Cost accounting – III-munotes

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1 1 UNIFORM COSTING AND INTER FIRM COMPARISON Unit Structure 1.1 Uniform costing meaning 1.2 Objectives of Uniform Costing 1.3 Advantages of Uniform Costing 1.4 Limitations of Uniform Costing 1.5 INTER-FIRM COMPARISON Meaning 1.6 Requisites of inter-firm comparison system 1.7 Advantages of Inter-firm comparison 1.8 Limitations of inter-firm comparison 1.1 UNIFORM COSTING MEANING Uniform Costing is not a distinct method of costing. In fact, when several undertakings start using the same costing principles and/or practices they are said to be following uniform costing. The basic idea behind uniform costing is that the different concerns in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good. The principles and methods of compilation, analysis, apportionment and absorption of overheads differ from one concern to the other in the same industry; but if a common or uniform pattern is adopted by all, it helps mutually in cost control and cost reduction. Therefore, it is necessary that a uniform method of costing should be adopted by the member unit of an industry. 1.2 OBJECTIVES OF UNIFORM COSTING The main objectives of Uniform Costing are as follows: — 1. Facilitates Comparison: To facilitate the comparison of costs and performances of different units in the same industry; it provides objective basis. 2. Eliminates Unhealthy Competition: To eliminate unhealthy competition among the different units of an industry. 3. Improves Efficiency: To improve production capacity level and labour efficiency by comparing the production costs of different units with each other. 4. Provides Relevant Data: To provide relevant cost information/data to the Government for fixing and regulating prices of the products. munotes.in

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2 Cost Accounting -III 5. Ensures Standardisation: To bring standardisation and uniformity in the operation of participating units. 6. Reduces Cost: To reduce production, administration, selling and distribution costs, and to exercise control on fixed costs. Advanced Management Account Essential requisites for the installation of Uniform Costing System : A successful system of uniform costing has the following requirements :— 1. The firms in the industry should be willing to share/furnish relevant data/information. 2. A spirit of cooperation and mutual trust should prevail among the participating firms. 3. Mutual exchange of ideas, methods used, special achievements made, research and know how etc. should be frequent. 4. Bigger firms should take the lead towards sharing their experience and know-how with the smaller firms to enable the latter to improve their performance. 5. Uniformity must be established with regard to several points before the introduction of uniform costing in an industry. In fact, uniformity should be with regard to following points: (a) Size of the various units covered by uniform costing. (b) Production methods. (c) Accounting methods, principles and procedures used. 1.3 ADVANTAGES OF UNIFORM COSTING The advantages accruing from the use of uniform costing system are as follows: - 1. The management of each firm will be saved from the exercise of developing and introducing a costing system of its own. 2. A costing system devised by mutual consultation and after considering the difficulties and circumstances prevailing in different firms is readily adopted and successfully implemented. 3. It facilitates comparison of cost figures of various firms to enable the firms to identify their weak and strong points besides controlling costs. 4. Optimum achievement of efficiency is attempted by all the firms by utilising the experience of other concerns in the industry. 5. Standing in the industry of each firm will be known by making a comparison of its cost data with others. munotes.in

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3
Uniform Costing and
Inter Firm Comparison 6. Services of cost consultants or experts may be available jointly to each firm in the industry by sharing their experiences and expenses. 7. Research and development benefits of bigger firms may be made available to smaller firms. 8. It helps in the reduction of labour turnover, as a uniform wage system is the pre-condition of a uniform costing system. 9. It helps Trade Associations in negotiating with the Government for any assistance or concession in the matters of taxation, exports, subsidies, duties and prices determination etc. 10. Unhealthy competition is avoided among the firms in the same industry in framing pricing policies and submitting tenders. 11. Prices fixed on the basis of uniform costing are representative of the whole industry and thus are reliable. 12. Uniform costing provide a basis for the comparative assessment of the performance of two firms in the same industry but in different sectors. 13. It helps the Government in regulating the prices of essential commodities such as bread, sugar, cement, steel etc. 1.4 LIMITATIONS OF UNIFORM COSTING 1. Sometimes it is not possible to adopt uniform standards, methods and procedures of costing in different firms due to differing circumstances in which they operate. Hence, the adoption of uniform costing becomes difficult in such firms. 2. Disclosure of cost information and other data is an essential requirement of a uniform costing system. Many firms do not wish to share such information with their competitors in the same industry. 3. Small firms in an industry believe that uniform costing system is only meant for big and medium size firms, because they cannot afford it. 4. It induces monopolistic trend in the business, due to which prices may be increased artificially and supplies withheld. 1.5 INTER-FIRM COMPARISON MEANING It is technique of evaluating the performance, efficiency, costs and profits of firms in an industry. It consists of voluntary exchange of information/data concerning costs, prices, profits, productivity and overall efficiency among firms engaged in similar type of operations for the purpose of bringing improvement in efficiency and indicating the weaknesses. Such a comparison will be possible where uniform costing is in operation. An inter-firm comparison indicates the efficiency of production and selling, adequacy of profits, weak spots in the organisation, etc. and thus demands munotes.in

