31

S.Y.B.COM.
(ACCOUNTING & FINANCE)
SEMESTER - III

COST ACCOUNTING
(METHODS OF COSTING) II

SUBJECT CODE : UA_FFSIII.2

 © UNIVERSITY OF MUMBAI
Prof. Suhas Pednekar
Vice-Chancellor,
University of Mumbai

Prof. Ravindra D. Kulkarni Prof. Prakash Mahanwar

Pro Vice-Chancellor, Director,
University of Mumbai IDOL, University of Mumbai

Programme Co-ordinator : Prof. Rajashri Pandit

Asst. Professor, in Economic,
Incharge Head Faculty of Commerce,
IDOL, University of Mumbai, Mumbai

Course Co-ordinator : Ms. Neha Bhatia

and Editor Asst. Professor, Programme Co-ordinator,
B.Com. (Accounting and Finance),
IDOL, University of Mumbai, Mumbai

Course Writer : Prof. S.D. Ovhal

Sidharth College of Commerce of Economics,
Fort, Mumbai - 400001

: Prof. Ashok Mahadik

Lala Lajpatrai College,
Maharalaxmi, Mumbai - 400034

: Prof. Shilpa Palande

R. J. Thakur College,
Thane (W), 400606

: Prof. Anthony D’Souza

R. J. Thakur College,
Thane (W), 400606

September 2022, Print - 1

Published by : Director,
Institute of Distance and Open Learning ,
University of Mumbai,
Vidyanagari, Mumbai - 400 098.

DTP Composed & : Mumbai University Press

Printed by Vidyanagari, Santacruz (E), Mumbai
 CONTENTS
Unit No. Title Page No.

1. Introduction to Cost Accounting 01

2. Classification of Costs and Cost Sheet 18
3. Reconcilation of Cost and Financial Accounts 36
4. Contract Costing 55
5. Process Costing 91


Revised Syllabus of Courses of B.Com. (Accounting and Finance)
Programme at Semester III
with Effect from the Academic Year 2022-2023

1. Elective Courses (EC)

Cost Accounting (Methods of Costing) – II

Modules at a Glance
Sr. Modules No. of
No. Lectures
1 Classification of Costs And Cost Sheets 20

2 Reconciliation of Cost and Financial Accounts 10

3 Contract Costing 15

4 Process Costing 15

Total 60
Sr. No. Modules / Units
1 Classification of Costs and Cost Sheet
Classification of costs, Cost of Sales, Cost Centre, Cost Unit, Profit Centre and
Investment Centre
Cost Sheet, Total Costs and Unit Costs, Different Costs for different purpose
Problems on preparation of cost sheet & Estimated Cost sheet
2 Reconciliation of cost and financial accounts
Practical problems based on reconciliation of cost and Financial accounts

3 Contract Costing
Progress payments, Retention money, Contract accounts, Accounting for material,
Accounting for Tax deducted at source by the contractee, Accounting for plant
used in a contract, treatment of profit on incomplete contracts, Contract profit
and Balance sheet entries. Escalation clause, practical problems
4 Process Costing
Process loss, Abnormal gains and losses, Joint products and by products.
Excluding Equivalent units, Inter-process profit
Practical problems Process Costing and joint and by products
 1

1
INTRODUCTION TO COST ACCOUNTING
Unit structure

1.0 Objectives
1.1 Introduction
1.2 Meaning of Cost, Costing and Cost Accounting
1.3 Objectives of Cost Accounting
1.4 Cost Centre and Cost Units
1.5 Classification of Cost
1.6 Elements of Cost
1.7 Summary
1.8 Exercise

1.0 OBJECTIVES

After studying this unit students will be able to:

• Understand the need of Cost Accounting
• Know the meaning of Cost, Costing and Cost Accounting
• Explain the objectives of Cost Accounting
• Understand the classification of Cost
• Discuss about the Elements of Cost
• Know the methods of Costing

1.1 INTRODUCTION

Cost Accounting is the system of accounting which is

concerned with determination of costs of doing something which
can be manufacturing or rendering service or even conducting any
activity or function. The objective of Cost Accounting is to render
detailed and useful information for guidance to Management.

Financial accounting is developed over the time to record,

summarise and present the financial transaction or events which
can be expressed in terms of money. This function was primarily
concerned with record keeping, leading to preparation of Profit and
Loss Account and Balance Sheet. The information obtained
through financial statements is useful to the Management or Owner
in several respects. However, the information provided by financial
 2

accounting is not sufficient for several purposes of decision making

in many areas such as : determining output level, determining
product selection – addition or dropping or changing product
combination in the case of multi product company, determining or
revising prices of products, whether Profit earned is optimum as
compared with competitors and in comparison to earlier years. The
need of data for such details lead to the development of Cost
Accountancy.

1.2 MEANING OF COST, COSTING AND COST

ACCOUNTING

1.2.1 Cost :
Institute of Cost and Works Accountants of India, defines
cost as “measurement, in monetary terms, of the amount of
resources used for the purpose of production of goods or rendering
services”.
Thus the term cost means the amount of expenditure, actual
or notional incurred or attributable to a given thing. It can be
regarded as the price paid for attaining the objective. For e.g.
Material cost is the price of materials acquired for manufacturing a
product.

1.2.2 Costing :
The term costing has been defined as “the techniques and
processes of ascertainment of costs. Whelden has defined costing
as, “the classifying recording and appropriate allocation of
expenditure for the determination of costs the relation of these
costs to sale value and the ascertainment of profitability.”

Therefore costing involves the following steps.

1. Ascertaining and Collecting of Costs
2. Analysis or Classification of Costs
3. Allocating total costs to a particular thing i.e. product, a
contract or a process.

Thus costing simply means cost finding by any process or

technique.

1.2.3 Cost Accounting :

Cost Accounting is a formal system of accounting by means
of which cost of products or service, are ascertained and controlled.

Whelden defines Cost Accounting as, “Classifying,

recording and appropriate allocation of expenditure for
determination of costs of products or services and for the
presentation of suitably arranged data for the purpose of control
and guidance of management.”
 3

Therefore, Cost Accounting is the application of costing

principles, methods and techniques in the ascertainment of costs
and analysis of savings or / and excesses as compared with
previous experience or with standards. It provides, detailed cost
information to various levels of management for efficient
performance of their functions. The information supplied by Cost
Accounting as a tool of management for making optimum use of
scarce resources and ultimately add to the profitability of business.

1.3 OBJECTIVES OF COST ACCOUNTING

Objectives of Cost Accounting are as follows :

1) To Ascertain the Cost : To ascertain the cost of product or a

services reveled and enable measurement of profit by proper
valuation of inventory.

2) To Analyse Costs : To analysis costs or to classify the

expenses under different heads of accounts viz. material,
labour, expenses etc.

3) To Allocate and Apportion the Costs : To allocate or charge

the direct expenses or specific costs such as Raw Material,
Labour to particular product, contract or process and to
distribute common expenses to each product, contract or
process on a suitable basis.

4) Cost Reporting : Cost Reporting or presentation includes :

a) What to report i.e. what is the nature of information to be
presented?
b) Whom to Report i.e. to whom the report is to be addressed.
c) When to Report i.e. when the report is to be presented i.e.
Daily weekly monthly yearly etc.
d) How to Report i.e. in what format the report is to be
presented.

5) To Assist the Management : Cost Accounting assist the

management in:
a) Indicating to the management any inefficiencies and extent
of various forms of waste of Raw Material, Time, Expenses
etc.
b) Fixing of selling price.
c) Providing information to enable management to take
decision of various types.
 4

d) Controlling Inventory of Raw Material, goods in process,

finished goods, spares and consumables etc.

6) Cost Control : Cost Accounting assist the management in cost

control. Cost control includes the following stages.
a) Setting up of targets of cast and production for each period.
b) Measuring the actual figures of performance relating to cost,
production etc. for the period concerned.
c) The figures of actual performance are to be compared with
the targets to find out the variation.
d) Analysing the variance, whether favourable or adverse.
e) Immediate action has to be taken in case of adverse
variation.

8) Optimum Product Mix : Advise the management in deciding

optimum product mix merits and demerits of alterative courses
of action viz. make of buy decisions, introduction or Automation
mechanization, rationalization, system of production etc.

9) Future Policies : Advise management on future policies

regarding Expansion, growth, capital investment, etc.

1.4 COST CENTRE AND COST UNITS

1.4.1 Cost Centre :

It is a location, person or item of equipment for which cost
may be ascertained and used for the purpose of cost control. It is a
convenient unit of the organisation for which cost may be
ascertained. The main purpose of ascertainment of cost is to
control the cost and fill up the responsibility of the person who is in
charge of the cost centre.

• Types of cost centers :

I. Personal Cost Centre :

It consists of a person or group of persons.
e.g. machine operator, salesmen, etc.

II. Impersonal Cost Centre :

It consists of a location or an item of equipment or group of
these. E.g. Factory, Machine etc.

III. Operational Cost Centre :

This consists of machines or persons carrying on similar
operations.
 5

IV. Process Cost Centre :

This consists of a continuous sequence of operation or specific
operations.
V. Production Cost Centre :
This is the centre where actual production takes place or these
include, those departments that are directly engaged in
manufacturing activity and contribute to the content and form of
finished product.

e.g. Cutting, Assembly and Finishing Departments etc.

VI. Service Cost Centre :

This is the Centre which renders services to production centres.
These contribute to the production process in an indirect
manner.

e.g. Stores department, Repairs and Maintainance department,

H.R. Department, Purchase Department etc.

1.4.2 Cost unit :

It is a unit of product, service or time in terms of which cost
are ascertained or expressed. It is basically, a unit of quantity of
product or service in relation to which costs may be ascertained or
expressed.

Few examples of cost unit are given below.

Name of Industry Cost unit

Textiles Meter, yards
Transport Passenger km
Power Kilowatt – hour
Paints Litre
Iron and Steel Tonne
Canteen Per meal
Chemical Litre, kilogram
Readymade Garments Number
Petrol Litre

1.5 CLASSIFICATION OF COST

Classification is the process of grouping costs according to

their common characteristics. It is a systematic placement of like
items together according to their common features. There are
various ways of classifying costs, according to their common
features as given below.
 6

Chart showing classification of cost :

Classification of Cost

On the basis of On the basis of On the basis

Identification Controlliability of Time

Direct Indirect Controllable Uncontrollable Historical Predetermined

Cost Cost Cost Cost Cost Cost

On the basis of On the basis of

behaviour of cost function

Fixed Variable Semi-Variable

Cost Cost Cost

Manufacturing Administration Selling and Research and

Cost Cost Distribution Development
Cost Cost

Other Basis

Conversion Normal Avoidable Unavoidable Product Period

Cost Cost Cost Cost Cost Cost

I On the basis of Identification :

On the basis of identification of cost with cost units or jobs or
processes, costs are classified into –

1. Direct Costs : These are the costs which are incurred for and
conveniently identified with a particular cost unit process or
department. These are the expenditures which can be directly
allocated to a particular job, product or an activity. E.g. Cost of
Raw Material used, wages paid to labourers etc.

2. Indirect Costs : These are general costs and are incurred for
the benefit of a number of cost units, processes or departments.
These costs can not be conveniently identified with a particular
cost unit or cost centre. Example : Depreciation of Machinery,
Insurance, Lighting, Power, Rent of Building, Managerial
Salaries, etc.
 7

II On the basis of behaviour of Cost

Behaviour means change in cost due to change in output.

Costs behave differently when the level of production rises or falls.
Certain costs change in direct proportion with production level while
other costs remain unchanged. As such on the basis of behaviour
of cost – costs are classified into

1) Fixed Costs : It is that portion of the total cost which remain

constant irrespective of output upto the capacity limit. It is the
cost which does not very with the change in the volume of
activity in the short run. These costs are not affected by
temporary fluctuation in the activity of an enterprise. These are
also known as period costs as it is concerned with period. Rent
of premises, tax and insurance, staff salaries, are the examples
of fixed cost.

Characteristics of Fixed Cost are :

a. Large in value
b. Fixed amount within an output range
c. Fixed cost per unit decreases with increased output
d. Indirect Cost
e. Lesser degree of controllability
f. Influence Variable Cost and Working Capital

Y
Cost (Rs.)

Total Fixed Cost

Fixed C
ost per Un
it

O Output (Units) X

Behaviour of Fixed Cost

2) Variable Cost : It is that cost which directly very with the

volume of activity. In other words, it is a cost which changes
according to the changes in the volume of output. It tends to
very in direct proportion to output. It means when the volume of
output increases, total variable cost also increases when the
volume of output decreases, total variable cost also decreases.
 8

But the variable cost per unit remains same. Direct material,
Direct Labour, Direct Expenses are the examples of variable
costs.

Characteristics of Variable Cost are :

a. Total cost changes in direct proportion to the change in
total output.
b. Cost per unit remains content.
c. It is quite divisible.
d. It is identifiable with the individual cost unit.
e. Such costs are controlled by functional manager.

st
Co
e
bl
ia
ar
lV
Cost (Rs.)

ta
To

Variable Cost per Unit

O Output (in Units) Y

Behaviour of Variable Cost

3) Semi-Variable Cost : This is also referred as semi-fixed costs.

These costs include both a fixed and a variable component. i.e.
These are partly fixed and partly variable. They remain
constant upto a certain level and registers change afterwards.
These costs vary in some degree with volume but not in direct
or same proportion. Such costs are fixed only in relation to
specified constant condition.

For example: Repairs and maintenance of machinery,

telephone charges, maintainance of building, supervision,
professional tax, compensation for accidents, light and power
etc.
 9

Semi Variable Cost

Cost (Rs.)
Output (in Units)
Behaviour of Semi-Variable Cost

III. On the basis of Controllability

On the basis of controllability, costs are classified into two

types :
1) Controllable Cost
2) Uncontrollable Cost

1) Controllable Cost : These are the costs which can not be

influenced or controlled by the concerned cost centre or
responsibility centre. These costs may be directly regulated at a
given level of management authority.

2) Uncontrollable Cost : These are the costs, which can not be

influenced or controlled by the action of a specific member of an
enterprise. For eg. it is very difficult to control costs like factory
rent, managerial salaries etc.

The important points to be noted regarding this classification.

First, controllable cost can not be distinguished from non-
controllable costs, without specifying the level and scope of
management authority. It means cost which is uncontrollable at
one level of management may be controllable at another level of
management. Eg. Rent and Factory Building may be beyond
control for the production department but can be controlled by
the administrative department by negotiations. Secondly all
costs are controllable in the long run and at the some
appropriate management level.

IV On the basis of Functions

An organisation performs many functions. On the basis of

functions costs can be classified as follows :
 10

1) Manufacturing Costs : It is the cost of all items involved in the

manufacturing of a product or service. It includes all direct costs
and all indirect costs related to the production. It includes cost
of direct materials, direct labour, direct expenses, and overhead
expenses related to production. Overhead expenses, means all
indirect costs involved in the production process. This is termed
as factory overhead or manufacturing overheads. Eg. Salaries
of staff for production department, technical supervision,
Expenses of stores department, Depreciation of Plant and
Machinery, Repairs and maintenance of Factory Building and
Machineries etc.

2) Administration Cost : These are costs incurred for general

management of an organisation. It is the cost which is incurred
for formulating the policy, directing the organisation of
controlling the operations. These are in the nature of indirect
costs and are also termed as administrative overhead. Eg.
Salaries of Administrative Stall, General Office expenses like
rent, lighting, telephone, stationery, postage etc.

3) Selling and Distribution Costs : Selling costs are the indirect

costs relating to selling of products or services. They include all
indirect cost in sales management for the organisation. Selling
costs include all expenses relating to regular sales and sales
promotion activities. Examples of expenses which are included
in selling costs are :
1) Salaries, Commission and traveling expenses for sales
personnel
2) Advertisement cost
3) Legal Expenses for debt realization
4) Market research cost
5) Show room expenses
6) Discount allowed
7) Sample and free gifts
8) Rent on Sales room
9) After sale services
Distribution costs are the costs incurred in handling a
product from the time it is completed in the works until it reaches
the ultimate consumer. Distribution expenses include all these
expenses which are incurred in connection with making the
goods available to customers. These expenses include the
following.
1) Packing charges
2) Loading charges
 11

3) Carriage on Sales
4) Rent of warehouse
5) Insurance and lighting of warehouse
6) Transportation costs
7) Salaries of godown keeper, driver, packing staff etc.

4) Research and Development Cost : Research and

development costs are incurred to discover new ideas,
processes, products by experiment. It includes the cost of the
process which begins with the implementation of the decision to
produce or improved product.

V On the basis of Time

On the basis of time of computation, costs are classified into

historical costs and predetermined costs.

1) Historical Costs : These are the costs which are ascertained

after these have been incurred. Historical costs are then
nothing but actual costs. They represent the costs of actual
operational performance. These costs are not available until
after the completion of manufacturing operations.

2) Pre determined Costs : These are the future costs which are
ascertained in advance of production on the basis of a
specification of all the factors affecting cost and cost data.
Predetermined costs are future costs determined in advance on
the basis of standards or estimates. These costs are
extensively used for the purpose of planning and control.
VI Other Basis
1) Normal Cost : Normal cost may be defined as a cost which is
normally incurred on expected lines at a given level of output, in
the condition in which that level of output in normally attained.
This cost is a part of production.

2) Abnormal Cost : Abnormal cost is that cost which is not

normally incurred at a given level of output, in the condition in
which that level of output is normally attained. Such cost is over
and above the normal cost and is not treated as a part of the
cost of production.

3) Avoidable Cost : The cost which can be avoided under the

present conditions is an avoidable cost. These are the costs
which under given conditions of performance efficiency should
not have been incurred. They are logically associated with
some activity and situation and are ascertained by the
 12

difference of actual cost with the happening of the situation and

the normal cost. Eg. when spoilage occurs in manufacturing in
excess of normal limit, the resulting cost of spoilage is avoidable
cost.

4) Unavoidable Cost : The cost which can not be avoidable under

the present condition is an unavoidable cost. They are
inescapable costs which are essentially to be incurred within the
limits or norms provided for. It is the cost that must be incurred
under a programme of business restriction.

CHECK YOUR PROGRESS

• Draw the chart showing Classification of Cost.
• Define the following terms:
1. Costing
2. Cost Accounting
3. Impersonal cost center
4. Service Cost center
5. Direct Cost
6. Uncontrollable cost
7. Predetermined cost
• Give Examples:
1. Fixed cost
2. Variable cost
3. Semi variable cost
4. Manufacturing cost
5. Administration cost
6. Selling cost
7. Distribution Cost

1.6 ELEMENTS OF COST

A manufacturing organisation converts raw materials

into finished products. For that it employs labour and provides other
facilities. While compiling production cost, amount spent on all
these are to be ascertained. For this purpose, cost are primarily
classified into various elements. This classification is required for
accounting and control.

The elements of cost are (i) Direct material (ii) Direct labour
(iii) Direct expenses and (iv) Overhead expenses.

The following chart depicts the broad headings of costs and

this acts as the basis for preparing a Cost sheet.
 13

Elements of cost

Materials Labour Other Expenses

Direct Indirect Direct Indirect Direct Indirect

Overheads

Factory Administrative Selling & Distribution

1.6.1 Material Cost

It is the cost of material of any nature used for the purpose of

production of a product or a service. Materials may be Direct
Material or Indirect Material.

• Direct material : It is the cost of basic raw material used for

manufacturing a product. Direct materials generally became a
part of the finished product. No finished product can be
manufactured without basic raw material. This cost is easily
identifiable and chargeable to the product. For e.g. Leather in
leather products, Steel in steel furniture, Cotton in textile etc.
Direct material includes the following.

Examples-
i) Material specially purchased for a specific job or process.
ii) Materials passing from one process to another.
iii) Consumption of materials or components manufactured in the
same factory.
iv) Primary packing materials.
v) Freight, insurance and other transport costs, import duty, octroi
duty, carriage inward, cost of storage and handling are treated
as direct costs of the materials consumed.

In certain cases direct materials are used in small quantities

and it will not be feasible to ascertain their costs and allocate them
directly. For instance, nails used in the manufacture of chairs and
tables, glue used in the manufacture of toys, thread used in
stitching garments etc. In such cases cost of the total quantity
consumed for the period will be treated as Indirect costs.

