COST ACCOUNTING- (METHODS OF COSTING) II-munotes

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11INTRODUCTION TO COST ACCOUNTINGUnit structure1.0 Objectives1.1 Introduction1.2 Meaning of Cost, Costing and Cost Accounting1.3 Objectives of Cost Accounting1.4 Cost Centre and Cost Units1.5 Classification of Cost1.6 Elements of Cost1.7 Summary1.8 Exercise1.0 OBJECTIVESAfter 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 Costing1.1 INTRODUCTIONCost Accounting is the system of accounting which isconcerned with determination of costs of doing something whichcan be manufacturing or rendering service or even conducting anyactivity or function. The objective of Cost Accounting is to renderdetailed and useful information for guidance to Management.Financial accounting is developed over the time to record,summarise and present the financial transaction or events whichcan be expressed in terms of money. This function was primarilyconcerned with record keeping, leading to preparation of Profit andLoss Account and Balance Sheet. The information obtainedthrough financial statements is useful to the Managemento rO w n e rin several respects. However, the information provided by financialmunotes.in

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2accounting is not sufficient for several purposes of decision makingin many areas such as : determining output level, determiningproduct selection – addition or dropping or changing p r o d u c tcombination in the case of multi product company, determining orrevising prices of products, whether Profit earned is optimum ascompared with competitors and in comparison to earlier years. Theneed of data for such details lead to the development of CostAccountancy.1.2 MEANING OF COST, COSTING AND COSTACCOUNTING1.2.1 Cost :Institute of Cost and Works Accountants of India, definescost as “measurement, in monetary terms, of the amounto fresources used for the purpose of production of goods or renderingservices”.Thus the term cost means the amount of expenditure, actualor notional incurred or attributable to a given thing. It can beregarded as the price paid for attaining the objective. For e.g.Material cost is the price of materials acquired for manufacturing aproduct.1.2.2 Costing :The term costing has been defined as “the techniquesa n dprocesses of ascertainment of costs.Wheldenhas defined costingas, “the classifying recording and appropriate allocation ofexpenditure for the determination of costs the relation of thesecosts to sale value and the ascertainment of profitability.”Therefore costing involves the following steps.1. Ascertaining and Collecting of Costs2. Analysis or Classification of Costs3. Allocating total costs to a particular thing i.e. p r o d u c t , acontract or a process.Thus costing simply means cost finding by any process ortechnique.1.2.3 Cost Accounting :Cost Accounting is a formal system of accounting by meansof which cost of products or service, are ascertained and controlled.Whelden defines Cost Accounting as, “Classifying,recording and appropriate allocation of expenditure fordetermination of costs of products or services and for thepresentation of suitably arranged data for the purpose of controland guidance of management.”munotes.in

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3Therefore, Cost Accounting is the application of costingprinciples, methods and techniques in the ascertainment of costsand analysis of savings or / and excesses as compared withprevious experience or with standards. It provides, d e t a i l e d c o s tinformation to various levels of management for efficientperformance of their functions. The information supplied by CostAccounting as a tool of management for making optimum u s e o fscarce resources and ultimately add to the profitability of business.1.3 OBJECTIVES OF COST ACCOUNTINGObjectives of Cost Accounting are as follows :1) To Ascertain the Cost : To ascertain the cost of product or aservices reveled and enable measurement of profit by propervaluation of inventory.2) To Analyse Costs : T o a n a l y s i s c o s t s o r t o c l a s s i f y t h eexpenses under different heads of accounts viz. material,labour, expenses etc.3) To Allocate and Apportion the Costs : To allocate or chargethe direct expenses or specific costs such as Raw Material,Labour to particular product, contract or process and todistribute common expenses to each product, contract o rprocess 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 bepresented?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 bepresented.5) To Assist the Management : Cost Accounting assist themanagement in:a) Indicating to the management any inefficiencies and extentof various forms of waste of Raw Material, Time, Expensesetc.b) Fixing of selling price.c) Providing information to enable management to takedecision of various types.munotes.in

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4d) Controlling Inventory of Raw Material, goods in process,finished goods, spares and consumables etc.6) Cost Control : Cost Accounting assist the management in costcontrol. 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 withthe targets to find out the variation.d) Analysing the variance, whether favourable or adverse.e) Immediate action has to be taken in case of adversevariation.8) Optimum Product Mix : Advise the management in decidingoptimum product mix merits and demerits of alterative coursesof action viz. make of buy decisions, introduction or Automationmechanization, rationalization, system of production etc.9) Future Policies : Advise management on future policiesregarding Expansion, growth, capital investment, etc.1.4 COST CENTRE AND COST UNITS1.4.1 Cost Centre :It is a location, person or item of equipment for which costmay be ascertained and used for the purpose of cost control. It is aconvenient unit of the organisation for which cost may beascertained. The main purpose of ascertainment of cost is tocontrol the cost and fill up the responsibility of the person who is incharge 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 g r o u p o fthese. E.g. Factory, Machine etc.III. Operational Cost Centre :This consists of machines or persons carrying on similaroperations.munotes.in

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5IV. Process Cost Centre :This consists of a continuous sequence of operation or specificoperations.V. Production Cost Centre :This is the centre where actual production takes place or theseinclude, those departments that are directly engaged inmanufacturing activity and contribute to the contentand form offinished 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 indirectmanner.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 costare ascertained or expressed. It is basically, a unit of quantity ofproduct or service in relation to which costs may be ascertained orexpressed.Few examples of cost unit are given below.Name of IndustryCost unitTextilesTransportPowerPaintsIron and SteelCanteenChemicalReadymade GarmentsPetrolMeter, yardsPassenger kmKilowatt – hourLitreTonnePer mealLitre, kilogramNumberLitre1.5 CLASSIFICATION OF COSTClassification is the process of grouping costs according totheir common characteristics. It is a systematic placement of likeitems together according to their common features. There arevarious ways of classifying costs, according to their commonfeatures as given below.munotes.in

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6Chart showing classification of cost :Classification of Cost
I On the basis of Identification :On the basis of identification of cost with cost units or jobs orprocesses, costs are classified into –1.Direct Costs : These are the costs which are incurred for andconveniently identified with a particular cost unit process ordepartment. These are the expenditures which can be directlyallocated to a particular job, product or an activity. E.g. Cost ofRaw Material used, wages paid to labourers etc.2.Indirect Costs : These are general costs and are incurred forthe benefit of a number of cost units, processes or departments.These costs can not be conveniently identified with a particularcost unit or cost centre. Example : Depreciation of Machinery,Insurance, Lighting, Power, Rent of Building, ManagerialSalaries, etc.ManufacturingCostAdministrationCostSelling andDistributionCostResearch andDevelopmentCostDirectCostFixedCostOn the basis ofbehaviour of costVariableCostSemi-VariableCostOn the basis ofIdentificationIndirectCostOn the basis ofControlliabilityControllableCostUncontrollableCostOn the basisof TimeHistoricalCostPredeterminedCostOn the basis offunction
ConversionCostOther BasisNormalCostAvoidableCostUnavoidableCostProductCostPeriodCostmunotes.in

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7II On the basis of behaviour of CostBehaviour 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 whileother costs remain unchanged. As such on the basis of behaviourof cost – costs are classified into1) Fixed Costs :It is that portion of the total cost which remainconstant irrespective of output upto the capacity limit. It is thecost which does not very with the change in the volume ofactivity in the short run. These costs are not affected bytemporary fluctuation in the activity of an enterprise. These arealso known as period costs as it is concerned with period. Rentof premises, tax and insurance, staff salaries, are the examplesof fixed cost.Characteristics of Fixed Cost are :a.Large in valueb.Fixed amount within an output rangec.Fixed cost per unit decreases with increased outputd.Indirect Coste.Lesser degree of controllabilityf.Influence Variable Cost and Working Capital
Cost (Rs.)Total Fixed CostFixedCostperUnitOutput (Units)Y
XOBehaviour of Fixed Cost2) Variable Cost :It is that cost which directly very with thevolume of activity. In other words, it is a cost which changesaccording to the changes in the volume of output. It t e nds t overy in direct proportion to output. It means when the volume ofoutput increases, total variable cost also increases when thevolume of output decreases, total variable cost also decreases.munotes.in

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8But the variable cost per unit remains same. Direct material,Direct Labour, Direct Expenses are the examples of variablecosts.Characteristics of Variable Cost are :a. Total cost changes in direct proportion to the change intotal 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.
Cost (Rs.)TotalVariableCostVariable Cost per UnitOutput (in Units)YX
OBehaviour of Variable Cost3) 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 remainconstant upto a certain level and registers change afterwards.These costs vary in some degree with volume but not in director same proportion. Such costs are fixed only in relation tospecified constant condition.For example: Repairs and maintenance of machinery,telephone charges, maintainance of building, supervision,professional tax, compensation for accidents, light and poweretc.munotes.in

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Cost (Rs.)Semi Variable Cost
Output (in Units)Behaviour of Semi-Variable CostIII. On the basis of ControllabilityOn the basis of controllability, costs are classified into twotypes :1) Controllable Cost2) Uncontrollable Cost1) Controllable Cost : T h e s e a r e t h e c o s t s w h i c h c a n n o t b einfluenced or controlled by the concerned cost centre orresponsibility centre. These costs may be directly regulated at agiven level of management authority.2) Uncontrollable Cost : These are the costs, which can not beinfluenced or controlled by the action of a specific member of anenterprise. For eg. it is very difficult to control costs like factoryrent, 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 s c o p e o fmanagement authority. It means cost which is uncontrollable atone level of management may be controllable at another level ofmanagement. Eg. Rent and Factory Building may be beyondcontrol for the production department but can be controlled bythe administrative department by negotiations. Secondly allcosts are controllable in the long run and at the someappropriate management level.IV On the basis of FunctionsAn organisation performs many functions. On the basis o ffunctions costs can be classified as follows :munotes.in

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101) Manufacturing Costs :It is the cost of all items involved in themanufacturing of a product or service. It includes all direct costsand all indirect costs related to the production. It includes costof direct materials, direct labour, direct expenses,and overheadexpenses related to production. Overhead expenses, means allindirect costs involved in the production process. This is termedas factory overhead or manufacturing overheads. Eg.S a l a r i e sof staff for production department, technical supervision,Expenses of stores department, Depreciation of PlantandMachinery, Repairs and maintenance of Factory Building andMachineries etc.2) Administration Cost :These are costs incurred for generalmanagement of an organisation. It is the cost which is incurredfor formulating the policy, directing the organisation ofcontrolling the operations. These are in the natureo f i n d i r e c tcosts and are also termed as administrative overhead. Eg.Salaries of Administrative Stall, General Office expenses likerent, lighting, telephone, stationery, postage etc.3) Selling and Distribution Costs :Selling costs are the indirectcosts relating to selling of products or services. They include allindirect cost in sales management for the organisation. Sellingcosts include all expenses relating to regular salesa n d s a l e spromotion activities. Examples of expenses which are includedin selling costs are :1) Salaries, Commission and traveling expenses for salespersonnel2) Advertisement cost3) Legal Expenses for debt realization4) Market research cost5) Show room expenses6) Discount allowed7) Sample and free gifts8) Rent on Sales room9) After sale servicesDistribution costs are the costs incurred in handling aproduct from the time it is completed in the works until it reachesthe ultimate consumer. Distribution expenses include all theseexpenses which are incurred in connection with making thegoods available to customers. These expenses include thefollowing.1) Packing charges2) Loading chargesmunotes.in

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113) Carriage on Sales4) Rent of warehouse5) Insurance and lighting of warehouse6) Transportation costs7) Salaries of godown keeper, driver, packing staff etc.4) Research and Development Cost :Research anddevelopment costs are incurred to discover new ideas,processes, products by experiment. It includes the cost of theprocess which begins with the implementation of the decision toproduce or improved product.V On the basis of TimeOn the basis of time of computation, costs are classified intohistorical costs and predetermined costs.1) Historical Costs : These are the costs which are ascertainedafter these have been incurred. Historical costs are thennothing but actual costs. They represent the costs o f a c t u a loperational performance. These costs are not available untilafter the completion of manufacturing operations.2) Pre determined Costs :These are the future costs which areascertained in advance of production on the basis of aspecification of all the factors affecting cost and cost data.Predetermined costs are future costs determined in advance onthe basis of standards or estimates. These costs areextensively used for the purpose of planning and control.VI Other Basis1) Normal Cost :Normal cost may be defined as a cost which isnormally incurred on expected lines at a given level of output, inthe 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 notnormally incurred at a given level of output, in the condition inwhich that level of output is normally attained. Such cost is overand above the normal cost and is not treated as a part of thecost of production.3) Avoidable Cost :The cost which can be avoided under thepresent conditions is an avoidable cost. These are the costswhich under given conditions of performance efficiency shouldnot have been incurred. They are logically associated withsome activity and situation and are ascertained by themunotes.in

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12difference of actual cost with the happening of the situation andthe normal cost. Eg. when spoilage occurs in manufacturing inexcess of normal limit, the resulting cost of spoilage is avoidablecost.4) Unavoidable Cost :The cost which can not be avoidable underthe present condition is an unavoidable cost. They areinescapable costs which are essentially to be incurred within thelimits or norms provided for. It is the cost that must be incurredunder a programme of business restriction.CHECK YOUR PROGRESS•Draw the chart showing Classification of Cost.•Define the following terms:1. Costing2. Cost Accounting3. Impersonal cost center4. Service Cost center5. Direct Cost6. Uncontrollable cost7. Predetermined cost•Give Examples:1. Fixed cost2. Variable cost3. Semi variable cost4. Manufacturing cost5. Administration cost6. Selling cost7. Distribution Cost1.6 ELEMENTS OF COSTA manufacturing organisation converts raw materialsinto finished products. For that it employs labour and provides otherfacilities. While compiling production cost, amount spent on allthese are to be ascertained. For this purpose, cost are primarilyclassified into various elements. This classification i s r e q u i r e d f o raccounting 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 andthis acts as the basis for preparing a Cost sheet.munotes.in

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13Elements of costMaterials Labour Other Expenses Direct Indirect Direct Indirect Direct IndirectOverheadsFactory Administrative Selling & Distribution1.6.1 Material CostIt is the cost of material of any nature used for the purpose ofproduction of a product or a service. Materials may be DirectMaterial or Indirect Material.•Direct material : I t i s t h e c o s t o f b a s i c r a w m a t e r i a l u s e d f o rmanufacturing a product. Direct materials generally became apart of the finished product. No finished product can bemanufactured without basic raw material. This cost is easilyidentifiable and chargeable to the product. For e.g.Leather inleather 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 thesame factory.iv) Primary packing materials.v) Freight, insurance and other transport costs, import duty, octroiduty, carriage inward, cost of storage and handling are treatedas direct costs of the materials consumed.In certain cases direct materials are used in small quantitiesand it will not be feasible to ascertain their costs and allocate themdirectly. For instance, nails used in the manufacture of chairs andtables, glue used in the manufacture of toys, thread u s e d i nstitching garments etc. In such cases cost of the total quantityconsumed for the period will be treated as Indirect costs.•Indirect material : I t i s t h e c o s t o f m a t e r i a l o t h e r t h a n d i r e c tmaterial which cannot be charged to the product directly. It cannot be treated as part of the product. These are minor inimportance. It is also known as expenses materials. It is themunotes.in

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14material which cannot be allocated to the product but can beapportioned 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 withspecific job. They may not vary directly with the output. It isconsidered as a part of overheads.1.6.2 Labour CostThis is the cost of remuneration in the form of wages, Salaries,Commissions, Bonuses etc. paid to the workers and employees ofan organisation.•Direct Labour Cost :Direct Labour Cost is the amount ofwages paid to those workers who are engaged on themanufacturing line. It consists of wages paid to workersengaged in converting of raw materials into finished products.The amount of wages can be conveniently identified with aparticular line, product, job or process. These workers directlyhandle machines on the production line. Direct wages includepayment made to the following group of workers.1) Labour engaged on the actual production of the product2) 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 readymadewear unit, Labour in construction work etc.•Indirect Labour Cost : It is the amount of wages paid to thoseworkers who are not engaged on the manufacturing line. It is ofgeneral character and can not be directly identified w i t h aparticular cost unit. This indirect labour is not directly engagedin the production operations but such labour assistor help inproduction operations. It can not be easily identified withspecific job, contract of work order. It may not vary directly withthe output. It is treated as part of overheads.Example : Labour in Human Resource department, Labour inpayroll department, Labour in stores, Labour in SecuritiesDepartment, Labour in power house department etc.munotes.in