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4 Cost Accounting -III from the firm’s management an immediate suitable action. Inter-firm comparison may enable the management to challenge the standards which it has set for itself and to improve upon them in the light of the current information gathered from more efficient units. Such a comparison may be carried out in electrical industry, printing firms, cotton spinning firms, pharmaceuticals, cycle manufacturing, etc. 1.6 REQUISITES OF INTER-FIRM COMPARISON SYSTEM The following requisites should be considered while installing a system of inter-firm comparison :– 1. Centre for Inter-Comparison: For collection and analysing data received from member units, for doing a comparative study and for dissemination of the results of study a Central body is necessary. The functions of such a body may be :– (a) Collection of data and information from its members; (b) Dissemination of results to its members; (c) Undertaking research and development for common and individual benefit of its members; (d) Organising training programmes and publishing magazines. 2. Membership: Another requirement for the success of inter-firm comparison is that the firms of different sizes should become members of the Centre entrusted with the task of carrying out inter-firm comparison. 3. Nature of information to be collected: Although there is no limit to information, yet the following information useful to the management is in general collected by the Centre for inter-firm comparison. a. Information regarding costs and cost structures. b. Raw material consumption. c. Stock of raw material, wastage of materials, etc. d. Labour efficiency and labour utilisation. e. Machine utilisation and machine efficiency. f. Capital employed and Return on capital. g. Liquidity of the organisation. h. Reserve and appropriation of profit. i. Creditors and debtors. j. Methods of production and technical aspects. 4. Method of Collection and presentation of information: The Centre collects information at fixed intervals in a prescribed form from its munotes.in

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Uniform Costing and
Inter Firm Comparison members. Sometimes a questionnaire is sent to each member ; the replies of the questionnaire received by the Centre constitute the information/data. The information supplied by firms is generally in the form of ratios and not in absolute figures. The information collected as above is stored and presented to its members in the form of a report. Such reports are not made available to non-members. 1.7 ADVANTAGES OF INTER-FIRM COMPARISON The main advantages of inter-firm comparison are :– 1. Such a comparison gives an overall view of the industry as a whole to its members– the present position of the industry, progress made during the past and the future of the industry 2. It helps a concern in knowing its strengths or weaknesses in relation to others so that remedial measures may be taken. 3. It ensures an unbiased specialized reporting on particular problems of the concern. 4. It develops cost consciousness among members of the industry. 5. It helps Government in effecting price regulation. 6. It helps to improve the quality of products manufactured and to reduce the cost of production. It is thus advantageous to the industry as well as to the society. 1.8 LIMITATIONS OF INTER-FIRM COMPARISON The following are the limitations in the implementation of a scheme of inter-firm comparison : 1. Top management feels that secrecy will be lost. 2. Middle management is usually not convinced with the utility of such a comparison. 3. In the absence of a suitable Cost Accounting System, the figures supplied may not be reliable for the purpose of comparison. 4. Suitable basis for comparison may not be available. SUMMARY • When several undertakings start using the same costing principles and/or practices they are said to be following uniform costing. • The main objectives of Uniform Costing are as follows : ✓ Facilitates Comparison munotes.in