• Indirect material : It is the cost of material other than direct

material which cannot be charged to the product directly. It can
not be treated as part of the product. These are minor in
importance. It is also known as expenses materials. It is the
 14

material which cannot be allocated to the product but can be

apportioned to the cost units.

Examples : Lubricants, Cotton waste, Grease, Oil, Small tools,

Minor items like thread in dress making, nails in furniture (nuts,
bolts in furniture) etc.

Therefore, indirect materials can not be easily identified with

specific job. They may not vary directly with the output. It is
considered as a part of overheads.

1.6.2 Labour Cost

This is the cost of remuneration in the form of wages, Salaries,

Commissions, Bonuses etc. paid to the workers and employees of
an organisation.

• Direct Labour Cost : Direct Labour Cost is the amount of

wages paid to those workers who are engaged on the
manufacturing line. It consists of wages paid to workers
engaged in converting of raw materials into finished products.
The amount of wages can be conveniently identified with a
particular line, product, job or process. These workers directly
handle machines on the production line. Direct wages include
payment made to the following group of workers.

1) Labour engaged on the actual production of the product

2) Labour engaged in aiding the operation viz. supervisor,
foremen, shop Clerks and worker on internal transport.
3) Inspectors, Analysts, needed for such production.

Example : Carpenter in furniture making unit, tailor in readymade

wear unit, Labour in construction work etc.

• Indirect Labour Cost : It is the amount of wages paid to those

workers who are not engaged on the manufacturing line. It is of
general character and can not be directly identified with a
particular cost unit. This indirect labour is not directly engaged
in the production operations but such labour assist or help in
production operations. It can not be easily identified with
specific job, contract of work order. It may not vary directly with
the output. It is treated as part of overheads.

Example : Labour in Human Resource department, Labour in

payroll department, Labour in stores, Labour in Securities
Department, Labour in power house department etc.
 15

1.6.3 Expenses

All costs other than material and labour are termed as

expenses. It is defined as the cost of services provided to an
undertaking and the notional cost of the use of owned assets.

• Direct Expenses : It is the amount of expenses which is directly

chargeable to product manufactured or which may be allocated
to product directly. It can be easily identified with the product.
These are the expenses which are specifically incurred in
connection with a particular job or cost unit. They are also
called as chargeable expenses.

Example : Hire of special plant for a particular job, Travelling

expenses in securing a particular contract, Carriage paid for
materials purchased for specific job, Royalty paid in mining or
production etc.

• Indirect Expenses (Overheads): All indirect costs other than

indirect materials and indirect labour costs, are termed as
indirect expenses. It is the amount of expenses which can not
be charged to the product directly. These can not be directly
identified with particular job, process or work order and are
common to cost units’ or cost centers.

• Indirect expenses / Overheads can be sub-divided into

following main groups.

1. Factory or Works Overheads: Also known as

manufacturing or production overheads it consists of all costs of
indirect materials, indirect labour and other indirect expenses which
are incurred in the factory.

Examples :
Factory rent and insurance. Depreciation of Factory building
and machinery.

2. Office or Administration overheads: All indirect costs

incurred by the office for administration and management of an
enterprise.

Examples:
Rent, rates, taxes and insurance of office buildings, audit fees,
directors fees.

3. Selling and Distribution overheads: These are indirect costs

in relation to marketing and sale.
 16

Examples :
Advertising, Salary and Commission of sales agents,
Travelling expenses of salesmen.

1.7 SUMMARY

Cost Accounting is the process of accounting for costs from

the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost center and cost
units. Cost accounting profession got recognition in 1939 in India. It
has been made compulsory for specified manufacturing companies.
Cost Accounting has the objectives of determining Product costs,
facilitate planning and control of regular business activities and
supply information for taking short term and long-term decisions.
Cost Accounting is useful in different areas such as materials,
labour, overheads, stock valuation etc.

1.8 EXERCISE

1. What is cost Accounting? What are its objectives?

2. What are the various elements of costs?
3. What is meant by Cost Accounting? Explain in brief different
ways of Cost Classification.
4. Write short notes on:
a. Cost centers
b. Cost units
c. Elements of costs

5. Choose the correct alternative

1. Cost accounting is an important system developed for

i) shareholders ii) government

iii) management iv) financial institutions
2. The costing which determines cost after it has been actually incurred is

i) historical ii) standard

iii) estimated iv) marginal
3. A cost center is a

i) location for which cost is incurred ii) an organisation

iii) a unit of cost iv) profit center

4. A cost center which is engaged in production activity is called

i) production cost center ii) process cost center

iii) impersonal cost centre iv) production unit
 17

56. Variable cost per unit remains ______.

i) constant ii) flexible
iii) (i) & (ii) iv) none of the above

7. Cost which is related to capacity is called :

i) Fixed cost ii) Capacity cost
iii) Plant cost iv) none of the above

8. Cost which is unaffected by the change in output is called as :

i) Fixed cost ii) Variable cost
iii) Period cost iv) None of the above

9. Cost which is relevant for decision-making is

i) Relevant cost ii) Past cost
iii) Opportunity cost iv) Imputed cost

10. The cost which remains constant irrespective of output upto capacity limit is
i) Fixed cost ii) Product cost
iii) Variable cost iv) Sunk cost

11. Variable cost is also known as

i) Product cost ii) Period cost
iii) Direct cost iv) Semi fixed cost

12. The cost which is directly chargeable to the product is

i) Indirect cost ii) Direct cost
iii) Overheads iv) Period cost



 18

2
CLASSIFICATION OF COSTS
AND COST SHEET

Unit Structure :

2.0 Objectives
2.1 Introduction
2.2 Cost Classifications
2.3 Cost Sheet
2.4 Solved Problems
2.5 Summary
2.6 Exercises

2.0 OBJECTIVES

After studying the unit the students will be able to:

• Understand the concept of cost

• Classify the costs
• Understand the cost sheet
• Explain the elements of cost.
• Prepare the cost sheets.

2.1 INTRODUCTION

A manufacturing organisation converts raw materials into

finished products. For the purpose, it employs labour and provides
other facilities. While compiling production cost, amounts spent on
all these facilities are required to be ascertained. Thus, cost
ascertainment involves (a) collection and classification of costs
according to cost elements (b) its allocation or apportionment to
cost centres or units (c) choice of an appropriate method of costing
and (d) selection of an appropriate costing technique. Costs are
primarily classified into various elements for accounting and
control.

2.2 COST CLASSIFICATIONS

Cost items are analysed or grouped according to their

common characteristics which is some independent factor. There
are many objectives of cost classifications depending on the
 19

requirements of management. The different cost classifications are

as follows:-

2.2.1 Cost Classification by Elements :

The constituent elements of costs are broadly classified into

three distinct elements i.e. materials, labour and expenses These
three elements of cost can be further grouped into direct and
indirect categories. Direct materials refer to the cost of materials
which are conveniently and economically traceable to specific units
of output for example. Raw cotton in textiles, crude oil in making
diesel. The indirect materials refer to materials that are needed for
the completion of the product but whose consumption with regard
to the product is either so small or so complex that it would not be
appropriate to treat it as a direct material. For example, stationery
lubricants, cotton waste etc.

2.2.2 Cost Classification by Function.

A business organisation has to perform several functions

such as Manufacturing, Administration, Selling and Distributing and
Research and Development. Functional classification of cost
implies that the business performs many functions for which costs
are incurred. Expenses or Costs are usually classified by function
and grouped under the headings of Manufacturing, Selling and
Administrative costs in measuring net income.

Manufacturing costs are all check costs incurred to

manufacture the products and to bring them to a saleable condition.
This includes direct material, direct labour and indirect
manufacturing costs or overheads. Administration costs are
incurred for formulation of policy, directing the organisation and
controlling the activities excluding the cost of research,
development, production, selling and distribution. These costs
include salary of executives, office, staff, office rent, stationery,
postage etc. Selling costs, include the cost of creating and
stimulating demand and getting customers. For example,
advertisement, salary and commission to salesmen, packing.
Distribution costs include the cost of warehouse, freight, cartage
etc.

Research and Development costs are incurred in the

process of finding out new ideas, new processes by experiments or
other means of putting the results of such experiments on a
commercial basis. Functional classification of cost is important
because it provides an opportunity to the management to evaluate
the efficiency of departments performing different functions in an
organisation.
 20

3.2.3 Cost Classification by variability:

Cost can be classified as (i) fixed (ii) variable and (iii) semi -
fixed or semi variable in terms of their variability or changes in cost
behaviour in relation to changes in output or activity or volume of
production. Activity may be indicated in any form such as units of
output, hours worked, sales, etc. The separation of costs into
variable and fixed categories is the most difficult part of the costing
operation. Certain costs are easily identifiable as variable or fixed
while other costs can be segregated only after careful consideration
of their nature and an examination of their behaviour.

i) Fixed costs:
Fixed cost is a cost which does not change in total for a
given time period despite wide fluctuations in output or volume of
activity. These costs must be met by the organisation irrespective
of the volume level. These costs are also known as capacity costs,
period costs or stand - by costs; for example, rent, property taxes,
supervisor’s salary, advertising, insurance etc.

ii) Variable costs:

Variable costs are those costs which vary directly and
proportionately with the output. There is a constant ratio between
the change in the cost and the change in the level of output. Direct
materials and labour are the examples of variable costs. Thus, all
these costs which tend to vary directly with variations in volume of
output are variable costs. However, it must be remembered that
variable costs remain the same or approximately the same in
amount per unit of production regardless of increase or decrease in
volume.

iii) Semi variable or semi fixed costs:

There is another group of costs in between the fixed and
variable costs. It is semi variable or semi fixed costs. These costs
vary in some degree with volume but not in direct proportion. Such
costs are fixed only in relation to specified constant conditions.
Semi fixed costs are those costs which remain constant upto a
certain level of output after which they become variable. For
example: maintenance of building, depreciation of plant,
supervisor’s salary, telephone expenses etc.

2.3 COST SHEET

Cost sheet is a statement prepared to present the detailed

costs of total output during a period. It provides information relating
to cost per unit at different stages of total cost of production. The
preparation of cost sheet is one of the important and primary
function of cost accounting. Cost sheet is not an account. There is
 21

a prescribed form for preparation of cost sheet. A cost sheet is a

statement of cost prepared for a given period of time in such a
manner that it indicates various elements of cost as clearly as
possible. The cost sheet is useful in ascertaining the total cost of
production per unit, formulation of production plan, fixing up the
selling price and to minimize the production cost. Sometimes
standard cost data are provided to facilitate comparison with the
actual cost increased. The preparation of the cost sheet requires
understanding of the treatment of the following items:-

a) Stock of raw materials: The opening and closing stock of raw

materials are to be adjusted with purchase of Raw materials in
order to determine the value of raw materials consumed for the
output produced. Carriage/ Freight inward and Octroi on
purchase etc. also to be added to purchases. This is a part of
Prime Cost.

b) Stock of Work in Process – The value of stock of work in

process is a part of Factory cost and therefore, it should be
adjusted with factory overheads. Sale of scrap should be
deducted from the factory overheads in order to determine the
total factory cost.

c) Stock of Finished goods :- Finished goods covers the

products on which factory work has been completed. It is the
cost of completed production. The opening and closing values
of finished goods are to be adjusted with the total cost of
production in order to arrive at cost of sales.

2.3.3 Expenses excluded from cost sheet:

There are certain expenses /costs which do not form a part

of cost sheet. Some of these expenses are an apportionment of
profit. Examples of these expenses are -

i) Dividend to shareholders
ii) Income Tax
iii) Interest on loan
iv) Donations paid
v) Capital expenditure
vi) Capital loss on sale of assets.
vii) Commission to Partners / Managing Director
viii) Discount on issue of shares/ debentures
ix) Underwriting commission.
x) Writing of goodwill/ bad debts
xi) Provision for Taxation, Bad Debts or any kind of Fund or
reserves.
 22

Break up of cost sheet

2.3.4 Specimen of cost sheet.

The specimen form of a cost sheet is given below:

Cost sheet for the period …..

(Production … Units )

Total Cost Cost Per

Particulars Rs. Unit
Rs.

Direct Materials
Raw Materials
Opening stock Materials :
Add : Purchases …..
Add : Carriage / Freight Inward -----------------
Less : Closing stock -----------------
Cost of materials consumed
Direct Labour
Direct Expenses
--------------- ------------
Prime cost
Factory overheads
Add: Work in Progress (Opening )
Less : Work in Progress (Closing )

Works /Factory cost

Office and administrative expenses
Cost of Production (of goods produced)
Add: Op. Stock of finished goods
Less closing of finished goods
cost of production (of goods sold)
 23

Selling & Distribution expenses

Cost of Sales

Add. Profit (Loss)

Sales

2.3.5 Elements of Total Cost

Costs are classified under different heads which represent

the successive stages through which the cost flow.

i) Prime Cost
Prime cost is the basic cost of any product. It comprises of
those expenses which could be traced directly to it. The prime cost
consists of cost of direct materials, direct labour and direct
expenses. Direct expenses include special expenses which can be
identified with product or job and are charged directly to the product
as part of the prime cost. For example cost of hiring special plant or
machinery, cost of special moulds, design or patterns, Architect’s
fees, Royalties, License fees etc.

ii) Work cost:

Works cost of a Product consists of prime cost plus the
portion of works or factory expenses chargeable against the
Production. Works or factory expenses include, indirect materials
indirect labour and indirect expenses. Indirect materials refer to
those materials that are needed for the completion of the product
but the consumption of these materials is either so small or
complex that it would not be appropriate to treat it as direct
materials. These are supplies that cannot be conveniently and
economically charged to a specific unit of output. For example,
lubricants, cotton waste, works stationery etc.

Indirect labour is that labour which does not affect the

construction or the composition of the finished product. This is the
labour cost of production related activities that cannot be
associated with or conveniently traced to specific product through
physical observation. For example, Foremen’s salary and salary of
employees engaged in maintenance or service work. Indirect
expenses covers all expenditure incurred by the manufacturer from
the time of production to its completion as delivery to customer by
way of rate of product. Any cannot be allocate but which can be
apportioned to or absorbed by the cost cehtres cost units are
known as indirect expenses. These expenses are incurred for the
benefit of more than one product, job or activity and, therefore,
must be apportioned by appropriate bases to the various functions
or products. For example, lighting and heating, maintenance factory
manager’s salary, watch and ward department’s salary etc.
 24

(ii) Cost of Production :

Cost of Production consists of works cost plus an additional
amount of office and administrative expenses. It includes all
expenses connected with the managerial functions such as
planning, organizing, directing, coordinating and controlling the
operations of the manufacturing business. For example, office rent,
salary, lighting, stationery, repairs and maintenance and
depreciation of office building, audit fees, legal expenses.

iv) Cost of Sales:

Cost of sales consists of cost of production plus
proportionate selling and distribution expenses of the product.
Selling expenses include the expenses incurred for creating
demand for the product such as advertisement, salaries of
salesmen, selling expenses and show room expenses. Distribution
expenses are those expenses incurred in connection with the
delivery of goods to the customers such as packing, carriage
outwards, warehouse expenses.

2.4 SOLVED PROBLEMS

Illustration -1

Bombay Manufacturing company submits the following

information on 31-3-2010
Particulars Rupees
Sales for the year 2,75,000
Inventories at the beginning of the year-
- Raw Materials 3,000
- Work in Progress 4,000
- Finished Goods 1,10,000
Purchase of materials 65,000
Direct Labour 6,000
Inventories at the end of the year -
- Raw Materials
4,000
- Work in Progress 6,000
- Finished Goods 8,000

Other expenses for the year –

Selling expenses 27,500
Administrative expenses 13,000
Factory overheads 40,000
Prepare Statement of cost
 25

Solution :

Bombay Manufacturing Company

Statement of cost for the year ended 31-3-2010

Rs. Rs.
Materials consumed
Opening stock: 3,000
+ Purchases 110000
113000
- Closing stock 4000
109000
Direct Labour 65000
Direct Expenses 6000
180000
Prime cost
Factory overheads 40000
+ Work in Progress (beginning ) 4000
44000
- Work in Progress (Closing ) 6000 38000
Works cost 2,18,000
Administrative expenses 13,000
Cost of Production 2,31,000
+ Opening Stock of finished goods 7,000
2,30,000
- Closing Stock of finished goods 8,000
2,30,000
Selling & Distribution expenses 27,500
cost a sales 2,57,500
Profit (Bal. Fig) 17,500
Sales 2,75,000

Illustration -2
From the following information prepare a statement showing
(i) Prime cost (ii) Works cost (iii) Cost of Production (iv) Cost of
Sales (v) Net profit of X Ltd. which produced and sold 1000 units in
June 2009.

Rs.
Opening Stock:
Raw Materials 24,000
Finished goods 16,000
Closing stock:
Raw Materials 20,000
Finished goods 15,000
Purchase of Raw Materials 80,000
Sales 2,00,000
Direct Wages 35,000
Factory Wages 2,000
 26

Carriage Inward 2,000

Carriage Outward 1,000
Factory Expenses 4,000
Office Salaries 15,000
Office Expenses 12,000
Factory Rent & Rates 2,500
Depreciation - Machinery 2,500
Bad Debts 1,500

Solution
Ltd.
Cost Statement for June, 2009
Particulars Rs. Total Cost Cost per Unit
Rs. Rs.
Opening stock of materials 24,000
Add: Purchase of materials 80,000
Add: Carriage Inward 2,000
1,06,000
Less: Closing stock of materials 20,000
Cost of Materials consumed 86,000 86.00
Direct Wages 35,000 35.00
(i) PRIME COST 121000 121.00
Factory overheads :
Factory Wages 2,000
Factory expenses 4,000
Factory Rent & Rates 2,500
Depreciation 2,500
11,000 11.00
(II) WORKS COST 1,32,000 132.00

Administrative Overheads :
Office Salaries 15,000
Office Expenses 12,000 27,000 27.00
(iii) COST OF PRODUCTION 1,59,000 159.00
Selling & Distribution Overheads :
Carriage Outward 1,000
Bad Debts 1,500
2,500 2.50
TOTAL COST 1,61,500 161.50
Add: Opening Stock of finished goods 16,000
1,77,500
Less: Closing Stock of finished goods 15,000
(iv) Cost of Sales 1,62,500 162.50
 27

(v) Net Profit (Bal.Fig) 37,500 37.50

Sales 2,00,000 200.00

Illustration – 3

NRC Ltd., manufactured and sold 1000 Radio sets during

the year 2009. The summarized accounts are given below :

Mfg. / Trading & Profit & Loss A/c

Rs. Rs.
To Cost of Materials 40,000 By Sales 2,00,000
To Direct Wages 60,000
To Manufacturing Exp. 25,000
To Gross Profit 75,000

2,00,000 2,00,000

To Salaries 30,000 By Gross Profit 75,000

To Rent, Rates & Taxes 5,000
To General Expenses 10,000
To Selling & Distribution Exp.
15,000
To Net Profit 15,000

75,000 75,000

It is estimated that output and sales will be 1200 Radio Sets

in the year 2010. Prices of Materials will rise by 20% on the
previous year’s level. Wages per unit will rise by 5% Manufacturing
expenses will rise in proportion to the combined cost of materials
and wages. Selling and distribution expenses per unit will remain
unchanged. Other expenses will remain unaffected by the rise in
output. Prepare cost sheet showing the price at which the Radio
Sets should be sold so as to earn a profit of 20% on the selling
price.
 28

Solution

COST SHEET
------------------------------------------------------------------------------------------------------------
2009 2010
1000 Radios 1200 Radios
Total Per Unit Total Per Unit
Rs. Rs. Rs. Rs.
------------------------------------------------------------------------------------------------------------
Direct Materials 40,000 40.00 57,600 48.00
Direct Wages 60,000 60.00 75,600 63.00

PRIME COST 1,00,000 100.00 1,33,200 111.00

Manufacturing Expenses 25,000 25.00 33,300 28.00

WORKS COST 1,25,000 125.00 1,66,500 139.00

Salaries 30,000 30.00 30,000 25.00
Rent, Rates Insurance 5,000 5.00 5,000 4.00
General Expenses 10,000 10.00 10,000 8.00

COST OF PRODUCTION 1,70,000 170.00 2,11,500 176.00

Selling & Distribution Expenses 15,000 15.00 18,000 15.00

Cost of Sales 1,85,000 185.00 2,29,500 191.00

Net Profit 15,000 15.00 57,275 48.00

SALES 2,00,000 200.00 2,86,775 239.00

Illustration – 4.:

A factory can produce 60,000 units per year at its 100%

capacity. The estimated cost of production are as under:-

Direct Material - Rs. 3 per unit

Direct Labour - Rs. 2 per unit

Indirect Expenses :
Fixed -
Rs. 1,50,000 per year
Variable -
Rs. 5 per unit
Semi-variable -
Rs.50,000 per year upto 50%
capacity and an extra expenses
of Rs.10,000 for every 25%
Increase in capacity or part
thereof.
The factory produces only against order and not for stock. If
the Production programme of the factory is as indicated below and
the management desires to ensure a Profit of Rs. 1,00,000 for the
 29

year, work out the average selling price at which per unit should be
quoted:
First 3 months of the year 50% of capacity remaining 9
months 80% of the capacity. Ignore selling, distribution and
administration overheads.