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151.6.3 ExpensesAll costs other than material and labour are termed a sexpenses. It is defined as the cost of services provided to anundertaking and the notional cost of the use of owned assets.•Direct Expenses :It is the amount of expenses which is directlychargeable to product manufactured or which may be allocatedto product directly. It can be easily identified with the product.These are the expenses which are specifically incurred inconnection with a particular job or cost unit. They are alsocalled as chargeable expenses.Example : Hire of special plant for a particular job, Travellingexpenses in securing a particular contract, Carriage paid formaterials purchased for specific job, Royalty paid in m i n i n g o rproduction etc.•Indirect Expenses (Overheads): A l l i n d i r e c t c o s t s o t h e r t h a nindirect materials and indirect labour costs, are termed asindirect expenses. It is the amount of expenses which can notbe charged to the product directly. These can not be directlyidentified with particular job, process or work order and arecommon to cost units’ or cost centers.•Indirect expenses / Overheads can be sub-divided intofollowing main groups.1. Factory or Works Overheads: A l s o k n o w n a smanufacturing or production overheads it consists of all costs ofindirect materials, indirect labour and other indirect expenses whichare incurred in the factory.Examples :Factory rent and insurance. Depreciation of Factory buildingand machinery.2. Office or Administration overheads: A l l i n d i r e c t c o s t sincurred by the office for administration and management of anenterprise.Examples:Rent, rates, taxes and insurance of office buildings, audit fees,directors fees.3. Selling and Distribution overheads: These are indirect costsin relation to marketing and sale.munotes.in

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16Examples :Advertising, Salary and Commission of sales agents,Travelling expenses of salesmen.1.7 SUMMARYCost Accounting is the process of accounting for costs fromthe point at which expenditure is incurred or committed to theestablishment of its ultimate relationship with costc e n t e r a n d c o s tunits. Cost accounting profession got recognition in 1939 in India. Ithas been made compulsory for specified manufacturing companies.Cost Accounting has the objectives of determining Product costs,facilitate planning and control of regular business a c t i v i t i e s a n dsupply 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 EXERCISE1. 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 differentways of Cost Classification.4. Write short notes on:a. Cost centersb. Cost unitsc. Elements of costs5. Choose the correct alternative1. Cost accounting is an important system developed fori)shareholdersii)governmentiii)managementiv)financial institutions2. The costing which determines cost after it has been actually incurred isi)historicalii)standardiii)estimatediv)marginal3. A cost center is ai)location for which cost is incurredii)an organisationiii)a unit of costiv)profit center4. A cost center which is engaged in production activity is calledi)production cost centerii)process cost centeriii)impersonal cost centreiv)production unitmunotes.in

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1756.Variable cost per unit remains ______.i)constantii)flexibleiii)(i) & (ii)iv)none of the above7.Cost which is related to capacity is called :i)Fixed costii)Capacity costiii)Plant costiv)none of the above8.Cost which is unaffected by the change in output is called as :i)Fixed costii)Variable costiii)Period costiv)None of the above9.Cost which is relevant for decision-making isi)Relevant costii)Past costiii)Opportunity costiv)Imputed cost10.The cost which remains constant irrespective of output upto capacity limit isi)Fixed costii)Product costiii)Variable costiv)Sunk cost11.Variable cost is also known asi)Product costii)Period costiii)Direct costiv)Semi fixed cost12.The cost which is directly chargeable to the product isi)Indirect costii)Direct costiii)Overheadsiv)Period cost


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CLASSIFICATION OF COSTSAND COST SHEETUnit Structure :
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.A manufacturing organisation converts raw materials intofinished products. For the purpose, it employs labour and providesother facilities. While compiling production cost, amounts spent onall these facilities are required to be ascertained. Thus, costascertainment involves (a) collection and classification of costsaccording to cost elements (b) its allocation or apportionment tocost centres or units (c) choice of an appropriate method of costingand (d) selection of an appropriate costing technique. Costs areprimarily classified into various elements for accounting andcontrol.Cost items are analysed or grouped according to theircommon characteristics which is some independent factor. Thereare many objectives of cost classifications depending on the182
2.0 Objectives2.1 Introduction2.2 Cost Classifications2.3 Cost Sheet2.4 Solved Problems2.5 Summary2.6 Exercises2.0 OBJECTIVES
2.1 INTRODUCTION
2.2 COST CLASSIFICATIONSmunotes.in

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requirements of management. The different cost classifications areas follows:-The constituent elements of costs are broadly classified intothree distinct elements i.e. materials, labour and expenses Thesethree elements of cost can be further grouped into direct andindirect categories. Direct materials refer to the cost of materialswhich are conveniently and economically traceable to specific unitsof output for example. Raw cotton in textiles, crude oil in makingdiesel. The indirect materials refer to materials that are needed forthe completion of the product but whose consumption with regardto the product is either so small or so complex that it would not beappropriate to treat it as a direct material. For example, stationerylubricants, cotton waste etc.A business organisation has to perform several functionssuch as Manufacturing, Administration, Selling and Distributing andResearch and Development. Functional classification of costimplies that the business performs many functions for which costsare incurred. Expenses or Costs are usually classified by functionand grouped under the headings of Manufacturing, Selling andAdministrative costs in measuring net income.Manufacturing costs are all check costs incurred tomanufacture the products and to bring them to a saleable condition.This includes direct material, direct labour and indirectmanufacturing costs or overheads. Administration costs areincurred for formulation of policy, directing the organisation andcontrolling the activities excluding the cost of research,development, production, selling and distribution. These costsinclude salary of executives, office, staff, office rent, stationery,postage etc. Selling costs, include the cost of creating andstimulating demand and getting customers. For example,advertisement, salary and commission to salesmen, packing.Distribution costs include the cost of warehouse, freight, cartageetc.Research and Development costs are incurred in theprocess of finding out new ideas, new processes by experiments orother means of putting the results of such experiments on acommercial basis. Functional classification of cost is importantbecause it provides an opportunity to the management to evaluatethe efficiency of departments performing different functions in anorganisation.2.2.1 Cost Classification by Elements :
2.2.2 Cost Classification by Function.19munotes.in

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Cost can be classified as (i) fixed (ii) variable and (iii) semi -fixed or semi variable in terms of their variability or changes in costbehaviour in relation to changes in output or activity or volume ofproduction. Activity may be indicated in any form such as units ofoutput, hours worked, sales, etc. The separation of costs intovariable and fixed categories is the most difficult part of the costingoperation. Certain costs are easily identifiable as variable or fixedwhile other costs can be segregated only after careful considerationof their nature and an examination of their behaviour.i) Fixed costs:Fixed cost is a cost which does not change in total for agiven time period despite wide fluctuations in output or volume ofactivity. These costs must be met by the organisation irrespectiveof 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 andproportionately with the output. There is a constant ratio betweenthe change in the cost and the change in the level of output. Directmaterials and labour are the examples of variable costs. Thus, allthese costs which tend to vary directly with variations in volume ofoutput are variable costs. However, it must be remembered thatvariable costs remain the same or approximately the same inamount per unit of production regardless of increase or decrease involume.iii) Semi variable or semi fixed costs:There is another group of costs in between the fixed andvariable costs. It is semi variable or semi fixed costs. These costsvary in some degree with volume but not in direct proportion. Suchcosts are fixed only in relation to specified constant conditions.Semi fixed costs are those costs which remain constant upto acertain level of output after which they become variable. Forexample: maintenance of building, depreciation of plant,supervisor’s salary, telephone expenses etc.Cost sheet is a statement prepared to present the detailedcosts of total output during a period. It provides information relatingto cost per unit at different stages of total cost of production. Thepreparation of cost sheet is one of the important and primaryfunction of cost accounting. Cost sheet is not an account. There is3.2.3 Cost Classification by variability:
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a prescribed form for preparation of cost sheet. A cost sheet is astatement of cost prepared for a given period of time in such amanner that it indicates various elements of cost as clearly aspossible. The cost sheet is useful in ascertaining the total cost ofproduction per unit, formulation of production plan, fixing up theselling price and to minimize the production cost. Sometimesstandard cost data are provided to facilitate comparison with theactual cost increased. The preparation of the cost sheet requiresunderstanding of the treatment of the following items:-a)Stock of raw materials: The opening and closing stock of rawmaterials are to be adjusted with purchase of Raw materials inorder to determine the value of raw materials consumed for theoutput produced. Carriage/ Freight inward and Octroi onpurchase etc. also to be added to purchases. This is a part ofPrime Cost.b)Stock of Work in Process –The value of stock of work inprocess is a part of Factory cost and therefore, it should beadjusted with factory overheads. Sale of scrap should bededucted from the factory overheads in order to determine thetotal factory cost.c)Stock of Finished goods :-Finished goods covers theproducts on which factory work has been completed. It is thecost of completed production. The opening and closing valuesof finished goods are to be adjusted with the total cost ofproduction in order to arrive at cost of sales.There are certain expenses /costs which do not form a partof cost sheet. Some of these expenses are an apportionment ofprofit. Examples of these expenses are -i) Dividend to shareholdersii) Income Taxiii) Interest on loaniv) Donations paidv) Capital expenditurevi) Capital loss on sale of assets.vii) Commission to Partners / Managing Directorviii) Discount on issue of shares/ debenturesix) Underwriting commission.x) Writing of goodwill/ bad debtsxi) Provision for Taxation, Bad Debts or any kind of Fund orreserves.2.3.3 Expenses excluded from cost sheet:21munotes.in

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Break up of cost sheet
The specimen form of a cost sheet is given below:Cost sheet for the period …..(Production … Units )ParticularsTotal CostRs.Cost PerUnitRs.Direct Materials Raw MaterialsOpening stock Materials : Add : Purchases …. . Add : Carriage / Freight Inward ----------------- Less : Closing stock ----------------- Cost of materials consumed Direct Labour Direct ExpensesPrime costFactory overheadsAdd: Work in Progress (Opening )Less : Work in Progress (Closing )Works /Factory costOffice and administrative expensesCost of Production (of goods produced)Add: Op. Stock of finished goodsLess closing of finished goods cost of production (of goods sold)---------------------------2.3.4 Specimen of cost sheet.22munotes.in

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Selling & Distribution expenses Cost of SalesAdd. Profit (Loss) SalesCosts are classified under different heads which representthe successive stages through which the cost flow.i) Prime CostPrime cost is the basic cost of any product. It comprises ofthose expenses which could be traced directly to it. The primecostconsists of cost of direct materials, direct labour and directexpenses. Direct expenses include special expenses which can beidentified with product or job and are charged directly to the productas part of the prime cost. For example cost of hiring special plant ormachinery, cost of special moulds, design or patterns, Architect’sfees, Royalties, License fees etc.ii) Work cost:Works cost of a Product consists of prime cost plus theportion of works or factory expenses chargeable against theProduction. Works or factory expenses include, indirect materialsindirect labour and indirect expenses. Indirect materials refer tothose materials that are needed for the completion of the productbut the consumption of these materials is either so small orcomplex that it would not be appropriate to treat it as directmaterials. These are supplies that cannot be conveniently andeconomically charged to a specific unit of output. For example,lubricants, cotton waste, works stationery etc.Indirect labour is that labour which does not affect theconstruction or the composition of the finished product. This is thelabour cost of production related activities that cannot beassociated with or conveniently traced to specific product throughphysical observation. For example, Foremen’s salary and salary ofemployees engaged in maintenance or service work. Indirectexpenses covers all expenditure incurred by the manufacturer fromthe time of production to its completion as delivery to customer byway of rate of product. Any cannot be allocate but which can beapportioned to or absorbed by the cost cehtres cost units areknown as indirect expenses. These expenses are incurred for thebenefit of more than one product, job or activity and, therefore,must be apportioned by appropriate bases to the various functionsor products. For example, lighting and heating, maintenance factorymanager’s salary, watch and ward department’s salary etc.2.3.5 Elements of Total Cost23munotes.in

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(ii) Cost of Production :Cost of Production consists of works cost plus an additionalamount of office and administrative expenses. It includes allexpenses connected with the managerial functions such asplanning, organizing, directing, coordinating and controlling theoperations of the manufacturing business. For example, office rent,salary, lighting, stationery, repairs and maintenance anddepreciation of office building, audit fees, legal expenses.iv) Cost of Sales:Cost of sales consists of cost of production plusproportionate selling and distribution expenses of the product.Selling expenses include the expenses incurred for creatingdemand for the product such as advertisement, salaries ofsalesmen, selling expenses and show room expenses. Distributionexpenses are those expenses incurred in connection with thedelivery of goods to the customers such as packing, carriageoutwards, warehouse expenses.Illustration -1Bombay Manufacturing company submits the followinginformation on 31-3-2010 Particulars RupeesSales for the year 2,75,000Inventories at the beginning of the year-- Raw Materials 3,000-W o r k i n P r o g r e s s 4 , 0 0 0- Finished Goods 1,10,000Purchase of materials 65,000Direct Labour 6,000Inventories at the end of the year -- Raw Materials 4,000-W o r k i n P r o g r e s s 6 , 0 0 0- Finished Goods 8,000Other expenses for the year –Selling expenses 27,500Administrative expenses 13,000Factory overheads 40,000Prepare Statement of cost2.4 SOLVED PROBLEMS24munotes.in

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Solution :Bombay Manufacturing CompanyStatement of cost for the year ended 31-3-2010Rs.Rs.Materials consumed Opening stock: + Purchases- Closing stockDirect Labour Direct ExpensesPrime costFactory overheads+ Work in Progress (beginning )- Work in Progress (Closing )Works costAdministrative expensesCost of Production+ Opening Stock of finished goods-C l o s i n g S t o c k o f f i n i s h e d g o o d sSelling & Distribution expenses cost a sales Profit (Bal. Fig) Sales3,0001100001130004000400004000440006000 109000 65000 6000 180000 38000 2,18,000 13,000 2,31,000 7,000 2,30,000 8,000 2,30,000 27,500 2,57,500 17,500 2,75,000Illustration -2From the following information prepare a statement showing(i) Prime cost (ii) Works cost (iii) Cost of Production (iv) Cost ofSales (v) Net profit of X Ltd. which produced and sold 1000 units inJune 2009.Rs.Opening Stock:Raw Materials 24,000Finished goods 16,000Closing stock:Raw Materials 20,000Finished goods 15,000Purchase of Raw Materials 80,000Sales 2,00,000Direct Wages 35,000Factory Wages 2,00025munotes.in

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Carriage Inward 2,000Carriage Outward 1,000Factory Expenses 4,000Office Salaries 15,000Office Expenses 12,000Factory Rent & Rates 2,500Depreciation - Machinery 2,500Bad Debts 1,500SolutionLtd.Cost Statement for June, 2009Particulars Rs. Total Cost Cost per UnitRs. Rs.Opening stock of materials 24,000 Add: Purchase of materials 80,000Add: Carriage Inward 2,0001,06,000Less: Closing stock of materials 20,000Cost of Materials consumed 86,000 86.00Direct Wages 35,000 35.00(i) PRIME COST 121000 121.00Factory overheads :Factory Wages 2,000Factory expenses 4,000Factory Rent & Rates 2,500Depreciation 2,50011,000 11.00(II) WORKS COST 1,32,000 132.00Administrative Overheads :Office Salaries 15,000Office Expenses 12,000 27,000 27.00(iii) COST OF PRODUCTION 1,59,000 159.00Selling & Distribution Overheads :Carriage Outward 1,000Bad Debts 1,5002,500 2.50TOTAL COST1,61,500 161.50Add: Opening Stock of finished goods 16,0001,77,500 Less: Closing Stock of finished goods 15,000(iv) Cost of Sales 1,62,500 162.5026munotes.in

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(v) Net Profit (Bal.Fig) 37,500 37.50Sales 2,00,000 200.00Illustration – 3NRC Ltd., manufactured and sold 1000 Radio sets duringthe year 2009. The summarized accounts are given below :Mfg. / Trading & Profit & Loss A/cRs. Rs.To Cost of Materials 40,000 By Sales 2,00,000To Direct Wages 60,000To Manufacturing Exp. 25,000To Gross Profit 75,000 2,00,000 2,00,000To Salaries 30,000 By Gross Profit 75,000To Rent, Rates & Taxes 5,000To General Expenses 10,000To Selling & Distribution Exp. 15,000To Net Profit 15,000 75,000 75,000It is estimated that output and sales will be 1200 Radio Setsin the year 2010. Prices of Materials will rise by 20% on theprevious year’s level. Wages per unit will rise by 5% Manufacturingexpenses will rise in proportion to the combined cost of materialsand wages. Selling and distribution expenses per unit will remainunchanged. Other expenses will remain unaffected by the rise inoutput. Prepare cost sheet showing the price at which the RadioSets should be sold so as to earn a profit of 20% on the sellingprice.27munotes.in

