COST ACCOUNTING

Introduction

The development of cost accounting in India is of recent origin and it is given

importance after Independence. When provision for cost audit Us233B of companies’
act was made. It revealed the malpractices of manufacturing companies. It was felt
that the financial audit falls short of expectations to reveal the malpractices. Therefore,
under the companies act, the government was given the power to order for cost audit.

Meaning of cost accounting

It is the method of accounting for cost. The process of recording and accounting for all
the elements of cost is called cost accounting.

Definition of cost accounting

I.C.M.A has defined cost accounting as follows:

“The process of accounting for cost from the point at which expenditure is incurred or
committed to the establishment of its ultimate relationship with cost centres and cost
units. It embraces the preparation of statistical data, the application of cost control
methods and the ascertainment of the profitability of activities carried out or planned”.

Cost: “ According to this definition the term cost represents the total of all expenses
incurred, whether paid or due, in the production and sale of a product or service.

Costing: The process of costing is the day to day affairs of ascertaining costs,
whatever the costs ascertained may be and by whatever means these costs are
determined.

Features of Cost Accounting


It is a sub-field in accounting. It is the process of accounting for costs
 
Provides data to management for decision making and budgeting for the future


It helps to establish certain standard costs and budgets.


provides costing data that helps in fixing prices of goods and services.

It is great tool to figure out the efficiency of a unit or a process. It can disclose
wastage of time and resources.

Nature and Scope of Cost Accounting

Cost accounts concerned with ascertainment and control of costs. The information
provided by cost-accounting to the management is helpful for cost control and cost
reduction through functions of planning, decision making, and control.
With the introduction of large-scale production, the scope was widened and providing
information for cost control and cost reduction has assuming equal significance along
with finding out the cost of production. To start with cost-accounting was apply in
manufacturing activities but now it applies in service organizations, government
organizations, local authorities, agricultural farms, Extractive industries and so on.

Objectives of cost accounting

Main objectives or purposes or functions or aims of cost accounting are:

a) cost finding or cost ascertainment

b) control of cost
c) Reduction of cost
d) Fixation of selling price
e) Providing information for framing business policy
a) cost finding or cost ascertainment
 The primary objective of cost accounting is ascertainment of cost. It is done
through the methods and techniques of costing. Costing is the process of
collection, classification and analysis of costs or expenses.
b) Control of Cost
A basic function of cost accounting is to control costs. In order to know the
efficiency of the organisation and its various departments and cost centres,
budgets and standards are fixed for materials, labour and overheads which
are compared with the actual performances.
c) Cost reduction
Cost reduction is to be understood as the achievement or real and permanent
reduction in the unit cost of goods manufactured or service rendered. Cost
accounting is helpful to management in cost reduction through the
techniques of budgetary control, standard costing, material control, labour
control and overheads control.
d) Fixation of selling price
Cost accounts provide detailed information regarding total cost in the form
of various components. They also provide information in terms of fixed cost
variable costs, so that the extent of price reduction to be done in case of
intensive competition, etc can be decided.
e) Framing Business policy
Cost accounting tries to help the management in formulating business
policy and decision making. Break even analysis, cost volume profit
relationships, differential costing etc., are helpful to the management in
taking decisions regarding:
Production or discontinuation of a project
Utilisation of idle capacity
The most profitable sales mix
Alternative based on key factor
Make or buy decisions, etc.
Advantages and limitations of cost accounting
Deficiencies in financial accounting are compensated by cost accounting. It
is immensely useful to the management, to the employees, to the public and
to the creditors. The advantages it offers to all the stake holders are
discussed below:
a) To the management
Effective decision making
Measuring efficiency
Cost reduction
Fixation of selling price
Effective cost control
Increase in efficiency
Effective in inventory control
Reduction of wastage
Effective utilisation of resources
Help in effective budgeting
b) To the employees
Stability of tenure
Fair wage policy
Rewards for higher efficiency through incentive schemes
c) To the creditors
Understanding the progress and profitability of the firm and future
prospects of the firm.
d) To the government
Granting of subsidies
Planning of resources
utilisation of scarce resources
e) To the public
Removal of wastages
Fair price of products
Employment opportunities
a) To the management
a) Effective decision making
Cost accounting provides information regarding individual
products, departments, divisions and cost centres. This facilitates
the management to identify unprofitable operations and improve
overall profitability.
b) Measuring efficiency
With help of cost accounting, the management can set budgets
and standards for various elements of cost and compare them
with actuals to measure efficiency.
c) Cost Reduction
It is helpful to management in reduction of cost through its
techniques by efficient and effective utilisation of raw materials,
labour and optimum production of output.
d) Fixation of Selling Price
It provides information under various classifications. Availability
of information in detail regarding variable and fixed costs helps
in fixing selling price under different circumstances.
e) Effective cost control
The fundamental objective of cost accounting is to ascertain and
control costs. The segregation of cost at different stages is helpful
in effective control through standard costing and budgetary
control.
f) Increased efficiency
under an efficient cost accounting system, proper inventory
control, labour utilisation and proper analysis of expenditure is
 possible. This result in increased efficiency throughout the
organisation.
g) Effective inventory control
Cost accounting system helps in effective inventory through
techniques like ABC analysis, stock verification, and levels of
stocks.
h) Reduction of wastages of material and labour
cost accounting sets predetermined costs for different elements
which are compared with actuals to reveal variances.
i) Effective utilisation of resources
Cost accounting helps in decision making regarding make or buy
of components, profit planning, export decisions, effective
utilisation of key factor, sales mix, etc.,
j) Effective budgeting
cost accounting emphasis and records both historical costs and
pre-determined costs, which are essential for the technique or
budgetary control.

b) To the employees
a) Stability of tenure
A good costing system is helpful to management in increasing
productivity and profitability of firms. This leads to prosperity of
industries, better wages for workers and security of job.
b) Fair wage policy and suitable incentive schemes
Cost accounting keeps records for each element of cost, labour hours
and labour cost are recorded in full detail. This will be helpful for the
management in introducing a good wage system to reward skilled
workers and stimulate them to go for higher production.
c) To the creditors
 Before the creditors offers loans to firm, they can have better
understanding of the progress and profitability of the firm
through relevant reports. Estimates and budgets can project the
future prospectus of a firm.
d) To the government
Cost data of specific industries and general trend of costs can
influence the government to initiate appropriate changes in granting
of subsidies, formulating taxation policies, import and export
legislation, etc.,
e) To the public
Good costing system helps in proper utilisation of resources cost
reduction is helpful in fair price of products and profitability of
organisations is helpful in prosperity of the industry through more
employment opportunities to the members of the public.
Limitations of cost accounting