Solution :
Particular First 3 months 9 Months Total
(7500 Units ) (3600 Units)
Rs. Rs. Rs.

-------------------------------------------------------------------------------------------------------------
Direct Material 22500 108000 130500
Direct Labour 15000 72000 87000
---------------- ---------------- --------------------
37500 1,80,000 2,17,500
Add : Indirect Expenses:
Fixed 1: 3) 37500 112500 150000
Variable @ Rs.5 b.u. 37500 180000 217500
Semi –variable
For 3 months 12500 ----- ------
@ Rs.50,000 p.a.
For 9 months
@ Rs.70,000 p.a. -- 525000 65000
-------------- -------------- ---------------
Total Cost 125000 525000 650000
Profit -- - 100000
----------------
Sales 750000
-----------------
Illustration -5
The following figures have been taken from the books of M Ltd. as
on 31.12.2009

Stock of Raw Materials on 1.1.2009 Rs. 35,000

Stock of Raw Materials on 31.12.2009 Rs. 5,000
Purchase of Materials Rs. 50,000
Factory Wages Rs. 45,000
Factory Expenses Rs. 17,500
Establishment Expenses Rs. 10,000
Finished Stock on 1.1.2009 Rs. 15,000
Finished stock on 31.12.2009 Rs. 7,500
Sales Rs. 2,00,000

The Company manufactured 4000 units during the year

2009. The company is required to quote for the price for supply of
1000 units during the year 2010. The cost of material will increase
 30

by 15% and factory labour will cost more by 10% in the year 2010
Prepare a statement showing the price to be quoted to give the
same percentage of net profit on sales and was realized during
2009.

a) Cost Sheet for the year 2009

Rs. Rs.
Opening Stock of Materials : 35,000
+ Purchases ….. 50,000
85,000
- Closing stock of Materials 5,000
Materials Consumed 80,000 20.00
Factory Wages 45,000 11.25
Prime Cost 1,25,000 31.25
Factory Expenses 17,500 4.37
Works Cost 1,42,500 35.62
Establishment Expenses 10,000 2.50
Cost of Production 1,52,500 38.12
Add : Opening Stock of finished goods 15,000
1,67,500
Less : Closing stock of finished goods 7,500
Cost of Sales 1,60,000
Profit 40,000
Sales 2,00,000

b) Statement showing quotation Price for 1000 units

Rs.
Materials (20 x 1000) = 20,000
+ 15% increase 3,000 23,000
Factory wages (11.25 x 1000)= 11,250
10% increase 1,125 12,375
Prime Cost 35,375
Factory Expenses (4.375 x 1000) 4,375
Works Cost 39,750
Establishment Expenses (2.50 x 1000) 2,500

Total Cost 42,250

Profit (20% on Sale i.e., 25% of Cost) 10,563
Sales 52,813

Note : Percentage of Profit on sales earned during the year 2002 is

20%
 31

4000
= = x 100 = 20%
2000

Illustration – 6.
In a factory two types of T.V sets are manufactured i.e black
& white + colour. From the following particulars prepare a
statement showing cost and profit per T.V Set sold. There is no
opening or closing stock.

B & W Rs.
Colour Rs.
Materials 273000 10,80,000
Labour 156000 6,20,000

Works overhead is charged at 60% of Prime cost and Office

overhead is taken at 20% at Works cost. The selling price of B & W
is Rs.60,00 and that of colour is 10000. During the period 200 B &
W and 400 colour T.V. sets were sold. The selling expenses are
Rs. 50 per T.V.Set.

Solution

B) Statement of Cost and Profit

Particulars B&W Colour

Rs. Rs. Per Unit
Materials 273000 10,80,000 2700
Labour 156000 6,20,000 1550
Prime Cost 429000 17,00,000 4250
Add : Work Overheads 257400 10,20,000 2550
(60% of Prime Cost )
Works Cost 686400 27,20,000 6800
Add : Office overheads 137280 5,44,000 1360
(20% of Works cost)
Cost of Production 823680 32,64,000 8160
Add : Selling Expenses 10000 20,000 50
Cost of Sales 833680 32,84,000 8210
Profit (Bal. Fig) 366320 7,16,000 1790
Sales 1,20,000 40,00,000 10,000
 32

2.5 SUMMARY

Cost is a resource sacrificed or forgone to achieve a specific

objective. It is a monetary amount that is paid to acquire goods or
services. Costing is the process of determining the cost of doing
something. Cost is composed of three elements - materials, labour
and expenses or overheads. Each of these costs can be further
classified as (a) Direct (b) Indirect. Cost can also be classified on
the basis of function, variability and elements. Cost sheet is a
statement prepared to present the detailed cost of total output
during a period. It provides information relating to cost per unit at
different stages of the total cost of production. There are certain
expenses which are not considered while preparing the cost sheet,
such as Dividend. Income tax, Interest on loan, Donation paid,
Capital expenditure, Writing off goodwill and Provisions. Prime
Cost, Work Cost, Cost of Production and Cost of sales are the
different elements of costs.

2.6 EXERCISES:

1. What is cost? What are the different elements of costs?

2. Explain the significance of each of the following cost
classifications:
a) Direct and indirect costs
b) Variable and fixed costs
c) Controllable and uncontrollable costs

3. What are the items of expenses which are excluded from cost
sheet? Why?
4. Fill in the blanks:
a) -------------------comprises of those expenses which could be
traced directly to the particular product. (Prime Cost)
b) Cost of hiring special plant or machinery is a ---------------
expenses. (Direct)
c) Architect’s fees, Royalties, License fees etc. are the part of -
----------cost. (Prime)
d) The opening and closing stock of raw materials are to be
adjusted with ------------. (purchase of Raw materials)
e) Carriage/ Freight inward and Octroi on purchase etc. are to
be added to (purchases of raw materials).
f) The value of stock of work in process is a part of --------------.
(Factory cost)
g) Sale of scrap should be deducted from the total --------
(factory overheads)
 33

h) The opening and closing values of finished goods are to be

adjusted with the ------------. (total cost of production).
i) Prime cost plus the portion of works or factory expenses
chargeable against the Production is equal to ---------.
(Works Cost)
j) Indirect materials indirect labour and indirect expenses are
called as ------------. (Works or factory expenses include)
k) Lubricants, cotton waste, works stationery etc. are the
examples of ------------------. ( Indirect materials)
l) ---------------labour does not affect the construction or the
composition of the finished product. (Indirect).
m) Foremen’s salary and salary of employees engaged in
maintenance or service work etc. are examples of ----------
labour. (indirect).
n) The expenses incurred for the benefit of more than one
product, job or activity are called as ------------expenses.
(Indirect overheads).
o) Factory manager’s salary, watch and ward department’s
salary etc. are the examples of ----------------. (Indirect
expenses)
p) Cost of Production consists of works cost plus an additional
amount of ---------------. (office and administrative expenses)
q) Cost of production plus proportionate selling and distribution
expenses of the product is equal to ------------------. (Cost of
sales)
r) Salesmen’s salary, show room expenses etc. are the ---------
expenses.(Selling)
s) Packing, carriage outwards, warehouse expenses etc. are --
---expenses. (Distribution)

5. The following information is supplied relating to an output for

the year ended 31.12.2009.

Particulars Rupees
Purchase of Raw materials 148000
Direct wages 132000
Rent & Rates 14000
Carriages inward 6000
Stock on 1-1-2009
Raw materials 22000
Work in progress 18000
Finished goods 30000
 34

Stock on 31.12.2009
Raw materials 24000
Work in progress 35000
Finished goods 25000
Factory expenses 18000
Sales 420000

Selling and distribution costs amounted to 75 paisa per unit sold.

25000 units were produced during the year. You are required to
prepare cost sheet showing break –up of costs, total net profit and
net profit per unit sold.

5. A factory produces a standard product. The following

information is given to you from which you are required to
prepare a cost sheet for January, 2009.

Direct materials consumed Rs. 90,000

Direct Wages Rs. 30,000
Other direct expenses Rs. 10,000
Factory overheads – 80% of direct wages
Office overheads – 10% of work cost
Selling and distribution expenses Rs. 2 per unit sold.

Units produced and sold during the month 10000.Find out

the selling price per unit on the basis that Profit mark up is
uniformly made to yield a profit of 20% of the selling price.
There was no stock of work in progress at the beginning or
at the end of the period.

6. A toy manufacturer earns an average net profit of Rs.3 per

piece on a selling price of Rs.15 by producing and selling
60,000 pieces at 60 percent of the potential capacity. The
composition of the cost of sales is :

Direct Materials Rs. 4

Direct wages Rs. 1
Work overhead Rs. 6 (50 per cent fixed)
Sales Overhead Rs. 1 (25 percent variable)

During the current year, he intends to produce the same

number of pieces, but anticipates that-

a) Fixed expenses will go up by 10 per cent.

b) Direct labour will increase by 20 percent.
c) Direct material cost will increase by 5 percent.
d) Selling price will remain the same.
 35

He obtains an order for a further 20 per cent of his capacity.

What minimum price will you recommend for accepting an
order to ensure the manufacturer an overall profit of
Rs.183500?

7. The following particulars are extracted from the works and

other relevant source in respect of a Ltd. Company?
a) Estimated material cost of the job is Rs.25000 and the
direct labour cost is likely to be Rs.5000
b) It will require machining by a German machine for 20
hours and a Japanese machine for 6 hours.
c) The machine hour rates for the German and Japanese
machines are Rs.100 and Rs.150 respectively.
d) The direct wages in all other shops during the last year
amounted to Rs.800000 as against Rs. 180000 of
factory overhead.
e) The factory cost of all other jobs amounted to
Rs.375000 as against Rs.375000 of office expenses.

You are required to make a quotation with 20 per cent profit

on selling price.



 36

3
RECONCILATION OF COST AND
FINANCIAL ACCOUNTS

Unit Structure :

3.0 Objectives
3.1 Introduction
3.2 Need for Reconciliation
3.3 Procedure for Reconciliation
3.4 Solved Problems
3.5 Exercises

3.0 OBJECTIVES:

After studying the unit the students will be able to:

• Ascertain the difference between Profit as shown by Financial

Profit and Loss Account and Profit appearing in Costing Profit &
Loss Account.
• Identify and quantify the cost components, which contribute to
the difference in profit figures.
• Prepare a statement reconciling the two profit figures reported
by financial and cost records.

3.1 INTRODUCTION

It is normally assumed that the profit of a business for a

given period is given by the Profit & Loss account made out for that
period.

Imagine your surprise, when Profit and Loss Account

prepared by the financial accountant of X Ltd. shows a profit of
Rs.4,56,000 for the year ended 31.03.2009. While the cost
accountant has prepared a cost sheet for the same period and
arrived at a profit of Rs.5, 12,000. You feel that one of the figures
reported should be wrong, otherwise how could there be a
difference.

However, there is a logical explanation for the difference in

the profit figures and both may be right.
 37

This is because the fundamental assumptions made by the

two accountants for preparing the profit and loss account vary. For
example, Interest on loan will be debited in financial Profit & Loss
Account but the cost accountant will ignore this item as he does not
consider this interest expense as an item of cost. Naturally, in this
case, the cost accountant will report a higher profit than the
financial account.

3.2 NEED FOR RECONCILIATION

3.2.1 Need for Reconciliation

The need for reconciliation arises due to the following
reasons:

a) To ensure that no income or expenditure item has been

omitted and that there is no under or over recovery of
overheads.

b) To check the arithmetical accuracy, as well as for the

determination of reason for disagreement between the two
results.

c) To know the reason for variation of profit or loss as internal

control.

d) To take administrative decisions such as depreciation, stock

valuation and direct expenses.

e) To test the reliability of cost accounts.

3.2.2 REASONS FOR DISAGREEMENT BETWEEN COST AND

FINANCIAL RESULT:-

It is very essential to know the causes, which generally give

rise to disagreement between Cost and Financial Accounts. These
are briefly summarised below:-

1. Expenses that are not taken into account in cost

accounting:
The under mentioned expenses are usually not included in
overheads or, for that matter in cost.

a) Expenses or income of purely financial nature like dividends

received, rent received, cash discount allowed, etc.

b) Expenses or profits of capital nature like profit or loss on sale of

investments, plant and equipment, etc.
 38

c) Items not representing actual costs but dependent on arbitrary

decisions of management e.g. an unreasonably high salary to
the managing director, providing for depreciation at a rate
exceeding the economic rate.

d) Appropriation of profits for dividends, payment of income tax

and transfer to reserves.

2. Items recorded in financial books only and not in cost

books:
a) Interest received/ paid on Debentures,
b) Interest received and paid on Investment and Bank loan or
overdraft respectively.
c) Interest charged/ paid to debtors /creditors
d) Discount allowed/ received.
e) Provision for discount on debtors/ creditors
f) Bad Debts written off/ bad debts recovered.
g) Discount on issue of shares and debentures.
h) Income tax paid /refund
i) Penalty and fines paid / received
j) Rent received/ paid
k) Loss by fire, natural calamities or theft /damage recovered.
l) Loss/ profit on sale of fixed assets, investment
m) Cost of share transfer /share transfer fees received.
n) Donation given/received
o) Deferred revenue expenses written off.
Such as writing off of:
i. Preliminary Expenses
ii. Discount on Shares/ Debentures

3. Items recorded in cost book only and not in financial

books:
a) Notional rent charges of owned premises
b) Salary of proprietor
c) Interest on proprietors fund

4. Items recorded in both books with different amounts:

In Cost book and Financial book some item of expenses and
incomes which are treated differently such as -
a) Method of charging depreciation:
In Financial Books depreciation may have been provided, on
Straight Line Method or Written down Value Method whereas in
Costing Book depreciation may have been charged on the basis of
Machine Hour Rate Method. Amounts of depreciation charge in
both books are bound to be different.
 39

b) Under and Over recovered expenses:

The expenses in costing books are recorded on the basis of
pre-determined rates but in financial books they are recorded on
actual basis hence the amount recorded in these two set of books
differ.

c) Method of Valuing Stocks:-

It is well known that in Cost Book Stocks are only valued at
cost. But in Financial Books stock are valued either at cost or
market price, whichever is lower.

3.3 PROCEDURE FOR RECONCILIATION

3.3.1 Procedure
When there is a difference between the profit/loss shown by
cost accounts and financial accounts the procedure for
reconciliation is similar to that of Bank Reconciliation Statement.
For reconciliation following steps should be considered.

1. Prepare a cost sheet for a particular period and find out costing
profit or loss if it is not given.
2. If financial profit or loss is not given then find out the same by
preparing Trading and Profit and loss account for a period which
corresponds to the cost sheet.
3. Ascertain items which are shown in financial account and not in
cost account.
4. Ascertain items which are shown in cost account only.
5. Calculate difference between expenses recorded in financial
books and the amount of expenses recorded in cost accounts.
6. Reconciliation Statement is to be prepared as on a particular
date. Hence one can start with the figure of profit / loss as per
cost account and arrive at the figure of profit/ loss as per
financial accounts or vice –versa.

[Entries which are at variance with each other will appear in

Reconciliation Statement and also entries appearing in only one set
of book (non - common items)]
 40

3.3.2 PROFORMA STATEMENT OF RECONCILIATION

1. Starting with financial profit:
Statement of Reconciliation
Between Financial Profit and Cost Profit for the Year ended.......
Rs Rs
Particulars

Financial Profit (as per the financial books) xxx

Add
1. Expenses, losses and appropriation xxx
debited in financial books only
2. Closing stock under valued in Financial xxx
Books xxx
3. Opening Stock over valued in Financial xxx
books xxx
4. Excess depreciation charged in Financial xxx xxx
Books
5. Expenses under recovered in Cost Books
6. Income credited only in Cost Books xxx
xxx
Less xxx
1. Income credited only in Financial Books xxx
2. Closing stock over valued in Financial xxx xxx
Books xxx
3. Opening Stock under valued in Financial
books
4. Short depreciation charged in Financial
Books
5. Expenses over recovered in Cost Books
Costing Profit (as per Costing books)

2. Starting with Costing Profit:

Statement of Reconciliation
Between Financial Profit and Cost Profit For the Year ended……

Particulars Rs Rs
Costing Profit (as per the Costing books) xxx
Add
1. Income credited only in Financial Books xxx
2. Closing stock over valued in Financial xxx
Books xxx
3. Opening Stock under valued in Financial xxx
Books xxx
4. Short depreciation charged in Financial xxx xxx
Books xxx
5. Expenses over recovered in Cost Books
6. Expenses debited only in Cost Books xxx
 41

Less xxx
1. Expenses, losses and appropriation debited xxx
in financial books only xxx
2. Closing stock under valued in Financial xxx
Books xxx xxx
3. Opening Stock over valued in Financial xxx
Books
4. Excess depreciation charged in Financial
Books
5. Expenses under recovered in Cost Books
6. Income credited only in Cost Books
Financial Profit (as per the financial books )

3.4 SOLVED PROBLEMS

Illustration 1: From the following particulars prepare a

reconciliation statement:-
Rs.
Net Profit as per financial records 154506
Net Profit as per costing records 206880
Works overheads under recovered in costing 3744
Administrative Overheads recovered in excess in costing 2040
Deprecation charged in financial accounts 13440
Depreciation recovered in Cost Accounts 15000
Interest received but not included in Cost Accounting 9600
Obsolescence loss charged in financial records 6840
Income tax provided in financial books 48360
Bank interest credited in financial books 900
Stores adjustment credited in financial books 570
Depreciation of stock charged in financial books 8100
 42

Solution

RECONCILIATION STATEMENT Rs. Rs.

Net Profit as per costing records 206880
Add:
1. Administrative Overheads over absorbed 2040
2. Depreciation excess charged 1560
3. Income not credited in costing -
Interest received 15000
Bank interest 900
Stores adjustment 570 16470
20070
Total 226950
Less 3744
1. Works overheads under recovered
2. Expenses not charged in costing books 9600
3. Income tax provided in Financial Book 48360
4. Depreciation of Stock charged in Financial Book 8100 66060 69804
Net Profit as per financial books 157146

Illustration 2 : Following is the Trading and Profit and loss

account of a factory producing a particular unit of a product of
which the actual output is 100000 units.

Trading & Profit and Loss A/c for the year ended 31/12/09

Rs Rs.
To Material 200000 By Sales 400000
To Wages 100000
To Works Exp. 60000
To Office rent 18000
To Selling & Dist. Exit 12000

To Net Profit 10000

400000 400000

The normal output of the factory is 1,50,000 units. Works

expenses are fixed to the extent of Rs.36,000. Office expenses for
all practical purposes are constant, Selling and distribution
expenses are variable to the extent of Rs.6000/- Prepare a cost
sheet and reconciliation statement.
 43

Solution :

(a) COST SHEET

Actual output 1,00,000 units Normal output 1,50,000 units

Per Unit (Rs.) Total (Rs.)