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SolutionCOST SHEET------------------------------------------------------------------------------------------------------------2009 20101000 Radios 1200 RadiosTotal Per Unit Total Per UnitRs. Rs. Rs. Rs.------------------------------------------------------------------------------------------------------------Direct Materials 40,000 40.00 57,600 48.00Direct Wages 60,000 60.00 75,600 63.00PRIME COST 1,00,000 100.00 1,33,200 111.00Manufacturing Expenses 25,000 25.00 33,300 28.00WORKS COST 1,25,000 125.00 1,66,500 139.00Salaries 30,000 30.00 30,000 25.00Rent, Rates Insurance 5,000 5.00 5,000 4.00General Expenses 10,000 10.00 10,000 8.00COST OF PRODUCTION 1,70,000 170.00 2,11,500 176.00Selling & Distribution Expenses 15,000 15.00 18,000 15.00Cost of Sales 1,85,000 185.00 2,29,500 191.00Net Profit 15,000 15.00 57,275 48.00SALES 2,00,000 200.00 2,86,775 239.00Illustration – 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 unitDirect Labour - Rs. 2 per unitIndirect Expenses :Fixed - Rs. 1,50,000 per yearVariable - Rs. 5 per unitSemi-variable - Rs.50,000 per year upto 50%capacity and an extra expensesof Rs.10,000 for every 25%Increase in capacity or partthereof.The factory produces only against order and not for stock. Ifthe Production programme of the factory is as indicated below andthe management desires to ensure a Profit of Rs. 1,00,000 for the28munotes.in

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year, work out the average selling price at which per unit should bequoted:First 3 months of the year 50% of capacity remaining 9months 80% of the capacity. Ignore selling, distribution andadministration overheads.Solution :Particular First 3 months 9 Months Total(7500 Units ) (3600 Units)Rs. Rs. Rs.-------------------------------------------------------------------------------------------------------------Direct Material 22500 108000 130500Direct Labour 15000 72000 87000---------------- ---------------- --------------------37500 1,80,000 2,17,500Add :Indirect Expenses:Fixed 1: 3) 37500 112500 150000Variable @ Rs.5 b.u. 37500 180000 217500Semi –variableFor 3 months 12500 ----- ------@ Rs.50,000 p.a.For 9 months@ Rs.70,000 p.a. -- 525000 65000-------------- -------------- ---------------Total Cost 125000 525000 650000Profit -- - 100000----------------Sales 750000-----------------Illustration -5The following figures have been taken from the books of M Ltd. ason 31.12.2009Stock of Raw Materials on 1.1.2009 Rs. 35,000Stock of Raw Materials on 31.12.2009 Rs. 5,000Purchase of Materials Rs. 50,000Factory Wages Rs. 45,000Factory Expenses Rs. 17,500Establishment Expenses Rs. 10,000Finished Stock on 1.1.2009 Rs. 15,000Finished stock on 31.12.2009 Rs. 7,500Sales Rs. 2,00,000The Company manufactured 4000 units during the year2009. The company is required to quote for the price for supply of1000 units during the year 2010. The cost of material will increase29munotes.in

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by 15% and factory labour will cost more by 10% in the year 2010Prepare a statement showing the price to be quoted to give thesame percentage of net profit on sales and was realized during2009.a) Cost Sheet for the year 2009 Rs.Rs.Opening Stock of Materials : 35,000+ Purchases ….. 50,000 85,000- Closing stock of Materials 5,000Materials ConsumedFactory WagesPrime CostFactory ExpensesWorks CostEstablishment ExpensesCost of ProductionAdd : Opening Stock of finished goodsLess : Closing stock of finished goodsCost of SalesProfitSales 80,000 45,000 1,25,000 17,500 1,42,500 10,000 1,52,500 15,000 1,67,500 7,500 1,60,000 40,000 2,00,000 20.00 11.25 31.25 4.37 35.62 2.50 38.12
b) Statement showing quotation Price for 1000 unitsRs.Materials (20 x 1000) = 20,000+ 15% increase 3,000 23,000Factory wages (11.25 x 1000)= 11,25010% increase 1,125 12,375Prime Cost35,375Factory Expenses (4.375 x 1000) 4,375Works Cost39,750Establishment Expenses (2.50 x 1000) 2,500Total Cost42,250Profit (20% on Sale i.e., 25% of Cost) 10,563Sales 52,813Note : Percentage of Profit on sales earned during the year 2002 is20%30munotes.in

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=4000100 20%2000x==Illustration – 6.In a factory two types of T.V sets are manufactured i.e black& white + colour. From the following particulars prepare astatement showing cost and profit per T.V Set sold. There is noopening or closing stock.B & W Rs.Colour Rs.Materials 273000 10,80,000Labour 156000 6,20,000Works overhead is charged at 60% of Prime cost and Officeoverhead is taken at 20% at Works cost. The selling price of B & Wis 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 areRs. 50 per T.V.Set.SolutionB) Statement of Cost and ProfitParticulars B & W ColourRs. Rs. Per UnitMaterials 273000 10,80,000 2700Labour 156000 6,20,000 1550Prime Cost 429000 17,00,000 4250Add : Work Overheads 257400 10,20,000 2550(60% of Prime Cost )Works Cost 686400 27,20,000 6800Add : Office overheads 137280 5,44,000 1360(20% of Works cost)Cost of Production 823680 32,64,000 8160Add : Selling Expenses 10000 20,000 50Cost of Sales 833680 32,84,000 8210Profit (Bal. Fig) 366320 7,16,000 1790Sales 1,20,000 40,00,000 10,00031munotes.in

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Cost is a resource sacrificed or forgone to achieve a specificobjective. It is a monetary amount that is paid to acquire goods orservices. Costing is the process of determining the cost of doingsomething. Cost is composed of three elements - materials, labourand expenses or overheads. Each of these costs can be furtherclassified as (a) Direct (b) Indirect. Cost can also be classified onthe basis of function, variability and elements. Cost sheet is astatement prepared to present the detailed cost of total outputduring a period. It provides information relating to cost per unit atdifferent stages of the total cost of production. There are certainexpenses 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. PrimeCost, Work Cost, Cost of Production and Cost of sales are thedifferent elements of costs.1. What is cost? What are the different elements of costs?2. Explain the significance of each of the following costclassifications:a) Direct and indirect costsb) Variable and fixed costsc) Controllable and uncontrollable costs3. What are the items of expenses which are excluded from costsheet? Why?4. Fill in the blanks:a) -------------------comprises of those expenses which could betraced 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 beadjusted with ------------. (purchase of Raw materials)e) Carriage/ Freight inward and Octroi on purchase etc. are tobe 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)2.5 SUMMARY
2.6 EXERCISES:32munotes.in

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h) The opening and closing values of finished goods are to beadjusted with the ------------. (total cost of production).i) Prime cost plus the portion of works or factory expenseschargeable against the Production is equal to ---------.(Works Cost)j) Indirect materials indirect labour and indirect expenses arecalled as ------------. (Works or factory expenses include)k) Lubricants, cotton waste, works stationery etc. are theexamples of ------------------. ( Indirect materials)l) ---------------labour does not affect the construction or thecomposition of the finished product. (Indirect).m) Foremen’s salary and salary of employees engaged inmaintenance or service work etc. are examples of ----------labour. (indirect).n) The expenses incurred for the benefit of more than oneproduct, job or activity are called as ------------expenses.(Indirect overheads).o) Factory manager’s salary, watch and ward department’ssalary etc. are the examples of ----------------. (Indirectexpenses)p) Cost of Production consists of works cost plus an additionalamount of ---------------. (office and administrative expenses)q) Cost of production plus proportionate selling and distributionexpenses of the product is equal to ------------------. (Cost ofsales)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 forthe year ended 31.12.2009.Particulars RupeesPurchase of Raw materials 148000Direct wages 132000Rent & Rates 14000Carriages inward 6000Stock on 1-1-2009Raw materials 22000Work in progress 18000Finished goods 3000033munotes.in

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Stock on 31.12.2009Raw materials 24000Work in progress 35000Finished goods 25000Factory expenses 18000Sales 420000Selling and distribution costs amounted to 75 paisa per unit sold.25000 units were produced during the year. You are required toprepare cost sheet showing break –up of costs, total net profit andnet profit per unit sold.5. A factory produces a standard product. The followinginformation is given to you from which you are required toprepare a cost sheet for January, 2009.Direct materials consumed Rs. 90,000Direct Wages Rs. 30,000Other direct expenses Rs. 10,000Factory overheads – 80% of direct wagesOffice overheads – 10% of work costSelling and distribution expenses Rs. 2 per unit sold.Units produced and sold during the month 10000.Find outthe selling price per unit on the basis that Profit mark up isuniformly made to yield a profit of 20% of the selling price.There was no stock of work in progress at the beginning orat the end of the period.6. A toy manufacturer earns an average net profit of Rs.3 perpiece on a selling price of Rs.15 by producing and selling60,000 pieces at 60 percent of the potential capacity. Thecomposition of the cost of sales is :Direct Materials Rs. 4Direct wages Rs. 1Work overhead Rs. 6 (50 per cent fixed)Sales Overhead Rs. 1 (25 percent variable)During the current year, he intends to produce the samenumber 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.34munotes.in

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He obtains an order for a further 20 per cent of his capacity.What minimum price will you recommend for accepting anorder to ensure the manufacturer an overall profit ofRs.183500?7. The following particulars are extracted from the works andother relevant source in respect of a Ltd. Company?a) Estimated material cost of the job is Rs.25000 and thedirect labour cost is likely to be Rs.5000b) It will require machining by a German machine for 20hours and a Japanese machine for 6 hours.c) The machine hour rates for the German and Japanesemachines are Rs.100 and Rs.150 respectively.d) The direct wages in all other shops during the last yearamounted to Rs.800000 as against Rs. 180000 offactory overhead.e) The factory cost of all other jobs amounted toRs.375000 as against Rs.375000 of office expenses.You are required to make a quotation with 20 per cent profiton selling price.


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RECONCILATION OF COST ANDFINANCIAL ACCOUNTSUnit Structure :
After studying the unit the students will be able to:•Ascertain the difference between Profit as shown by FinancialProfit and Loss Account and Profit appearing in Costing Profit &Loss Account.•Identify and quantify the cost components, which contribute tothe difference in profit figures.•Prepare a statement reconciling the two profit figures reportedby financial and cost records.It is normally assumed that the profit of a business for agiven period is given by the Profit & Loss account made out for thatperiod.Imagine your surprise, when Profit and Loss Accountprepared by the financial accountant of X Ltd. shows a profit ofRs.4,56,000 for the year ended 31.03.2009. While the costaccountant has prepared a cost sheet for the same period andarrived at a profit of Rs.5, 12,000. You feel that one of the figuresreported should be wrong, otherwise how could there be adifference.However, there is a logical explanation for the difference inthe profit figures and both may be right.3
3.0 Objectives3.1 Introduction3.2 Need for Reconciliation3.3 Procedure for Reconciliation3.4 Solved Problems3.5 Exercises3.0 OBJECTIVES:
3.1 INTRODUCTION36munotes.in

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This is because the fundamental assumptions made by thetwo accountants for preparing the profit and loss account vary. Forexample, Interest on loan will be debited in financial Profit & LossAccount but the cost accountant will ignore this item as he does notconsider this interest expense as an item of cost. Naturally, in thiscase, the cost accountant will report a higher profit than thefinancial account.reasons:a) To ensure that no income or expenditure item has beenomitted and that there is no under or over recovery ofoverheads.b) To check the arithmetical accuracy, as well as for thedetermination of reason for disagreement between the tworesults.c) To know the reason for variation of profit or loss as internalcontrol.d) To take administrative decisions such as depreciation, stockvaluation and direct expenses.e) To test the reliability of cost accounts.It is very essential to know the causes, which generally giverise to disagreement between Cost and Financial Accounts. Theseare briefly summarised below:-1. Expenses that are not taken into account in costaccounting:The under mentioned expenses are usually not included inoverheads or, for that matter in cost.a) Expenses or income of purely financial nature like dividendsreceived, rent received, cash discount allowed, etc.b) Expenses or profits of capital nature like profit or loss on sale ofinvestments, plant and equipment, etc.3.2 NEED FOR RECONCILIATION3.2.1 Need for ReconciliationThe need for reconciliation arises due to the following
3.2.2 REASONS FOR DISAGREEMENT BETWEEN COST ANDFINANCIAL RESULT:-37munotes.in

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c) Items not representing actual costs but dependent on arbitrarydecisions of management e.g. an unreasonably high salary tothe managing director, providing for depreciation at a rateexceeding the economic rate.d) Appropriation of profits for dividends, payment of income taxand transfer to reserves.2. Items recorded in financial books only and not in costbooks:a) Interest received/ paid on Debentures,b) Interest received and paid on Investment and Bank loan oroverdraft respectively.c) Interest charged/ paid to debtors /creditorsd) Discount allowed/ received.e) Provision for discount on debtors/ creditorsf) Bad Debts written off/ bad debts recovered.g) Discount on issue of shares and debentures.h) Income tax paid /refundi) Penalty and fines paid / receivedj) Rent received/ paidk) Loss by fire, natural calamities or theft /damage recovered.l) Loss/ profit on sale of fixed assets, investmentm) Cost of share transfer /share transfer fees received.n) Donation given/receivedo) Deferred revenue expenses written off.Such as writing off of:i. Preliminary Expensesii. Discount on Shares/ Debentures3. Items recorded in cost book only and not in financialbooks:a) Notional rent charges of owned premisesb) Salary of proprietorc) Interest on proprietors fund4. Items recorded in both books with different amounts:In Cost book and Financial book some item of expenses andincomes which are treated differently such as -a) Method of charging depreciation:In Financial Books depreciation may have been provided, onStraight Line Method or Written down Value Method whereas inCosting Book depreciation may have been charged on the basis ofMachine Hour Rate Method. Amounts of depreciation charge inboth books are bound to be different.38munotes.in

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b) Under and Over recovered expenses:The expenses in costing books are recorded on the basis ofpre-determined rates but in financial books they are recorded onactual basis hence the amount recorded in these two set of booksdiffer.c) Method of Valuing Stocks:-It is well known that in Cost Book Stocks are only valued atcost. But in Financial Books stock are valued either at cost ormarket price, whichever is lower.cost accounts and financial accounts the procedure forreconciliation 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 costingprofit or loss if it is not given.2. If financial profit or loss is not given then find out the same bypreparing Trading and Profit and loss account for a period whichcorresponds to the cost sheet.3. Ascertain items which are shown in financial account and not incost account.4. Ascertain items which are shown in cost account only.5. Calculate difference between expenses recorded in financialbooks and the amount of expenses recorded in cost accounts.6. Reconciliation Statement is to be prepared as on a particulardate. Hence one can start with the figure of profit / loss as percost account and arrive at the figure of profit/ loss as perfinancial accounts or vice –versa.[Entries which are at variance with each other will appear inReconciliation Statement and also entries appearing in only one setof book (non - common items)]3.3 PROCEDURE FOR RECONCILIATION3.3.1 ProcedureWhen there is a difference between the profit/loss shown by39munotes.in

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1. Starting with financial profit:Statement of ReconciliationBetween Financial Profit and Cost Profit for the Year ended.......ParticularsRsRsFinancial Profit (as per the financial books)Add1. Expenses, losses and appropriationdebited in financial books only2. Closing stock under valued in FinancialBooks3. Opening Stock over valued in Financialbooks4. Excess depreciation charged in FinancialBooks5. Expenses under recovered in Cost Books6. Income credited only in Cost BooksLess1. Income credited only in Financial Books2. Closing stock over valued in FinancialBooks3. Opening Stock under valued in Financialbooks4. Short depreciation charged in FinancialBooks5. Expenses over recovered in Cost BooksCosting Profit (as per Costing books) xxx xxx xxx xxx xxxxxxxxx xxx xxx xxx xxx xxxxxx xxx xxx2. Starting with Costing Profit:Statement of ReconciliationBetween Financial Profit and Cost Profit For the Year ended…… ParticularsRsRsCosting Profit (as per the Costing books)Add1. Income credited only in Financial Books2. Closing stock over valued in FinancialBooks3. Opening Stock under valued in FinancialBooks4. Short depreciation charged in FinancialBooks5. Expenses over recovered in Cost Books6. Expenses debited only in Cost Books xxx xxxxxxxxx xxx xxx xxx xxxxxx xxx3.3.2 PROFORMA STATEMENT OF RECONCILIATION40munotes.in