a) Lack of uniformity
There is no uniform system of costing applicable to all industries. Even
for the same firm, two different cost accountants may arrive at two
different cost figures.
b) Second hand data
Costing depends on financial accounts for a lot of information, which is
second hand. Any errors or short comings in that data creep in to cost
account also.
c) Conventions
several conventions are routinely applied or used in costing which may
not be appropriate in all situations. For example. classifying over heads
in to variable and fixed, recovery or overheads on machine hour or
labour hour basis etc.,
d) Uncertainty
 Estimates are used in different context like Tenders & Quotations,
contracts etc. Different methods of pricing of materials are available.
All these factors lead to uncertainty in costing. It becomes difficult to
derive correct costs. Actual costs may differ from estimated costs,
rendering quotations etc.,
e) Costly
The need to observe several formalities to derive benefits of costing
makes it costly for small and medium enterprises.
f) Applicability
Costing is applicable primarily in manufacturing and service firms. It is
not useful for trading firms.
Distinction between Financial Accounting and Cost Accounting
Financial Accounting Cost Accounting
Objective Financial accounting is to Cost accounting is to
prepare profit/loss a/c and provide cost
balance sheet to report to information to
owner and outsiders management for
decision making
Legal Financial records are Cost accounts are
requirement maintained as per the maintained to fulfil
requirement of companies the internal
act and Income tax act requirement of the
management as per
conventional
guidelines
Classification Financial accounting Cost accounting
of transactions classifies records and records and analyses
analysis transactions in a expenditure in an
subject manner objective manner
 Analysis of In financial accounts, the Cost accounts reveals
profit and cost profit or loss of the entire profit or loss of
enterprise is disclosed different products,
departments
separately.
Accounting Financial reports are Cost reports are of
period prepared annually continuous process
may be daily, weekly
monthly, quarterly or
annually
Emphasis Emphasis is laid on the Cost accounting lays
recording of transaction emphasis on
and control ascertainment of cost
and cost control
Nature Financial accounts are Cost accounts lay
maintained based on emphasis on both
historical records historical and
predetermined costs.

Essentials of Good costing system

 Simplicity
It must be simple, flexible and adaptable to
changing condition. The information provided must
be in the proper order, in written and right person
so as to utilize fully.
 Flexibility and Adoptability
The costing system must be flexible to
accommodate the changing condition, the
expansion construction or changes must be adopted
in the existing system.
 Economy
It must suit the finance available the
expenditure must be less than the benefit derived
from the system adopted.
 Comparability
It must be able to make comparison of the
facts and figures with the past figures.
 Suitable to the firms
Before accepting a costing system, the nature,
requirements, size, conditions of the business etc…
must be carefully considered.
 Minimum changes to the existing
When introducing a costing system, it may
reason minimum disturbance to the existing setup
of the business.
 Less clerical work
Printed forms will involve less labor to fill, has
the worker may be a little educated they may not
like to spend much time in filling the forms.
 Reconciliation
 The systems of costing and financial
accounting must be facilitated to reconcile in the
easiest.
 Overall efficiency of cost accountant
The work of the cost accountant, under a good
system of costing must be clearly defined, duties
and responsibility to the firm are very essential.
CLASSIFICATIONS OF COST ACCOUNTING

I. According to element
Based on elements, cost is classified into
material, labour and expenses, they are sub divided
into direct and indirect material labour and
expenses, the total direct cost is termed as prime
cost indirect material, and indirect labour and
indirect expenses together are termed as indirect
cost or overheads. Overheads are sub divided into
factory overhead, office overhead, selling and
distribution overhead.
II. According to functions
 Production cost
The cost of sequence of operation which
begins with supplying materials, labour and
services and ends with primary packing of product
 Administration cost
 It is the cost of formulating the policy,
directing the organization and controlling the
operations of undertaking, which is not related
directly to a production, selling, distribution.
 Selling cost
The cost of seeking to create and simulate
demand securing orders – ICMA.

 Research cost
It is cost of searching for new and improves
product, new applications of methods or new
improved methods
 Distribution cost
The cost of sequence of operation which begin
with making the pack product available for
dispatch and ends with making reconditions, return
empty package, if any available for reuse. -ICMA.
 Development cost
The research the management decides to
produces a new and improvement product or to
employ a new or improved method, the cost of
process beginning with the commencement of
formal production of that product.
III. According to nature and behavior
Based on nature and behavior, cost is classified
into fixed, variable & semi-variable.
  Fixed cost
A cost which tends to be unaffected by various
levels of production
 Variable cost
A cost which tends to be very directly with level of
output, variable cost are sometime refer to as direct
cost in system of direct costing.
 Semi-variable cost
A cost which is partly variable and partly fixed
IV. According to control ability
 Control able cost
This is the cost which can be influence by the
action of specified manner, example: Direct
material, direct labour etc.
 Uncontrolled able cost
This is the cost which cannot be influenced by
the action of any specified manner.
V. According to Normality
This is the cost incurred in the conditions in
which the output is normally attained, normal cost
is included in cost of production, abnormal cost are
usually incurred at a given levels of output.
VI. According to decision making and control
 Shutdown cost
 A cost which is incurred irrespective of plant is
in operation or shutdown, example cost of rent,
rates, depreciation etc…
 Opportunity cost
The net selling price, rental value or transfer
value which could not be obtained at a point in
time if a particular assets or group of assets were to
be sold it is known as opportunity cost
 Replacement
It is the current cost at which asset or material
can be replaced with identical one form the market,
it reflects the present market price of such assets or
material
 Production cost
Production cost is those which are identified
with the product and included in inventory values,
they can be charged, allocated or apportioned to the
product.
 Cost centre
According to ICMA “cost centre is
defined as a location, person or item of
equipment for which cost may be
ascertained and used for the purpose of
cost control”
 Cost Units
 According to ICMA “A unit of
product or service in relation to which
costs are ascertained.
Format of Cost Sheet
Cost
Total
Particular per
Cost
unit
Direct material XXXX
Direct labour XXXX
Direct Expenses XXXX
Carriage Inward XXXX
Prime Cost* XXXX XXXX
(+)Add
Work overhead/
Factory overhead XXXX
Indirect material XXXX
Indirect wages XXXX
Factory rent & rates XXXX
Factory heating & XXXX
lighting XXXX
Power & fuels XXXX
Repairs & maintenance XXXX
Drawing office expenses XXXX
Depreciation on plant & XXXX
machinery XXXX
Factory stationery XXXX
Insurance of factory XXXX XXXX
Factory/works manager
salary
Water consumption in
factory
Work cost/Factory cost* XXXX XXXX
(+)Add
Office and
Administration XXXX
overhead XXXX
Office rent & rates XXXX
Office lighting XXXX
Drawing office expenses XXXX
Depreciation on XXXX
Furniture XXXX
Office stationery XXXX
Office Salaries XXXX
Legal charges XXXX
Bank commission XXXX XXXX
Telephone & postage
Office cleaning
Cost of production* XXXX XXXX
(+)Add
Selling and
Distribution overheads XXXX
Sales man salary XXXX
Sales man commission XXXX
Showroom rent XXXX
Advertisement XXXX
Travelling expenses XXXX
Warehouse rent & rates XXXX
Repairs and depreciation XXXX
on travelling vans XXXX XXXX
Carriage outwards
Cost of sales XXXX XXXX
Profit/loss XXXX XXXX
Sales XXXX XXXX