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6 Cost Accounting -III ✓ Eliminates Unhealthy Competition ✓ Improves Efficiency ✓ Provides Relevant Data ✓ Ensures Standardisation ✓ Reduces Cost • It is technique of evaluating the performance, efficiency, costs and profits of firms in an industry An inter-firm comparison indicates the efficiency of production and selling, adequacy of proof- its, weak spots in the organisation, etc. and thus demands from the firm’s management an immediate suitable action • Requisites of inter-firm comparison system are as follows: ✓ Centre for Inter-Comparison ✓ Membership ✓ Nature of information to be collected ✓ Method of Collection and presentation of information MULTIPLE CHOICE QUESTIONS 1. The use by several undertakings of the same costing principles and/or practices.________, (a) Unit costing (b) Uniform costing (c) Standard costing (d) Differential costing. 2. Uniform Costing helps an individual firm in________, (a) Ascertainment of cost (b) Cost control and cost reduction (c) Allocation of costs (d) apportionment of costs 3. Inter-firm comparison is one of the aims of_______, (a) Unit costing (b) Uniform costing (c) Standard costing (d) Marginal costing 4. Inter-firm comparison is____________, (a) A method of costing (b) A method of allocation of overheads (c) A technique of evaluating the performance of firms in an industry (d) Related to marginal costing munotes.in

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7
Uniform Costing and
Inter Firm Comparison SELF-EXAMINATION QUESTIONS 1. Define Uniform costing. Explain its objectives. 2. What are the requisites for the installation of a Uniform Costing System? 3. What are the advantages of Uniform Costing ? State its limitations. 4. Enumerate the points on which uniformity is essential before introducing Uniform costing system. 5. What to you mean by inter-firm comparison ? Give its advantages and limitations. 6. Describe the requisites to be considered while installing a system of inter-firm comparison by an industry.  munotes.in

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7 2 INTEGRATED SYSTEM OF ACCOUNTS Unit Structure 2.0 Objectives 2.1 Introduction 2.2 Meaning 2.3 Features 2.4 Advantages and Disadvantages 2.5 Journal entries and preparing integrated ledgers 2.6 Difference between Integrated and non-integrated system of accounts 2.7 Practical problems 2.8 Summary 2.9 Questions 2.0 OBJECTIVES After studying this unit, the learner will be able to –  Understand the concept of Integrated system of accounts, its features, Advantages & Disadvantages.  Able to solve the practical problems.  Identify ledgers maintained under integrated system  Able to understand the journal entries for accounting purpose. 2.1 INTRODUCTION Under integral accounting system, only one set of books of accounts is prepared and the accounts are written in such a manner that due justice is done to all the Cost Accounting and financial Accounting principles. The accounts to be opened would depend on ultimate outcome expected and ultimate outcome of integral accounting system is the cost sheet for cost accountant and profit and loss A/c and balance sheet for financial accountant. 2.2 MEANING Integrated accounting is a type of software that combines major financial accounting functions into one application. Business activities such as payroll, HR paperwork, business operations, and even meeting deliverables can often incur significant expenses. munotes.in

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8 Cost Accounting -III Comprehensive information on such costs is accessible in the integrated accounting format. However, this method may not suit businesses that manage data related to cost transactions or expenses and financial data separately. With this method, records for control accounts, including work carried out or in progress, completed tasks, etc., are maintained in a general ledger book. 2.3 FEATURES An integrated accounting system can include the following Basic features: 1. There is no need for cost ledger because all control accounts are maintained in the financial ledger 2. Maintenance of a single set of books for recording expenses, orders, or other operational and financial purposes 3. Reduce the chance of errors 4. Complete analysis of cost and sales are kept. 5. Complete details of all payments in cash are kept 6. Complete details of all assets and liabilities are kept and this system does not use a notional account to represent all impersonal accounts 7. Generate accurate profitability reports. 8. Recover more reimbursable expenses. 9. Accounting for expenses is carried out during the cost period rather than the final account period. 2.4 ADVANTAGES AND DISADVANTAGES Advantages 1. There is no need for reconciliation because there will be only one figure of profit or loss as there is only one set of books. 2. This system is economical because it avoids duplication of recording the transactions in two separate set of books. 3. Accounting information is readily available and the correctness of the data is automatically checked. 4. It enables the introduction of mechanized accounting 5. It is economical also as it is based on the concept of “Centralization of Accounting function”. 6. No delay is caused in obtaining information as it is provided from books of original entry. munotes.in