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Less1. Expenses, losses and appropriation debitedin financial books only2. Closing stock under valued in FinancialBooks3. Opening Stock over valued in FinancialBooks4. Excess depreciation charged in FinancialBooks5. Expenses under recovered in Cost Books6. Income credited only in Cost BooksFinancial Profit (as per the financial books ) xxx xxx xxx xxx xxxxxxxxx
Illustration 1: From the following particulars prepare areconciliation statement:-Rs.Net Profit as per financial records 154506Net Profit as per costing records 206880Works overheads under recovered in costing 3744Administrative Overheads recovered in excess in costing 2040Deprecation charged in financial accounts 13440Depreciation recovered in Cost Accounts 15000Interest received but not included in Cost Accounting 9600Obsolescence loss charged in financial records 6840Income tax provided in financial books 48360Bank interest credited in financial books 900Stores adjustment credited in financial books 570Depreciation of stock charged in financial books 81003.4 SOLVED PROBLEMS41munotes.in

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SolutionRECONCILIATION STATEMENTRs.Rs.Net Profit as per costing recordsAdd:1. Administrative Overheads over absorbed2. Depreciation excess charged3. Income not credited in costing - Interest received 15000 Bank interest 900 Stores adjustment 570TotalLess1. Works overheads under recovered2. Expenses not charged in costing books 96003. Income tax provided in Financial Book 483604. Depreciation of Stock charged in Financial Book 8100 Net Profit as per financial books 2040 1560 16470 3744 66060 206880
20070226950 69804 157146Illustration 2 : Following is the Trading and Profit and lossaccount of a factory producing a particular unit of a product ofwhich the actual output is 100000 units.Trading & Profit and Loss A/c for the year ended 31/12/09 Rs Rs.To MaterialTo WagesTo Works Exp.To Office rentTo Selling & Dist. ExitTo Net Profit 200000 100000 60000 18000 12000 10000 400000By Sales400000400000The normal output of the factory is 1,50,000 units. Worksexpenses are fixed to the extent of Rs.36,000. Office expenses forall practical purposes are constant, Selling and distributionexpenses are variable to the extent of Rs.6000/- Prepare a costsheet and reconciliation statement.42munotes.in

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Solution :(a) COST SHEETActual output 1,00,000 units Normal output 1,50,000 unitsPer Unit (Rs.) Total (Rs.)Material 2.00 2,00,000Wages 1.00 1,00,000-----------------------------------PRIME COST 3.00 3,00,000Works expensesFixed (2/3 of 36000) = 24000Variable = 24000 0.48 48,000------------------------------------WORKS COST 3.48 348000*Actual output/ Normal output = 2/3Proportionate fixed cost are consideredOffice Expenses (2/3 * 36000) 0.12 12,000---------------------------------------COST OF PRODUCTION 3.60 3,60,000Selling and Distribution ExpensesFixed (2/3) = 4000Variable = 6000 0.1 10,000-------------------------------------------COST OF SALES 3.7 3,70,000Profit 0.3 30,000-------------------------------------------Sales 4.00 4,00,000------------------------------------------b) Reconciliation StatementProfit shown by Cost Accounts 30,000Less : 1. Under recovery of Work Expenses 120002. Under recovery of Office Expenses 60003. Under recovery of Selling Expenses 2000 20000--------------------------------Profits shown by Financial Accounts 10,000--------------------------------43munotes.in

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Illustration 3 : The Trading & Profit & Loss account of “A’ Ltd. is asfollows:-Trading & Profit & Loss AccountTo PurchasesLess : Closing StockTo Gross ProfitTo Net ProfitTo Direct WagesTo Works ExpensesTo Selling ExpensesTo AdministrativeExpensesTo DepreciationTo Net Profit 25120 4050 53870------------ 75000 10500 12130 7100 5340 1100 20300------------ 56470By Sales (50000 units@ of Rs Rs.1.50each)By Gross ProfitBy Discount receivedBy Profit on sale ofland75000--------- 7500043870 2602340--------- 56470The profit as per cost accounts was only Rs.19,770.Reconcile the financial and costing profits using the followinginformation :a) Cost accounts valued closing stock at Rs. 4280b) The work expenses in the cost accounts were taken at 100%of direct wages.c) Selling & administration expenses were charged in the costaccounts at 10% of sales and 0.10 per unit respectively.d) Depreciation in the cost accounts was Rs.800Solution :RECONCILIATION STATEMENTRs.Rs.Profit as per Cost AccountsAdd: 1. Over absorption of selling expenses 2. Discount received 3. Profit on sale of landLess 1. Difference in valuation of closing 2. Under absorption of AdministrativeExp. 3. Under absorption of Works Exps. 4. Depreciation under changed Profit as per Financial Accounts 400 260 2340----------- 200 340 1630 300----------- 19770 3000------------ 22770 2470----------- 2030044munotes.in

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Illustration 4 :From the following Profit & loss account draw up aMemorandum Reconciliation account showing the Profit as perCost Accounts:-To Office SalariesTo Office ExpensesTo Salary to SalesmenTo Sales ExpensesTo Distribution Exp.To Loss on Sale of MachineryTo FinesTo DiscountTo Net Profit c/dTo Income TaxTo Transfer to ReservesTo DividendTo Balance c/d 11282 6514 4922 9304 2990 1950 200 100 17936 55198 8000 1000 4800 4136 17936By Gross ProfitBy Dividend receivedBy Interest on Bank FD
By Net Profit b/d 54648 400 150 55198 17936 17936The cost accountant has ascertained a Profit of Rs.19636 asper his books.Solution :Memorandum Reconciliation Account :Dr Cr. Rs Rs.To Expenses not debitedto Cost accounts: Fines Discount Loss on sale of Care Income TaxTr. to Reserves DividendTo Net Profit c/d 200 100 1950 8000 1000 4800 4136 20186By Profit as per costaccountBy Income not credited in Cost accounts: Dividend Received Interest on Bank FD 19636 400 1502018645munotes.in

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Illustration : 5M/s ESVEE Ltd. has furnished you the following informationfrom the financial books for the year ended 31st December, 2009.ParticularsRs.Materials consumedWagesFactory overheadsAdministration OverheadsSelling and Distribution overheadsBad DebtsPreliminary expensesOpening Stock (500 units at Rs.35/- each)Closing stock (250 units at Rs.50/- each)Sales (10250 units)Interest ReceivedRent Received 260000 150000 94750 106000 55000 4000500017500 12500 717500 250 10000The cost sheet shows the following:Cost of materials Rs. 26 per unit.Labour cost Rs. 15 per unitFactory overheads 60% of Labour costAdministration overheads 20% of Factory costSelling expenses Rs, 6 per unitOpening Stock Rs. 45 per unitYou are required to prepare:1. Financial Profit & Loss Account2. Costing Profit & Loss Account3. Statement of Reconciliation46munotes.in

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SolutionA) Financial BooksProfit and Loss Account for the year ended 31-12-2009 Rs Rs.To Opening Stock(500 Units at Rs.35 each)To Materials consumed(10000 units)To Wages To Gross Profit c/dTo Factory overheadsTo Administration c/dTo Selling ExpensesTo Bad DebtsTo Preliminary ExpensesTo Net Profit 17,500 2,60,000 1,50,000 3,02,500-------------- 7,30,000 94,750 1,06,000 55,000 4,000 5,000 48,000--------------- 3,12,750By Sales (10250 units )By Closing stock(250 unitsat Rs.50 each)By Gross Profit b/dBy Interest receivedBy Rent Provided 7,17,500 12,500-------------- 7,30,000 3,02,500 250 10,000-------------- 3,12,750B) COST SHEET FOR THE YEAR ENDED 31.12.2009Prod. 10000 units ParticularsTotal Cost Rs.Cost perUnit Rs.Material ConsumedLabour WORKS COSTAdministration overheads(20% of work cost) COST OF PRODUCTIONAdd : Opening Stock of finished goods(500 units at (Rs.45/- each) 260000 150000-------------- 410000 90000--------------- 500000 100000600000 22500--------------- 6225002615------------- 41 9------------ 50 1060.47
PRIME COST Factory Overheads (60% of Labour cost)munotes.in

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Less : Closing stock of finished goods(250 units)Selling ExpensesCOST OF SALES PROFIT SALES 15000--------------- 607500 61500--------------- 669000 48500--------------- 717500------------- 6------------ 66 4------------- 70C) STATEMENT OF RECONCILIATION AS ON 31.12.2002Starting Point (Cost Accountant ) Rs. Rs.Profit as per Cost AccountsAdd: 1. Over recovery of overheads : Selling expenses 2. Over valuation of stock : Opening stock 3. Purely financial income: Interest RentLess : Under recovery of overheads- 4. Factory overheads 5. Administrative overheads 6. Over valuation of stock : Closing Stock 7. Purely financial expenses: Bad Debts Preliminary expenses Project as be Financial Accounts 6500 5000250 10000-----------47506000 250040005000----------- 48500 31750------------ 70250 22250------------480001. What is the need for reconciliation of cost and financialaccounts?2. Discuss the main sources of difference between Profit shownby cost accounts and that as per financial accounts.3. Objective type questions;3.5 EXERCISES48munotes.in

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A. Multiple choice questions:1. Dividend received is shown in _________i) costing profit and loss A/c iii) Ignoredii) financial profit and loss A/c iv) None of the above2. Over valuation of closing stock in Cost Accounts----------------.i) Increases costing profit iii) Decreases costing profitii) Increases financial profit iv) Decreases financial profit3. Over absorption of overheads in financial accountingi) Decreases financial profit iii) Increases costing profitii) Increases financial profit iv) Both (i) & (ii)4. Under valuation of opening stock in costingi) Increases costing profit iii) Decreases costing profitii) Decreases financial profit iv) Both (i) & (ii)5. Donations paid isi) Debited to costing P & L A/c iii) Ignored in costingii) Debited to financial P & L A/c iv) (ii) & (iii)Answers: ii, i, i, iii, ii.B. True or false1. Under absorption of overheads in cost accounting decreasescosting 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 decreasesthe costing profit.6. Cost accounting considers the Loss or profit on sale of capitalassets.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 reducesfinancial profit.11.Under valuation of closing stock in costing increases costingprofit.12.Difference in Depreciation in costing and financial accountingdistinguishes costing profit from financing profit.Answers:False, True, False, True, False, False, true, true, true, true, false, true.49munotes.in

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Fill in the blanks1. Premium on issue of shares is shown in --------------accountsonly.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 iscalled 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 ofoverheads in costing, under absorption of overheads in financialaccounting, financial profits, costing profit, financial profits, costingprofits, financial profits, costing profits, financial.4. Practical Problems:1. The following transactions have been extracted from thefinancial books of a company.Rs. Units-----------------------------------------------------------------------------------------Sales 250000.00 20000.00Materials 100000.00Wages 50000.00Factory overheads 45000.00Office & Administrative overheads 26000.00Selling & Distribution overheads 18000.0050munotes.in

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Closing stock:Finished goods 15000.00Work in progress 1230.00Materials 3000.00Wages 2000.00Factory overheads 2000.00 7000.00Goodwill written off 20000.00Interest on capital 2000.00-----------------------------------------------------------------------------------------In costing books factory overheads were charged at 100% ofwages, administration over heads were charged at 10% of factorycost and selling and distribution overheads at the rate of Re.1 perunit sold. Prepare a statement reconciling the Profit as per cost andfinancial accounts.2. The financial Profit and loss Account of a manufacturingcompany for the year ended 31st March, 2009 is as follows:-RsRs.To Materials consumedTo Carriage inwardsTo Direct wagesTo Works ExpensesTo Administration Expenses.To Selling an Distribution ExpensesTo Debenture InterestTo Net Profit d 50000.001000.0034000.00 12000.004500.00 6500.001000.00 15000.00124000.00By Sales124000.00
124000.00The net profit shown by the cost accounts for the year isRs.16.270 Upon a detailed comparison of the two sets of accountsit is found that (a) The amounts charged in the cost account inrespect of overheads charges are as follows:- Works overheadcharges Rs.11,500; Office overhead charges Rs.4590, Selling andDistribution Expenses Rs.6,640 (b) No charge has been made inthe cost account in respect of debenture interest. You arerequested to reconcile the profits shown by the two sets ofaccounts.3. During the year a company’s profit have been estimated fromthe costing system to be Rs.23,063 whereas the financialaccounts prepared by the auditors disclose a profit of Rs.16,624.Given the following information you are required to prepare aReconciliation statement showing clearly the reason for thedifference.51munotes.in

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Profit and Loss Account for the year ended March 3, 2009 Rs.Rs.Rs.OpeningStockPurchasesClosing stockDirect wagesFactoryoverheadsGross ProfitAdministrationexpensesSelling expensesNet Profit 2,47,179 82,154----------- 3,29,333 75,121-----------2,54,21223,13320,826 48,329-----------3,46,500 9,84522,176 16,624----------- 48,645Sales
Gross profitb/dSundryIncome3,46,500
-----------3,46,500 48,329 316----------- 48,645The costing record shows:a. a stock ledger closing balance of Rs.78,197b. a direct wages absorption account of Rs.24,867c. a factory overhead absorption account of Rs.19,714d. administration expenses calculated at 3% of the selling pricee. selling expenses are five percent on selling pricef. no mention of sundry income.52munotes.in

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4. A company’s Trading and Profit and Loss Account was asfollows:- Rs.Rs.Rs.OpeningStockPurchasesLess:Closing stockTo Direct wagesTo Factory WagesTo Gross Profit C/f.Total Rs.To Administration expensesTo Selling expenses To Net Profit100000.00 80000.00---------------180000.00 80000.00--------------100000.0020000.0015000.0040000.00--------------175000.00--------------10000.0015000.0015000.00--------------40000.00Sales
Total Rs.By Grossprofit175000.00
-------------175000.00-------------- 40000.00--------------40000.00Costing records show the following:-a. Stock Ledger closing balance Rs.89, 000b. Direct labour Rs.23, 000c. Factory overheads Rs.13, 000d. Administrative overheads and selling expenses each arecalculated at 8 per cent of the selling price.Prepare costing profit and loss account and the statement ofreconciliation between the profit or loss as per the two accounts.5.From the following information you are required to prepare astatement reconciling the result of Cost Book with FinancialBooksRs.Net profit as per Financial Books 51,052Works overhead under recovered in Cost Book 1,001Depreciation charged in Financial Book 13,000Depreciation charged in Cost Book 14,326Obsolescence loss charged in Financial Books only 2,021Income tax provided in Financial Books only 2,626Interest received but not recorded in Cost Book 3,031Bank interest debited in Financial Book only 29253munotes.in

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6.The following is the Financial Profit and Loss Account of acompany for the year ending 31st March, 2009.Profit and Loss Account Rs Rs.To Purchases“ Wages“ Works Expenses“ AdministrationExpenses“ Selling Expenses“ Depreciation“ Net Profit 2,53,000 1,03,0001,16,000 55,000 68,000 12,000 2,63,000------------8,70,000By Sales (50000(units at Rs. 16each)By Closing stockBy Interest onInvestmentsBy Profit on Sale ofbuilding8,00,000 43,0003,00024,000------------8,70,000The 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% ofwages3. Selling Expenses in cost accounts have been charged at 10%on sales.4. Administration Expenses in cost accounts have been taken atRs.1 per unit sold.5. Depreciation shown in cost accounts was Rs.10,000Prepare a reconciliation statement to reconcile the profit shownas per cost accounts with the profit shown as per financialaccounts.