Format of Raw material Stock

Opening stock of raw XXXX
material XXXX
(+) Purchase of raw material XXXX
(+)Carriage inward XXXX
(+)Other direct material XXXX XXXX
used XXXX
(+)Tax & duties on the XXXX
Material purchased XXXX XXXX
(-) Closing stock of raw
material
(-)Sales of unsuitable raw
material
(-)Sales of scrap of raw
material
Cost of Raw material XXXX
consumed

Cost Sheet with Inventories

Particulars Rupees. Rupees.
Opening stock of raw material XXXX
(+) Purchase of direct material XXXX
(+) Purchase of Raw material XXXX
(+) Expenses & taxes on raw XXXX
material purchased XXXX
XXXX
(-) Closing stock on raw XXXX
material
(-) Direct material scrap sold
Cost of material consumed* XXXX XXXX
(+) Direct wages XXXX
(+) Direct or chargeable XXXX
expenses
Prime cost* XXXX
(+) Factory Overhead XXXX
XXXX
(+) Opening work in progress XXXX
XXXX
(-) Closing work in progress XXXX
Factory/ Work cost* XXXX
(+) Office and Administration XXXX
overhead XXXX
XXXX
(+) Opening stock of finished XXXX
goods XXXX

(-) Closing stock of finished

goods
Cost of production* XXXX
 (+) Selling & Distribution XXXX
overheads
Cost of sales XXXX
Profit/Loss XXXX
Sales* XXXX
1) During the year 2016, X limited produce 50000 units
of a product. The following were the expenses
Particulars Rupees.
Stock of raw material on 10000
01.01.2016 20000
Stock of raw material on 160000
31.12.2016 75000
Purchases 25000
Direct wages 37500
Direct expenses 62500
Factory expenses 25000
Office expenses
Selling expenses
You are required to prepare cost sheet and cost per unit.
Solution:
Cost sheet of ‘X’ limited for the year ended 31.12.2016
(50000 units produced)
Particulars Total Cost per
cost unit
Stock of raw material 10000
01.01.2016 160000
(+) Purchase 170000
 20000
(-) Closing Stock of raw
material 31.12.2016
Raw material consumed* 150000 3.00
(+) Direct Wages 75000 1.50
(+) Direct expenses 25000 0.50
Prime Cost* 250000 5.00
(+) Factory Expenses 37500 0.75
Factory/work cost 287500 5.75
(+) Office Expenses 62500 1.25
Cost of production* 350000 7.00
(+) Selling expenses 25000 0.50
Cost of sales* 375000 7.50

2) The following detail obtained from the cost of X ltd.

Particulars Rupees.
Stock of raw material
on 01.12.2010 75000
Stock of raw material 91500
on 31.12.2010 52500
Direct wages 2750
Indirect wages 211000
Sales 28000
Work-in-progress 35000
01.12.2010 66000
Work-in-progress 15000
31.12.2010 3500
1500
 Purchase of raw 2500
materials 3500
Factory rent, Rates & 2500
Power 6500
Depreciation of plant & 54000
machinery 31000
Expenses on purchase
Carriage outwards
Advertising
Office rent & taxes
Travelers wages &
Commission
Stock of finished goods
01.12.2010
Stock of finished goods
31.12.2010
You are required to prepare cost sheet.
Solution:
Cost sheet of ‘X’ limited for the month of 31.12.2010
Total
Particular
Cost
Stock of raw material 75000
01.12.2010 66000
(+) Purchase of Raw 141000
material 1500
142500
(+) Expenses on purchased 91500
51000
(-) Stock material 52500
31.12.2010
Raw material consumed
Direct Wages
Prime Cost* 103500
(+)Add
Work overhead/ Factory
overhead 15000
Indirect wages 3500
Factory rent & rates 2750
Depreciation on plant & 21250
machinery 28000
49250
(+) Work-in-progress 35000 14250
01.12.2010

(-)Work-in-progress
31.12.2010
Work cost/Factory cost* 117750
(+)Add
Office and Administration
overhead 2500
Office rent & rates 54000
(+) Stock of finished goods 56500
01.12.2010 31000 25500

(-) Stock of finished goods

31.12.2010
Cost of production* 143250
(+)Add
 Selling and Distribution
overheads 2500
Carriage outwards 3500
Advertisement 6500 12500
Travelling expenses
Cost of sales 155750
Profit 55250
Sales 211000

3). Following data are extracted from the book of X

limited for the year 2007.
Particulars Rupees. Particulars Rupees.
Opening Stock Salary to 2000*
of raw material salesman 900
Closing Stock 25000 Other office 5700
of raw material 40000 expenses 12000
Purchase of raw 85000 Other factory 1000
materials 5000 expenses 1100
Carriage inward 75000 Managing 1000
Direct wages 10000 director 250000
Indirect wages 15000 remuneration 15000
Other direct 500 Other selling 2000
charges 500 expenses
Rent and rates 1500 Travelling
factory 100 expenses
Indirect 2500 Carriage
consumption of outwards
material Sales
Depreciation on Advanced
plant income tax paid
Depreciation on Advertisement
office furniture
Salary office
Managing director remuneration is allocated
Rs.4000 to the factory, Rs.2000 to the office and
Rs.6000 to the selling department. Calculate cost sheet
Solution:
Cost sheet of ‘X’ limited for the year ended 31.12.2007
Total
Particular
Cost
Stock of raw material 25000
01.01.2007 85000
(+) Purchase of Raw 110000
material 40000
70000
(-) Stock material 75000
31.12.2007 5000
Raw material Consumed 15000
Direct Wages
Carriage inward
Other direct charge
Prime Cost* 165000
(+)Add
Work overhead/ Factory
overhead 5000
Factory rent & rates 500
Indirect consumption of 1500
material 10000
Depreciation on plant & 5100
machinery 4000 26700
Wages indirect
Other factory expenses
Managing director
remuneration
Work cost/Factory cost* 191700
(+)Add
Office and Administration
overhead 500
Office rent & rates 100
Depreciation of office 2500
furniture 900
Salary 2000 6000
Other office expenses
Managing director
remuneration
Cost of production* 197700
(+)Add
Selling and Distribution
overheads 2000
Salary sales man 6000
Managing director 1000
Other selling expenses 1100
 Travelling expenses 1000
Carriage outwards 2000 13100
Advertisement
Cost of sales 210800
Profit 39200
Sales 250000
Note: Excluded advanced income tax paid because of
financial nature. Because of not appear in cost
accounting.