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9 Integrated system of
Accounts 7. Due to use of one set of books, there is a significant saving in efforts made. 8. A better understanding among the staff Disadvantages 1. The accounting system is sophisticated and requires efficient and trained staff. 2. Not suitable if cost and financial data are required to be separately presented 3. This accounting system is complicated and costly. 2.5 JOURNAL ENTRIES AND PREPARING INTEGRATED LEDGERS
2.6 DIFFERENCE BETWEEN NON-INTEGRATED ACCOUNTING AND INTEGRATED ACCOUNTING

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10 Cost Accounting -III 2.7 PRACTICAL PROBLEMS Illustration 1: Journalise the following transactions assuming that cost and financial accounts are integrated: Particulars Rs. Raw materials purchased 1,50,000 Direct material issued to production 1,12,500 Wages paid (30% indirect) 90,000 Manufacturing expenses incurred 63,000 Manufacturing overheads charged to production 69,000 Selling and distribution cost 15,000 Finished product at cost 1,50,000 Sales 2,25,000 Receipts form customer 52,500 Paid to creditors 82,500 Closing stock Nil Adapted Solution: Journal Particulars Debit
Amount
(Rs.) Credit
Amount
(Rs.) 1 Stores ledger control a/c Dr.
To bought ledger control a/c
(being raw material bought) 1,50,000
1,50,000 2 Work -in-progress ledger control a/c Dr.
To Stores ledger control a/c
(being materials issued for production) 1,12,500
1,12,500 3 Wages control a/c Dr.
Factory overhead control a/c Dr.
To Bank a/c
(being wages paid) 63,000
27,000

90,000 4 Work -in-progress ledger control a/c Dr.
To Wages control a/c
(Being the allocation of wages to production) 63,000
63,000 5 Factory overhead control a/c Dr.
To Bank a/c
(Being the manufacturing expenses incurred) 63,000
63,000 6 Work -in-progress ledger control a/c Dr.
To Factory overhead control a/c
(Being overhead charged to production) 69,000
69,000 munotes.in

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11 Integrated system of
Accounts Particulars Debit
Amount
(Rs.) Credit
Amount
(Rs.) 7 Selling & distribution overhead control a/c Dr.
To Bank a/c
(Being selling and distribution cost incurred) 15,000
15,000 8 Finished stores ledger control a/c Dr.
To Work in progress ledger control a/c
(Being cost of production of completed jobs) 1,50,000
1,50,000 9 Cost of sales a/c Dr.
To Finished stock ledger control a/c
To Selling & distribution overhead control a/c
(Being the cost of products sold) 1,65,000
1,50,000
15,000 10 Sales ledger control a/c Dr.
To Sales a/c
(being the amount of sales) 2,25,000
2,25,000 11 Bank a/c Dr.
To Sales ledger control a/c
(being amount received from customers) 52,500
52,500
12 Bought ledger control a/c Dr.
To Bank a/c
(being amount paid to credirors) 82,500
82,500 Illustration 2: From the following information you are requested to pass journal entries and prepare necessary accounts under the system of integrated accounts Material purchased on credit 1,48,000 Wages paid 1,68,000 Wages productive 148,000 Wages unproductive 20,000 Material issued to production 128,000 Works expenses incurred 65,000 Works expenses charged to production 86,000 Office and administration expenses paid 44,000 Office and administration expenses charged to production 43,500 Cost of Goods sold 300,000 Selling overheads expenses paid 45,000 Selling overheads charged to sales 45,000 Sales credit 390,000 munotes.in

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12 Cost Accounting -III Solution: Journal Particulars Debit
Amount
(Rs.) Credit
Amount
(Rs.) 1 Stores ledger control a/c Dr.
To Creditors a/c
(being the stores purchased on credit) 148,000
148,000 2 Wages control a/c Dr.
To Cash a/c
(being wages paid) 168,000
168,000 3 Work -in-Progress control a/c Dr.
To Wages Control a/c
(being the wages charged to production) 148,000
148,000 4 Work Expenses Control A/c Dr.
To Wages Control A/c
(Being the wages charged to work expenses since
these are indirect payments) 20,000
20,000 5 Work -in-Progress Control a/c Dr.
To Stores Ledger Control A/c
(Being materials issued to Production) 128,000
128,000 6 Work Expenses Control a/c Dr.
To Cash
(being the works expenses paid during the year) 65,000
65,000 7 Work -in-Progress Control a/c Dr.
To Work Expenses Control A/c
(being the works expenses charged to production) 86,000
86,000 8 Office and Administration Expenses Control A/c
Dr.
To Cash
(Being amount paid to office expenses) 44,000
44,000 9 Work -in-Progress Control A/c Dr.
To Office and Administration Expenses
Control A/c
(Being office and administration expenses
charged to production ) 43,500
43,500 10 Cost of Sales A/c Dr.
To Work -in-Progress Control A/c
(Being the finished product transferred) 300,000
300,000 11 Selling Expenses Control A/c Dr.
To Cash
(Being the selling expenses incurred) 45,000
45,000 12 Cost of Sales A/c Dr.
To Selling Expenses Control A/c
(Being selling expenses charged to sales) 45,000
45,000 13 Debtors A/c Dr.
To Sales A/c
(Being sales made on credit) 390,000
390,000 munotes.in