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CONTRACT COSTINGUnit Structure :
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 CostingA contract is nothing but a big job having the following mainfeatures: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 awayfrom the main office of the contractor.Contract costing is the method of costing which is used to findout the cost or particular contract. It may be generally calculatedfrom the point of view or the contractor.Some of the important terms used in contract costing:-1) Contract:-A contract is an agreement between the contractor andcontractee it include the time period taken to complete thecontract, price of the contract and so on.5544.0 Objectives4.1 Introduction4.2 Important Concepts4.3 Different Cost of The Contract4.4 Profit on Contract4.5 Format of Contract Account4.6 Solved Problems4.7 Exercises4.0 OBJECTIVES4.1 INTRODUCTION
4.2 IMPORTANT CONCEPTSmunotes.in

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2) Contractor:-A person who undertakes the contract.3) ContracteeA person for whom the job is being undertaken.4) Contract Price:-The amount which is to be paid by the contractee to thecontractor, for completing the contract work.5) Work Certified:-It is an amount of work done by the contractor and certificatedby the architect as per the terms of contract.6) Work Uncertified:-It is an amount of work completed by the contractor but notcertified by the architect at the end of the particular accountingyear.7) Retention Money:-It is an part of value of work certified by the architect which is aretained by the contractee as a security. It means, the cashpaid by the contractee to the contractor in between thecontract period is depend on the value of work certified by thearchitect. From this work certified amount some of percentagebeing paid by the contractee and the balance of this is calledas retention money.For e.g.→ I f t h e w o r k c e r t i f i e d i s8,00,000 then thecontractee is being paid the amount is being 90% of8,00,000as per the agreement and the balance or 10% of work certifiedis called as Retention Money.1. Material:-Material which is required for contract is either purchased orissued from store because contract site is away from the headoffice 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 anothercontract, then those who received the material are debited andwho gives the material are credited to the respective contractA/c.4.3 DIFFERENT COST OF THE CONTRACT:56munotes.in

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c.If the material is supplied by the contractee then it is not debitedto contract A/c.d. Material Returned to Store / Supplier:-If the material is return to store or supplier it may be credited tothe contract A/c.e. Material Lost or Destroyed:-If the Material Lost or destroy then the cost of material iscredited to costing Profit & Loss A/c.f. Sale of Material:-If the material or scrap is sold, then the actual cost of material iscredited to the contract A/c and the difference of any profit orloss may be transferred to costing Profit & Loss A/c.g. Material at Site:-After completion of the contract or at the end of the accountingyear if any material is lying at site is shown as material at site tothe credit side of the contract A/c.2. Labour:-Any labour charges related to the particular contract is eitherpaid or outstanding are debited to the contract Account.3. Direct Expenses:-Any direct expenses which are related to the particularcontract is either paid or outstanding are debited to thecontract A/c. It includes architect fees, sanitary fitting, etc.4. Indirect Expenses:-Any indirect expenses which are related to the particularcontract is either paid or outstanding are debited to thecontract A/c. It induces head office expenses, generaladministrative expenses etc.5. Special Plant:-Plant which is specialty purchases for a particular contract andit is also used for that particular contract only, is called asspecial plant. Plant is also charged to the contract A/c but onlyupto 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 plantvalue to the contract A/c and at the end of the year or contractcredit the W.D.V. of the plant. It means, we give the debiteffect of the depreciation of the particular plant.For eg. During a contract plant is purchase for2,00,000 andat the end of the contract the valuation of the plant is1,80,000.57munotes.in

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Dr. Contract A/c Cr.ParticularParticularsTo Dept on Sp. Plant20,000Effects of plant as for capital MethodDr. Contract A/c Cr.ParticularParticularsTo Special Plant2,00,000By WDV of Special Plant1,80,000Under both method the net effect of appreciation is20,000.6. Common Plant:-A common Plant, it means a plant which is used for any contractwhenever needed. The treatement of the common plant is givenin the same way of special point. It means either we can use‘Direct Method’ of charging depreciation or plant on the debitside of the contract A/c of ‘Capital Method or Debiting theopening value of the plant to the contract A/c and creating theWDV 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 contractwork in progress may be appear under Asset side of theBalance Sheet.Extract of Balance SheetAssets SideAmtCost of Work Certifiedxx(+) Work Uncertifiedxx( - ) Profit & Loss A/c (Reserve)xxxx( - ) Cash Received from ContractedxxWork in progressxx1) Complete Contract :-If the contract is completed then the profit or loss on contract, itmay be debited or credited to the contract A/c. There is no need totransfer the profit to the reserve, it is entirely transferred to profitand loss a/c.4.4 PROFIT ON CONTRACT58The effect given under Direct Method.munotes.in

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If there is an incomplete contract then whatever difference isfind out between the value of work in progress certified (Cr. Side ofthe contract A/c) and the cost of work in progress certified (Dr. Sideof the contract A/c) is transfer to national profit.Then me national profit is distributed between the Profit & LossA/c and work in progress (Reserve profit) Firstly we have to find outthe transfer of Profit and Loss A/c. is as under:-a. If the contract is complete upto 25% - then profit & loss a/c isnil. It means there is no need to transfer any profit fromnotional profit to profit & loss a/c. The entire amount ofnotional profit is transferred to work in progress (profitreserve).b. If the contract is completed between 25% to 50% - Then theprofit & loss is calculated as - * ; 1
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Format of Contract A/c(If Contract is 100% completed)ParticularsParticularsTo MaterialxxBy MaterialTo LabourxxReturned / Sales /DestroyedxxTo Direct ExpensesxxBy WDV of Common Plant(Capital Method)xxTo Indirect Exp.xxBy WDV of Special Plant(Capital Method)xxTo Common PlantBy Contractee’s A/c (FullContract PricexxxDepreciation (Direct Method)xxBy Profit & Loss A/c (Loss)xxCost (Capital Method)xxTo Special Plant Depreciationxx(Direct Method) ORCost (Capital Method)xxTo Profit & Loss A/c (Profit)xxxxxxxxMaterial Returned / Sold / Destroyed is credited to the contractA/c only at original cost whatever profit or Loss is transferred tocosting profit and Loss A/c.Format of Contract A/c(If Contract is Incomplete)ParticularsParticularsTo MaterialxxxBy Material Returned /Sold / DestroyedxxTo LabourxxBy WDV of Common Plant(Capital Method)xxTo Direct Exp.xxBy WDV of Special Plant(Capital Method)xxTo Indirect Exp.xxBy Contractee’s A/c (FullContract Price)xxTo Common PlantDepreciationxxBy Profit & Loss A/c (IfLoss)xx4.5 FORMAT OF CONTRACT ACCOUNT60munotes.in

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(Direct Method) ORCost of Plant (CapitalMethod)xxTo Special PlantDepreciationxx(Direct Method) ORCost of Special Plant(Capital Method)xxTo Notional Profit c/d (IfProfit)xxxxxxTo Profit & Loss A/cxxBy National Profit b/dTo working Progress c/d toBalance Sheet (ReserveProfit)xxxxxxUnder Incomplete contract, if there is profit, it must be transferto Notional Profit.Illustration : 1(Contract Complete Less than 20%).On 1st October 2013 Arvind Undertook a contract for5,00,000.The following information is available in respect oF a contract forthe year ended 31/12/2013.ParticularsWork Certified80,000Wages Paid30,000Material Supplied45,000Other Expenses5,000Work Uncertified1,800Material Lying at Site1,500Wages Outstanding1,000Plant20,0004.6 SOLVED PROBLEMS61munotes.in

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Provide 10% depreciation on plant p.a. prepare contract A/c inthe books of Arvind.Solution:-Dr. Contract A/c (3 Months) Cr.ParticularsParticularTo Material45,000By work in Progressc/dTo Wages30,000Material at Site1,500( + ) O/s1,00031,000To Other Expenses5,000Work Certified1,800To Depreciation onPlant500Work Uncertified80,000To Notional Profit c/d1,80083,30083,300To Profit & Loss A/cNilBy Notional Profit b/d1,800To Work in Progress(Reserve)1,8001,8001,800Dep. on Plant =320000 10% 50012×× = (For 3 Month)Out of Notional Profit some amount transfer to Profit & Loss A/c iscalculated by comparing work certified with the contract price firstlyto find out now much percentage (%) the contract is completed.Contract Price - 5,00,000 = 100%Work Certified 80,000 = ?Contract Completed =10080,000 16%5, 00, 000×=Contract Completed = 16%∴Profit Transfer to Profit & Loss A/c is Nil. Total notional Profitis transfer to work in progress (Reserve).62munotes.in

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In Complete Contract.M/s. ABC builder undertook a contract for a contract price of60,00,000 and commenced the work on 1st July 2013. Thefollowing particulars are available for 9 months ended 31-03-2014ParticularsMaterial Issued from Stores4,00,000Material Bought Directly20,50,000Wages Paid19,00,000Direct Expenses3,00,000Establishment Charges1,50,000Plant6,50,000Sub - Contract Charges1,00,000Scrop Sold30,000Work Certified50,00,000The following further information was available:-a) Outstanding wages and direct expenses were10,000 and20,000 respectively on 31-03-2014.b) Material at site at the end of the year is Valued at1,20,000.c) Value of work uncertified2,00,000 on 31.03.2014.d) Included in wages is the salary paid to supervisor @30,000p.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 endor which it is estimated to be realized50,000 as scrap value.The plant was purchased exclusively for this contract only.Prepare contract A/c for the year ended 31-03-201463Illustration : 2munotes.in

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Dr. M/s ABC Builders Cr.ParticularsParticularsTo Material IssuedFrom Stores4,00,000By Scrop Sold30,000To Material boughtdirectly20,50,000By Work in ProgressWork Certified50,00,000To Wages (WN)17,75,000Work Uncertified2,00,000To Direct Expenses(WN)3,20,000Material at Site1,20,000To EstablishmentCharges1,50,000To Depreciation onPlant (WN)90,000To Sub - ContractCharges1,00,000To Notional Profit &Loss A/c4,65,00053,50,00053,50,000To Profit & Loss A/c(WN)3,10,000By National Profit b/d4,65,000To Work inProgress (Reserve)1,55,0004,65,0004,65,00064Solution:-munotes.in

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i)Wages:- Wages Paid19,00,000 (+ ) Outstanding10,00019,10,000(- ) S u p e r v i s i o n sS a l a r y1,35,000half of the time devoted to other∴half salary recovered(30,000 p.m. x 50% x 9 month)Total Wages17,75,000ii)Direct Expenses3,00,000( + ) Outstanding20,000Total Direct Expenses3,20,000iii) Depreciation on PlantContract A/c to be prepared for 9 month (i.e. from 1st J u l y2013 to 31-03-2014)!:2026*4
7;<%,:78
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8 * 91, 20, 000 . . 90, 00012pa∴ × = for 9 monthsiv) Notional Profit = 4,65,000Out of this transfer to Profit & Loss A/c is calculated by howmuch % the contract is completed.Contract Price = 60,00,000 = 100%Work Certified = 50,00,000Contract Completed =10050,00,00060,00,000 × = 83.33%65Working Note:-munotes.in

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Profit & Loss A/c is calculated as 8.33% contract completedthen used the formula.(50 - 90%)P & L A/c =23× Notional Profit =23 × 4,65,000Profit & Loss A/c = 3,10,000iv) Work in progress (Reserve) is calculated as= Notional Profit - Profit & Loss A/c (Profit)= 4,65,000 - 3,10,0001,55,000Illustration : 3The Maharashtra construction company undertook theconstruction of a building at a contract price of12,00,000. Thedate of commencement of contract was 1st April 2013.The following cost information is given for the year ended 31-03-2014ParticularsMaterial Sent to the site3,00,000Wages4,40,000Archited Fees55,500Office & Administrative Overheads1,51,000Work Uncertified55,000Material at site at the end of the year10,000Cash Received from the Contractee9,45,000(Being 90% of the work certified)Material Destroyed by Five5,000Supervisors Salary60,000Plant and Machinery at Cost2,00,000(Date or Purchase - 1st July 2013. The estimated working lifeof the plant - 10 years and its estimated scrap value at the end 20,000)66munotes.in

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You are required to prepare a contract account for the yearended 31st March 2014.Solution:Maharashtra construction companycontract A/cfor the year ended 31-03-2014 (12 months)Dr. Cr.ParticularsParticularsTo Material Sent to Site3,00,000By Material destroy byFire (Profit & Loss A/c)5,000To Wages4,40,000By Work in progressWork Certified10,50,000To Architectures Fees55,500Work Uncertified55,000To Office andAdministrative Overhead1,51,000Material at Site10,000To Depreciation on Plant(WN)13,500To Supervisors Salary60,000To Notional Profit c/d1,00,00011,20,00011,20,000To Profit & Loss A/c (wn)60,000By Notional Profit b/d1,00,000To working Progress(Reserve)40,0001,00,0001,00,000Working Note:-i) Depreciation on Plant:-(For 9 Months)(Plant Purchase on 1/7/13 upto 31/03/2014)!:2026*4
7;<%,:*8
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"4*6< =2, 00, 000 20, 000 1,80, 00010 10 − = Depreciation 18,000 p.a.D
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576<1;=918,000 13,50012 × = 67munotes.in

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ii) Notional Profit = 1,00,000 it is distributed between profit &Loss A/c and work in progress (Reserve). Profit & Loss A/cshould be calculated by how much % contract is completedcompare with contract price & work certified.Contract Price = 12,00,000 = 100%Work Certified = 10,50,000 = ?=10010,50,000 87.5%12,00,000 × = Contract Completed = 87.5%Formula used 50 - 90%)  * ; 1
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Estimated profit is calculated for the purpose of transferringprofit to the profit & Loss A/c.Illustration : 4Uddan Constructors Pvt. Ltd. provide you the followinginformation:a) The project commenced on 1st S e p t e m b e r 2 0 1 3 a n d i t w a sestimated to be completed by 31st March 2015.b) The contract price was negotiated at680 lacs.c) The actual expenditure upto 31st March, 2014 and subsequentadditional estimated expenditure upto 31st March, 2015 isfurnished as under:ParticularsActual Exp.During 1-9-13 to31-3-2014Estimated Exp.during 1-4-14 to31-3-2015Direct Material195,60,000127,40,000Indirect Material14,23,00011,77,000Direct Wages42,46,50041,33,500Supervision Charges4,14,4005,55,600Archited Fees8,17,50012,82,500Construction Overheads31,52,60021,47,400AdministrativeOverheads14,16,00024,34,000Closing Material at Site7,50,000--Work Uncertified at theend of the year13,80,000--Work Certified during theyear350,00,000330,00,000The Value of plant and machinery sent to site was60 Lacs,whereas the scrap value of the plant and machinery at the end atthe project was estimated to be3,00,000.It was decided that the profit to be taken credit for should bethat proportion of the estimated net profit to be realized oncompletion of the project which the certified value of work as on 31-03-2014, bears to the total contract price. You are required toprepare contract account for the period ended 31st March 2014alongwith the working of profit to be taken credit for.69munotes.in

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Uddan Constructors Pvt. Ltd.Contract A/cfor the Period from 1-9-2013 to 31-3-2014Dr. Cr.ParticularsParticularsTo Direct Material195,60,000By Work inProgressTo Indirect Material14,23,000Work Certified350,00,000To Direct Wages42,46,500Work Uncertified13,80,000To SupervisionCharges4,14,400Material at Site7,50,000To Architect Fees8,17,500To ConstructionOverheads31,52,600To AdministrativeOverheads14,16,000To Depreciation onPlant & Machinery21,00,000To Notional Profitc/d40,00,000371,30,000371,30,000To Profit & Loss A/c35,00,000By Notional Profitb/d40,00,000To Work inProgress (Reserve)5,00,00040,00,00040,00,00070Solution:-munotes.in

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ParticularsActualExp. (1-9-2013 to 31-3-2014)7 MonthEstimatedExp. (1-4-14to 31-3-15)12 MonthTotal7 + 12 = 19MonthsParticularsTo DirectMaterial1,95,60,0001,27,40,0003,23,00,000ByContraction’sA/c (FullContractPrice6,80,00,000To IndirectMaterial14,23,00011,77,00026,00,000To Wages42,46,50041,33,50083,80,000To SuperVisionCharges4,14,4005,55,6009,70,000To ArchitedFees8,17,50012,82,50021,00,000ToAdministrative on14,16,00024,34,00038,50,000To Dept onPlant21,00,00036,00,00057,00,000To ConStructionOverheads31,52,60021,47,40053,00,000Total Exp.3,31,30,0002,80,70,0006,12,00,000EstimatedProfit68,00,0006,80,00,0006,80,00,000Working Note:-1) Depreciation on Plant & Machinery:-Depreciation =!:2026*4
7;<

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76<1; Depreciation =3,00,000 p.m.71Dr. Memorandum Contract A/c (1-9-2013 to 31-3-2015) Cr.munotes.in