4. From the following information prepare cost sheet

for the month of December 1985
Particulars Rupees.
Stock of raw material 25000
on 01.12.1985 17300
Stock of finished goods 26200
1.12.1985 15700
Stock of raw material 21900
on 31.12.1985 1100
Stock of finished goods 8200
31.12.1985 9100
Purchase of raw 72300
material 17200
Carriage on purchase 800
Work-in-progress 1200
01.12.1985 8300
 Work-in-progress 3200
31.12.1985 4200
Sale of finished goods
Direct wages
Non-productive wages
Direct Expenses
Factory overhead
Administrative
overheads
Selling & Distribution
overheads
Solution:
Cost sheet for the month of December 1985
Total
Particulars cot
Rupees.
Opening stock of raw material 25000
(+) Purchase of Raw material 21900
46900
(+) Carriage on purchased 1100
48000
(-) Closing stock on raw 26200
material
Cost of material consumed* 21800
(+) Direct wages 17200
(+) Direct expenses 1200
Prime cost* 40200
(+) Factory Overhead 8300
 (+) Non- Productive Wages 800
9100
(+) Opening work in progress 8200
17300
(-) Closing work in progress 9100 8200
Factory/ Work cost* 48400
(+) Office and Administration 3200
overhead ----------
51600
(+) Opening stock of finished 17300
goods ----------
68900
(-) Closing stock of finished 15700
goods
Cost of production* 53200
(+) Selling & Distribution 4200
overheads
Cost of sales 57400
Profit 14900
Sales* 72300

5) The following particular extracted from the books of

manufacturing company.
Particulars Rupees. Particulars Rupees.
47000 Rent – office 1600
Opening Stock
Travelling 3100
of raw material
50000 expenses 8400
01.01.2010
140000
 Closing Stock of 208000 Travelling 7100
raw material 9600 commission 600
31.12.2010 14000 Production 6000
Purchase of raw 8200 wages 1500
material 5100 Depreciation P 300
Office salary 3400 & M 5000
(Drawing) 4700 Depreciation 12000
Counting houses 10600 office furniture
salary 3000 Directors fees
Carriage inwards Water charges –
Carriage outward factory
Cash discount Water charges –
allowed office
Bad debt written General charges
off Managers
Repair to P & M salary
Rent – Factory
Out of 48hours in a week, the time devoted by the
manager to the factory and office 40 hours and 8 hour
respectively throughout the accounting year.
Prepare a statement giving the following information
a) Prime cost
b) Factory on cost as a percentage of production
wages
c) Factory cost
d) General on cost as a percentage of factory cost
e) Total cost

Solution:
Cost sheet of ‘X’ limited for the year ended 31.12.2010
Total
Particular
Cost
Stock of raw material 47000
01.12.2010 208000
(+) Purchase of Raw 255000
material 50000
205000
(-) Stock material 8200
31.12.2010 140000
Raw material Consumed
Carriage inward
Production wages
Prime Cost* 353200
(+)Add
Work overhead/ Factory
overhead 10600
Repair P & M 3000
Rent – Factory 7100
Depreciation P & M 1500
Water charge – Factory 10000
Manager salary 9600 41800
12000X40/48
Office salary (Drawing)
Work cost/Factory cost* 395000
(+)Add
Office and Administration
overhead 14000
Counting house salary 1600
 Office rent 600
Depreciation on office 6000
furniture 300
Director fees 2000
Water charges – office 5000 29500
Manager salary 12000X8/48
General charges
Cost of production* 424500
(+)Add
Selling and Distribution
overheads 5100
Carriage outward 3100
Travelling expenses 8400
Travelling commission 4700 21300
Bad debts written off
Cost of sales 445800
a) Prime cost = 353200/
b) Factory on cost as a percentage of production
wages = 41800/140000 X100=29.86%
c) Factory cost = 395000 /-
d) General Cost = 50800/395,000 X 100 = 12.86%
e) Total cost = Rs.4,45,800
Note: Cash discount is usually excluded from cost
accounts because it is a result of financial policy
Drawing office is a part of factory, consisting of
drafts man who prepares product & machinery
drawing.
6) X limited are the manufacturer of Tube Light. The
following data relating to the management manufacture.
 Raw material consumed Rs.20000
 Direct wages Rs.12000
 Machine hours worked 9500/hour
 Machine hour rate Rs.2
 Office overhead 20% of work cost
 Selling overhead 50 paisa per unit
 Unit produced 20000 units
 Unit sold 18000 units at Rs.5 per unit
Prepare cost sheet and cost per unit and profit.
Solution:

Cost sheet for the month ended (20000 units produced)

Particulars Total Cost per
cost unit
Raw material consumed 20000 1.00
(+) Direct Wages 12000 0.60
Prime Cost* 32000 1.60
(+) Factory Overhead
Machine 9500 hrs X Rs.2 19000 0.95
Factory/work cost 51000 2.55
(+) Office Overhead
51000X20/100 10200 0.51
 (-) Closing stock of finished 6120 -
goods
(20000-18000)=2000 X
3.06
Cost of production* 55080 3.06
(+) Selling Overhead
18000 units X Rs.0.50 9000 0.45
Cost of sales* 64080 3.51
Profit* 25920 1.49
Sales 18000units X 5 90000 5.00

7). You are required to calculate a statement showing

cost and profit from the information given, showing
clearly material consumed, prime cost, work cost, cost
of production, cost of sales, profit & sales.
 Material purchase Rs.200000
 Wages Rs.100000
 Direct expenses Rs. 20000
 Opening stock of raw material Rs. 40000
 Closing stock of raw material Rs. 60000
Factory overhead is 20% on wages,
Administration overhead is 25% on work cost,
selling & distribution are 20% on cost of
production and profit is 20% on sales.
Solution:
 Cost sheet for the year ended
Particulars Rupees.
Opening stock of raw material 40000
(+) Purchase 200000
240000
(-) Closing stock on raw 60000
material
Cost of material consumed* 180000
(+) Direct wages 100000
(+) Direct expenses 20000
Prime cost* 300000
(+) Factory Overhead
100000X20/100 20000
Factory/ Work cost* 320000
(+) Office and Administration overhead
320000X25/100 80000
Cost of production* 400000
(+) Selling & Distribution overheads
400000X20/100 80000
(80%) Cost of sales 480000
(20%) 480000X20/80 120000
Profit
Sales* 600000