Material 2.00 2,00,000

Wages 1.00 1,00,000
-----------------------------------
PRIME COST 3.00 3,00,000

Works expenses
Fixed (2/3 of 36000) = 24000
Variable = 24000 0.48 48,000
------------------------------------
WORKS COST 3.48 348000

*Actual output/ Normal output = 2/3

Proportionate fixed cost are considered
Office Expenses (2/3 * 36000) 0.12 12,000
---------------------------------------
COST OF PRODUCTION 3.60 3,60,000

Selling and Distribution Expenses

Fixed (2/3) = 4000
Variable = 6000 0.1 10,000
-------------------------------------------

COST OF SALES 3.7 3,70,000

Profit 0.3 30,000
-------------------------------------------
Sales 4.00 4,00,000
------------------------------------------

b) Reconciliation Statement
Profit shown by Cost Accounts 30,000

Less : 1. Under recovery of Work Expenses 12000

2. Under recovery of Office Expenses 6000
3. Under recovery of Selling Expenses 2000 20000
--------------------------------
Profits shown by Financial Accounts 10,000
--------------------------------
 44

Illustration 3 : The Trading & Profit & Loss account of “A’ Ltd. is as
follows:-
Trading & Profit & Loss Account
To Purchases 25120 By Sales (50000 units
@ of Rs Rs.1.50 75000
Less : Closing Stock 4050 each)

To Gross Profit 53870

------------ ---------
To Net Profit 75000 75000

To Direct Wages 10500

To Works Expenses 12130 By Gross Profit 43870
To Selling Expenses 7100 By Discount received 260
To Administrative 5340 By Profit on sale of
Expenses land 2340
To Depreciation 1100
To Net Profit 20300
------------ ---------
56470 56470
The profit as per cost accounts was only Rs.19,770.
Reconcile the financial and costing profits using the following
information :
a) Cost accounts valued closing stock at Rs. 4280
b) The work expenses in the cost accounts were taken at 100%
of direct wages.
c) Selling & administration expenses were charged in the cost
accounts at 10% of sales and 0.10 per unit respectively.
d) Depreciation in the cost accounts was Rs.800
Solution :
RECONCILIATION STATEMENT Rs. Rs.
Profit as per Cost Accounts 19770
Add: 1. Over absorption of selling expenses 400
2. Discount received 260
3. Profit on sale of land 2340 3000
----------- ------------
Less 1. Difference in valuation of closing 22770
2. Under absorption of Administrative 200
Exp. 340
3. Under absorption of Works Exps.
4. Depreciation under changed 1630
Profit as per Financial Accounts 300 2470
----------- -----------
20300
 45

Illustration 4 : From the following Profit & loss account draw up a

Memorandum Reconciliation account showing the Profit as per
Cost Accounts:-

To Office Salaries 11282 By Gross Profit 54648

To Office Expenses 6514 By Dividend received 400
To Salary to Salesmen 4922 By Interest on Bank FD 150
To Sales Expenses 9304
To Distribution Exp. 2990
To Loss on Sale of Machinery 1950
To Fines 200
To Discount 100
To Net Profit c/d 17936
To Income Tax 55198 55198
To Transfer to Reserves 8000 By Net Profit b/d 17936
To Dividend 1000
To Balance c/d 4800
4136
17936 17936

The cost accountant has ascertained a Profit of Rs.19636 as

per his books.

Solution :

Memorandum Reconciliation Account :

Dr Cr.
Rs Rs.
To Expenses not debited By Profit as per cost 19636
to Cost accounts: account
Fines 200
Discount 100 By Income not credited in 400
Loss on sale of Care 1950 Cost accounts: 150
Income Tax 8000 Dividend Received
Tr. to Reserves 1000 Interest on Bank FD
Dividend 4800

To Net Profit c/d 4136

20186 20186
 46

Illustration : 5

M/s ESVEE Ltd. has furnished you the following information

from the financial books for the year ended 31 st December, 2009.

Particulars Rs.
Materials consumed 260000
Wages 150000
Factory overheads 94750
Administration Overheads 106000
Selling and Distribution overheads 55000
Bad Debts 4000
Preliminary expenses 5000
Opening Stock (500 units at Rs.35/- each) 17500
Closing stock (250 units at Rs.50/- each) 12500
Sales (10250 units) 717500
Interest Received 250
Rent Received 10000

The cost sheet shows the following:

Cost of materials Rs. 26 per unit.
Labour cost Rs. 15 per unit
Factory overheads 60% of Labour cost
Administration overheads 20% of Factory cost
Selling expenses Rs, 6 per unit
Opening Stock Rs. 45 per unit

You are required to prepare:

1. Financial Profit & Loss Account
2. Costing Profit & Loss Account
3. Statement of Reconciliation
 47

Solution

A) Financial Books

Profit and Loss Account for the year ended 31-12-2009

Rs Rs.
To Opening Stock 17,500 By Sales (10250 units ) 7,17,500
(500 Units at Rs.35 each)
To Materials consumed 2,60,000 By Closing stock
(10000 units) (250 units
To Wages 1,50,000
To Gross Profit c/d 3,02,500 at Rs.50 each) 12,500
-------------- --------------
7,30,000 7,30,000

To Factory overheads 94,750 By Gross Profit b/d 3,02,500

To Administration c/d 1,06,000 By Interest received 250
To Selling Expenses 55,000 By Rent Provided 10,000
To Bad Debts 4,000
To Preliminary Expenses 5,000
To Net Profit 48,000
--------------- --------------
3,12,750 3,12,750
B) COST SHEET FOR THE YEAR ENDED 31.12.2009

Prod. 10000 units

Particulars Total Cost Cost per

Rs. Unit Rs.
Material Consumed 260000 26
Labour 150000 15
-------------- -------------
PRIME COST 410000 41
Factory Overheads (60% of Labour cost) 90000 9
--------------- ------------
WORKS COST 500000 50
Administration overheads
(20% of work cost) 100000 10
COST OF PRODUCTION 600000 60.
Add : Opening Stock of finished goods
(500 units at (Rs.45/- each) 22500
---------------
622500
 48

Less : Closing stock of finished goods 15000 -------------

(250 units) ---------------
607500 6
Selling Expenses 61500 ------------
--------------- 66
669000 4
COST OF SALES 48500 -------------
PROFIT --------------- 70
717500
SALES

C) STATEMENT OF RECONCILIATION AS ON 31.12.2002

Starting Point (Cost Accountant ) Rs. Rs.

Profit as per Cost Accounts 48500

Add: 1. Over recovery of overheads :

Selling expenses 6500
2. Over valuation of stock :
Opening stock 5000
3. Purely financial income:
Interest 250
Rent 10000 31750
----------- ------------
70250
Less : Under recovery of overheads-
4. Factory overheads 4750
5. Administrative overheads 6000
6. Over valuation of stock : 2500
Closing Stock
7. Purely financial expenses: 4000
Bad Debts
Preliminary expenses 5000 22250
----------- ------------
Project as be Financial Accounts 48000

3.5 EXERCISES

1. What is the need for reconciliation of cost and financial

accounts?
2. Discuss the main sources of difference between Profit shown
by cost accounts and that as per financial accounts.
3. Objective type questions;
 49

A. Multiple choice questions:

1. Dividend received is shown in _________
i) costing profit and loss A/c iii) Ignored
ii) financial profit and loss A/c iv) None of the above

2. Over valuation of closing stock in Cost Accounts----------------.

i) Increases costing profit iii) Decreases costing profit

ii) Increases financial profit iv) Decreases financial profit

3. Over absorption of overheads in financial accounting

i) Decreases financial profit iii) Increases costing profit

ii) Increases financial profit iv) Both (i) & (ii)

4. Under valuation of opening stock in costing

i) Increases costing profit iii) Decreases costing profit
ii) Decreases financial profit iv) Both (i) & (ii)

5. Donations paid is
i) Debited to costing P & L A/c iii) Ignored in costing
ii) Debited to financial P & L A/c iv) (ii) & (iii)

Answers: ii, i, i, iii, ii.

B. True or false
1. Under absorption of overheads in cost accounting decreases
costing profit.
2. Interest received on Bank Deposit is ignored in cost accounting.
3. Interest on investment increases Costing profit.
4. Dividend paid on share capital is debited to financial P & L A/c.
5. Over absorption of overheads in financial accounting decreases
the costing profit.
6. Cost accounting considers the Loss or profit on sale of capital
assets.
7. Abnormal loss has considered in costing.
8. Fines and penalties reduce the financial profit.
9. Interest or Dividend received increases financial profit.
10. Overvaluation of opening stock in Financial Accounting reduces
financial profit.
11. Under valuation of closing stock in costing increases costing
profit.
12. Difference in Depreciation in costing and financial accounting
distinguishes costing profit from financing profit.
Answers:
False, True, False, True, False, False, true, true, true, true, false, true.
 50

Fill in the blanks

1. Premium on issue of shares is shown in --------------accounts

only.
2. Transfer to General Reserve is purely -------------- item.
3. Interest on Bank Deposits is Credited in -----------------.
4. Overheads recovered more than actual in costing is called as
_________.
5. Overheads recovered less than actual in financial accounting is
called as _________.
6. Interest on capital reduces _________ profit.
7. Under absorption of overheads in costing increases _________
profit.
8. Over valuation of closing stock in financial accounting increases
_________ profit.
9. Under valuation of closing stock in costing decreases
_________ profit.
10. Over absorption of overheads in financial accounting decreases
_________ profit.
11. Under absorption of overheads in costing increases _________
profit.
12. Dividend paid on shares is debited to _________ P & L A/c.
Answers:
financial accounts, financial, financial P&L A/c., over absorption of
overheads in costing, under absorption of overheads in financial
accounting, financial profits, costing profit, financial profits, costing
profits, financial profits, costing profits, financial.

4. Practical Problems:

1. The following transactions have been extracted from the

financial books of a company.
Rs. Units
-----------------------------------------------------------------------------------------
Sales 250000.00 20000.00
Materials 100000.00
Wages 50000.00
Factory overheads 45000.00
Office & Administrative overheads 26000.00
Selling & Distribution overheads 18000.00
 51

Closing stock:
Finished goods 15000.00
Work in progress 1230.00
Materials 3000.00
Wages 2000.00
Factory overheads 2000.00
7000.00
Goodwill written off 20000.00
Interest on capital 2000.00
-----------------------------------------------------------------------------------------
In costing books factory overheads were charged at 100% of
wages, administration over heads were charged at 10% of factory
cost and selling and distribution overheads at the rate of Re.1 per
unit sold. Prepare a statement reconciling the Profit as per cost and
financial accounts.

2. The financial Profit and loss Account of a manufacturing

company for the year ended 31st March, 2009 is as follows:-

Rs Rs.
To Materials consumed 50000.00 By Sales 124000.00
To Carriage inwards 1000.00
To Direct wages 34000.00
To Works Expenses 12000.00
To Administration Expenses. 4500.00
To Selling an Distribution
Expenses 6500.00
To Debenture
Interest 1000.00
To Net Profit d 15000.00
124000.00 124000.00

The net profit shown by the cost accounts for the year is
Rs.16.270 Upon a detailed comparison of the two sets of accounts
it is found that (a) The amounts charged in the cost account in
respect of overheads charges are as follows:- Works overhead
charges Rs.11,500; Office overhead charges Rs.4590, Selling and
Distribution Expenses Rs.6,640 (b) No charge has been made in
the cost account in respect of debenture interest. You are
requested to reconcile the profits shown by the two sets of
accounts.

3. During the year a company’s profit have been estimated from

the costing system to be Rs.23,063 whereas the financial
accounts prepared by the auditors disclose a profit of Rs.16,624.
Given the following information you are required to prepare a
Reconciliation statement showing clearly the reason for the
difference.
 52

Profit and Loss Account for the year ended March 3, 2009

Rs. Rs. Rs.

Opening Sales 3,46,500
Stock 2,47,179
Purchases 82,154
-----------
3,29,333
Closing stock 75,121 2,54,212
-----------
Direct wages 23,133
Factory 20,826
overheads
48,329
Gross Profit ----------- -----------
3,46,500 3,46,500

9,845 Gross profit

Administration b/d 48,329
expenses Sundry 316
22,176 Income
Selling expenses 16,624
Net Profit ----------- -----------
48,645 48,645

The costing record shows:

a. a stock ledger closing balance of Rs.78,197

b. a direct wages absorption account of Rs.24,867
c. a factory overhead absorption account of Rs.19,714
d. administration expenses calculated at 3% of the selling price
e. selling expenses are five percent on selling price
f. no mention of sundry income.
 53

4. A company’s Trading and Profit and Loss Account was as

follows:-

Rs. Rs. Rs.

Opening Sales 175000.00
Stock 100000.00
Purchases 80000.00
---------------
180000.00
Less:
Closing stock 80000.00
--------------
100000.00
To Direct wages 20000.00
To Factory Wages 15000.00
To Gross Profit C/f. 40000.00
-------------- -------------
Total Rs. 175000.00 Total Rs. 175000.00
-------------- --------------
To Administration expenses 10000.00 By Gross 40000.00
To Selling expenses 15000.00 profit
To Net Profit 15000.00
-------------- --------------
40000.00 40000.00

Costing records show the following:-

a. Stock Ledger closing balance Rs.89, 000

b. Direct labour Rs.23, 000
c. Factory overheads Rs.13, 000
d. Administrative overheads and selling expenses each are
calculated at 8 per cent of the selling price.

Prepare costing profit and loss account and the statement of

reconciliation between the profit or loss as per the two accounts.

5. From the following information you are required to prepare a

statement reconciling the result of Cost Book with Financial
Books
Rs.
Net profit as per Financial Books 51,052
Works overhead under recovered in Cost Book 1,001
Depreciation charged in Financial Book 13,000
Depreciation charged in Cost Book 14,326
Obsolescence loss charged in Financial Books only 2,021
Income tax provided in Financial Books only 2,626
Interest received but not recorded in Cost Book 3,031
Bank interest debited in Financial Book only 292
 54

6. The following is the Financial Profit and Loss Account of a

company for the year ending 31st March, 2009.

Profit and Loss Account

Rs Rs.
To Purchases 2,53,000 By Sales (50000
“ Wages 1,03,000 (units at Rs. 16
“ Works Expenses 1,16,000 each) 8,00,000
“ Administration 55,000 By Closing stock 43,000
Expenses By Interest on
“ Selling Expenses 68,000 Investments 3,000
“ Depreciation 12,000 By Profit on Sale of
“ Net Profit 2,63,000 building 24,000
------------ ------------
8,70,000 8,70,000

The cost accounts disclosed the following information :-

1. Value of closing stock was Rs.45,000/-
2. Works expenses in cost accounts have been taken at 100% of
wages
3. Selling Expenses in cost accounts have been charged at 10%
on sales.
4. Administration Expenses in cost accounts have been taken at
Rs.1 per unit sold.
5. Depreciation shown in cost accounts was Rs.10,000

Prepare a reconciliation statement to reconcile the profit shown

as per cost accounts with the profit shown as per financial
accounts.



 55

4
CONTRACT COSTING
Unit Structure :

4.0 Objectives
4.1 Introduction
4.2 Important Concepts
4.3 Different Cost of The Contract
4.4 Profit on Contract
4.5 Format of Contract Account
4.6 Solved Problems
4.7 Exercises

4.0 OBJECTIVES

After studying the unit the students will be able to:

• Understand the features of Contract Costing
• Explain the important concepts used in Contract costing.
• Know the format of Contract Account.
• Solve the problems on Contract Costing

4.1 INTRODUCTION

A contract is nothing but a big job having the following main

features:

1) It May be completed within a months or years.

2) It usually for a higher price like lakhs or thousands.
3) The actual work may be take place, or at a site which is away
from the main office of the contractor.

Contract costing is the method of costing which is used to find

out the cost or particular contract. It may be generally calculated
from the point of view or the contractor.

4.2 IMPORTANT CONCEPTS

Some of the important terms used in contract costing:-

1) Contract:-
A contract is an agreement between the contractor and
contractee it include the time period taken to complete the
contract, price of the contract and so on.
 56

2) Contractor:-
A person who undertakes the contract.

3) Contractee
A person for whom the job is being undertaken.

4) Contract Price:-
The amount which is to be paid by the contractee to the
contractor, for completing the contract work.

5) Work Certified:-
It is an amount of work done by the contractor and certificated
by the architect as per the terms of contract.

6) Work Uncertified:-
It is an amount of work completed by the contractor but not
certified by the architect at the end of the particular accounting
year.

7) Retention Money:-
It is an part of value of work certified by the architect which is a
retained by the contractee as a security. It means, the cash
paid by the contractee to the contractor in between the
contract period is depend on the value of work certified by the
architect. From this work certified amount some of percentage
being paid by the contractee and the balance of this is called
as retention money.

For e.g. → If the work certified is `8,00,000 then the

contractee is being paid the amount is being 90% of `8,00,000
as per the agreement and the balance or 10% of work certified
is called as Retention Money.

4.3 DIFFERENT COST OF THE CONTRACT:

1. Material:-
Material which is required for contract is either purchased or
issued from store because contract site is away from the head
office of the contractor. Material May be taken from different way -
a. Material Issue / Purchased:-
It is debited to contract A/c.
b. Material Transferred:-
If the Materials transferred from one contract to another
contract, then those who received the material are debited and
who gives the material are credited to the respective contract
A/c.
 57

c. If the material is supplied by the contractee then it is not debited

to contract A/c.
d. Material Returned to Store / Supplier:-
If the material is return to store or supplier it may be credited to
the contract A/c.
e. Material Lost or Destroyed:-
If the Material Lost or destroy then the cost of material is
credited to costing Profit & Loss A/c.
f. Sale of Material:-
If the material or scrap is sold, then the actual cost of material is
credited to the contract A/c and the difference of any profit or
loss may be transferred to costing Profit & Loss A/c.
g. Material at Site:-
After completion of the contract or at the end of the accounting
year if any material is lying at site is shown as material at site to
the credit side of the contract A/c.

2. Labour:-
Any labour charges related to the particular contract is either
paid or outstanding are debited to the contract Account.
3. Direct Expenses:-
Any direct expenses which are related to the particular
contract is either paid or outstanding are debited to the
contract A/c. It includes architect fees, sanitary fitting, etc.
4. Indirect Expenses:-
Any indirect expenses which are related to the particular
contract is either paid or outstanding are debited to the
contract A/c. It induces head office expenses, general
administrative expenses etc.
5. Special Plant:-
Plant which is specialty purchases for a particular contract and
it is also used for that particular contract only, is called as
special plant. Plant is also charged to the contract A/c but only
upto the extent of depreciation amount, which is called as
‘direct Method.’ or otherwise we can use also capital method.
Under capital Method, we debit the opening balance of plant
value to the contract A/c and at the end of the year or contract
credit the W.D.V. of the plant. It means, we give the debit
effect of the depreciation of the particular plant.

For eg. During a contract plant is purchase for `2,00,000 and

at the end of the contract the valuation of the plant is
`1,80,000.
 58

The effect given under Direct Method.

Dr. Contract A/c Cr.

Particular ` Particulars `
To Dept on Sp. Plant 20,000

Effects of plant as for capital Method

Dr. Contract A/c Cr.

Particular ` Particulars `
To Special Plant 2,00,000 By WDV of Special Plant 1,80,000

Under both method the net effect of appreciation is `20,000.

6. Common Plant:-
A common Plant, it means a plant which is used for any contract
whenever needed. The treatement of the common plant is given
in the same way of special point. It means either we can use
‘Direct Method’ of charging depreciation or plant on the debit
side of the contract A/c of ‘Capital Method or Debiting the
opening value of the plant to the contract A/c and creating the
WDV of the plant at the end of the contract of accounting year.
7. Work in Progress in Balance Sheet:-
At the end of the accounting year under incomplete contract
work in progress may be appear under Asset side of the
Balance Sheet.
Extract of Balance Sheet
Assets Side Amt
Cost of Work Certified xx
(+) Work Uncertified xx
( - ) Profit & Loss A/c (Reserve) xx
xx
( - ) Cash Received from Contracted xx
Work in progress xx

4.4 PROFIT ON CONTRACT

1) Complete Contract :-
If the contract is completed then the profit or loss on contract, it
may be debited or credited to the contract A/c. There is no need to
transfer the profit to the reserve, it is entirely transferred to profit
and loss a/c.
 59

2) Incomplete Contract:-

If there is an incomplete contract then whatever difference is

find out between the value of work in progress certified (Cr. Side of
the contract A/c) and the cost of work in progress certified (Dr. Side
of the contract A/c) is transfer to national profit.