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13 Integrated system of
Accounts Stores ledger control account Particulars Rs. Particulars Rs. To creditors 148,000 By Work -in-process
control A/c 128,000 By balance c/d 20,000 148,000 148,000 Wages ledger control account Particulars Rs. Particulars Rs. To cash 168,000 By Work -in-process
control A/c 148,000 By works expenses
control a/c 20,000 168,000 168,000 Works expenses control account Particulars Rs. Particulars Rs. To wages control a/c 20,000 By Work -in-process
control A/c 86,000 To cash 65,000 To balance c/d 1,000 86,000 86,000 By balance b/d 1,000 Office and administrative expenses control account Particulars Rs. Particulars Rs. To cash 44,000 By Work -in-process
control A/c 43,500 By balance c/d 500 44,000 44,000 Selling expenses control account Particulars Rs. Particulars Rs. To cash 45,000 By Cost of sales A/c 45,000 45,000 45,000 Work-in-progress control account Particulars Rs. Particulars Rs. To wages control a/c 148,000 By cost of sales 300,000 To stores ledger 128,000 By balance c/d 105,500 To works expenses 86,000 To office and
administration exp. 43,500 405,500 405,500 munotes.in

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14 Cost Accounting -III Illustration 3: Journalise the following transactions under integral accounting system Direct wages paid in cash 60,000 Indirect wages paid in cash 30,000 Purchases made in cash 15,000 Purchases (credit) 290,000 Stores issued against production order 275,000 Works expenses incurred and paid in cash 55,000 Works expenses allocated to jobs 80,000 Administration expenses paid in cash 40,000 Administration expenses allocated to jobs 48,000 Finished goods transferred to warehouse 450,000 I.C.W.A Inter adapted Solution: Journal entries under integrated accounting system Particulars Debit
Amount
(Rs.) Credit
Amount
(Rs.) 1 Wages control a/c Dr.
To Cash a/c
(being direct and indirect wages paid in cash) 90,000
90,000 Work -in-progress control a/c Dr.
Production overhead control a/c Dr.
To wages control a/c
(being direct wages transferred to WIP control
a/c and indirect wages to production overhead
control a/c) 60,000
30,000

90,000 Stores ledger control a/c Dr.
To Cash a/c
To sundry creditors a/c
(being purchases made in cash and on credit) 305,000
15,000
290,000 Work in progress ledger control a/c Dr.
To stores ledger control a/c 275,000
275,000 Production overhead control a/c Dr.
To Cash a/c
(works expenses paid in cash) 55,000
55,000 Work in progress ledger control a/c Dr.
To Production overhead control a/c
(works expenses charged to production) 80,000
80,000 Administration overhead control a/c Dr.
To Cash a/c
(Administration expenses paid in cash) 40,000
40,000 Finished goods control a/c Dr.
To Administration overhead control a/c
(Administration overhead charged to finished
goods) 48,000
48,000 Finished goods control a/c Dr.
To work in progress ledger control a/c
(Transfer to finished goods to warehouse) 450,000
450,000
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15 Integrated system of
Accounts Illustration 4: Journalise the following transactions in the integrated books of accounts 1 Credit purchased 1200 ,000 2 Production wages paid 700,000 3 Stock issued to production orders 800,000 4 Works expenses charged to production 450,000 5 Finished goods transferred from production orders 1800 ,000 6 Administration expenses charged to production 150,000 7 Works expenses outstanding 120,000 8 Works expenses paid 460,000 I.C.W.A INTER ADAPTED Solution: Journal entries under integrated accounting system Particulars Debit
Amount
(Rs.) Credit
Amount
(Rs.) 1 Stores ledger control a/c Dr.
To sundry creditors a/c
(being purchase of material on credit) 1200 ,000
1200 ,000 2 Wages control a/c Dr.
To cash or bank a/c
(wages paid to workers in cash/cheque) 700,000
700,000 3 Work in progress ledger control a/c Dr.
To stores ledger control a/c
(stores issued against production orders) 800,000
800,000 4 Work in progress ledger control a/c Dr.
To production overhead control a/c
(works expenses charged to production) 450,000
450,000 5 Finished goods ledger control a/c Dr.
To Work in progress ledger control a/c
(Goods finished during the year transferred) 1800 ,000
1800 ,000 6 Work in progress ledger control a/c Dr.
To Administration overhead control a/c
(Admin overhead charged to production) 150,000
150,000 7 Production overhead control a/c Dr.
To outstanding works overhead a/c
(works overhead incurred during the period but
still unpaid) 120,000
120,000 8 Production overhead control a/c Dr.
To cash /bank a/c
(works expenses paid in cash /cheque during
the period) 120,000
120,000 munotes.in