Sales = 100%
Less: Profit = 20%
---------------
Cost of Sales = 80%
-----------------
If you calculate profit on cost of sales =
(Ex: 4,80,000 x 20/80= 1,20,000)
If you Calculate Profit on Sales = (Ex: 6,00,000
x20/100= 1,20,000)

7.
The cost accounts department of a company has
supplied the following data for the supply of 2000 units
of product.
Direct materials : 40,000 tons at Rs.5 per ton.
Direct wages : 8,000 Labour hours at Rs.50 per
hour
Overheads:
Variable : Factory Rs.10 per Labour hour
Selling Rs.20 per unit
Fixed : Factory Rs.1,00,000
 Office Rs. 2,00,000
Prepare a statement the price to be fixed which will
realize a profit of 25% on cost.
Solution
Statement of cost and profit for the year ended (2000
units)
Particulars Total cost Rs Cost
per
unit Rs
Direct materials 40,000 X 2,00,000 100
Rs.5 4,00,000 200
Direct Wages 8,000 hours 6,00,000 300
X Rs.50 Per hour

Prime Cost
Add: Factory Overheads
Variable 8,000 hours X
Rs10 Per hour 80,000 1,80,000 90
Fixed 7,80,000 390
1,00,000

_______
2,00,000 100
Works cost 9,80,000 490
Add: Administration
Overheads 40,000 20
Cost of
Production
Add: Selling and 10,20,000
Distribution overheads 2,55,000 510
2000units X Rs. 20 12,75,000
per unit 127.50
Cost of 637.50
Sales
Add: Profit Rs.10,20,000
X 25/100

Sales

8. The following is the manufacturing and profit and

loss account of Raj Manufacturing Company for the
year ended 31.3.1993, output 850 units
Particulars Rs Particulars Rs
To Materials 64,000 By sales 3,20,000
To Wages 96,000
To Works 40,000
Expenses 48,000
To Salaries 8,000
To Office 24,000
Expenses 16,000
To General 24,000
Expenses 3,20,000 3,20,000
To Selling
Expenses
To Net Profit

For the year ending 31.3.1994, it is estimated that:

a) Output and sales will be 1000 units
b) Material price will increase by 25%
c) Wage cost will increase by 12.5%
d) Works expenses will increase in proportion to the
combined cost of materials and wages
e) Selling expenses per unit will remain constant
f) Other expenses remain constant
g) Profit of 12.5% on sales is to be made
Prepare a statement of cost and profit for the year
and estimated costs and profit for the next year.
Raj Manufacturing Company,
statement of cost and profit
for the year ending 31.3.1993(850 units)
Particulars Total Cost Cost per
Rs unit Rs
Materials 64,000 75.29
Wages 96,000 112.94

1,60,000 188.23
Prime cost 40,000 47.05
Add: Factory Overhead
2,00,000 235.28
Works cost
Add: Administration
Overheads 80,000 94.11
Salaries 2,80,000 329.39
48,000
Office Expenses
8,000
General Expenses
24,000
16,000 18.82
Cost of Production
Add: Selling and 2,96,000 348.21
Distribution overheads
24,000 28.23
Cost of Sales
3,20,000 376.44
Profit

Sales

Workings:
a) Works expenses to combined cost of materials and
wages (Prime Cost)
40,000
-----------
X 100 = 25%
1,60,000
Estimated cost and profit for the year 31.03.1994
(1000 units)
Particulars Total Cost Cost Per
Rs Unit Rs
Material 64,000 X 1000
X 125 94,118 94.12
----
-----
850 1,27,059 127.06
100
Wages 96,000 X 1,000
X 112.5 2,21,177 221.18
-------
- ------- 55,294 55.29
850
100
2,76,471 276.47

Prime cost 80,000 80.00

Add: Factory Overhead
2,21,177 X 25 3,56,471 356.47
------
100
18,823 18.82
Works Cost
3,75,294 375.29
Add: Administrative
Overheads
 Cost of
Production 53,613 53.61

Add: Selling Overheads 4,28,907 428.90

16,000 X 1000
------
850

Cost of Sales
Profit at 12.5% on
Sales
Or
Profit on cost of
sales
3,75,295 X 12.5
----
--

87.5

Sales

Note: a) Works overheads is calculated as a

percentage of combined cost of materials and
wages (prime cost) as instructed.
b) Selling expenses are constant per unit. So, they
increase proportion to units
 c) Other expenses (all the salaries, office expenses
and general expenses) remain constant. So, they are
fully fixed.

Tenders and Quotations

Frequently the manufacturer of consumer durables and
capital goods are asked to quote the price at which they
can supply their output. The price at which the items of
output are offered for sale is known as tender or
quotations price. The tender has to prepared carefully
since it may be accepted, and goods have to be supplied
in future at the quote rate.
In order to prepare the tender, the following items are to
be analysed.
1. Raw materials
2. Direct labour
3. Chargeable expenses
4. Works overhead
5. Office overhead
6. Selling overhead
7. Estimated profit
Estimation of different elements of cost has to be
made. The following are the accepted norms:
a) Direct material and direct labour costs are generally
estimated based on cost per unit of preceding
 period, subject fluctuations in the market price of
materials and labour rates.
b) Overhead is estimated based on past experience, as
given below:
1. Percentage of factory overheads to direct wages
Factory overhead
= ------------------------- X100
Direct wages
2. Percentage of office overhead to works cost
Office overhead
= --------------------- X100
Works Cost
3. Percentage of selling and distribution overhead
to works cost
Selling and distribution overhead
= ---------------------------------------------
X 100
Works cost
(or)
4. The percentage may be calculated on cost of
production
Selling and distribution overhead
= --------------------------------------------
--- X100
Cost of production
1. The accounts of a machine manufacturing
company disclose the following information
for six months ending 31st December 1982.
Material used Rs. 1,50,000
Direct wages Rs. 1,20,000
Factory overhead Rs. 30,000
Administrative overhead Rs. 15,000
Prepare cost sheet for the half year and
calculate the price which the company should
quote for the manufacture of a machine
requiring materials valued at Rs.1250 and
expenditure in productive wages Rs.750, so
that the price might yield a profit of 20% on
the selling price
Solution
Statement of cost for six months ending
31.12.1982
Particulars Rs
Material used 1,50,000
Direct wages 1,20,000

Prime cost 2,70,000

Add: Factory overhead 30,000

3,00,000
Works cost 15,000
Add: Administrative Overheads
Cost of production 3,15,000

Workings:
Percentage of factory overheads to wages
30,000
= ---------- X 100 = 25%