Then me national profit is distributed between the Profit & Loss

A/c and work in progress (Reserve profit) Firstly we have to find out
the transfer of Profit and Loss A/c. is as under:-

a. If the contract is complete upto 25% - then profit & loss a/c is
nil. It means there is no need to transfer any profit from
notional profit to profit & loss a/c. The entire amount of
notional profit is transferred to work in progress (profit
reserve).
b. If the contract is completed between 25% to 50% - Then the
profit & loss is calculated as -
1 Cash Received
Profit & Loss A / c = ×Notional Profit ×
3 Work Certified
c. If the contract is completed between 50% to 90% - then the
profit & loss a/c is calculated as,
2 Cash Received
Profit & Loss A / c = ×Notional Profit ×
3 Work Certified
d. Nearing Completion - If the contract is completed between
90% to 99% then profit & loss a/c is calculated as,
Cash Received
Profit & Loss = Estimated Profit ×
Contract Price

OR
Sometimes it is given in the problem.

Contract completed is calculated by comparing with the

contract price to the work certified.
For eg - If the contract price is `10,00,000 and work certified is
`6,00,000 then the percentage of contract completed is calculated
as,
Contract Price = 10,00,000 = 100%
Work Certified 6,00,000 = ?
100
∴ 6, 00, 000 × = 60%
10, 00, 000
∴ Contract completed is 60% the 2.3 formula can be used to
transfer profit to the profit & loss a/c.
 60

4.5 FORMAT OF CONTRACT ACCOUNT

Format of Contract A/c

(If Contract is 100% completed)

Particulars ` Particulars `
To Material xx By Material
To Labour xx Returned / Sales / xx
Destroyed
To Direct Expenses xx By WDV of Common Plant xx
(Capital Method)
To Indirect Exp. xx By WDV of Special Plant xx
(Capital Method)
To Common Plant By Contractee’s A/c (Full xxx
Contract Price
Depreciation (Direct Method) xx By Profit & Loss A/c (Loss) xx
Cost (Capital Method) xx
To Special Plant Depreciation xx
(Direct Method) OR xx
Cost (Capital Method)
To Profit & Loss A/c (Profit) xx
xxx xxx

Material Returned / Sold / Destroyed is credited to the contract

A/c only at original cost whatever profit or Loss is transferred to
costing profit and Loss A/c.

Format of Contract A/c

(If Contract is Incomplete)

Particulars ` Particulars `
To Material xx By Material Returned / xx
x Sold / Destroyed
To Labour xx By WDV of Common Plant xx
(Capital Method)
To Direct Exp. xx By WDV of Special Plant xx
(Capital Method)
To Indirect Exp. xx By Contractee’s A/c (Full xx
Contract Price)
To Common Plant xx By Profit & Loss A/c (If xx
Depreciation Loss)
 61

(Direct Method) OR xx
Cost of Plant (Capital
Method)
To Special Plant xx
Depreciation
(Direct Method) OR xx
Cost of Special Plant
(Capital Method)
To Notional Profit c/d (If xx
Profit)
xx xx
To Profit & Loss A/c xx By National Profit b/d
To working Progress c/d to xx
Balance Sheet (Reserve
Profit)
xx xx

Under Incomplete contract, if there is profit, it must be transfer

to Notional Profit.

4.6 SOLVED PROBLEMS

Illustration : 1

(Contract Complete Less than 20%).

On 1st October 2013 Arvind Undertook a contract for `5,00,000.
The following information is available in respect oF a contract for
the year ended 31/12/2013.

Particulars `
Work Certified 80,000
Wages Paid 30,000
Material Supplied 45,000
Other Expenses 5,000
Work Uncertified 1,800
Material Lying at Site 1,500
Wages Outstanding 1,000
Plant 20,000
 62
Provide 10% depreciation on plant p.a. prepare contract A/c in
the books of Arvind.

Solution:-

Dr. Contract A/c (3 Months) Cr.

Particulars ` Particular `
To Material 45,000 By work in Progress
c/d
To Wages 30,000 Material at Site 1,500
( + ) O/s 1,000 31,000
To Other Expenses 5,000 Work Certified 1,800
To Depreciation on 500 Work Uncertified 80,000
Plant
To Notional Profit c/d 1,800
83,300 83,300

To Profit & Loss A/c Nil By Notional Profit b/d 1,800

To Work in Progress 1,800
(Reserve)
1,800 1,800
3
Dep. on Plant = 20000 ×10% × = 500 (For 3 Month)
12

Out of Notional Profit some amount transfer to Profit & Loss A/c is
calculated by comparing work certified with the contract price firstly
to find out now much percentage (%) the contract is completed.

Contract Price - 5,00,000 = 100%

Work Certified 80,000 = ?
100
Contract Completed = 80, 000 × = 16%
5, 00, 000
Contract Completed = 16%
∴ Profit Transfer to Profit & Loss A/c is Nil. Total notional Profit
is transfer to work in progress (Reserve).
 63

Illustration : 2

In Complete Contract.
M/s. ABC builder undertook a contract for a contract price of
`60,00,000 and commenced the work on 1 st July 2013. The
following particulars are available for 9 months ended 31-03-2014

Particulars `
Material Issued from Stores 4,00,000
Material Bought Directly 20,50,000
Wages Paid 19,00,000
Direct Expenses 3,00,000
Establishment Charges 1,50,000
Plant 6,50,000
Sub - Contract Charges 1,00,000
Scrop Sold 30,000
Work Certified 50,00,000

The following further information was available:-

a) Outstanding wages and direct expenses were `10,000 and

`20,000 respectively on 31-03-2014.
b) Material at site at the end of the year is Valued at `1,20,000.
c) Value of work uncertified `2,00,000 on 31.03.2014.
d) Included in wages is the salary paid to supervisor @ `30,000
p.m. who had devoted half of the time on this contract.
e) Working life of the plant is estimated to be 5 years at the end
or which it is estimated to be realized `50,000 as scrap value.
The plant was purchased exclusively for this contract only.

Prepare contract A/c for the year ended 31-03-2014

 64

Solution:-

Dr. M/s ABC Builders Cr.

Particulars ` Particulars `

To Material Issued 4,00,000 By Scrop Sold 30,000

From Stores
To Material bought 20,50,000 By Work in Progress 50,00,000
directly Work Certified
To Wages (WN) 17,75,000 Work Uncertified 2,00,000
To Direct Expenses 3,20,000 Material at Site 1,20,000
(WN)
To Establishment 1,50,000
Charges
To Depreciation on 90,000
Plant (WN)
To Sub - Contract 1,00,000
Charges
To Notional Profit & 4,65,000
Loss A/c
53,50,000 53,50,000

To Profit & Loss A/c 3,10,000 By National Profit b/d 4,65,000

(WN)
To Work in 1,55,000
Progress (Reserve)
4,65,000 4,65,000
 65

Working Note:-

i) Wages:-
Wages Paid 19,00,000
(+ ) Outstanding 10,000
19,10,000
( - ) Supervisions Salary 1,35,000
half of the time devoted to other
∴ half salary recovered
(30,000 p.m. x 50% x 9 month)
Total Wages 17,75,000

ii) Direct Expenses 3,00,000

( + ) Outstanding 20,000
Total Direct Expenses 3,20,000

iii) Depreciation on Plant

Contract A/c to be prepared for 9 month (i.e. from 1st July

2013 to 31-03-2014)
Original Cost - Scrop Value
Depreciation =
Estimated Life of Plant
6,00,000 - 50,000
= = 1,20,000 p.a.
5
9
∴1, 20, 000 p.a. × = 90, 000 for 9 months
12

iv) Notional Profit = 4,65,000

Out of this transfer to Profit & Loss A/c is calculated by how
much % the contract is completed.
Contract Price = 60,00,000 = 100%
Work Certified = 50,00,000
100
Contract Completed = 50, 00, 000 ×
60, 00, 000
= 83.33%
 66

Profit & Loss A/c is calculated as 8.33% contract completed

then used the formula.
(50 - 90%)
2
P & L A/c = × Notional Profit
3
2
= × 4,65,000
3
Profit & Loss A/c = 3,10,000

iv) Work in progress (Reserve) is calculated as

= Notional Profit - Profit & Loss A/c (Profit)
= 4,65,000 - 3,10,000
1,55,000

Illustration : 3

The Maharashtra construction company undertook the

construction of a building at a contract price of `12,00,000. The
date of commencement of contract was 1st April 2013.

The following cost information is given for the year ended 31-
03-2014

Particulars `
Material Sent to the site 3,00,000
Wages 4,40,000
Archited Fees 55,500
Office & Administrative Overheads 1,51,000
Work Uncertified 55,000
Material at site at the end of the year 10,000
Cash Received from the Contractee 9,45,000
(Being 90% of the work certified)
Material Destroyed by Five 5,000
Supervisors Salary 60,000
Plant and Machinery at Cost 2,00,000

(Date or Purchase - 1st July 2013. The estimated working life

of the plant - 10 years and its estimated scrap value at the end
` 20,000)
 67

You are required to prepare a contract account for the year

ended 31st March 2014.

Solution:
Maharashtra construction company
contract A/c
for the year ended 31-03-2014 (12 months)
Dr. Cr.

Particulars ` Particulars `
To Material Sent to Site 3,00,000 By Material destroy by 5,000
Fire (Profit & Loss A/c)
To Wages 4,40,000 By Work in progress
Work Certified 10,50,000
To Architectures Fees 55,500 Work Uncertified 55,000
To Office and 1,51,000 Material at Site 10,000
Administrative Overhead
To Depreciation on Plant 13,500
(WN)
To Supervisors Salary 60,000
To Notional Profit c/d 1,00,000
11,20,000 11,20,000

To Profit & Loss A/c (wn) 60,000 By Notional Profit b/d 1,00,000
To working Progress 40,000
(Reserve)
1,00,000 1,00,000

Working Note:-
i) Depreciation on Plant:-
(For 9 Months)
(Plant Purchase on 1/7/13 upto 31/03/2014)
Original Cost - Scrap value
Depreciation =
Estimated Life of Plant
2, 00, 000 − 20, 000 1,80, 000
= =
10 10
Depreciation 18,000 p.a.
Depreciation for 9 months
9
= 18, 000 × = 13,500
12
 68

ii) Notional Profit = 1,00,000 it is distributed between profit &

Loss A/c and work in progress (Reserve). Profit & Loss A/c
should be calculated by how much % contract is completed
compare with contract price & work certified.

Contract Price = 12,00,000 = 100%

Work Certified = 10,50,000 = ?
100
= 10,50, 000 × = 87.5%
12, 00, 000
Contract Completed = 87.5%
Formula used 50 - 90%)
2 Cash Received
Profit & Loss = ×Notional Profit ×
3 Work Certified
2 90
= × 1, 00, 000 ×
3 100
Profit & Loss A/c = 60,000

iii) Work in progress (Reserve) =

= Notional Profit - Profit & Loss A/c
= 1,00,000 - 60,000
= 40,000

Note:-
Cash Received `9,45,000 (being 90% or the work certified)
∴ Cash received = 9,45,000 = 90%
Work Certified = ? 100%
∴ Work Certified can be calculated as
100
= 9, 45, 000 ×
90
= 10,50,000
∴ Work Certified = 10,50,000

Estimated Contract:-

Under Estimated contract we have to find out the total estimated

profit after completion of contract, nothing but if the contract period
is more than one year then the total contract cost deducted from
the total contract price and find out the profit. It is not the actual
profit it is our estimation in short after completion of contract we will
earn the profit.
 69

Estimated profit is calculated for the purpose of transferring

profit to the profit & Loss A/c.

Illustration : 4

Uddan Constructors Pvt. Ltd. provide you the following

information:

a) The project commenced on 1st September 2013 and it was

estimated to be completed by 31st March 2015.
b) The contract price was negotiated at `680 lacs.
c) The actual expenditure upto 31st March, 2014 and subsequent
additional estimated expenditure upto 31 st March, 2015 is
furnished as under:

Particulars Actual Exp. Estimated Exp.

During 1-9-13 to during 1-4-14 to
31-3-2014 31-3-2015
` `
Direct Material 195,60,000 127,40,000
Indirect Material 14,23,000 11,77,000
Direct Wages 42,46,500 41,33,500
Supervision Charges 4,14,400 5,55,600
Archited Fees 8,17,500 12,82,500
Construction Overheads 31,52,600 21,47,400
Administrative 14,16,000 24,34,000
Overheads
Closing Material at Site 7,50,000 --
Work Uncertified at the 13,80,000 --
end of the year
Work Certified during the 350,00,000 330,00,000
year

The Value of plant and machinery sent to site was `60 Lacs,
whereas the scrap value of the plant and machinery at the end at
the project was estimated to be `3,00,000.

It was decided that the profit to be taken credit for should be

that proportion of the estimated net profit to be realized on
completion of the project which the certified value of work as on 31-
03-2014, bears to the total contract price. You are required to
prepare contract account for the period ended 31 st March 2014
alongwith the working of profit to be taken credit for.
 70

Solution:-

Uddan Constructors Pvt. Ltd.

Contract A/c
for the Period from 1-9-2013 to 31-3-2014

Dr. Cr.

Particulars ` Particulars `
To Direct Material 195,60,000 By Work in
Progress
To Indirect Material 14,23,000 Work Certified 350,00,000
To Direct Wages 42,46,500 Work Uncertified 13,80,000
To Supervision 4,14,400 Material at Site 7,50,000
Charges
To Architect Fees 8,17,500
To Construction 31,52,600
Overheads
To Administrative 14,16,000
Overheads
To Depreciation on 21,00,000
Plant & Machinery
To Notional Profit 40,00,000
c/d
371,30,000 371,30,000

To Profit & Loss A/c 35,00,000 By Notional Profit 40,00,000

b/d
To Work in 5,00,000
Progress (Reserve)
40,00,000 40,00,000
 71

Dr. Memorandum Contract A/c (1-9-2013 to 31-3-2015) Cr.

Particulars Actual Estimated Total Particulars `

Exp. (1-9- Exp. (1-4-14 7 + 12 = 19
2013 to 31- to 31-3-15) Months
3-2014) 12 Month
7 Month

To Direct 1,95,60,000 1,27,40,000 3,23,00,000 By 6,80,00,000

Material Contraction’s
A/c (Full
Contract
Price
To Indirect 14,23,000 11,77,000 26,00,000
Material
To Wages 42,46,500 41,33,500 83,80,000
To Super 4,14,400 5,55,600 9,70,000
Vision
Charges
To Archited 8,17,500 12,82,500 21,00,000
Fees
To 14,16,000 24,34,000 38,50,000
Administrat
ive on
To Dept on 21,00,000 36,00,000 57,00,000
Plant
To Con 31,52,600 21,47,400 53,00,000
Struction
Overheads

Total Exp. 3,31,30,000 2,80,70,000 6,12,00,000

Estimated 68,00,000
Profit

6,80,00,000 6,80,00,000

Working Note:-
1) Depreciation on Plant & Machinery:-
Original Cost - Scrap Value
Depreciation =
Estimated Life of Plant
60,00,000 - 3,00,000 57,00,000
= =
19 Months 19
Depreciation = `3,00,000 p.m.
 72

Depreciation is also calculated for actual and estimated

period.
i) Actual Period (from 1-9-2013 to 31-3-2014) for 7 Months.
∴ Dep. 3,00,000 p.m. x 7 months
= 21,00,000
ii) Depreciation for estimated period (from 1-4-2014 to 31-3-
2015) = 12 months
∴ Dep. 3,00,000 pm. x 12 months.
= 36,00,000

2) Notional Profit is `40,00,000 distributed between profit & Less

A/c & Work in progress (Reserve).
Notional Profit is `40,00,000
Estimated Profit is `68,00,000
For Profit & Loss A/c Formula is given in the problem as.
Work Certified as on 31- 3 - 2014
Profit & Loss A/c = Estimated Profit ×
Total Contract Price
3,50, 00, 000
= 68, 00, 000 ×
6,80, 00, 000
Profit & Loss A/c = 35,00,000

Illustration : 5

Ratnagiri Construction Pvt. Ltd. provides you the following

information:

a) The project commenced on 1st May 2013 and it was estimated

to be completed by 31st January 2015.
b) The contract price was fixed at `2,70,00,000.
c) The actual expenditure upto 31st March 2014.and subsequent
additional estimated expenditure upto 31st January 2015 is
furnished as under:
 73

Particulars Actual Exp. Estimated Exp.

1-5-13 to 31-3-14 1-4-14 to 31-1-15

Work Certified (cumulative) 1,62,00,000 2,70,00,000

Cash Received 1,29,60,000 1,40,40,000
Work Uncertified 3,85,000 --
Direct Material 87,14,500 37,92,500
Direct Wages 17,47,500 18,58,500
Direct Expenses 8,44,400 4,32,600
Indirect Material 3,25,600 2,85,500
Supervision Charges 1,98,500 1,65,600
Administrative Overheads 9,47,600 8,54,600
Sub Contract Charges 1,87,900 1,80,200
Material Return to Stores 75,500 --
Architect Fees 3% of W. C. 3% of W.C.
RCC Consultant Fees 4% of W.C. 4% of W.C.
Plant Issued at Commencement 40,00,000 --
Material at site as on 31-03-2014 1,39,500 --

Other Information:-

1) The estimated value of the issued plant at the end of the

project is to be `5,35,000.
2) It was decided that the profit to be taken credit for should be
that proportion of the estimated net profit to be realized on
completion of the contract which the certified value of work as
on 31st March 2014, bears to the total contract price.
Prepare contract A/c for the period ended 31st March 2014
and show your calculation profit to be credited to Profit and
Loss A/ for the period ended 31st March 2014.
 74

Solution:-

Ratnagiri Construction Pvt. Ltd.

Contract Account
Dr (From 1-5-13 to 31-3-15) 11 Months Cr.

Particulars ` Particulars `

To Direct Material 87,14,500 By Material Return to 75,500

Store

To Direct Wages 17,47,500 By Work in Progress

To Direct Expenses 8,44,400 Work Certified 1,62,00,000

To Indirect Material 3,25,600 Work Uncertified 3,85,000

To Supervision Charges 1,98,500 Material at Site 1,39,500

To Administrative Overheads 9,47,600

To Sub Contract charges 1,87,900

To Architect Fees (3% of 4,86,000

1,62,00,000)

To RCC Consultant Fees 6,48,000

(4% of 1,62,00,000)

To Depreciation on Plant 18,15,000

(1,65,000 p.m. x 11)

To Notional Profit c/d 8,85,000

1,68,00,000 1,68,00,000

To Profit & Loss A/c 6,65,700 By Notional Profit b/d 8,85,000

To Work in Progress 2,19,300

(Reserve)

8,85,000 8,85,000
 75

Memorandum Contract A/c

Particulars Actual Exp. Estimated Total Exp. Particulars `
(1-5-13 to Exp. (1-4-14
31-3-14) to 31-1-15)
11 Months 10 Months 21 Months
To Direct Material 87,14,500 37,92,500 1,25,07,000 By 2,70,00,000
Contractee’s
A/c (Full
Contract
Price)
To Direct Wages 17,47,500 18,58,500 36,06,000
To Direct Exp. 8,44,400 4,32,600 12,77,000
To Indirect Material 3,25,600 2,85,500 6,11,100
To Supervision 1,98,500 1,65,600 3,64,100
Charges
To Administrative 9,47,600 8,54,600 18,02,200
Overheads
To Sub Contract 1,87,900 1,80,200 3,68,100
Charges
To Architect Fees 4,86,000 3,24,000 8,10,000
To RCC Cons. 6,48,000 4,32,000 10,80,000
Fees
To Depreciation on 18,15,000 16,50,000 34,65,000
Plant
Total Exp. 1,59,15,000 99,75,500 2,58,90,500
Estimated Profit 11,09,500
2,70,00,000 2,70,00,000

Working Note:-

i) Depreciation on Plant
Original Cost - Scrop Value
Depreciation =
Estimated Life or Plant
Estimated Life of Plant =
1) Actual Period 1-5-13 to 31-3-14 = 11 Months
2) Estimated Period 1-4-14 to 31-1-15 = 10 Months
21 Months
40, 00, 000 − 5,35, 000
Dep. =
21
∴ Depreciation 1,65,000 p.m.
∴ Depreciation for Actual Period
= 1,65,000 x 11 Months = 18,15,000
∴ Depreciation for Estimated Period
= 1,65,000 x 10 Months = 16,50,000
 76

ii) Transfer to Profit & Loss A/c Out of Notional Profit = 8,85,000

Work Certified as on 31- 03 -14

Profit & Loss A / c = Estimated Profit ×
Total Contract Price
1, 62, 00, 000
= 11, 09,500 ×
2, 70, 00, 000
Profit & Loss A/c = 6,65,700

iii) Work in Progress (Reserve)

= Notional Profit - Profit & Loss A/c (Reserve)
= 8,85,000 - 6,65,700
= 2,19,300
Many Contracts - (More than 1 Contract aa a time)

Illustration : 6
Mr. Bean Contractor has undertaken two contracts one at
Mumbai and another at Thane. The details of the contracts are
given below. For the year ended 31st March 2014.

