock on 1st Jan. 1994

Raw materials 2,000 2,000
Finished mixture 500 1,750
Factory stores ------ 7,250
Purchases
Raw materials 1,60,000 1,80,000
Factory stores ------ 24,250
Sales
Finished mixture 1,53,050 9,18,000
Factory scrap ------ 8,170
Factory wages ------ 1,78,650
Power ------ 30,400
Depreciation of machinery ------ 18,000
Salaries
Factory ------ 72,220
Office ------ 37,220
Selling ------ 41,500
Expenses
Direct ------ 18,500
Office ------ 18,200
Selling ------ 18,000
Stock on 31st December 1994
Raw material 1,200
Finished mixture 450
Factory stores ------ 5,550
The stock of finished mixture at the end of 1994 is to be valued at the factory cost of the mixture
for that year. The purchase price of raw–materials uncharged throughout 1994.

Prepare a statement giving the maximum possible information about cost and its break up for the
year 1994.

(Ans. Prime cost Rs 3,77,800 factory cost Rs 5,16,200 cost of production of finished mixture sold Rs
5,71,852 cost of sales Rs 6,31,352)

4. Calculate
a) Value of raw-materials consumed
b) Total cost of production
c) Cost of goods sold and
d) The amount of profit from the following particulars:

Rs Rs

Opening stock Power 2,000

Raw – materials 5,000 Factory heating and lighting 2,000
Finished goods 4,000 Factory insurance 1,000
Closing stock Experimental Expenses 500
Raw – materials 4,000 Sales of wastage of materials 200
Finished goods 5,000 Office management salaries 4,000
Raw – materials purchased 50,000 Office printing and stationery 200
Wages paid to labourers 20,000 Salaries of salesmen 2,000
commission of traveling
agent
Chargeable expenses 2,000
Factory rent, rates & taxes 5,000 Sales 1,00,000

(Ans. (a) Rs 50,800, (b) Rs 87,500, (c) Rs 89,500, (d) Rs 10,500)

[Hint sales of raw-materials wastage of Rs 200 has been deducted from the cost of raw-materials]

5. The cost of the sale of product ‘X’ is made up as follows:

Rs

Materials used in manufacturing 10,20

Materials used in packing materials 2,500
Materials used in selling the product 350
Materials used in office 75
Materials used in factory 125
Labour required in producing 2,500
Salary paid to works manager and other principal officers of the factory 450
Expenses – indirect office 250
Expenses – direct factory 1,000
Bad debts 300
Packing expenses 150
Lighting and heating charges of the factory 200
Expenses – indirect factory 125

Assuming that all the products manufactured are sold, what should be the selling price to obtain a
profit of 20% on cost price?

Illustrate in a chart fork for presentation to your mange, the division of costs of product ‘X’

[Ans. Prime cost Rs 16,200, works cost Rs 17,100 cost of sales Rs 18,225 sales Rs 21,870]

6. Calculate the prime cost, factory cost, total cost of production and cost of sales from the
following particulars:

Rs.

Raw materials consumed 12,000

Directly chargeable expenses 500
Wages paid to labourers 2,500
Grease, oil, cotton waste etc. 25
Salary manager and clerks 1,750
Insurance of stock of raw materials 300
Consumable stores 400
Printing and stationery:
Factory 50
Office 200
Sales deptt. 100
----------- 350

Rent of office building 150

Depreciation :
Factory premises 200
Office furniture 50
Delivery vans 75
--------- 325
Power and fuel 500
Contribution to provident fund of factory employees 1,000
Salaries of administrative directors 100
Bank charges 75
Cost of samples 250
Salaries of sales manger 300
Advertising 500
Packing material 350
Storage in stocks of finished goods 20

[Ans. Prime cost Rs 15,000, factory cost Rs 19225 total cost of production Rs 19,800 cost of sales Rs
21,395]

7. Calculate
a) Value of raw-materials consumed
b) Total cost of production
 c) Cost of goods sold and
d) The amount of profit from the following particulars:

Rs

Opening stock:
Raw materials 1,350
Finished goods 2,500
Closing stock:
Raw-materials 750
Finished goods 1,500
Raw materials purchased 20,000
Wages paid to labourers 8,000
Direct expenses 1,250
Experimental expenses 450
Factory printing and stationery 350
Rent :
Factory 250
Office 120
-------- 370
Wages of fireman 1,000
Lighting – office 125
Audit fees 150
Telephone expenses 500
Advertising 1,250
Market research expenses 550
Salary of godown – keepers 175
Traveling expenses 750
Commission of traveling agent 500
Sales 50,000

[Ans. (a) value of raw – materials consumed Rs. 20,600 (b) Total cost of production Rs 32,795, (c)
cost of goods sold Rs 33,795, (d) profit Rs 12,980]

8. Prepare a statement of cost from the following trading and profit and loss account for the
year ending 31st March, 1995.

Particulars Rs Particulars Rs

Opening stock: Sales 1,00,000

Materials 8,000 Closing stock:
Finished goods 25,000 Materials 15,000
Purchase of materials 70,000 Finished goods 30,000
Direct labour 10,000
Grease, oil etc. 500
Salary of storekeeper 700
Power & fuel 800
Gross profit c/d 30,000
------------- -------------
1,45,000 1,45,000
 ------------- -------------
Lighting: Gross profit b/d 30,000
Office 500 Dividends received 2,000
Sales deptt. 650 Interest on loan 600
Depreciation: Transfer fees 1,450
Office premises 1,000 Received
Delivery vans 750
Fees of office manager 2,000
Bank charges 1,500
Selling expenses 1,500
Sales commission 500
Preliminary expenses 3,000
Packing expenses 1,100
Dividends paid on 1,000
Share capital of company
Discount on debentures 500
Net profit 20,000
------------ -----------
34,000 34,000

[Ans. Prime cost Rs 73,000, works cost Rs 75,000, total cost of production Rs 80,000 cost of goods
sold Rs 75000 cost of sales Rs 79,000 profit Rs 21,000]

9. The following data relate to the manufacture of standard product during the four week
ending on 28th Oct. 1994.

Raw materials consumed Rs 20,000

Direct wages Rs 12,000
Machine hr worked 950 (hrs)
Machine hour rate Rs 2.00
Office overhead 15% on works cost
Selling overhead Rs 0.37 per unit
Units produced 20,000
Units sold @ Rs 2.50 each 18,000
Prepare a statement from the above showing:
(a) The cost of production per unit, and
(b) The profit for the period

[Ans. (a) Rs 1,949 (b) Rs 3,258

10. A firm has purchased a plant to manufacture a new product, the cost data for which is given
below:

Estimated annual sales 24,000 units

Estimated costs:
Material Rs 4.00 per unit
Direct labour Rs 0.60 per unit
Overheads Rs 24,000 per year
Administrative expenses Rs 28,800 per year
Selling expenses 15% of sales
Calculate the selling price if profit per unit is Rs 1.02

[Ans. Rs 9.20]

11. Prepare a cost sheet from the following data to find out profit and cost per unit:

Raw materials consumed Rs 1,60,000

Direct wages Rs 80,000
Factory overheads 20% of direct wages
Office overheads 10% of factory cost
Selling overheads 12,000
Unit produced 4,000
Units sold 3,600
Selling price Rs 100 per unit

[Ans. Prime cost Rs 2,40,000, factory cost Rs 2,56,000, cost of production Rs 2,81,600, cost of sales
Rs 2,65,440, profit Rs 94,560]