1,20,000
Percentage of administrative overheads to
works cost

15,000
= ------------ X 100 =
5%
3,00,000
Statement showing price to be quoted for a
machine
Particulars Rs.
Materials 1,250.00
Productive wages 750.00
2,000.00
Prime cost
Add: Factory overheads (25% of 187.50
wages) 2187.50
750 x 25%
109.38
 Works cost
Add: Administrative overheads
(5% of works cost)
2187.50 X 5% 2296.88

Cost of production
Add: Profit 20% on sales
Or
2296.88 X 20/80 574.22
2871.10

Sales

2. The particulars of a factory for the year 2018

are given below
Raw material Rs.3,00,000
Direct wages Rs.1,68,000
Works overhead Rs.1,50,000
Office Overhead Rs.1,68,000
Selling overhead Rs.1,12,000
Distribution overhead Rs.70,000
Net profit Rs.1,10,00
In 2019, the expenses incurred on the
execution of a work order:
Raw materials Rs.12,000; Wages Rs.7,000;
Assuming that in 2019 works overhead went
up 20%, distribution overhead went down by
10% and selling and office overhead went up
12.5%, at what rate of price should the product
be quoted so as to earn the rate of profit on the
selling price same as in 2018.

Solution
Statement of cost and profit for the year
ended 2018
Partiuclars Rs. Rs.
Raw materials 3,00,000
Direct wages 1,68,000
4,68,000
Prime cost 1,50,000
Add: works overhead 6,18,000

Works cost 1,68,000

Add: office overhead 7,86,000
Cost of
production 1,12,000 1,82,000
Add: selling overhead 70,000 9,68,000
Distribution 1,10,000
overhead 10,78,000
Cost of sales
Add: net profit

Sales
Workings:
1. Works overhead to direct wages ratio
1,50,000
------------- X 100 = 89.286%

1,68,000
2. Office overhead to work cost ratio
1,68,000
=
------------ X 100 = 27.184%

6,18,000
3. Selling overhead to works cost ratio
1,12,000
=
------------- X 100 = 18.12%

6,18,000
4. Distribution overhead to works cost
70,000
------------- X 100 = 11.33%

6,18,000
5. Profit of sales ratio in 2018
1,10,000
 =
------------- X 100 = 10.204%

10,78,000

Quotation for work order in 2019

Particulars Rs. Rs.
Raw material 12,000
Wages 7,000
19,000
Prime cost
Add: works overhead 7,500
7,000 X 89.28/100 X
120/100 26,500

8,104
Works cost
Add : Office overhead
26,500 x 27.18/100 X 34,604
112.5/100
 Cost of production

5,402
Add: Selling Overhead
26,500 X 18.12/100 x
112.5/100 2,702
8,104
Distribution overhead
26,500 x 11.33/100 x
90/100 42,708

Cost of sales 4,853

Add: Profit of 10.24% on

sales (or) 47,561

10.24
= 42,708 X -------
89.76

sales

3. On August 15, 1991 a manufacturer of X ltd desired

to quote for a contract for the supply of 500 radio sets.
From the following details prepare a statement showing
the price to be quoted to give the same percentage of
net profit on turnover as was realised during 6 months
ending on 30th June 1991.

Stock of material as on 1 Jan 1991 Rs.20,000

Stock of material as on 30th June 1991 Rs.25,000
Purchases of materials during 6 months Rs.
1,50,000
Direct wages during 6 months Rs.1,20,000
Indirect charges during 6 months Rs.25,000
Opening stock of completed set nil
Closing stock of completed sets 100
Sales during 6 months Rs.3,24,000
The number of radio sets manufactured during these six
months was 1450 sets including those sold and those
stocked at the end of the period. The radios to be quoted
are of uniform quality and size as were manufactured
during the six months to 30th June 1991. As from
August 1, cost of factory has gone up by 10%

Solution
Statement of cost and profit of radio sets for six months
ending 30th June 1991(1450 Radio sets)
 Particulars Total Cost Cost per
Rs. unit Rs.
Opening stock of material 20,000
Purchase of material 1,50,000
1,70,000
Less: closing stock of material 25,000
Cost of 1,45,000 100.00
material consumed 1,20,000 82.76
Direct wages
2,65,000 182.76

Prime cost
Add: Indirect charges 25,000 17.24

2,90,000 200.00
Cost of production
Less: Closing stock of finished 20,000 ---
radios (100 x Rs.200) 2,70,000 200.00
Cost of 54,000 40.00
sales 240.00
3,24,000
Profit
Sales (1450-
100=1350 radios)

Workings
1. Profit percentage: on sales
 54,000
------------- X 100 = 16.66%
3,24,000

OR
Profit On cost 54,000
= ------------ X 100 =
20%
2,70,000
2. Direct wages per unit 82.76
Add: 10% in increase 8.27
----------
91.04
---------

Statement showing quotations for 500 radio sets

Particulars Total Cost Cost
Rs. per unit
Rs.
Material 50,000 100.00
Factory wages 45,520 91.04

Prime cost 95,520 191.04

8,620 17.24
Add: Indirect charges 1,04,140 208.28
Cost of production (or) cost 20,828 41.656
of sales
Profit
16.66
 = 1,04,140 X -- 1,24,968 249.936
-----

83.33

Selling price( or)

quotation

3. From the following particulars you are required to

prepare a statement showing a) the cost of material
consumed b) the prime cost c) the works cost d) the
total cost e) the percentage of works overhead to
productive wages and f) the percentage of general
overheads to works cost
Stock of finished goods on 1.1.1999
Rs.72,800
Stock of raw material on 1.1.1999
Rs.33,280
Purchases of raw materials
Rs.7,59,200
Productive wages Rs.5,16,880
Sales of finished goods
Rs.15,39,200
Stock of finished goods on 31.12.1999
Rs. 78,000
Stock of raw material on 31.12.1999
Rs. 35,360
Works overhead charges Rs.
1,29,220
Office and general expenses Rs.
70,161
The company is about to send a tender for a large
plant. The costing department has estimated that
the materials required would cost Rs.52,000 and
the wages to workmen for making the plant would
cost Rs.31,200. The tender is to be make at a net
profit of 20% on the selling price. Show what the
amount of tender would be, if it is based on the
above percentages.
Solution
Statement showing cost and profit for the year
ended 31.12.1999
Particulars Rs Rs
Opening stock of raw 33,280
materials 7,59,200
Add: purchase of raw 7,92,480
materials 35,360
7,57,120
Less: closing stock of raw 5,16,880
materials 12,74,000
a) Cost of raw material 1,29,220
consumed 14,03,220
Production wages 70,161
b) Prime cost 14,73,381
Add:Works overhead 72,800
c) Works cost
 Add: Office and general 15,46,181
expenses 78,000
d) Total cost or cost of 14,68,181
production 71,019
Add: opening stock of
finished goods 15,39,200