Particulars Contract at Mumbai Contract at Thane

01/07/2013 01/10/2013
Date of Commencement
` `
Contract Price 10,00,000 15,00,000
Direct Labour 2,55,000 1,82,000
Material Issued from Stores 2,20,000 2,00,000
Material Returned to Stores 10,000 15,000
Plant Installed at Site 2,00,000 3,50,000
Direct Expenses 40,000 30,000
Office Overheads 15,000 10,000
Material Sold (Cost `8,000) 10,000 -
Material at Site 18,000 16,000
Cash Received from 4,80,000 2,40,000
Contractee
(Representing 80% of
Work Certified)
Work Uncertified 13,000 9,000
Architect Fees 7,000 3,000

i) Provide depreciation on plant at 20% p.a.

ii) During the year material costing `10,000 were transferred
from Thane contract to Mumbai Contract.
 77

You are required to prepare contract A/c of Mumbai and

Thane Contract.

Solution:-

Mr. Bean Contractor

Mumbai Contract A/c (1-7-13 to 31-3-14 - 9 Months)
Dr. Cr.
Particulars ` Particulars `
To Material Issued 2,20,000 By Material Returned 10,000
To Direct Labour 2,55,000 By Material Sold 8,000
To Direct Expenses 40,000 By Work in Progress
c/d
To Office Overhead 15,000 Work Certified (W.N) 6,00,000
To Architect Fees 7,000 Work Uncertified 13,000
To Depreciation on 30,000 Material at Site 18,000
Plant
To Material from 10,000
Thane Contract
To Notional Profit 72,000
Ltd
6,49,000 6,49,000

To Profit & Loss A/c 38,400 By Notional Profit b/d 72,000

To Work in 33,600
progress (Reserve)
72,000 72,000

Working Note:-
i) Work Certified -
Cash Received being 80% of Work Certified - `4,80,000
Cash Received = 4,80,000 = 80%
∴ Work Certified = ? = 100
100
Work Certified = 4,80,000 ×
80
∴ Work Certified = 6,00,000
ii) Depreciation on Plant.
Total Contract Period is 9 Months (from 1-7-13 to 31-3-14)
9
Depreciation = 2, 00, 000 × 20% ×
12
Depreciation = 30,000
 78

iii) Out of Notional Profit `72,000 transfer to Profit & Loss A/c is
calculated by finding out how much contract is completed between
work certified with the contract price.

Contract Price = 10,00,000 = 100%

Work Certified = 6,00,000 = ?
100
∴ Contract Completed = 6, 00, 000 ×
10, 00, 000
∴ Contract Completed = 60%.
∴ Profit & Loss A/c transferred is calculated by following
formula contract completed between 50-90%
2 Cash Recevied
Profit & Loss A / c = ×Notional Profit ×
3 Work Certified
2 4,80, 000
× 72, 000 ×
=
3 6, 00, 000
Profit & Loss A/c = 38,400

iv) Work in Progress (Reserve) =

Notional Profit - Profit & Loss A/c
72,000 - 38,400 = 33,600

Thane Contract A/c

(From 1-10-2013 to 31-3-2014 - 6 Months)
Dr. Cr.

Particulars ` Particulars `
To Material Issued 2,00,000 By Material Return 15,000
To Direct Labour 1,82,000 By Material Transferred 10,000
to Mumbai Contract
To Direct Expenses 30,000 By Work in Progress c/d
To Office 10,000 Work Certified 3,00,000
Overheads
To Architect Fees 3,000 Work Uncertified 9,000
To Depreciation on 35,000 Material at Site 16,000
Plant
By Profit & Loss A/c 1,10,000
(Loss)
4,60,000 4,60,000
 79

Working Note:-
i) Calculation of Depreciation on plant.
Contract Period is 6 months.
(From 01-10-2013 to 31-03-2014)
Depreciation = 3,50,000 x 20%
= 70,000 p.a.
6
∴ Dep. For 6 months = 70, 000 ×
12
∴ Depreciation = 35,000

ii) Calculation of work certified :-

Cash Received `2,40,000 being 80% of work certified.
∴ Cash Received = 2,40,000 = 80%
Work Certified = ? = 100
100
∴ Work certified = 2, 40, 000 ×
80
∴ Work Certified = 3,00,000

Many Years → contract Completed in more than 1 year.

Illustration : 7
Ram contractor undertook a contract for `15,00,000 on 1st July
2012. The contract was completed on 31st March 2014. The
contractor prepares his accounts as on 31 st March. The details of
the contract are:

Particulars Period Period

1-7-12 to 31-3-13 1-4-13 to 31-3-14
Material Issued 1,52,000 3,30,000
Direct Wages 1,25,000 4,65,000
Direct Expenses 30,000 45,000
Material Returned to 22,000 15,000
Stores
Material at Site 20,000 8,000
Uncertified Work 48,000 --
Office Overheads 23,000 66,000
Material Lost by Fire -- 5,000
Work Certified 3,00,000 15,00,000
Plant Issued 3,00,000 1,50,000

Provide depreciation @ 20% on plant. Prepare contract A/c for the

year ended 31-03-2013 and 31-03-2014.
 80

Solution:

Ram Contractors

Contract Account
(From 1-7-12 to 31-3-13 - 9 Months)
Dr. Cr.
Particulars ` Particulars `
To Material Issued 1,52,000 By Material 22,000
Returned to Store
To Direct Wages 1,25,000 By Work in Progress
To Direct Expenses 30,000 Work Certified 3,00,000
To Office Overheads 23,000 Work Uncertified 48,000
To Depreciation on 45,000 Material Site 20,000
Plant
To Notional Profit c/d 15,000
3,90,000 3,90,000

To Profit & Loss A/c NIL By Notional Profit 15,000

b/d
To Work in Progress 15,000
(Reserve)
15,000 15,000

Working Note:-

i) Depreciation on Plant :
(Period or Contract 01-07-2012 to 31-03-13 - 9 Months)
Depreciation = 3,00,000 x 20% p.a.
= 60,000 p.a.
9
Depreciation for 9 Months = 60, 000 ×
12
Depreciation for 9 Months = 45,000
 81

ii) Notional Profit - `15,000 out of transfer to Profit & Loss A/c is
NIL.
Because contract completed is less than 25%. To find out
contract completed compare with work certified to the contract
price.
∴ Contract Price = 15,00,000 = 100%
Work Certified 3,00,000 = ?
100
∴ % of Contract Completed = 3, 00, 000 × = 20%
15, 00, 000

Dr. Contract Account Cr.

(From 1-4-13 to 31-3-14 - 12 Months)

Particulars ` Particulars `
To Work in Progress By Work in 15,000
b/d Progress b/d
(Reserve)
Work Certified 3,00,000 By Material 15,000
Returned
Work Uncertified 48,000 By Material at Site 8,000
Material at Site 20,000 By Material Lost by 5,000
Fire
To Material Issued 3,30,000 By Contractee’s 15,00,000
A/c (Full Contract
Price)
To Direct Wages 4,65,000
To Direct Expenses 45,000
To Office Overheads 66,000
To Depreciation on 81,000
Plant (WN)
To Profit & Loss A/c 1,88,000
(Profit)
15,43,000 15,43,000
 82

Working Note:-

i) Depreciation on Plant:
Depreciation is calculated on WDV basic.
Plant which was used for 1 year its Opening Balance is 3,00,000
( - ) Depreciation for 1st Year 45,000
WDV of Plant 2,55,000
∴ Depreciation on 1st Plant
2,55,000 x 20% - 51,000
Depreciation on 2nd Plant
1,50,000 x 20% - 30,000
∴ Total Depreciation for 2 year is = 51,000 + 30,000 = 81,000

Many Contract (Opening W/P given)

Illustration : 8
Navin Ltd has under taken three Contracts. It furnishes the
following information for the year ended 31 st March 2014:

Particulars Goa Roha Surat

Contract Contract Contract
1) Balances on 1/4/2013
Material at Site 100 2,000 --
Uncertified Work 25,000 4,000 --
Plant at Site 22,000 3,100 --
Work Certified 19,500 1,400 --
Provision for Contingencies 10,000 600 --
2) Transactions During the
Year:
Material Issued -- 6,200 8,000
Subcontract Charges 600 11,800 9,000
3) Balances on 31-03-14
Material at Site -- 1,000 800
Uncertified Work -- 1,000 3,850
Plant at Site -- 2,000 950
Work Certified 25,000 30,000 12,000
4) Contract Price 25,000 40,000 50,000
5) Amount Received 25,000 27,000 10,800
 83

6) Value of Plant Transferred from Goa Contract to Surat Contract

`1,550.
7) The Company consistently adopt the policy of taking credit for
the contract profit considering the proportion of amounts
received to the contract price.
You are required to:
a) Prepare the respective contract accounts for the year ended
31st March 2014.
b) Find the net profit as per profit & Loss A/c.

Solution:

Navin Ltd
Dr. Goa Contract A/c Cr.

Particulars ` Particulars `
To Opening Balance By Provision for 1,000
Contingencies b/d
Work in Progress By Contractee’s A/c 25,000
(Full Contract Price)
Work Certified 19,500
Work Uncertified 2,500
Material at Site 100
To Sub Contract 600
Charges
To Depreciation on 650
Plant (WN)
To Profit & Loss A/c 2,650
(Profit)
26,000 26,000

Working Note:-

i) Depreciation on Plant.

Op. Balance of Plant in Goa A/c 2,200

( - ) Transferred to Surat Contract 1,550
Plant Depreciation of Goa Contract 650
 84

Dr. Roha Contract A/c Cr.

Particulars ` Particulars `
To Opening Balance By Provision for 600
Contingencies b/d
Work in Progress By Work in Progress b/d
Work Certified 1,400 Work Certified 30,000
Work Uncertified 4,000 Work Uncertified 1,000
Material at Site 2,000 Material at Site 1,000
To Material Issued 6,200
To Sub Contract 11,800
Charges
To Depreciation on Plant 1,100
To National Profit b/d 6,100
32600 32,600

To Profit & Loss A/c 4,118 By Notional Profit b/d 6,100

To Work in Progress 1,982
(Reserve)
6,100 6,100

Working Note:-

i) Depreciation on Plant at Roha Contract

Opening Balance of Plant 3,100
( - ) Closing Balance of Plant 2,000
Depreciation on Plant 1,100

ii) Notional Profit `6,100, out of that Transfer to Profit & Loss A/c,
specific instruction given in the problem
Cash Received
Profit & Loss A / c = Notional Profit ×
Contract Price
27, 000
= 6,100 × = 4,118
40, 000
Profit & Loss A/c = 4,118

iii) Work in Progress (Reserve) = Notional Profit - Profit & Loss

A/c 1982 = 6,100 - 4,118
 85

Dr. Surat Contract Cr.

Particulars ` Particulars `
To Material Issued 8,000 By Work in Progress c/d
To Sub Contract 9,000 Work Certified 12,000
Charges
To Depreciation on Plant 600 Work Uncertified 3,850
(1550 - 950)
Material at Site 800
By Profit & Loss A/c 950
(Loss)
17,600 17,600

Working Note:-

i) Depreciation on Plant for Surat Contract -

Plant Transform from Goa 1,550

Closing Plant at Surat - 950
Depreciation on Plant 600

Dr. Profit & Loss A/c Cr.

Particulars ` Particulars `
To Surat Contract 950 By Goa Contract 2,650
(Loss) (Profit)
To Net Profit c/d 5,818 By Roha Contract 4,118
(Profit)
6,768 6,768

4.6 EXERCISE

A. Objectives type Questions

Q.1 Multiple Choice Questions.

1. Retention money is
a) Payment received – Work certified
b) Work certified – Cash received
c) Work certified – work uncertified
d) Contract price – Work certified
 86

2. Work in progress is valued at cost plus profit which has been

taken to the
A. Contract A’C B. Profit and loss A’C
C. Contractees A/C D. None of the above

3. If the contract completed 80% then transfer to profit and loss

A’C out of
A. NIL B. 1/3 * Notional profit
C. 2/3 * Notional profit D . Entire profit

4. Cost of normal wastage of materials is

A. Debited to contract A’C B. Credited to contract A/C
C. Debited to P & L A/C D. Credited to P & L A/C

5. Cost of abnormal wastage of materials in a contract is

transferred to the
A. Contract A/C B. Costing profit and loss A/C
C. Profit and Loss A/C D. None of the above

6. Cash received on contract is credited to

A. Contract A/C B. Contractees A/C
C. Profit and Loss A/C D. None of the above

7. If the contract price is RS. 10,00,000 work certified is 60 %

,the amount of the profit is 72,000 ,then the reserve will be RS .
A . RS. 33,600 B. RS.30,600
C.RS.32,200 D.RS. 40,000

8. If the contract completed is less than 20% then the amount of

profit is transfer to P & L A/C
A. Full amount B. 50%
C. NIL D. 20%
9. Cash received is calculated by
A. Work certified - Retention money
B. Work certified x cash received as % of W.C.
C. Contract price x % of W.C. x % of cash received
D. All of the above

10 Notional profit is calculated by

A. Work certified – Cost of Work certified
B. Work certified –Work uncertified
C. Work certified – Cash received
D. Any of the above
(Answers : 1. A 2. B 3. C 4. A 5. B 6. B 7. A 8.C
9. D 10. A)
 87

Q .2 True and False

1. Cash received = Value of work certified – Retention money
2. Cost of material transferred from one contract to another
contract , the contract A/C which receives the material is
credited to the particular contract A/C.
3. Contractor is the person who undertakes the contract.
4. Contertee is the person who undertakes the contract.
5. Sale of plant , the sale price is debited to the contract A/C.
6. Under capital method, the amount of depreciaton is debited
to contract A/C.
7. Cash received is credited to the contract A/c.
8. If the contract is 100 % completed ,then the entire profit is
transferred to P & L A/C.
9. The cost of material issued by stores is debited to the
contract A/c.
10. Work certified is that portion of the work completed which
has been certified by the contractee’s architect .

(Answers: True : 1,3,8,9,10 False : 2,4,5,6,7.)

B. Practical Problem:-

Q.1 Jai Hind Construction Company under took the construction of

a building at a contract price of `2,00,00,000.
The Date of Commencement of contract was 1st May 2013.
The following cost information is given for the period ended
31st March 2014:
1) Direct Material Sent to the Site - 5,000 tons @ `1.50 per kg.
2) Indirect Material `6,50,000.
3) Direct Labour - 12,000 Mandays @ `180 per Monday.
4) Indirect labour charged at 7.5% of Direct Labour.
5) sub Contract Charges Charged at 15% of Indirect Materials.
6) Direct Materials returned to stores 20 tons.
7) Direct Material lost in an accident 5 tons.
8) Supervision charges paid `8,000 per month.
9) Administrative Overheads incurred `12,000 per month.
10) Architect Fees Charged at 2% of Work Certified.
11) Plant & Machinery installed at site on the date of
commencement of contract at a cost of `15,00,000. Which is
to be depreciated @ 12% p.a. under original cost method.
 88

12) Cash received from contractee `1,26,00,000 which is equal to

90% of work certified.
13) Direct Material at site as on 31st March 2014 - 15.
14) Cost of work done but not certified was `2,04,500 on 31st
March 2014.

You are required to prepare a contract Account for the period

ended 31st March 2014, in the books of Jai Hind Construction
Company and show what profit or loss should be taken into account
for the period ended 31st March 2014.

Q.2 R. Limited commenced a contract on 01-07-2013. The Total

contract price was `5,00,000 but R Limited accepted the same
for `4,50,000. It was decided to estimate the total profit and to
take to the credit of profit & Loss A/c that proportion of
estimated profit on cash basis which the work completed and
certified borne to the total contract. Actual expenditure till 31-
12-2013 and estimated expenditure in 2014 are given below.

Particulars Accruals Estimate for 2014

` `
Material 75,000 1,30,000
Labour 55,000 60,000
Plant Purchased (Original Cost) 40,000 --
Miscellaneous Expenses 20,000 35,500
Plant Returned to Stores (at 10,000 25,000
Original Cost)
Material at Site 5,000 --
Work Certified 2,00,000 Full
Work Uncertified 7,500 --
Cash Received 1,80,000 Full

The plant is subjected to annual depreciation @ 20% of

original cost. The contract is likely to be completed on 30-09-2014.
You are required to prepare the contract A/c for the year
ended 31-12-2013. Working showed be clearly given.
It is the policy or the company to charge depreciation on time
basis.
Q.3 Raj and Company has undertaken two contract viz. A and B.
The following particulars are available for the year ended 31st
March 2014.
 89

Particulars Contract A Contract B

Date of Commencement 01-07-2013 01-12-2013
Contract Price 6,00,000 5,00,000
Material Sent to Site 1,60,000 60,000
Material Returned 4,000 2,000
Closing Stock of Material at Site 22,000 8,000
Direct Labour 1,50,000 42,000
Direct Expenses 66,000 35,000
Establishment Expenses 25,000 7,000
Plant Installed at Site 80,00 72,000
Work Uncertified 23,000 10,000
Work Certified 4,20,000 1,35,000
Architect Fees 2,000 1,000

During the year Material Costing `9,000 have been transferred

from contract A to contract B. The contractor charges depreciation
@ 25% p.a. on plant.
You are required to prepare contract A/c, working for profits, if
any, and show how the relevant items would appear in the Balance
Sheet Assuming that contractce had paid 90% of the work certified.
Q.4 M/s Jadhav constructions under took contract For
`5,00,00,000 on 1st August 2012. The contract was completed
on 31st March 2014. The contractor closes his accounts on
31st March. The details of the contract are as follows:

Particulars For the Period For the Period

ended 31-03-13 ended 31-03-14
` `
Material Issued 95,48,500 1,17,65,000
Direct Labour 31,37,800 45,40,000
Sub Contract Charges 7,88,900 28,13,000
Administrative Overheads 15,85,400 31,42,000
Supervision Charges 3,45,600 8,05,500
Material Returned to Stores 1,32,400 2,44,300
Work Uncertified 5,23,200 --
Work Certified (Cumulative) 2,00,00,000 5,00,00,000
Material at Site 1,00,600 --
Cash Received 1,80,00,000 3,20,00,000
Architect Fees 4% of Work 4% of Work
Certified Certified
 90

The Plant and Machinery purchased on 01/08/2012 for the

contract was `84,25,000 and the estimated scrap value of the plant
and machinery at the end of the contract was `4,25,000. It realized
on completion of contract at its estimated scrap value.

You are required to prepare:

a) Contract A/c for the period indeed 31st March 2013 and
b) Contract A/c for the year ended 31st March 2014.

Q.6 Parna Kutir Ltd. furnishes you with the following information for
the year ended 31st March 2013 and 31st March 2014.

Particulars 31-03-2013 31-03-2014

Material Issued 13,000 24,700
Sub - Contract Charges 4,500 20,000
Value of Work Certified During the 20,000 80,000
year
Closing Stock of Material at Site 3,000 --

To Total contract Price is `1,00,000. The entire amount was

received by 31st March 2014. As per the accounting policy adopted
by the company no profit is to be considered unless the value of the
work certified at the year end excess 25% of the contract price.

Prepare contract account for the years ended 31 st March 2013

and 31st March 2014.





 91

5
PROCESS COSTING
Unit Structure :

5.0 Objectives
5.1 Introduction
5.2 Costing Procedure
5.3 Treatment to Several Items
5.4 Format of Process A/C
5.5 Solved Problems
5.6 Exercises

5.0 OBJECTIVES

After studying the unit the students will be able to:

• Understand the meaning and costing procedure of Process
Costing
• Know how to Normal and Abnormal process losses and
Abnormal Gains.
• Calculate Process Cost per unit.
• Solve the problems on process costing.