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Depreciation is also calculated for actual and estimatedperiod.i) Actual Period (from 1-9-2013 to 31-3-2014) for 7 Months.∴Dep. 3,00,000 p.m. x 7 months= 2 1 , 0 0 , 0 0 0ii) Depreciation for estimated period (from 1-4-2014 to 31-3-2015) = 12 months∴ Dep. 3,00,000 pm. x 12 months.= 36,00,0002) Notional Profit is40,00,000 distributed between profit & LessA/c & Work in progress (Reserve).Notional Profit is40,00,000Estimated Profit is68,00,000For Profit & Loss A/c Formula is given in the problem as.Profit & Loss A/c =)7:3
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ParticularsActual Exp.1-5-13 to 31-3-14Estimated Exp.1-4-14 to 31-1-15Work Certified (cumulative)1,62,00,0002,70,00,000Cash Received1,29,60,0001,40,40,000Work Uncertified3,85,000--Direct Material87,14,50037,92,500Direct Wages17,47,50018,58,500Direct Expenses8,44,4004,32,600Indirect Material3,25,6002,85,500Supervision Charges1,98,5001,65,600Administrative Overheads9,47,6008,54,600Sub Contract Charges1,87,9001,80,200Material Return to Stores75,500--Architect Fees3% of W. C.3% of W.C.RCC Consultant Fees4% of W.C.4% of W.C.Plant Issued at Commencement40,00,000--Material at site as on 31-03-20141,39,500--Other Information:-1) The estimated value of the issued plant at the end of theproject is to be5,35,000.2) It was decided that the profit to be taken credit for should bethat proportion of the estimated net profit to be realized oncompletion of the contract which the certified value of work ason 31st March 2014, bears to the total contract price.Prepare contract A/c for the period ended 31st March 2014and show your calculation profit to be credited to Profit andLoss A/ for the period ended 31st March 2014.73munotes.in

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Ratnagiri Construction Pvt. Ltd.Contract AccountDr (From 1-5-13 to 31-3-15) 11 Months Cr.ParticularsParticularsTo Direct Material87,14,500By Material Return toStore75,500To Direct Wages17,47,500By Work in ProgressTo Direct Expenses8,44,400Work Certified1,62,00,000To Indirect Material3,25,600Work Uncertified3,85,000To Supervision Charges1,98,500Material at Site1,39,500To Administrative Overheads9,47,600To Sub Contract charges1,87,900To Architect Fees (3% of1,62,00,000)4,86,000To RCC Consultant Fees(4% of 1,62,00,000)6,48,000To Depreciation on Plant(1,65,000 p.m. x 11)18,15,000To Notional Profit c/d8,85,0001,68,00,0001,68,00,000To Profit & Loss A/c6,65,700By Notional Profit b/d8,85,000To Work in Progress(Reserve)2,19,3008,85,0008,85,00074Solution:-munotes.in

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ParticularsActual Exp.(1-5-13 to31-3-14)11 MonthsEstimatedExp. (1-4-14to 31-1-15)10 MonthsTotal Exp.21 MonthsParticularsTo Direct Material87,14,50037,92,5001,25,07,000ByContractee’sA/c (FullContractPrice)2,70,00,000To Direct Wages17,47,50018,58,50036,06,000To Direct Exp.8,44,4004,32,60012,77,000To Indirect Material3,25,6002,85,5006,11,100To SupervisionCharges1,98,5001,65,6003,64,100To AdministrativeOverheads9,47,6008,54,60018,02,200To Sub ContractCharges1,87,9001,80,2003,68,100To Architect Fees4,86,0003,24,0008,10,000To RCC Cons.Fees6,48,0004,32,00010,80,000To Depreciation onPlant18,15,00016,50,00034,65,000Total Exp.1,59,15,00099,75,5002,58,90,500Estimated Profit11,09,5002,70,00,0002,70,00,000Working Note:-i) Depreciation on Plant!:2026*4
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You are required to prepare contract A/c of Mumbai andThane Contract.Solution:-Mr. Bean ContractorMumbai Contract A/c (1-7-13 to 31-3-14 - 9 Months)Dr. Cr.ParticularsParticularsTo Material Issued2,20,000By Material Returned10,000To Direct Labour2,55,000By Material Sold8,000To Direct Expenses40,000By Work in Progressc/dTo Office Overhead15,000Work Certified (W.N)6,00,000To Architect Fees7,000Work Uncertified13,000To Depreciation onPlant30,000Material at Site18,000To Material fromThane Contract10,000To Notional ProfitLtd72,0006,49,0006,49,000To Profit & Loss A/c38,400By Notional Profit b/d72,000To Work inprogress (Reserve)33,60072,00072,000Working Note:-i) Work Certified -Cash Received being 80% of Work Certified -4,80,000D*;1
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∴ Work Certified = ? = 100D)7:3
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B∴Work Certified = 6,00,000ii) Depreciation on Plant.Total Contract Period is 9 Months (from 1-7-13 to 31-3-14)Depreciation =92, 00, 000 20%12 × × Depreciation = 30,00077munotes.in

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iii) Out of Notional Profit72,000 transfer to Profit & Loss A/c iscalculated by finding out how much contract is completed betweenwork certified with the contract price.Contract Price = 10,00,000 = 100%Work Certified = 6,00,000 = ?∴ Contract Completed =1006, 00, 00010,00,000×∴Contract Completed = 60%.∴ P r o f i t & L o s s A / c t r a n s f e r r e d i s c a l c u l a t e d b y f o l l o w i n gformula contract completed between 50-90%  * ; 1
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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.∴ Dep. For 6 months =670,00012 ×∴ Depreciation = 35,000ii) Calculation of work certified :-Cash Received2,40,000 being 80% of work certified.∴ Cash Received = 2,40,000 = 80% Work Certified = ? = 100∴ Work certified =1002, 40, 00080 × ∴ Work Certified = 3,00,000Many Years→ contract Completed in more than 1 year.Illustration : 7Ram contractor undertook a contract for15,00,000 on 1st July2012. The contract was completed on 31st March 2014. Thecontractor prepares his accounts as on 31st March. The details ofthe contract are:ParticularsPeriod1-7-12 to 31-3-13Period1-4-13 to 31-3-14Material Issued1,52,0003,30,000Direct Wages1,25,0004,65,000Direct Expenses30,00045,000Material Returned toStores22,00015,000Material at Site20,0008,000Uncertified Work48,000--Office Overheads23,00066,000Material Lost by Fire--5,000Work Certified3,00,00015,00,000Plant Issued3,00,0001,50,000Provide depreciation @ 20% on plant. Prepare contract A/c for theyear ended 31-03-2013 and 31-03-2014.79munotes.in

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Ram Contractors Contract Account(From 1-7-12 to 31-3-13 - 9 Months)Dr. Cr.ParticularsParticularsTo Material Issued1,52,000By MaterialReturned to Store22,000To Direct Wages1,25,000By Work in ProgressTo Direct Expenses30,000Work Certified3,00,000To Office Overheads23,000Work Uncertified48,000To Depreciation onPlant45,000Material Site20,000To Notional Profit c/d15,0003,90,0003,90,000To Profit & Loss A/cNILBy Notional Profitb/d15,000To Work in Progress(Reserve)15,00015,00015,000Working 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.Depreciation for 9 Months =960,00012 × Depreciation for 9 Months = 45,00080Solution:munotes.in

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ii) Notional Profit -15,000 out of transfer to Profit & Loss A/c isNIL.Because contract completed is less than 25%. To find outcontract completed compare with work certified to the contractprice.∴Contract Price = 15,00,000 = 100% Work Certified 3,00,000 = ?∴% of Contract Completed =1003, 00, 000 20%15,00,000×=Dr. Contract Account Cr.(From 1-4-13 to 31-3-14 - 12 Months)ParticularsParticularsTo Work in Progressb/dBy Work inProgress b/d(Reserve)15,000 Work Certified3,00,000By MaterialReturned15,000 Work Uncertified48,000By Material at Site8,000 Material at Site20,000By Material Lost byFire5,000To Material Issued3,30,000By Contractee’sA/c (Full ContractPrice)15,00,000To Direct Wages4,65,000To Direct Expenses45,000To Office Overheads66,000To Depreciation onPlant (WN)81,000To Profit & Loss A/c(Profit)1,88,00015,43,00015,43,00081munotes.in

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i) Depreciation on Plant:Depreciation is calculated on WDV basic.Plant which was used for 1 year its Opening Balance is3,00,000( - ) Depreciation for 1st Year45,000WDV of Plant2,55,000∴Depreciation on 1st Plant 2,55,000 x 20% - 51,000Depreciation on 2nd Plant 1,50,000 x 20% - 30,000∴Total Depreciation for 2 year is = 51,000 + 30,000 = 81,000Many Contract (Opening W/P given)Illustration : 8Navin Ltd has under taken three Contracts. It furnishes thefollowing information for the year ended 31st March 2014:ParticularsGoaContractRohaContractSuratContract1) Balances on 1/4/2013Material at Site1002,000--Uncertified Work25,0004,000--Plant at Site22,0003,100--Work Certified19,5001,400--Provision for Contingencies10,000600--2) Transactions During theYear:Material Issued--6,2008,000Subcontract Charges60011,8009,0003) Balances on 31-03-14Material at Site--1,000800Uncertified Work--1,0003,850Plant at Site--2,000950Work Certified25,00030,00012,0004) Contract Price25,00040,00050,0005) Amount Received25,00027,00010,80082Working Note:-munotes.in

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6) Value of Plant Transferred from Goa Contract to Surat Contract1,550.7) The Company consistently adopt the policy of taking credit forthe contract profit considering the proportion of amountsreceived to the contract price.You are required to:a) Prepare the respective contract accounts for the year ended31st March 2014.b) Find the net profit as per profit & Loss A/c.Solution:Navin LtdDr. Goa Contract A/c Cr.ParticularsParticularsTo Opening BalanceBy Provision forContingencies b/d1,000Work in ProgressBy Contractee’s A/c(Full Contract Price)25,000 Work Certified19,500 Work Uncertified2,500 Material at Site100To Sub ContractCharges600To Depreciation onPlant (WN)650To Profit & Loss A/c(Profit)2,65026,00026,000Working Note:-i) Depreciation on Plant.Op. Balance of Plant in Goa A/c2,200( - ) Transferred to Surat Contract1,550Plant Depreciation of Goa Contract65083munotes.in

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ParticularsParticularsTo Opening BalanceBy Provision forContingencies b/d600Work in ProgressBy Work in Progress b/d Work Certified1,400 Work Certified30,000 Work Uncertified4,000 Work Uncertified1,000 Material at Site2,000 Material at Site1,000To Material Issued6,200To Sub ContractCharges11,800To Depreciation on Plant1,100To National Profit b/d6,1003260032,600To Profit & Loss A/c4,118By Notional Profit b/d6,100To Work in Progress(Reserve)1,9826,1006,100Working Note:-i) Depreciation on Plant at Roha ContractOpening Balance of Plant3,100( - ) Closing Balance of Plant2,000Depreciation on Plant1,100ii) Notional Profit6,100, out of that Transfer to Profit & Loss A/c,specific instruction given in the problem*;1
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ParticularsParticularsTo Material Issued8,000By Work in Progress c/dTo Sub ContractCharges9,000Work Certified12,000To Depreciation on Plant(1550 - 950)600Work Uncertified3,850Material at Site800By Profit & Loss A/c(Loss)95017,60017,600Working Note:-i) Depreciation on Plant for Surat Contract -Plant Transform from Goa1,550Closing Plant at Surat- 950Depreciation on Plant600Dr. Profit & Loss A/c Cr.ParticularsParticularsTo Surat Contract(Loss)950By Goa Contract(Profit)2,650To Net Profit c/d5,818By Roha Contract(Profit)4,1186,7686,768A. Objectives type QuestionsQ.1 Multiple Choice Questions.1. Retention money isa) Payment received – Work certifiedb) Work certified – Cash receivedc) Work certified – work uncertifiedd) Contract price – Work certified4.6 EXERCISE85Dr. Surat Contract Cr.munotes.in

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2. Work in progress is valued at cost plus profit which has beentaken to theA. Contract A’C B. Profit and loss A’CC. Contractees A/C D. None of the above3. If the contract completed 80% then transfer to profit and lossA’C out ofA. NIL B. 1/3 * Notional profitC. 2/3 * Notional profit D . Entire profit4. Cost of normal wastage of materials isA. Debited to contract A’C B. Credited to contract A/CC. Debited to P & L A/C D. Credited to P & L A/C5. Cost of abnormal wastage of materials in a contract istransferred to theA. Contract A/C B. Costing profit and loss A/CC. Profit and Loss A/C D. None of the above6. Cash received on contract is credited toA. Contract A/C B. Contractees A/CC. Profit and Loss A/C D. None of the above7. 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.30,600C.RS.32,200 D.RS. 40,0008. If the contract completed is less than 20% then the amount ofprofit is transfer to P & L A/CA. Full amount B. 50%C. NIL D. 20%9. Cash received is calculated byA. Work certified - Retention moneyB. Work certified x cash received as % of W.C.C. Contract price x % of W.C. x % of cash receivedD. All of the above10 Notional profit is calculated byA. Work certified – Cost of Work certifiedB. Work certified –Work uncertifiedC. Work certified – Cash receivedD. Any of the above(Answers : 1. A 2. B 3. C 4. A 5. B 6. B 7. A 8.C9. D 10. A)86munotes.in

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Q .2 True and False1. Cash received = Value of work certified – Retention money2. Cost of material transferred from one contract to anothercontract , the contract A/C which receives the material iscredited 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 debitedto contract A/C.7. Cash received is credited to the contract A/c.8. If the contract is 100 % completed ,then the entire profit istransferred to P & L A/C.9. The cost of material issued by stores is debited to thecontract A/c.10.Work certified is that portion of the work completed whichhas 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 ofa building at a contract price of2,00,00,000.The Date of Commencement of contract was 1st May 2013.The following cost information is given for the period ended31st March 2014:1) Direct Material Sent to the Site - 5,000 tons @1.50 per kg.2) Indirect Material6,50,000.3) 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 paid8,000 per month.9) Administrative Overheads incurred12,000 per month.10) Architect Fees Charged at 2% of Work Certified.11) Plant & Machinery installed at site on the date ofcommencement of contract at a cost of15,00,000. Which isto be depreciated @ 12% p.a. under original cost method.87munotes.in

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12) Cash received from contractee1,26,00,000 which is equal to90% of work certified.13) Direct Material at site as on 31st March 2014 - 15.14) Cost of work done but not certified was2,04,500 on 31stMarch 2014.You are required to prepare a contract Account for the periodended 31st March 2014, in the books of Jai Hind ConstructionCompany and show what profit or loss should be taken into accountfor the period ended 31st March 2014.Q.2 R. Limited commenced a contract on 01-07-2013. The Totalcontract price was5,00,000 but R Limited accepted the samefor4,50,000. It was decided to estimate the total profit and totake to the credit of profit & Loss A/c that proportion ofestimated profit on cash basis which the work completed andcertified borne to the total contract. Actual expenditure till 31-12-2013 and estimated expenditure in 2014 are given below.ParticularsAccrualsEstimate for 2014Material75,0001,30,000Labour55,00060,000Plant Purchased (Original Cost)40,000--Miscellaneous Expenses20,00035,500Plant Returned to Stores (atOriginal Cost)10,00025,000Material at Site5,000--Work Certified2,00,000FullWork Uncertified7,500--Cash Received1,80,000FullThe plant is subjected to annual depreciation @ 20% oforiginal cost. The contract is likely to be completed on 30-09-2014.You are required to prepare the contract A/c for the yearended 31-12-2013. Working showed be clearly given.It is the policy or the company to charge depreciation on timebasis.Q.3 Raj and Company has undertaken two contract viz. A and B.The following particulars are available for the year ended 31stMarch 2014.88munotes.in

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ParticularsContract AContract BDate of Commencement01-07-201301-12-2013Contract Price6,00,0005,00,000Material Sent to Site1,60,00060,000Material Returned4,0002,000Closing Stock of Material at Site22,0008,000Direct Labour1,50,00042,000Direct Expenses66,00035,000Establishment Expenses25,0007,000Plant Installed at Site80,0072,000Work Uncertified23,00010,000Work Certified4,20,0001,35,000Architect Fees2,0001,000During the year Material Costing9,000 have been transferredfrom 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, ifany, and show how the relevant items would appear in the BalanceSheet Assuming that contractce had paid 90% of the work certified.Q.4 M/s Jadhav constructions under took contract For5,00,00,000 on 1st August 2012. The contract was completedon 31st March 2014. The contractor closes his accounts on31st March. The details of the contract are as follows:For the Periodended 31-03-13For the Periodended 31-03-14ParticularsMaterial Issued95,48,5001,17,65,000Direct Labour31,37,80045,40,000Sub Contract Charges7,88,90028,13,000Administrative Overheads15,85,40031,42,000Supervision Charges3,45,6008,05,500Material Returned to Stores1,32,4002,44,300Work Uncertified5,23,200--Work Certified (Cumulative)2,00,00,0005,00,00,000Material at Site1,00,600--Cash Received1,80,00,0003,20,00,000Architect Fees4% of WorkCertified4% of WorkCertified89munotes.in

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The Plant and Machinery purchased on 01/08/2012 for thecontract was84,25,000 and the estimated scrap value of the plantand machinery at the end of the contract was4,25,000. It realizedon completion of contract at its estimated scrap value.You are required to prepare:a) Contract A/c for the period indeed 31st March 2013 andb) Contract A/c for the year ended 31st March 2014.Q.6 Parna Kutir Ltd. furnishes you with the following information forthe year ended 31st March 2013 and 31st March 2014.Particulars31-03-201331-03-2014Material Issued13,00024,700Sub - Contract Charges4,50020,000Value of Work Certified During theyear20,00080,000Closing Stock of Material at Site3,000--To Total contract Price is1,00,000. The entire amount wasreceived by 31st March 2014. As per the accounting policy adoptedby the company no profit is to be considered unless the value of thework certified at the year end excess 25% of the contract price.Prepare contract account for the years ended 31st March 2013and 31st March 2014.