Less: closing stock of

finished goods
Cost of sales
Profit

Sales

e)
Percentage of works overhead to productive wags
1,29,220/5,16,880 X100 = 25%
f)
Percentage of general overhead to works cost
70,161/14,03,220X10= 5%
Tender for large plant
Particulars Rs

Materials 52,000
Wages 31,200
83,200
Prime cost
7,800
 Add: works overheads 25% of
wages
25 91,000
= 31,200 X ------
100
4,550
Works cost
Add: Office and general overheads 95,550
5% of works cost=
5
91000
X -----
23,888
100

Total cost
1,19,438

Profit at 20% on selling price

95,550 X 20/80

Tender price of plant or sales

Reconciliation of cost and financial accounts

Introduction
 Cost accounts and financial accounts are usually
prepared for the same period and for basically same
transactions. One may expect them to reveal the same
profit. But in actual practice, the profits shown by these
two sets of accounts rarely agree due to a variety of
causes. Thus, the need for reconciliation of the profits
shown by cost and financial accounts arises.
Reconciliation means tallying the profits revealed
by both set of accounts. It aims at finding out the
reasons for disagreement of the two profits.
Importance of or need for reconciliation
1. Numerical accuracy: Basic arithmetical accuracy of
both sets of books can be ensured. A check on cost
ascertainment and accounting is also achieved in
addition to check on financial accounts.
2. Comparability: common classification of all major
expenses makes both sets of books more
comparable.
3. Coordination & cooperation: Reconciliation
facilitates and promotes coordination and
cooperation between the activities of costing and
financial sections of the accounting department.
4. Standardisation: policies relating to stock
valuation, depreciation and absorption of overheads
tend to become standardised in the long run due to
reconciliation.
5. Integration: Introduction of integrated accounting
system at a future data becomes easier due to
comparability, standardisation etc., brought about
by reconciliation.
6. Effective control and decision making:
management becomes familiar with the reasons for
variation in profits which covers way for better
internal control. Information provided by costing
records can be more confidently used for
management decisions.
Table showing treatment of differences
No Reasons for difference If base is If base
costing is
profit or financial
financial profit or
loss costing
loss
1. Excess closing stock in Less Add
cost accounts
2. Excess closing stock in Add Less
financial accounts
3. Excess opening stock in Add Less
cost accounts
4. Excess opening stock in Less Add
financial accounts
5. Excess overhead in cost Add Less
accounts ( over
absorption)
 6. Excess overhead in Less Add
financial accounts (
under absorption)
7. Excess depreciation in Add Less
cost accounts
8. Excess depreciation in Less Add
financial accounts
9. Expenses shown in Add Less
costing only, like rent,
interest on capital
10. Incomes and gains Add Less
shown in financial
accounts only, like
interest received,
dividends received etc.
11. Expenses and losses Less Add
and appropriations of
profit shown in
financial accounts only
like income tax, good
will written off,
dividend paid etc.

1. From the following figures prepare reconciliation

statement between cost and financial records.
Net profits as per financial records Rs.
1,28,755
Net profits as per costing records Rs.
1,72,400
Works overhead under recovered in costing
Rs.3,120
Administrative overhead recovered in excess Rs.
1,700
Depreciation charged in financial records
Rs.11,200
Depreciation recovered in costing Rs. 12,500
Interest received but not included in costing Rs.
8,000
Obsolescence loss charged in financial records
Rs. 5,700
Income tax provided in financial books Rs.
40,300
Bank interest credited in financial books
Rs.750
Stores adjustment (credit in financial books) Rs.
475
Depreciation of stock charged in financial books
Rs.6,750

Solution
Reconciliation statement
Particulars Rs Rs Rs
Profits as per cot 1,72,400
accounts
Add: a) Administrative 1,700
overhead over
1,300
recovered in cost
account
b) Depreciation over 8,000
recovered in cost 750
account (12,500 – 475 9,225 12,225
11,200) 1,84,625
c) Incomes and gains 3,120
credited in financial
accounts, but not
shown in cost 5,700
accounts: 40,300
Interest received 6,750 52,750
Bank Interest 55,870
Stores adjustment
Less: a) works 1,28,755
overhead under
recovered in costing
b) Expenses and losses
debited in financial
accounts but not
shown in cost
accounts:
Obsolescence loss
Provision for income
tax
Depreciation of stock

Profits as per financial

accounts
Note: The terms Absorption and Recovery are used
interchangeably, and they mean the same thing.

Table showing treatment of differences

No Reasons for difference If base is If base
costing is
profit or financial
financial profit or
loss costing
loss
1. Excess closing stock in Less Add
cost accounts
2. Excess closing stock in Add Less
financial accounts
3. Excess opening stock in Add Less
cost accounts
4. Excess opening stock in Less Add
financial accounts
5. Excess overhead in cost Add Less
accounts ( over
absorption)
6. Excess overhead in Less Add
financial accounts (
under absorption)
7. Excess depreciation in Add Less
cost accounts
8. Excess depreciation in Less Add
financial accounts
 9. Expenses shown in Add Less
costing only, like rent,
interest on capital
10. Incomes and gains Add Less
shown in financial
accounts only, like
interest received,
dividends received etc.
11. Expenses and losses Less Add
and appropriations of
profit shown in
financial accounts only
like income tax, good
will written off,
dividend paid etc.

2. For a company the profit as per cost accounts is

Rs.86,250. The following points are found out on
comparison between cost accounts and financial
accounts:
Particulars Cost Financial
Account Accounts
Rs Rs.
a) Opening stock
Material 10,300 10,500
Work in progress 8,000 8,500
b) Closing stock
Material 15,000 14,200
 Work in progress 6,000 5,600

c) Dividend and interest received Rs.600

d) Loss on sale of investment Rs.1,000
e) Rs.1,500 expenses charged in cost accounts but not
considered in financial accounts
f) Goodwill Rs.2,500 and preliminary expenses
Rs.3,000 have been written off during the year.
g) Overhead incurred Rs.40,600 but overheads
recovered amount to Rs.38,500.
Find out the profits as financial accounts by
preparing a reconciliation statement.