5.1 INTRODUCTION

A process means a difference manufacturing operation or

stages. When a product is produced, it means a row material will be
converted into finished product it is passes through difference
stages, it is called as a process.

Process costing means to find out the cost or each process.

For eg. - if a product passes through 3 processes at that time we
have a find out the cost of each process.

5.2 COSTING PROCEDURE

Under Process Costing following procedures are as follows:

1) Separate Process A/c:-
Under process costing different process accounts are
prepared, it means how many process are given separate
process A/c is prepared.
 92

2) Debit Side of Process A/c:-

Under each process the cost of each process divided as
follows:-
i) Material : Whatever Material used for each process is
debited to a Particular Account.
ii) Labour : Whatever labour used or wages paid to worker
are debited to the particular process A/c.
ii) Overheads : Whatever expenses or overhead paid for
particular process are debited to that A/c.

3) Credit Side of Process A/c:-

Any sale of scrap related to a particular process are credited
to process A/c.

4) Cost of Process:-
To find out the net cost of process is total of Debit side Less
Credit Side of process A/c which gives the net cost of a
particular process i.e. (Total expenses (Dr. Side) - Sale or
scrap (Cr. Side).

5.3 TREATMENT TO SEVERAL ITEMS

5.3.1 PROCESS LOSS:-
In many process, there is a weight loss. It means under any
process there is surety of some % of loss on input. If there are total
three process, we introduced input in process I, then there is surety
that same % of loss on that input whatever balance transfer to next
process i.e. process II. Again in process II if there is weight loss,
and balance transfer to next process i.e. process III again in
process III there is weight loss what balance is an actual output.
The loss may be divided into two categories.
i) Normal Loss
ii) Abnormal Loss.

i) Normal Loss :-
Under any process, before production we assume that there is
a loss under each process which is called as normal loss. It is
already assume before production process start.

ii) Abnormal Loss:-

As per above we can say that before production, assume
some % of loss i.e. weight loss or normal loss. But after the
production if there is an increase in normal loss, it means loss is
over and above expectation is called as abnormal loss.
 93

For e.g. if input is 1000 units, assumed that normal or weight

Loss is 5% before production i.e. 50. It means expected output is
950 units, but after production actual output is 920 units then these
30 unit (950-920) are called as abnormal loss. In short, you
expected only 50 units of normal loss but actual wastage is 80 so it
is over and above expected loss as abnormal loss.

5.3.2 Abnormal Gains:-

In some process, there is a normal Loss but the actual

productions are more than expectation. In short, output is over and
above expectation, is called as abnormal gain. For eg - If input is
1000 units, assumed that normal loss or weight loss is 5% before
production i.e. 50 unit. It means, expected output is 950 units but
production actual output is 970 units then these 20 units (970 - 950)
are called as abnormal gain. In short, you expected only 50 units of
normal Loss but actual wastage is only 30 units, so these 20 units
are over and above expectation known as abnormal gain.

5.3.3 Cost Per Unit:-

Under each process always find out cost per unit. In short find
out net cost of each process. Firstly take the total of Debit side
Minus Credit Side of Process A/c it is calculated by following

Formula

Total Cost( Dr. Side) - Scrap Value of Normal Loss( Cr. Side)
Cost Per Units =
Input( Units) - Normal Loss( Units)

5.4 FORMAT OF PROCESS A/C

Process I A/c

Particulars Units Rate ` Particulars Units Rate `

To Input By Normal
Loss
To Direct By Transfer
to Process II
A/c
Material
To Labour
To
Overheads
To Expenses
 94

Process II A/c (Abnormal Loss)

Particulars Units Rate ` Particulars Units Rate `

To Transfer By Normal
from Loss
Process I
To Material By
Abnormal
Loss A/c
To Labour By Transfer
to Process
III A/c
To
Overheads
to Expenses

Process III A/c (Abnormal Gain)

Particulars Units Rate ` Particulars Units Rate `

To Transfer By Normal
from Loss
Process II
To Material By Transfer
to Finished
Stock A/c
To Labour
To
Overheads
To
Expenses
To
Abnormal
Gain
 95

Normal Loss A/c

Particulars Units Rate ` Particulars Units Rate `

To Process By Actual Sale
I
To Process Process I
II
To Process II
III
III
By Abnormal
Gain (Process
III)

Abnormal Loss A/c

Particulars Units Rate ` Particulars Units Rate `

To Process By Actual Sales
II
Process II
By Costing P & L A/c

Abnormal Gain A/c

Particulars Units Rate ` Particulars Units Rate `

To Normal By Process
Loss III A/c
To Costing
Profit & Loss
A/c

Quantity Reconciliation

Particulars I II III
Input
( - ) Normal Loss
Expected Output
( - ) Actual Output
Abnormal Loss / Gain
 96

ð Abnormal Loss = Actual Output is Less than the expected

Output.
ð Abnormal Gain = Actual output is more than the expected
output.

5.5 SOLVED PROBLEMS

Illustration : 1

Samar Ltd. manufactures a product which passes through two

consecutive process viz. Purvardha and Uttarardha. The company
provides you with the following information for the year ended 31 st
March 2014.

Particulars Purvardha Uttarardha

Basic Material 5000 units --
Rate Per Unit `2.20 --
` `
Process Material 4,000 3,000
Wages 3,000 4,000
Factory Overheads 2,000 2,630
Process Loss as percentage of input 10% 10%
Scrap Value of process loss (per 100 40 60
units)

Prepare Process A/c and other relevant accounts.

The entire output of Uttarardha process was sold for `30,000.

Solution:-

Quantity Reconciliation

Particulars Purvardha Uttarardha

Input 5,000 4,500
( - ) Normal Loss 500 450
Expected / Actual Output 4,500 4,050
 97

Purvardha Process A/c

Particulars Units Rate ` Particulars Units Rate `

To Material 5,000 2.20 11,000 By Normal 500 0.40 200
Loss
To Process 4,000
Material
To Wages 3,000 By Transfer 4,500 4.40 19,800
to
Uttarardha
Process
To Factory 20,000
Overheads
5,000 20,000 5,000 20,000

Total Cost - Scrap Value or Normal Loss

Cost Per Untis =
Input - Normal Loss
20, 000 − 200 19,800
= = = 4.40
5, 000 − 500 4,500

Uttarardha Process A/c

Particulars Units Rate ` Particulars Units Rate `

To Transfer 4,500 4.40 19,800 By Normal 450 0.60 270
from Loss
Purvardha
Process
To Process 3,000 By Output 4,050 7.20 29,160
Material c/d
To Wages 4,000
To Factory 2,630
Overheads
4,500 29,430 4,500 29,430

To Output 4,050 7.20 29,160 By Sale 4,050 30,000

b/d
To Costing 840
P/L A/c
4,050 30,000 4,050 30,000

Total Cost - Scrop Value of Normal Loss

Cost Per Units =
Input - Normal Loss Units
29, 430 − 270 29,160
= = = `7.20
4,500 − 450 4, 050
 98

Illustration : 2

Y Ltd. Manufacture a Chemical product which passes through

three process. The cost records show the following particulars for
the year ended 30th June 2014.

Particulars Process I Process II Process III

Material 48,620 1,08,259 1,03,345
Labour 32,865 84,553 77,180
Expenses 2,515 10,588 16,275
Normal Loss 20% 15% 10%
Scrop Value Per Unit 1 2 3
Actual Output (Units) 18,000 16,000 15,000

Input to Process I 20000 Units @ `28 per unit. Prepare

Process Accounts, Abnormal gain / Loss A/c Also show process
cost per unit for each process.
Solution:-
Quantity Reconciliation

Particulars I II III
Input 20,000 18,000 16,000
(-) Normal Loss 4,000 2,700 1,600
Expected Output 16,000 15,300 14,400
(-) Actual Output 18,000 16,000 15,000
Abnormal 2,000 700 600
Gain Gain Gain

Process I A/c

Particulars Units Rate ` Particular Units Rate `

s
To Input 20,000 28 5,60,000 By Normal 4,000 1 4,000
Loss
To Material 48,620 By 18,000 40 7,20,000
Transfer
To
Process II
To Labour 32,865
To 2,515
Expenses
To 22,000 40 80,000
Abnormal
Gain
22,000 7,24,000 22,000 7,24,000
 99

Cost Per Units = Total Cost - Normal Loss Scrap

Input - Normal Loss Units
Value
6, 44, 000 − 4, 000 6, 40, 000
= = = 40
20, 000 − 4, 000 16, 000

Process II A/c

Particulars Units Rate ` Particulars Units Rate `

To Transfer By Normal 2,700 2 5,400
Loss
From Process I 18,000 40 7,20,000 By Transfer 16,000 60 9,60,000
to Process
III A/c
To Material 1,08,259
To Labour 84,553
To Expenses 10,588
To Abnormal 700 60 42,000
Gain
18,700 9,65,400 18,700 9,65,400

9,23,400 - 5,400 9,18,000

CPU = = = 60
18,000 - 2,700 15,300

Process III A/c

Particulars Units Rate ` Particulars Units Rate `

To Transfer 16,000 60 9,60,000 By Normal 1,600 3 4,800
from Process II Loss
To Material 1,03,345 By Output 15,000 80 12,00,000
(Finished
Stock A/c)
To Labour 77,180
To Expenses 16,275
To Abnormal 600 80 48,000
Gain
16,600 12,04,800 16,600 12,04,800

11,56,800 - 4,800 11,52,000

CPU = = = 80
16,000 - 1,600 14,400
 100

Normal Loss A/c

Particulars Units Rate ` Particulars Units Rate `

To Process I 4,000 1 4,000 By Actual Sale
To Process II 2,700 2 5,400 Process I 2,000 1 2,000
To Process III 1,600 3 4,800 II 2,000 2 4,000
III 1,000 3 3,000
By Abnormal Gain
Process I 2,000 1 2,000
II 700 2 1,400
III 600 3 1,800
8,300 14,200 8,300 14,200

Abnormal Gain A/c

Particulars Units Rate ` Particulars Units Rate `

To Normal By Actual
Loss A/c Sales
Process I 2,000 1 2,000 Process I 2,000 40 80,000
II 700 2 1,400 II 700 60 42,000
III 600 3 1,800 III 600 80 48,000
To Costing 1,64,800
Profit &
Loss A/c
3,300 1,70,000 3,300 1,70,000

Illustration : 3
Product A is manufactured after it passes through three
distinct processes. The following information is obtained from the
records of a company for the year ended 31st December 2013.

Particulars Process I Process II Process III

Direct Material 2,500 2,000 3,000
Direct Wages 2,000 3,000 4,000
Output during the week 950 840 750
Percentage of Normal Loss 5% 10% 15%
to Input
Value or Scrap Per Unit ` 3/- 5/- 5/-

Product Overheads are `9,000. 1000 Units at `5 each were

introduced to process I. There was no stock or materials or work in
progress at the beginning and at the and of the year. The output of
each process passes direct to the next process and finally to the
finished stock A/c. Production overheads are recovered on 100% of
direct wages.
 101

Prepare Process Cost Accounts and Abnormal Gain or Loss

Account for the year ended 31st December, 2013.
Solution:-
Quantity Reconciliation

Particulars Process I Process II Process III

Input 1,000 950 840
(-) Normal Loss 50 95 126
Expected Output 950 855 714
(-) Actual Output 950 840 750
Abnormal NIL 15 36
Loss Gain
Process I A/c

Particulars Units Rate ` Particulars Units Rate `

To Input 1,000 5 5,000 By Normal 50 3 150

Loss
To Direct 2,500 By Transfer 950 11.95 11,350
Material to Process
II A/c
To Wages 2,000
ToProduct 2,000
Overheads

(100% of
Wages)

1,000 11,500 1,000 11,500

Total Cost - Normal Loss Scrop Value

Cost Per Units =
Input - Normal Loss Units

11,500 − 150 11,350

= = = 11.95
1, 000 − 50 950
 102

Process II A/c

Particulars Units Rate ` Particulars Units Rate `

To Transfer 950 11.95 11,350 By Normal 95 5 475

from Loss
Process I

To Material 2,000 By Abnormal 15 22.07 331

Loss

To Wages 3,000 By Process III 840 22.07 18,544

A/c Transfer

To Product 3,000
Overheads

950 19,350 950 19,350

19350 - 475 18875

Cost Per Unit = = = 22.07
950 - 95 855

Process III A/c

Particulars Units Rate ` Particulars Units Rate `

To Transfer 840 22.07 18,544 By Normal 126 5 630

from Process Loss
II

To Material 3,000 By Finished 750 40.49 30,372

Stock A/c

To Wages 4,000

To Product 4,000
Overheads

To Abnormal 36 40.49 1,458

Gain

876 31,002 876 31,002

29,544 - 630 28,914

Cost Per Unit = = = 40.49
840 - 126 714
 103

Normal Loss A/c

Particulars Units Rate ` Particulars Units Rate `

To Process 50 3 150 By Actual
I Sales
To Process 95 5 475 Process I 50 3 150
II
To Process 126 5 630 Process II 95 5 475
III
Process III 90 5 450
By 36 5 180
Abnormal
Gain
Process III
271 1,255 271 1,255

Abnormal Loss A/c

Particulars Units Rate ` Particulars Units Rate `

To Process 15 22.07 331 By Actual 15 5 75
II Sales
Process II 256
By Costing
Profit &
Loss A/c
15 331 15 331

Abnormal Gain A/c

Particulars Units Rate ` Particulars Units Rate `

To Actual 36 5 180 By Process 36 40.49 1.458
Sale III
Process III
To Costing 1,278
Profit &
Loss A/c
36 1,458 36 1,458

PARTLY OUTPUT - TRANSFER / STOCK / SALE

After completing each and every process, partly material either

sold or transfer to next process and finally from last process 100%.
material or output will be sold or transfer to warehouse.
 104

Illustration : 4

M/s XYZ and company manufacture a chemical which passes

through three processes. The following particulars gathered for the
month of January, 2014.

Particulars Process I Process II Process III

Material (Litre) 400 208 168
Material Cost `38,400 `18,800 `6,000
Wages `7,680 `7,600 `2,200
Normal Loss (% of input) 4% 5% 5%
Scrap Sale Value -- `3 Per Ltr. --
Output Transferred to Next 50% 40% --
Process
Output Transferred to ware 50% 60% 100%
houses

Overheads are charged @ 50% of Direct Wages. You are

required to prepare Process Account.

Solution:-

Quantity Reconciliation

Particulars Process Process Process

I II III
Transfer from Process - 192 152
(+) Input 400 208 168
Total 400 400 320
(-) Normal Loss 16 20 16
384 380 304
Transfer to Next Process → 192 152 --
Transfer to Warehouse → 192 228 304
 105

Process I A/c

Particulars Ltr Rate ` Particulars Ltr Rate `

To Material 400 38,400 By Normal 16 -- --
Loss
To Wages 7,680 By Transfer to 192 130 24,960
Next Process
(50%)
To Overheads 3,840 By Transfer to 192 130 24,960
(50% of wages) Warehouse
(50%)
400 49,920 400 49,920

Total Cost - Scrap Value of Normal Loss

Cost Per Unit =
Input - Normal Loss Units

49,920 - Nil 49,920

C. P. U. = = = 130
400 - 16 16

Process II A/c

Particulars Ltr Rate ` Particulars Ltr Rate `

To Transfer 192 130 24,960 By Normal 20 3 60
from Loss
Process II
To Material 208 18,800 By Transfer 152 145 22040
to Next
Process III
(40%)
To Wages 7,600 By Transfer 228 145 33,060
to Warehouse
(60%)
To 3,800
Overheads
(50% of
wages)
400 55,160 400 55,160

55,160 - 60 55,100
Cost Per Unit = = = 145 / -
400 - 20 380
 106

Process III A/c

Particulars Ltr Rate ` Particulars Ltr Rate `

To Transfer 152 145 22,040 By Normal 16 -- --
from Process Loss
II
To Material 168 6,000 By Transfer to 304 103.09 31,340
Warehouse
(100%)
To Wages 2,200
To Overheads 1,100
(50% of
wages)
320 31,340 320 31,340

31,340 - Nil 31,340

Cost Per Unit = = = 103.09
320 - 16 304

Output Partly Sold and Partly Transferred to Next

Process.
Illustration : 5
KT Ltd. provides you the following information for the year
ended 31st March 2014.

Particulars Process A Process B Process C

Raw Material (Units) 12,000 2,440 2,600
Cost of Raw Material Per Unit 5 5 5
(`)
Direct Wages ` 34,000 24,000 15,000
Production Overheads ` 16,160 16,200 9,600
Normal Loss (% of Total No. of 4% 5% 3%
Units entering to the process)
Wastage (% of Total No. of 6% 5% 4%
Units Entering to the Process)
Scrap Per Unit of Wastages ` 3 4 5
Output Transferred to 70% 60% --
Subsequent Process
Out Sold at the End of the 30% 40% 100%
Process
Selling Price Per Unit ` 12 16 17

Prepare Process A, B and C.

 107

Solution:-

Quantity Reconciliation

Particulars Process A Process B Process C

Input 12,000 2,440 2,600
(+) Transfer from Process -- 7,560 5,400
Total 12,000 10,000 8,000
(-) Normal Loss 480 500 240
(-) Wastage 720 500 320
10,800 9,000 7,440
→ Transfer to Next Process 7,560 5,400 --
→ Partly Sold 3,240 3,600 7,440 Sold

Process A A/c

Particulars Units Rate ` Particulars Units Rate `

To Material 12,000 5 60,000 By Normal 480 -- --

Loss
To Wages 34,000 By Wastage 720 3 2,160
To 16,160 By Output c/d 10,800 10 1,08,000
Production
Overheads

12,000 1,10,160 12,000 1,10,160

To Output 10,800 10 1,08,000 By Transfer 7,560 10 75,600

b/d to Process B
(70%)
To Costing 6,480 By Sold 3,240 12 38,880
Profit & Loss (30%)
A/c (Profit)

10,800 1,14,480 10,800 1,14,480

 108

Process B A/c

Particulars Units Rate ` Particulars Units Rate `

To Process A 7,560 10 75,600 By Normal 500 -- --

Loss

To Material 2,440 5 12,200 By 500 4 2,000

Wastage

To Wages 24,000 By Output 9,000 14 1,26,000

c/d

To Overheads 16,200

1,000 1,28,000 10,000 1,28,000

To Output b/d 9,000 14 1,26,000 By Transfer 5,400 14 75,600

to Process
C / 60%)

To Costing 7,200 By Sold 3,600 16 57,600

Profit & Loss (40%)
A/c (Profit)

9,000 1,33,200 9,000 1,33,200

Process C A/c

Particulars Units Rate ` Particulars Units Rate `

To Process B 5,400 14 75,600 By Normal 240 -- --

Loss

To Material 2,600 5 13,000 By 320 5 1,600

Wastage

To Wages 15,000 By Sales 7,440 17 1,26,480

To Overheads 9,600

To Costing 14,880
Profit & Loss
A/c (Profit)

8,000 1,28,080 8,000 1,28,080

 109

Illustration : 6

Assemblers Ltd. have three Assembly shop viz. General

Assembly, Lower Assembly and Higher Assembly. Part of the
output is transferred to the next assembly and part is sold directly.
The company furnished the following in formations.

Particulars General Lower Higher

Raw Material (In Ltrs) 5,000 1,920 3,576
Material Cost Per Ltr. `60 `40 `80
Labour Cost 4,28,000 1,06,000 2.10.000
Direct Expenses 88,000 2,85,200 1,04,800
Wastage as percentage of 4% 5% 10%
Total input
a) Output Transferred
To Lower Assembly 60% -- --
To Higher Assembly -- 40% --
b) Output Sold in Market 40% 60% 100%
Sales Price Per Ltr. `200 `205 `250

Administrative Overheads - `36,000

Marketing Overhead - `48,000
Prepare Various Assembly A/c and costing Profit & Loss A/c
Solution :
Quantity Reconciliation

Particulars General Lower Higher

Input 5,000 1,920 3,576
(+) Transfer from Process -- 2,880 1,824
Total 5,000 4,800 5,400
(-) Normal Loss 200 240 540
Actual Output 4,800 4,560 4,860
(-) Sold Out 1,920 2,736 4,860
(-) Transfer to Next Process 2,880 1,824 --
 110

General Process A/c

Particulars Ltrs Rate ` Particulars Ltrs Rate `

To Material 5,000 60 3,00,000 By Normal 200 -- --

Loss
(Wastage)
To Labour 4,28,000 By Output 4,800 170 8,16,000
c/d
To Direct 88,000
Exp.