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PROCESS COSTINGUnit Structure :
After studying the unit the students will be able to:•Understand the meaning and costing procedure of ProcessCosting•Know how to Normal and Abnormal process losses andAbnormal Gains.•Calculate Process Cost per unit.•Solve the problems on process costing.A process means a difference manufacturing operation orstages. When a product is produced, it means a row material will beconverted into finished product it is passes through differencestages, 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 wehave a find out the cost of each process.Under Process Costing following procedures are as follows:1) Separate Process A/c:-Under process costing different process accounts areprepared, it means how many process are given separateprocess A/c is prepared.55.0 Objectives5.1 Introduction5.2 Costing Procedure5.3 Treatment to Several Items5.4 Format of Process A/C5.5 Solved Problems5.6 Exercises5.0 OBJECTIVES
5.1 INTRODUCTION
5.2 COSTING PROCEDURE91munotes.in

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2) Debit Side of Process A/c:-Under each process the cost of each process divided asfollows:-i) Material : Whatever Material used for each process isdebited to a Particular Account.ii) Labour : Whatever labour used or wages paid to workerare debited to the particular process A/c.ii) Overheads : Whatever expenses or overhead paid forparticular process are debited to that A/c.3) Credit Side of Process A/c:-Any sale of scrap related to a particular process are creditedto process A/c.4) Cost of Process:-To find out the net cost of process is total of Debit side LessCredit Side of process A/c which gives the net cost of aparticular process i.e. (Total expenses (Dr. Side) - Sale orscrap (Cr. Side).In many process, there is a weight loss. It means under anyprocess there is surety of some % of loss on input. If there are totalthree process, we introduced input in process I, then there is suretythat same % of loss on that input whatever balance transfer to nextprocess i.e. process II. Again in process II if there is weight loss,and balance transfer to next process i.e. process III again inprocess III there is weight loss what balance is an actual output.The loss may be divided into two categories.i) Normal Lossii) Abnormal Loss.i) Normal Loss :-Under any process, before production we assume that there isa loss under each process which is called as normal loss. It isalready assume before production process start.ii) Abnormal Loss:-As per above we can say that before production, assumesome % of loss i.e. weight loss or normal loss. But after theproduction if there is an increase in normal loss, it means loss isover and above expectation is called as abnormal loss.5.3 TREATMENT TO SEVERAL ITEMS5.3.1 PROCESS LOSS:-92munotes.in

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For e.g. if input is 1000 units, assumed that normal or weightLoss is 5% before production i.e. 50. It means expected output is950 units, but after production actual output is 920 units then these30 unit (950-920) are called as abnormal loss. In short, youexpected only 50 units of normal loss but actual wastage is 80 so itis over and above expected loss as abnormal loss.In some process, there is a normal Loss but the actualproductions are more than expectation. In short, output is over andabove expectation, is called as abnormal gain. For eg - If input is1000 units, assumed that normal loss or weight loss is 5% beforeproduction i.e. 50 unit. It means, expected output is 950 units butproduction actual output is 970 units then these 20 units (970 - 950)are called as abnormal gain. In short, you expected only 50 units ofnormal Loss but actual wastage is only 30 units, so these 20 unitsare over and above expectation known as abnormal gain.Under each process always find out cost per unit. In short findout net cost of each process. Firstly take the total of Debit sideMinus Credit Side of Process A/c it is calculated by followingFormula&7<*4
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5.3.3 Cost Per Unit:-
5.4 FORMAT OF PROCESS A/C93munotes.in

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ParticularsUnitsRateParticularsUnitsRateTo TransferfromProcess IBy NormalLossTo MaterialByAbnormalLoss A/cTo LabourBy Transferto ProcessIII A/cToOverheadsto ExpensesProcess III A/c (Abnormal Gain)ParticularsUnitsRateParticularsUnitsRateTo TransferfromProcess IIBy NormalLossTo MaterialBy Transferto FinishedStock A/cTo LabourToOverheadsToExpensesToAbnormalGain94Process II A/c (Abnormal Loss)munotes.in

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ParticularsUnitsRateParticularsUnitsRateTo ProcessIBy Actual SaleTo ProcessIIProcess ITo ProcessIII II IIIBy AbnormalGain (ProcessIII)Abnormal Loss A/cParticularsUnitsRateParticularsUnitsRateTo ProcessIIBy Actual SalesProcess IIBy Costing P & L A/cAbnormal Gain A/cParticularsUnitsRateParticularsUnitsRateTo NormalLossBy ProcessIII A/cTo CostingProfit & LossA/cQuantity ReconciliationParticularsIIIIIIInput( - ) Normal LossExpected Output(- ) A c t u a l O u t p u tAbnormal Loss / Gain95Normal Loss A/cmunotes.in

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Abnormal Loss = Actual Output is Less than the expectedOutput.
Abnormal Gain = Actual output is more than the expectedoutput.Illustration : 1Samar Ltd. manufactures a product which passes through twoconsecutive process viz. Purvardha and Uttarardha. The companyprovides you with the following information for the year ended 31stMarch 2014.ParticularsPurvardhaUttarardhaBasic Material5000 units--Rate Per Unit2.20--Process Material4,0003,000Wages3,0004,000Factory Overheads2,0002,630Process Loss as percentage of input10%10%Scrap Value of process loss (per 100units)4060Prepare Process A/c and other relevant accounts.The entire output of Uttarardha process was sold for30,000.Solution:-Quantity ReconciliationParticularsPurvardhaUttarardhaInput5,0004,500( - ) Normal Loss500450Expected / Actual Output4,5004,0505.5 SOLVED PROBLEMS96munotes.in

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ParticularsUnitsRateParticularsUnitsRateTo Material5,0002.2011,000By NormalLoss5000.40200To ProcessMaterial4,000To Wages3,000By TransfertoUttarardhaProcess4,5004.4019,800To FactoryOverheads20,0005,00020,0005,00020,000&7<*4
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7;;20,000 200 19,8004.405, 000 500 4, 500 − = = = − Uttarardha Process A/cParticularsUnitsRateParticularsUnitsRateTo TransferfromPurvardhaProcess4,5004.4019,800By NormalLoss4500.60270To ProcessMaterial3,000By Outputc/d4,0507.2029,160To Wages4,000To FactoryOverheads2,6304,50029,4304,50029,430To Outputb/d4,0507.2029,160By Sale4,05030,000To CostingP/L A/c8404,05030,0004,05030,000&7<*4
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'62<;29, 430 270 29,1604,500 450 4, 050 − = = = − 7.2097Purvardha Process A/cmunotes.in

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Y Ltd. Manufacture a Chemical product which passes throughthree process. The cost records show the following particulars forthe year ended 30th June 2014.ParticularsProcess IProcess IIProcess IIIMaterial48,6201,08,2591,03,345Labour32,86584,55377,180Expenses2,51510,58816,275Normal Loss20%15%10%Scrop Value Per Unit123Actual Output (Units)18,00016,00015,000Input to Process I 20000 Units @28 per unit. PrepareProcess Accounts, Abnormal gain / Loss A/c Also show processcost per unit for each process.Solution:-Quantity ReconciliationParticularsIIIIIIInput20,00018,00016,000(- )Normal Loss4,0002,7001,600Expected Output16,00015,30014,400(- )Actual Output18,00016,00015,000Abnormal2,000700600GainGainGainProcess I A/cParticularsUnitsRateParticularsUnitsRateTo Input20,000285,60,000By NormalLoss4,00014,000To Material48,620ByTransferToProcess II18,000407,20,000To Labour32,865ToExpenses2,515ToAbnormalGain22,0004080,00022,0007,24,00022,0007,24,00098Illustration : 2munotes.in

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  Process III A/cParticularsUnitsRateParticularsUnitsRateTo Transferfrom Process II16,000609,60,000By NormalLoss1,60034,800To Material1,03,345By Output(FinishedStock A/c)15,0008012,00,000To Labour77,180To Expenses16,275To AbnormalGain6008048,00016,60012,04,80016,60012,04,800

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ParticularsUnitsRateParticularsUnitsRateTo Process I4,00014,000By Actual SaleTo Process II2,70025,400Process I2,00012,000To Process III1,60034,800 II2,00024,000 III1,00033,000By Abnormal GainProcess I2,00012,000 II70021,400 III60031,8008,30014,2008,30014,200Abnormal Gain A/cParticularsUnitsRateParticularsUnitsRateTo NormalLoss A/cBy ActualSalesProcess I2,00012,000Process I2,0004080,000 II70021,400 II7006042,000 III60031,800 III6008048,000To CostingProfit &Loss A/c1,64,8003,3001,70,0003,3001,70,000Illustration : 3Product A is manufactured after it passes through threedistinct processes. The following information is obtained from therecords of a company for the year ended 31st December 2013.ParticularsProcess IProcess IIProcess IIIDirect Material2,5002,0003,000Direct Wages2,0003,0004,000Output during the week950840750Percentage of Normal Lossto Input5%10%15%Value or Scrap Per Unit3/-5/-5/-Product Overheads are9,000. 1000 Units at5 each wereintroduced to processI. There was no stock or materials or work inprogress at the beginning and at the and of the year. The output ofeach process passes direct to the next process and finally to thefinished stock A/c. Production overheads are recovered on 100% ofdirect wages.100Normal Loss A/cmunotes.in

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Prepare Process Cost Accounts and Abnormal Gain or LossAccount for the year ended 31st December, 2013.Solution:-Quantity ReconciliationParticularsProcess IProcess IIProcess IIIInput1,000950840(- )Normal Loss5095126Expected Output950855714(- )Actual Output950840750AbnormalNIL1536LossGainProcess I A/cUnitsRateParticularsUnitsRateTo Input1,00055,000By NormalLoss503150To DirectMaterial2,500By Transferto ProcessII A/c95011.9511,350To Wages2,0002,000(100% ofWages)1,00011,5001,00011,500&7<*4
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ParticularsUnitsRateParticularsUnitsRateTo TransferfromProcess I95011.9511,350By NormalLoss955475To Material2,000By AbnormalLoss1522.07331To Wages3,000By Process IIIA/c Transfer84022.0718,544To ProductOverheads3,00095019,35095019,350

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  102Process II A/cmunotes.in

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ParticularsUnitsRateParticularsUnitsRateTo ProcessI503150By ActualSalesTo ProcessII955475Process I503150To ProcessIII1265630Process II955475Process III905450ByAbnormalGainProcess III3651802711,2552711,255Abnormal Loss A/cParticularsUnitsRateParticularsUnitsRateTo ProcessII1522.07331By ActualSales15575Process IIBy CostingProfit &Loss A/c2561533115331Abnormal Gain A/cParticularsUnitsRateParticularsUnitsRateTo ActualSaleProcess III365180By ProcessIII3640.491.458To CostingProfit &Loss A/c1,278361,458361,458PARTLY OUTPUT - TRANSFER / STOCK / SALEAfter completing each and every process, partly material eithersold or transfer to next process and finally from last process 100%.material or output will be sold or transfer to warehouse.103Normal Loss A/cmunotes.in

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M/s XYZ and company manufacture a chemical which passesthrough three processes. The following particulars gathered for themonth of January, 2014.ParticularsProcess IProcess IIProcess IIIMaterial (Litre)400208168Material Cost38,40018,8006,000Wages7,6807,6002,200Normal Loss (% of input)4%5%5%Scrap Sale Value--3 Per Ltr.--Output Transferred to NextProcess50%40%--Output Transferred to warehouses50%60%100%Overheads are charged @ 50% of Direct Wages. You arerequired to prepare Process Account.Solution:-Quantity ReconciliationParticularsProcessIProcessIIProcessIIITransfer from Process-192152( + )Input400208168Total400400320(- )Normal Loss162016384380304Transfer to Next Process→192152--Transfer to Warehouse→192228304104Illustration : 4munotes.in

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ParticularsLtrRateParticularsLtrRateTo Material40038,400By NormalLoss16----To Wages7,680By Transfer toNext Process(50%)19213024,960To Overheads(50% of wages)3,840By Transfer toWarehouse(50%)19213024,96040049,92040049,920 &7<*4
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ParticularsLtrRateParticularsLtrRateTo Transferfrom ProcessII15214522,040By NormalLoss16----To Material1686,000By Transfer toWarehouse(100%)304103.0931,340To Wages2,200To Overheads(50% ofwages)1,10032031,34032031,340

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Output Partly Sold and Partly Transferred to NextProcess.Illustration : 5KT Ltd. provides you the following information for the yearended 31st March 2014.ParticularsProcess AProcess BProcess CRaw Material (Units)12,0002,4402,600Cost of Raw Material Per Unit()555Direct Wages34,00024,00015,000Production Overheads16,16016,2009,600Normal Loss (% of Total No. ofUnits entering to the process)4%5%3%Wastage (% of Total No. ofUnits Entering to the Process)6%5%4%Scrap Per Unit of Wastages345Output Transferred toSubsequent Process70%60%--Out Sold at the End of theProcess30%40%100%Selling Price Per Unit121617Prepare Process A, B and C.106Process III A/cmunotes.in

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Quantity ReconciliationParticularsProcess AProcess BProcess CInput12,0002,4402,600(+)Transfer from Process--7,5605,400Total12,00010,0008,000(-)Normal Loss480500240(-)Wastage72050032010,8009,0007,440→Transfer to Next Process7,5605,400--→Partly Sold3,2403,6007,440 SoldProcess A A/cParticularsUnitsRateParticularsUnitsRateTo Material12,000560,000By NormalLoss480----To Wages34,000By Wastage72032,160ToProductionOverheads16,160By Output c/d10,800101,08,00012,0001,10,16012,0001,10,160To Outputb/d10,800101,08,000By Transferto Process B(70%)7,5601075,600To CostingProfit & LossA/c (Profit)6,480By Sold(30%)3,2401238,88010,8001,14,48010,8001,14,480107Solution:-munotes.in

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ParticularsUnitsRateParticularsUnitsRateTo Process A7,5601075,600By NormalLoss500----To Material2,440512,200ByWastage50042,000To Wages24,000By Outputc/d9,000141,26,000To Overheads16,2001,0001,28,00010,0001,28,000To Output b/d9,000141,26,000By Transferto ProcessC / 60%)5,4001475,600To CostingProfit & LossA/c (Profit)7,200By Sold(40%)3,6001657,6009,0001,33,2009,0001,33,200Process C A/cParticularsUnitsRateParticularsUnitsRateTo Process B5,4001475,600By NormalLoss240----To Material2,600513,000ByWastage32051,600To Wages15,000By Sales7,440171,26,480To Overheads9,600To CostingProfit & LossA/c (Profit)14,8808,0001,28,0808,0001,28,080108Process B A/cmunotes.in

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Assemblers Ltd. have three Assembly shop viz. GeneralAssembly, Lower Assembly and Higher Assembly. Part of theoutput is transferred to the next assembly and part is sold directly.The company furnished the following in formations.ParticularsGeneralLowerHigherRaw Material (In Ltrs)5,0001,9203,576Material Cost Per Ltr.604080Labour Cost4,28,0001,06,0002.10.000Direct Expenses88,0002,85,2001,04,800Wastage as percentage ofTotal input4%5%10%a) Output TransferredTo Lower Assembly60%----To Higher Assembly--40%--b) Output Sold in Market40%60%100%Sales Price Per Ltr.200205250Administrative Overheads -36,000Marketing Overhead -48,000Prepare Various Assembly A/c and costing Profit & Loss A/cSolution :Quantity ReconciliationParticularsGeneralLowerHigherInput5,0001,9203,576(+)Transfer from Process--2,8801,824Total5,0004,8005,400(-)Normal Loss200240540Actual Output4,8004,5604,860(-)Sold Out1,9202,7364,860(-)Transfer to Next Process2,8801,824--109Illustration : 6munotes.in