Solution
Particulars Rs. Rs. Rs.
Profit as per cost account 86,250
Add: a) Incomes not shown
in cost accounts: 600
Dividend and
Interest 1,500 2100
b) Expenses shown in 88,350
costs accounts but not
considered in financial
accounts

Less: a) opening stock of

material under valued in 200
1,900
cost account (10,500- 500
10,300)
Opening stock of work in 800
progress under valued in 400
cost account (8500-8000) 6,500
Closing stock of material 10,500
overvalued in cost account 1,000 2,100
(15,000-14,200) 2,500 77,850
Closing stock of work in 3,000
progress over Valued in
cost accounts (6000-5,600)
b) Expenses and losses not
shown in cost accounts but
recorded in financial
accounts:
loss on sale of investment
Goodwill written off
Preliminary expenses
c) overheads under
recovered in cost accounts
(40,600 – 38,500)
Profits as per financial
accounts

Table showing treatment of differences

No Reasons for difference If base
is
financial
profit or
 costing
loss
1. Excess closing stock in Add
cost accounts
2. Excess closing stock in Less
financial accounts
3. Excess opening stock in Less
cost accounts
4. Excess opening stock in Add
financial accounts
5. Excess overhead in cost Less
accounts ( over absorption)
6. Excess overhead in Add
financial accounts ( under
absorption)
7. Excess depreciation in cost Less
accounts
8. Excess depreciation in Add
financial accounts
9. Expenses shown in costing Less
only, like rent, interest on
capital
10. Incomes and gains shown Less
in financial accounts only,
like interest received,
dividends received etc.
11. Expenses and losses and Add
appropriations of profit
shown in financial
accounts only like income
 tax, good will written off,
dividend paid etc.

3. Prepare a reconciliation statement from the

following details:
Net loss as per cost accounts
Rs.3,44,800
Net loss as per financial accounts
Rs.4,32,890
Works overhead under recovered in costing
Rs.6,240
Depreciation overcharged in costing
Rs.2,600
Interest on investment Rs.17,500
Administrative overhead over recovered in costing
Rs.2,600
Goodwill written off Rs.92,000
Stores adjustment in financial book (Cr)
Rs.950
Depreciation of stock charged in financial books
Rs.13,500

Reconciliation statement
Particulars Rs. Rs. Rs.
Net loss as per cost 3,44,800
accounts 6,240
Add: works overhead
under recovered in 92,000
accounts 13,500 1,05,500 1,11,740
Losses shown 4,56,540
only in financial
accounts: 2,600
Goodwill
written off 2,600
Depreciation
of stock 17,500
950 18,450 23,650
4,32,890
Less: Depreciation
overcharged in
costing
Administration
overhead over
recovered in costing
Incomes shown
only in financial
accounts:
Interest on
investments
Stores
adjustment (Cr)

Net loss as per

financial accounts
 Table showing treatment of differences
No Reasons for difference If base
is
financial
profit or
costing
loss
1. Excess closing stock in Add
cost accounts
2. Excess closing stock in Less
financial accounts
3. Excess opening stock in Less
cost accounts
4. Excess opening stock in Add
financial accounts
5. Excess overhead in cost Less
accounts ( over absorption)
6. Excess overhead in Add
financial accounts ( under
absorption)
 7. Excess depreciation in cost Less
accounts
8. Excess depreciation in Add
financial accounts
9. Expenses shown in costing Less
only, like rent, interest on
capital
10. Incomes and gains shown Less
in financial accounts only,
like interest received,
dividends received etc.
11. Expenses and losses and Add
appropriations of profit
shown in financial
accounts only like income
tax, good will written off,
dividend paid etc.

4. The net profit of a company amounted to Rs.60,412

for the year ending 31st Dec 1989, as per its
financial records. The cost records, however,
 revealed a different figure. A scrutiny of both sets
of accounts disclosed the following facts:
a. Works overhead recovered in cost accounts during
the period amounted to Rs.28,450 while the actual
amount of these expenses was Rs.21,390 only.
b. Actual office expenses for the period were
Rs.19,850, whereas the office overhead recovered
in cost accounts amounted to Rs.14,500.
c. The annual rental value of premises owned by the
company, amounting to Rs.10,800, was charged in
cost accounts but not in financial accounts.
d. Selling and distribution expenses for the period
amounting to Rs.16,490, were excluded from
costing records.
e. Excess depreciation charged in cost accounts
Rs.2,400
f. Expenses not included in cost accounts and shown
in financial accounts.
Interest on bank loan Rs. 1,600
Bank Charges Rs.160
Directors fees Rs.750
Penalty due to late completion of contract Rs.2,500
g. Gains during the year not included in cost accounts
Transfer fees Rs.45
Profit on sale of Investment Rs.4,250
Interest on investment Rs.9,450
h. The following appropriations had been made
before arriving at the profits figure of Rs.60,412
shown above.
Transfer to dividend equalisation fund
Rs.10,500
Transfer to income tax reserve Rs.6,400
Transfer to debenture redemption fund Rs.
9,000
i. A sum of Rs.10,000 given as donation to the Prime
Minister Relief Fund had been charged to profit
and loss account as business expenses.
Prepare a Reconciliation statement and find the
amount of net profit/loss as per costing records.

Solution
Particulars Rs. Rs. Rs.
Net profits as per 60,412
financial accounts
Add: Office Overhead 5,350
under recovered in cost
account (19,850- 16,490
14,500) 1,600
Expenses and losses 160
not shown in cost 750 19,000
accounts: 2,500
Selling & distribution 10,000 31,500
expenses
Interest on bank loan
Bank charges 10,500
Directors fee 6,400
Penalty due to late 9,000 25,900
completion of contract 1,23,162
Donation to Prime
minister’s relief fund 10,800

Appropriations of 7,060
profit shown in cost
accounts: 2,400
Transfer to dividend
equalisation fund 45
Transfer to income tax 4,250
reserve 9,450 13,745 34,005
Transfer to debenture
redemption fund 89,157

Less: Rent on own

premises charged only
in cost accounts:
Works overhead over
recovered in cost
accounts
(28,450-21,390)
Excess depreciation
charged in costing
 Gains not shown in
cost accounts:
Transfer fees
Profits on sale of
investments
Interest on investment

Profit as per cost

accounts

Target costing meaning:

Target costing is an approach to determine a
product's life-cycle cost which should be sufficient to
develop specified functionality and quality, while
ensuring its desired profit. It involves setting a target
cost by subtracting a desired profit margin from a
competitive market price.
Features of Target Costing:
 The price of the product is determined by market
conditions. The company is a price taker rather
than a price maker.
 The minimum required profit margin is already
included in the target selling price.
 It is part of management’s strategy to focus on cost
reduction and effective cost management.
 Product design, specifications, and customer
expectations are already built-in while formulating
the total selling price.
 The difference between the current cost and the
target cost is the “cost reduction,” which
management wants to achieve.
 A team is formed to integrate activities such as
designing, purchasing, manufacturing, marketing,
etc., to find and achieve the target cost.
Example:
ABC Inc. is a big FMCG player that operates in a
very competitive market. It sells packaged food to
end customers. ABC can only charge $20 per unit.
If the company’s intended profit margin is 10% on
the selling price, calculate the target cost per unit.

Solution:
Target Profit Margin = 10% of 20 = $2 per unit
Target Cost = Selling Price – Profit Margin ($20 –
$2)
Target Cost = $18 per unit