5,000 8,16,000 5,00 8,16,000

To Output 4,800 170 8,16,000 By Transfer 2,880 170 4,89,600

b/d to Lower
To Costing 57,600 By Sales 1,920 200 3,84,000
P/L A/c
(Profit)

8,73,600 8,73,600

Lower Assembly A/c

Particulars Ltrs Rate ` Particulars Ltrs Rate `

To General 2,88`0 170 4,89,600 By 240 -- --
Assembly Wastage
Transfer
To Material 1,920 40 76,800 By Output 4,560 210 9,57,600
c/d
To Labour 1,06,000
To Direct Exp 2,85,200
4,860 9,57,600 4,860 9,57,600

To Output b/d 4,560 210 9,57,600 By Transfer 1,824 210 3,83,040

to Higher
By Sales 2,736 505 5,60,880
By Costing 13,680
P/L A/c
(Loss)
4,560 9,57,600 4,560 9,57,600
 111

Higher Assembly A/c

Particulars Ltrs Rate ` Particulars Ltrs Rate `

To Lower 1,824 210 3,83,040 By 540 -- --
Assembly A/c Wastage
(Transfer)
To Material 3,576 80 2,86,080 By Output 4,860 202.45 9,83,920
c/d
To Labour 2,10,000
To Direct Exp. 1,04,800
5,400 9,83,920 5,400 9,83,920

To Output b/d 4,860 202.45 9,83,920 By Sales 4,860 250 12,15,000

To Costing 2,31,080
P/L A/c
(Profit)
4,860 12,15,000 4,860 12,15,000

Total Cost - Normal Loss Scrap Value

Cost Per Unit =
Input - Normal Loss( Units)
8,16,000 - Nil
General Assembling =
5,000 - 200
8,16, 000
= = 170
4,800
9,57,600 - Nil
Lower Assembly =
4,800 - 240
9,57, 600
= = 210
4,560
9,83,920 - Nil
Higher Assembly =
5,400 - 540
9,83,920
= = 202.45
4,860
 112

Costing Profit & Loss A/c

Particulars ` Particulars `
To Lower Assembly 13,680 By General Assembly 57,600
To Administrator Overheads 36,000 By Higher Assembly 2,31,080
To Marketing Overheads 48,000
To Net Profit c/d 1,91,000
2,88,680 2,88,680

Process Stocks:-
Under Process Costing, Whatever output of each and every
process is transfer to next process or sold out partly or entirely
transfer to next process and after completion of process at the end
the output is sold. But when there is process stock given then the
entire output of a particular process would be transfer to particular
process stock A/c, then added opening stock and deducting closing
stock whatever balance remain it transfer to next process. For eg.
In a process a input are 1000 units normal loss is 50 units. Process
stock A/c shows opening balance 100 units, closing stock is 150
units then transfer to next process is calculated as
Input - 1000
(-) Normal Loss - 50
Expected Output - 950 Actual Output
(+) Opening Stock - 100
1,050
( - ) Closing Stock - 150
900 - Transfer to Next Process
 113

Illustration : 7
Reliance Yarn Ltd. manufactures a yarn product. The product
passes through three consecutive processes F.Y., S. Y., and T. Y.,
Relevant details for the months of March 2014 are as under:

Particulars F. Y. S. Y. T. Y.
Quantitative in Formation in Kg.
Basic input kg @ 10 Per Kg. 2000 -- --
Output during the month 1950 1925 1679
Stock of Process
- On 1st March 2014 200 300 100
- On 31st March 2014 150 400 59
% of Normal Loss to input in process 2% 5% 8%
Monetary Information ` ` `
Process Material 9000 2100 2716
Wages 9064 1860 4000
Value or Opening Stock 3880 6720 2800
Scrap Value per kg `1 `2 `4

Closing Stock is to be valued at the respective cost of each

process.
Prepare process A/c, Process Stock A/c, Abnormal Loss and
Abnormal Gain A/c. Find out the costing profit, when the sales out
of T.Y. Process Stock are made at `40 per kg.

Solution:
Quantity Reconciliation

Particulars F. Y. S. Y. T. Y.
Input 2000 2000 1825
(-) Normal Loss 40 100 146
Expected Output 1960 1900 1679
(-) Actual Output 1950 1925 1679
Abnormal Loss / Gain 10 (Loss) (25) Gain -
Actual Output 1950 1925 1679
(+) Opening Stock 200 300 100
(-) Closing Stock (150) (400) (59)

Transfer to Next Process 2000 1825 1720 Sold

 114

F. Y. Process A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Input 2000 10 20,000 By Normal 40 1 40
Loss
To Material 9,000 By 10 19.40 194
Abnormal
Loss
To Wages 9,064 By Transfer 1950 19.40 37,830
to F.Y.
Process
Stock A/c
2000 38,064 2000 38,064

Total Cost - Normal Loss Scrap Value

Cost Per Unit =
Input - Normal Loss Units
38064 − 40 38024
= = = 19.40
2000 − 40 1960

F. Y. Process Stock A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Balance 200 19.40 3,880 By Transfer 2000 19.40 38,800
b/d to S. Y.
Process A/c
To Transfer 1950 19.40 37,830 By Balance 150 19.40 2,910
From F. Y. c/d
Process
2150 41,710 2150 41,710

S. Y. Process A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Transfer 2000 19.40 38,800 By Normal 100 2 200
from F. Y. Loss
Process
Stock
To Material 2,100 By Transfer 1925 22.40 43,120
to S. Y.
Process
Stock A/c
To Wages 1,860
To 25 22.40 560
Abnormal
Gain
2025 43,320 2025 43,320
 115

S. Y. Process Stock A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Balance 300 22.40 6,720 By Transfer 1825 22.40 40,880

b/d to T. Y.
Process
To Transfer 1925 22.40 43,120 By Balance 400 22.40 8,960
from S. Y. c/d
Process

2225 49,840 2225 49,840

42760 − 200
S.Y. Process =
2000 − 100
42560
= = 22.40
1900

T. Y. Process A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Transfer 1825 22.40 40,880 By Normal 146 4 584

from S. Y. Loss
Process
Stock A/c
To Material 2,716 By Transfer 1679 28 47,012
to T. Y.
Process
Stock A/c
To Wages 4,000

1825 47,596 1825 47,596

T. Y. Process Stock A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Transfer 1679 28 47,012 By Transfer 1720 28 48,160

from T. Y. to Costing
Process A/c P/L A/c
To Bal b/d 100 28 2,800 By Balance 59 28 1,652
c/d

1779 49,812 1779 49,812

 116

Cost Per Unit = Total Cost - Normal Loss Scrap

Input - Normal Loss Units
Value
47596 − 584 47012
T.Y. Process = = = 28
1825 − 146 1679

Normal Loss A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To F. Y. Process 40 1 40 By Actual Sales
To S. Y. Process 100 2 200 F. Y. Process 40 1 40
To T. Y. Process 146 4 584 S. Y. Process 75 2 150
T. Y. Process 146 4 584
By Abnormal
Gain
Process S. Y. 25 2 50
286 824 286 824

Abnormal Loss A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To F. Y. 10 19.40 194 By Actual 10 1 10
Process Sales
By Costing 184
P/L A/c
10 194 10 194

Abnormal Gain A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Normal 25 2 50 By S. Y. 25 22.40 560
Loss Process A/c
To Costing 510
P/L A/c
25 560 25 560

Costing Profit & Loss A/c

Particulars ` Particulars `
To TY Process Stock 48,160 By Abnormal Gain 510
A/c A/c
To Abnormal Loss A/c 184 By Sales (1720 x 40) 68,800
To Net Profit c/d 20,966
69,310 69,310
 117

Illustration : 8
Satyug Times Ltd. submits the following information in respect
of its product which passes through 3 consecutive process viz
Ingestion process, Idigestion process and Assimilation process for
the month ended 31st January, 2014.

Particulars Ingestion Digestion Assimilation

Quantitative
Information (kgs)
Basic Raw 80,000 -- --
Material @ `40
per kg.
Normal Yield 80% 60% 70%
Output during the 62,000 36,000 21,000
month
Stock of Process
Output:
31-12-2013 8,000 8,000 5,000
31-01-2014 10,000 4,000 4,000
Other Additional
Informational
Process Material `3,45,000 `8,26,000 `6,17,000
Labour Mandays 2,400 1,500 1,000
Labour Rate Per `80 `100 `150
Manday
Machine 60% of Wages 50% of Process `2,34,000
Overheads Material
Other 2,75,800 1,63,000 1,27,000
Manufacturing
Overheads
Value of Opening `60 `140 `300
Stock Per Kgs.
Scrap Value Per `10 `15 `20
Kgs.

Finished Stock of assimilation process was sold at `350 per

kg.

Prepare the process A/c, Process Stock A/c, Normal Loss A/c
and the Abnormal Gain / Loss A/c.
 118

Ingestion Process A/c

Particulars Kgs. Rate ` Particular Kgs. Rate `

s
To Input 80000 40 32,00,000 By Normal 16000 10 1,60,000
Loss
To Process 3,45,000 By 2000 62 1,24,000
Material Abnormal
Loss
To Labour (2400 1,92,000 By 62,000 62 38,44,000
x 80) transfer to
Process
Stock A/c
To Machine 1,15,200
Overheads
(60% of Labour)
To Manufacturing 2,75,800
Overheads
80000 41,28,000 80,000 41,28,000

Ingestion Process Stock A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Balance b/d 8000 60 4,80,000 By Transfer to 60,000 37,04,000
Digestion
Process
To Transfer 62000 62 38,44,000 By Balance c/d 10000 62 6,62,000
from Ingestion
Process A/c
70,000 43,24,000 70,000 43,24,000

Digestion Process A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Transfer 60000 37,04,000 By Normal 24000 15 3,60,000

from Loss
Ingestion
Process
Stock
To Process 8,26,000 By Transfer 36,000 136 48,96,000
Material to Process
Stock A/c
To Labour 1,50,000
(1500 x 100)
To Machine 4,13,000
Overheads
(50% of
Process
Material)

52,56,000 52,56,000
 119

Digestion Process Stock A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Balance b/d 8,000 140 11,20,000 By Transfer to 40,000 54,72,000

Assimilation
Process A/c

To Transfer 36,000 136 48,96,000 By Balance c/d 4000 136 5,44,000

from Digestion
Process A/c

44000 60,16,000 44000 60,16,000

Assimilation Process A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Transfer 40000 54,72,000 By Normal 20000 20 4,00,000
from Loss
Digestion
Process
Stock A/c
To Process 6,17,000 By Transfer 21000 310 65,10,000
Material To Process
Stock A/c
To Labour 1,50,000
(1000 x
150)
To 2,34,000
Machine
Overheads
To 1,27,000
Manufactur
ing
Overheads
To 1000 310 3,10,000
Abnormal
Gain
41000 69,10,000 41000 69,10,000

Assimilation Process Stock A/c

Particulars Kgs. Rate ` Particular Kgs. Rate `

s
To Bal b/d 5000 300 15,00,000 By Sales 22000 350 77,00,000
To Transfer 21000 310 65,10,000 By 4000 310 12,40,000
from Balance
Assimilation c/d
Process
Stock A/c
To Costing 9,30,000
P/L A/c
26000 89,40,000 26000 89,40,000
 120

Normal Loss A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Ingestion 16000 10 1,60,000 By Actual

Sales
To 24000 15 3,60,000 Ingestion 16000 10 1,60,000
Digestion
To 20000 20 4,00,000 Digestion 24000 15 3,60,000
Assimilation
Assimilation 19000 20 3,80,000
By
Abnormal
Gain
Assimilation 1000 20 20,000

60,000 9,20,000 60,000 9,20,000

Abnormal Loss A/c

Particulars Kgs. Rate ` Particulars Kgs. Rate `

To Ingestion 2000 62 1,24,000 By Actual 2000 10 20,000

Process Sale
By Costing 1,04,000
P/L A/c
(Loss)

2000 1,24,000 2000 1,24,000

Abnormal Gain A/c

Particulars Kgs. Rate ` Particulars Kgs. Rat `

e

To Normal 1000 20 20,000 By 1000 310 3,10,000

Loss A/c Assimilation
Process A/c
To Costing 2,90,000
P/L A/c
(Profit)

1000 3,10,000 1000 3,10,000

 121

Costing Profit & Loss A/c

Particulars ` Particulars `
To Abnormal Loss 1,04,000 By Assimilation 9,30,000
Process A/c
To Net Profit c/d 11,16,000 By Abnormal Gain 2,90,000
12,20,000 12,20,000

Total Cost - Scrap Values of Normal Loss

Cost Per Unit =
Input - Normal Loss Units

4128000 − 160000 39, 68, 000

Ingestion = = = 62
80, 000 − 16, 000 64, 000

52,56, 000 − 3, 60, 000 48,96, 000

Digestion = = = 136
60, 000 − 24, 000 36, 000

6600000 − 400000 62, 00, 000

Assimilation = = = 310
40000 − 20000 20, 000

Quantity Reconciliation:

Particular Ingestion Digestion Assimilation

Input 80,000 60,000 40,000
(-) Normal Loss 16,000 24,000 20,000
Expected 64,000 36,000 20,000
Output
(-) Actual Output 62,000 36,000 21,000
Abnormal Loss 2,000 (Loss) Nil 1,000 (Gain)
/ gain
Actual Output 62,000 36,000 21,000
(+) Opening Stock 8,000 8,000 5,000
(-) Closing Stock (10,000) 4,000 4,000
Transfer to 60,000 40,000 22,000
Next Process Output Sold

* Instead of Normal Loss, Normal Yield is given. It means total input

- Normal Yield = Normal Loss.

If input is 100%
∴ Ingestion Process Normal Yield is 80%
∴ Normal Loss = Input - Normal Yield
= 100 - 80
 122

∴ Normal Loss = 20%

Input of Ingestion Process 80,000 x 20% = 16,000

Some way of Digestion & Assimilation Process.

5.6 EXERCISE

A. Objective Questions

Q.1 Multiple Choice Questions

1. The cost of units of abnormal Loss is
A. Credited to the process A/C
B. Debited to the process A/C
C. Credited to the normal Loss A/C
D. Debited to the normal Loss A/C

2. The cost of units of abnormal loss is

A . Credited to the normal loss A/C
B. Debited to the normal loss A/C
C. Credited to the process A/C
D. None of the above

3. The cost of units of abnormal gain is

A. Debited to the process A/C
B. Debited to profit and loss A/C
C. Credited to the process A/C
D. None of the above

4. Normal loss is calculated as

A. Actual output –Normal output
B. Normal output – Actual output
C. Input x % of Normal loss
D. None of the above

5. Normal output is equal to

A. Input – normal loss
B. Input – abnormal loss
C. Input –abnormal gains
D. None of the above

6. Abnormal loss is equal to

A. Input –Actual output
B. Actual output – Normal output
C. Normal output – Actual output
D. Actual output – input
 123

7. Abnormal gain is equal to

A. Actual output – Normal output
B. Normal output –Actual output
C. Actual output – Input
D. Input –Actual output

8. Cost Per Unit is calculated as

A. Total Cost /Normal output
B. Normal cost/ Total cost
C. Cost of process –sale value of normal loss / Input – Normal Loss
D. Total cost/ Total Output

9. Allocation of joint cost deals with ----------------------------------

A. CAS-3
B. CAS-5
C. CAS-4
D. CAS-2

10. Sale of residue or scrap is ---------------------------------

A. Credited to process A/C
B. Credited to P & L A/C
C. Credited to Abnormal Loss A/C
D. None of the above

(Answers :- 1. A 2.C 3.A 4. C 5. B 6. C 7. A 8.C

9. C 10. A)

Q.2 True and False

1. The cost of good units is increased by the abnormal gain in

process costing.
2. The cost of units of abnormal loss is debited to the process
A/C.
3. Invisible waste has sale value .
4. The cost of units of abnormal gain is credited to the process
A/C.
5. The sale value of residue is credited to the process A/C.
6. Under contribution margin method , variable costs apportion on
the basis of units produced.
7. Joints products are of unequal importance.
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8. Under Net Realizable value method, the estimated profit margin

deducted.
9. The proportion of joint products can be changed at the will of
the management.
10. Joint products are produced from the different processes.

(Answer: True :- 1, 5, 6, 8. False :- 2, 3, 4, 7, 9, 10.)

B. Practical Problems:

1) Product x is obtained after it is processed through 3 distinct

processes:-

The following information is available for the month of March

2014.

Particulars Process A Process B Process C Total

Material Consumed 10,400 8,000 4,100 22,500
Direct Labour 9,000 14,720 5,600 29,320
Production Overhead - - - 29,320

2000 Units at `4 per unit were introduced in process A.

Production overheads to be distributed as 100% on direct labour.
The actual output and normal loss of the respective process are:

Particulars Output in Normal Loss Value of Scrap

Units on Input Per Unit
Process A 1800 10% 2.00
B 1360 20% 4.00
C 1080 25% 5.00

There is no stock or work in progress in any process. You are

required to prepare process a/c.

2) Product ‘A’ is obtained after it is processed through

process x, y and z .
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The following cost information is available for the month ended

31st March, 2014.

Particulars x y z
Number of Units introduced in the 500 -- --
process
Rate per unit of units introduced ` 04 -- --
Cost of Material 2,600 2,000 1,025
Direct Wages 2,250 3,680 1,400
Production Overheads 2,250 3,680 1,400
Normal Loss (% on Units Introduced of 10% 20% 25%
each Process)
Value of Scrop per Unit 2/- 4/- 5/-
Output in Units 450 340 270

There is no stock in any process. You are required to prepare

the Process A/c.

3) The product of a company process through of distinct

processes to completion. These process or known as x, y and z .
From the past experience, it is ascertained that wastage is incurred
in each process as under - process x − 2% , Process y - 4%,
Process z - 10%

The Wastage at each process possess scrap value. The

wastage of process x and y is sold at `2.50 per unit, and that of
process z at `5.00 per unit. The output of each process passes
immediately to the next process and finished units are transferred
from process z into stock. The following information is obtained.

Particulars x y z
Material 2,70,000 2,60,000 1,20,000
Wages 4,30,000 2,40,000 1,30,000
Direct Expenses 1,37,500 1,45,000 1,80,000
Output of each process (in 48,750 47,000 42,000
units)

50,000 units were put in process x at a cost of `10/- per unit. There
is no stock of work in progress in any process. Prepare process
A/c. Abnormal Loss and Gain A/c.
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4) A product of a manufacturing concern passes through two

process viz A and B and then to finished stock. The following
figures have been taken from its books for the year ended 31 st
March 2013.

Particulars Process A Process B

Raw Material Introduced in Process (Units) 10,000 700
Cost of Raw Material introduced (per unit `) 125 200
Wages (`) 2,80,000 1,00,000
Machine Expenses (`) 20,000 10,000
Direct Expenses (`) 10,000 10,000
Other Factory Expenses (`) 45,000 22,500
Indirect Material (`) 5,000 10,000
Normal Loss in Weight 5% 5%
(% of total units introduced in each process)
Normal Scrap (% on total Units Introduced in each 10% 10%
process )
Realizable Value of Scrap (per 10 units) (`) 800 (`) 2,000
Output (Units) 8,300 7,800

Prepare Process A/c, Abnormal Loss and Abnormal Gain A/c.

5) ABC and Co. manufactures a chemical which passes through
three processes. The following particulars garnered for the month
of January 2014.

Particulars Process I Process II Process III

Material (Litre) 4000 208 168
Material Cost `38,400 `18,800 `6,000
Wages `7,680 `7,600 `2,200
Normal Loss (% of input) 4% 5% 5%
Scrap Sale Value -- `3 per Ltr. --
Output Transferred to Next 50% 40% --
Process
Output Transferred to 50% 60% 100%
Warehouse

Overheads are charged @ 50% of Direct Wages. You are

required to prepare Process A/c.

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