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ParticularsLtrsRateParticularsLtrsRateTo Material5,000603,00,000By NormalLoss(Wastage)200----To Labour4,28,000By Outputc/d4,8001708,16,000To DirectExp.88,0005,0008,16,0005,008,16,000To Outputb/d4,8001708,16,000By Transferto Lower2,8801704,89,600To CostingP/L A/c(Profit)57,600By Sales1,9202003,84,0008,73,6008,73,600Lower Assembly A/cParticularsLtrsRateParticularsLtrsRateTo GeneralAssemblyTransfer2,88`01704,89,600ByWastage240----To Material1,9204076,800By Outputc/d4,5602109,57,600To Labour1,06,000To Direct Exp2,85,2004,8609,57,6004,8609,57,600To Output b/d4,5602109,57,600By Transferto Higher1,8242103,83,040By Sales2,7365055,60,880By CostingP/L A/c(Loss)13,6804,5609,57,6004,5609,57,600110General Process A/cmunotes.in

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ParticularsLtrsRateParticularsLtrsRateTo LowerAssembly A/c(Transfer)1,8242103,83,040ByWastage540----To Material3,576802,86,080By Outputc/d4,860202.459,83,920To Labour2,10,000To Direct Exp.1,04,8005,4009,83,9205,4009,83,920To Output b/d4,860202.459,83,920By Sales4,86025012,15,000To CostingP/L A/c(Profit)2,31,0804,86012,15,0004,86012,15,000&7<*4
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ParticularsParticularsTo Lower Assembly13,680By General Assembly57,600To Administrator Overheads36,000By Higher Assembly2,31,080To Marketing Overheads48,000To Net Profit c/d1,91,0002,88,6802,88,680Process Stocks:-Under Process Costing, Whatever output of each and everyprocess is transfer to next process or sold out partly or entirelytransfer to next process and after completion of process at the endthe output is sold. But when there is process stock given then theentire output of a particular process would be transfer to particularprocess stock A/c, then added opening stock and deducting closingstock whatever balance remain it transfer to next process. For eg.In a process a input are 1000 units normal loss is 50 units. Processstock A/c shows opening balance 100 units, closing stock is 150units then transfer to next process is calculated asInput - 1000(-) Normal Loss - 50Expected Output - 950 Actual Output(+) Opening Stock - 1001,050( - ) Closing Stock - 150 900-T r a n s f e r t o N e x t P r o c e s s112Costing Profit & Loss A/cmunotes.in

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Illustration : 7Reliance Yarn Ltd. manufactures a yarn product. The productpasses through three consecutive processes F.Y., S. Y., and T. Y.,Relevant details for the months of March 2014 are as under:ParticularsF. Y.S. Y.T. Y.Quantitative in Formation in Kg.Basic input kg @ 10 Per Kg.2000----Output during the month195019251679Stock of Process- On 1st March 2014200300100- On 31st March 201415040059% of Normal Loss to input in process2%5%8%Monetary InformationProcess Material900021002716Wages906418604000Value or Opening Stock388067202800Scrap Value per kg124Closing Stock is to be valued at the respective cost of eachprocess.Prepare process A/c, Process Stock A/c, Abnormal Loss andAbnormal Gain A/c. Find out the costing profit, when the sales outof T.Y. Process Stock are made at40 per kg.Solution:Quantity ReconciliationParticularsF. Y.S. Y.T. Y.Input200020001825(- )Normal Loss40100146Expected Output196019001679(- )Actual Output195019251679Abnormal Loss / Gain10 (Loss)(25) Gain-Actual Output195019251679( + )Opening Stock200300100(- )Closing Stock(150)(400)(59)Transfer to Next Process200018251720 Sold113munotes.in

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ParticularsKgs.RateParticularsKgs.RateTo Input20001020,000By NormalLoss40140To Material9,000ByAbnormalLoss1019.40194To Wages9,064By Transferto F.Y.ProcessStock A/c195019.4037,830200038,064200038,064&7<*4
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'62<;=38064 40 3802419.402000 40 1960 − = = − F. Y. Process Stock A/cParticularsKgs.RateParticularsKgs.RateTo Balanceb/d20019.403,880By Transferto S. Y.Process A/c200019.4038,800To TransferFrom F. Y.Process195019.4037,830By Balancec/d15019.402,910215041,710215041,710S. Y. Process A/cParticularsKgs.RateParticularsKgs.RateTo Transferfrom F. Y.ProcessStock200019.4038,800By NormalLoss1002200To Material2,100By Transferto S. Y.ProcessStock A/c192522.4043,120To Wages1,860ToAbnormalGain2522.40560202543,320202543,320114F. Y. Process A/cmunotes.in

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ParticularsKgs.RateParticularsKgs.RateTo Balanceb/d30022.406,720By Transferto T. Y.Process182522.4040,880To Transferfrom S. Y.Process192522.4043,120By Balancec/d40022.408,960222549,840222549,840S.Y. Process =42760 2002000 100 − − =4256022.401900 = T. Y. Process A/cParticularsKgs.RateParticularsKgs.RateTo Transferfrom S. Y.ProcessStock A/c182522.4040,880By NormalLoss1464584To Material2,716By Transferto T. Y.ProcessStock A/c16792847,012To Wages4,000182547,596182547,596T. Y. Process Stock A/cParticularsKgs.RateParticularsKgs.RateTo Transferfrom T. Y.Process A/c16792847,012By Transferto CostingP/L A/c17202848,160To Bal b/d100282,800By Balancec/d59281,652177949,812177949,812115S. Y. Process Stock A/cmunotes.in

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Illustration : 8Satyug Times Ltd. submits the following information in respectof its product which passes through 3 consecutive process vizIngestion process, Idigestion process and Assimilation process forthe month ended 31st January, 2014.ParticularsIngestionDigestionAssimilationQuantitativeInformation (kgs)Basic RawMaterial @40per kg.80,000----Normal Yield80%60%70%Output during themonth62,00036,00021,000Stock of ProcessOutput: 31-12-20138,0008,0005,000 31-01-201410,0004,0004,000Other AdditionalInformationalProcess Material3,45,0008,26,0006,17,000Labour Mandays2,4001,5001,000Labour Rate PerManday80100150MachineOverheads60% of Wages50% of ProcessMaterial2,34,000OtherManufacturingOverheads2,75,8001,63,0001,27,000Value of OpeningStock Per Kgs.60140300Scrap Value PerKgs.101520Finished Stock of assimilation process was sold at350 perkg.Prepare the process A/c, Process Stock A/c, Normal Loss A/cand the Abnormal Gain / Loss A/c.117munotes.in

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ParticularsKgs.RateParticularsKgs.RateTo Input800004032,00,000By NormalLoss16000101,60,000To ProcessMaterial3,45,000ByAbnormalLoss2000621,24,000To Labour (2400x 80)1,92,000Bytransfer toProcessStock A/c62,0006238,44,000To MachineOverheads1,15,200(60% of Labour)To ManufacturingOverheads2,75,8008000041,28,00080,00041,28,000Ingestion Process Stock A/cParticularsKgs.RateParticularsKgs.RateTo Balance b/d8000604,80,000By Transfer toDigestionProcess60,00037,04,000To Transferfrom IngestionProcess A/c620006238,44,000By Balance c/d10000626,62,00070,00043,24,00070,00043,24,000Digestion Process A/cParticularsKgs.RateParticularsKgs.RateTo TransferfromIngestionProcessStock6000037,04,000By NormalLoss24000153,60,000To ProcessMaterial8,26,000By Transferto ProcessStock A/c36,00013648,96,000To Labour(1500 x 100)1,50,000To MachineOverheads(50% ofProcessMaterial)4,13,00052,56,00052,56,000118Ingestion Process A/cmunotes.in

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ParticularsKgs.RateParticularsKgs.RateTo Balance b/d8,00014011,20,000By Transfer toAssimilationProcess A/c40,00054,72,000To Transferfrom DigestionProcess A/c36,00013648,96,000By Balance c/d40001365,44,0004400060,16,0004400060,16,000Assimilation Process A/cParticularsKgs.RateParticularsKgs.RateTo TransferfromDigestionProcessStock A/c4000054,72,000By NormalLoss20000204,00,000To ProcessMaterial6,17,000By TransferTo ProcessStock A/c2100031065,10,000To Labour(1000 x150)1,50,000ToMachineOverheads2,34,000ToManufacturingOverheads1,27,000ToAbnormalGain10003103,10,0004100069,10,0004100069,10,000Assimilation Process Stock A/cParticularsKgs.RateParticularsKgs.RateTo Bal b/d500030015,00,000By Sales2200035077,00,000To TransferfromAssimilationProcessStock A/c2100031065,10,000ByBalancec/d400031012,40,000To CostingP/L A/c9,30,0002600089,40,0002600089,40,000119Digestion Process Stock A/cmunotes.in

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ParticularsKgs.RateParticularsKgs.RateTo Ingestion16000101,60,000By ActualSalesToDigestion24000153,60,000Ingestion16000101,60,000ToAssimilation20000204,00,000Digestion24000153,60,000Assimilation19000203,80,000ByAbnormalGainAssimilation10002020,00060,0009,20,00060,0009,20,000Abnormal Loss A/cParticularsKgs.RateParticularsKgs.RateTo IngestionProcess2000621,24,000By ActualSale20001020,000By CostingP/L A/c(Loss)1,04,00020001,24,00020001,24,000Abnormal Gain A/cParticularsKgs.RateParticularsKgs.RateTo NormalLoss A/c10002020,000ByAssimilationProcess A/c10003103,10,000To CostingP/L A/c(Profit)2,90,00010003,10,00010003,10,000120Normal Loss A/cmunotes.in

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ParticularsParticularsTo Abnormal Loss1,04,000By AssimilationProcess A/c9,30,000To Net Profit c/d11,16,000By Abnormal Gain2,90,00012,20,00012,20,000&7<*4
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'62<;Ingestion =4128000 160000 39,68,0006280,000 16,000 64,000 − = = − Digestion =52,56,000 3,60,000 48,96,00013660,000 24,000 36,000 − = = − Assimilation =6600000 400000 62,00,00031040000 20000 20,000 − = = − Quantity Reconciliation:ParticularIngestionDigestionAssimilationInput80,00060,00040,000(-)Normal Loss16,00024,00020,000ExpectedOutput64,00036,00020,000(-)Actual Output62,00036,00021,000Abnormal Loss/ gain2,000 (Loss)Nil1,000 (Gain)Actual Output62,00036,00021,000(+)Opening Stock8,0008,0005,000(-)Closing Stock(10,000)4,0004,000Transfer toNext Process60,00040,00022,000Output 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 - 80121Costing Profit & Loss A/cmunotes.in

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∴ Normal Loss = 20%Input of Ingestion Process 80,000 x 20% = 16,000Some way of Digestion & Assimilation Process.A. Objective QuestionsQ.1 Multiple Choice Questions1. The cost of units of abnormal Loss isA. Credited to the process A/CB. Debited to the process A/CC. Credited to the normal Loss A/CD. Debited to the normal Loss A/C2. The cost of units of abnormal loss isA . Credited to the normal loss A/CB. Debited to the normal loss A/CC. Credited to the process A/C D. None of the above3. The cost of units of abnormal gain isA. Debited to the process A/CB. Debited to profit and loss A/CC. Credited to the process A/CD. None of the above4. Normal loss is calculated asA. Actual output –Normal outputB. Normal output – Actual outputC. Input x % of Normal lossD. None of the above5. Normal output is equal toA. Input – normal lossB. Input – abnormal lossC. Input –abnormal gainsD. None of the above6. Abnormal loss is equal toA. Input –Actual outputB. Actual output – Normal outputC. Normal output – Actual outputD. Actual output – input5.6 EXERCISE122munotes.in

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7. Abnormal gain is equal toA. Actual output – Normal outputB. Normal output –Actual outputC. Actual output – InputD. Input –Actual output8. Cost Per Unit is calculated asA. Total Cost /Normal outputB. Normal cost/ Total costC. Cost of process –sale value of normal loss / Input – Normal LossD. Total cost/ Total Output9. Allocation of joint cost deals with ----------------------------------A. CAS-3B. CAS-5C. CAS-4D. CAS-210.Sale of residue or scrap is ---------------------------------A. Credited to process A/CB. Credited to P & L A/CC. Credited to Abnormal Loss A/CD. None of the above(Answers :- 1. A 2.C 3.A 4. C 5. B 6. C 7. A 8.C9. C 10. A)Q.2 True and False1. The cost of good units is increased by the abnormal gain inprocess costing.2. The cost of units of abnormal loss is debited to the processA/C.3. Invisible waste has sale value .4. The cost of units of abnormal gain is credited to the processA/C.5. The sale value of residue is credited to the process A/C.6. Under contribution margin method , variable costs apportion onthe basis of units produced.7. Joints products are of unequal importance.123munotes.in

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8. Under Net Realizable value method, the estimated profit margindeducted.9. The proportion of joint products can be changed at the will ofthe 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) Productx is obtained after it is processed through 3 distinctprocesses:-The following information is available for the month of March2014.ParticularsProcess AProcess BProcess CTotalMaterial Consumed10,4008,0004,10022,500Direct Labour9,00014,7205,60029,320Production Overhead---29,3202000 Units at4 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:ParticularsOutput inUnitsNormal Losson InputValue of ScrapPer UnitProcess A180010%2.00 B136020%4.00 C108025%5.00There is no stock or work in progress in any process. You arerequired to prepare process a/c.2) Product ‘A’ is obtained after it is processed throughprocess,xy a n d z .124munotes.in

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The following cost information is available for the month ended31st March, 2014.ParticularsxyzNumber of Units introduced in theprocess500----Rate per unit of units introduced04----Cost of Material2,6002,0001,025Direct Wages2,2503,6801,400Production Overheads2,2503,6801,400Normal Loss (% on Units Introduced ofeach Process)10%20%25%Value of Scrop per Unit2/-4/-5/-Output in Units450340270There is no stock in any process. You are required to preparethe Process A/c.3) The product of a company process through of distinctprocesses to completion. These process or known as,xy a n d z .From the past experience, it is ascertained that wastage is incurredin each process as under - process2%x − , Process y - 4%,Process z - 10%The Wastage at each process possess scrap value. Thewastage of processxa n d y is sold at2.50 per unit, and that ofprocess z at5.00 per unit. The output of each process passesimmediately to the next process and finished units are transferredfrom process z into stock. The following information is obtained.ParticularsxyzMaterial2,70,0002,60,0001,20,000Wages4,30,0002,40,0001,30,000Direct Expenses1,37,5001,45,0001,80,000Output of each process (inunits)48,75047,00042,00050,000 units were put in processx at a cost of10/- per unit. Thereis no stock of work in progress in any process. Prepare processA/c. Abnormal Loss and Gain A/c.125munotes.in

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4) A product of a manufacturing concern passes through twoprocess viz A and B and then to finished stock. The followingfigures have been taken from its books for the year ended 31stMarch 2013.ParticularsProcess AProcess BRaw Material Introduced in Process (Units)10,000700Cost of Raw Material introduced (per unit)125200Wages ()2,80,0001,00,000Machine Expenses ()20,00010,000Direct Expenses ()10,00010,000Other Factory Expenses ()45,00022,500Indirect Material ()5,00010,000Normal Loss in Weight5%5%(% of total units introduced in each process)Normal Scrap (% on total Units Introduced in eachprocess )10%10%Realizable Value of Scrap (per 10 units)) 800() 2,000Output (Units)8,3007,800Prepare Process A/c, Abnormal Loss and Abnormal Gain A/c.5) ABC and Co. manufactures a chemical which passes throughthree processes. The following particulars garnered for the monthof January 2014.ParticularsProcess IProcess IIProcess IIIMaterial (Litre)4000208168Material Cost38,40018,8006,000Wages7,6807,6002,200Normal Loss (% of input)4%5%5%Scrap Sale Value--3 per Ltr.--Output Transferred to NextProcess50%
--Output Transferred toWarehouse50%60%100%Overheads are charged @ 50% of Direct Wages. You arerequired to prepare Process A/c.
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