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16 Cost Accounting -III 2.8 SUMMARY In this chapter we will able to understand the concept of integrated system of accounting and we will understand how to journalise the entries for the integrated accounting system 2.9 QUESTIONS 1. An integrated system of accounts are maintained a) in separate books of accounts for costing and financial accounting purposes b) In the same books of accounts c) both (a)&(b) d) None of the above Answer: b 2. What will be the accounting entry in integrated accounts for absorption of works overhead? a) Factory overhead A/c Dr. To Work-in-Progress A/c b) Factory overhead A/c Dr. To Factory overhead control A/c c) Work-in-Progress control A/c Dr. To Factory overhead control A/c d) no entry required Answer: c 3. _____ Accounts is the name given to a system whereby cost and financial accounts are kept in the same set of books. a) Non-integrated b) Finalize c) Cost d) Integrated Answer: d 4. In entry under the integrated system for credit purchases of material for stock, stores ledger control is_____ a) Non impacted munotes.in

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17 Integrated system of
Accounts b) increased c) debited d) credited Answer: c 5. In entry under the integrated system for cash purchases of special materials for direct use in a job _____ account is debited. a) general ledger adjustment b) stores ledger control c) cost ledger control account d) work-in-progress answer: D SHORT NOTES 1) Explain the Features of an integrated system of accounts 2) Explain the difference between an integrated system and non integrated system 3) Explain the advantages and disadvantages of an integrated system of accounts 4) Explain the important journal entries in this system 5) What are the impact of this system in accounting?  munotes.in

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18 3 NON-INTEGRATED SYSTEM OF ACCOUNTS Unit Structure 3.0 Objectives 3.1 Introduction 3.2 Meaning 3.3 Features 3.4 Advantages and disadvantages 3.5 Journal entries and preparing cost control accounts 3.6 Practical problems 3.7 Summary 3.8 Questions 3.0 OBJECTIVES After studying this unit, the learner will be able to – Understand the concept of Non-Integrated system of accounts, its features, Advantages & Disadvantages. Able to solve the practical problems. Identify ledgers maintained under non-integrated accounts Able to understand the journal entries for accounting purposes. 3.1 INTRODUCTION Non integrated system of accounting is a system under which two separate sets of accounts are maintained in which one is for cost accounting and another is for finance accounting, in other words cost accounts are maintained separately from financial accounts. Since both the books prepared by separately hence, the cost accountant is responsible for cost records and financial accountant is responsible for financial transactions. Non- -integrated system of accounting is also known as a non-integrated system or inter-locking system or cost ledger accounting system 3.2 MEANING It is a system where separate ledgers are maintained for cost and financial accounting by the accountant. Under such a system of accounting the cost munotes.in

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19 Non-Integrated system
of Accounts accounts restricts itself to recording only those transactions which relates to the product or services being provided.

3.3 FEATURES 1. Separate account books are maintained to record financial and cost transactions. 2. Financial and cost accountant both are responsible to record transactions in the book separately. 3. The double entry system is adapted for recording the transactions in both accounts books. Personal and real accounts are not opened in cost account books. 4. General and cost ledger adjustment account is opened in cost books to complete the double entry system 5. Reconciliation statement is prepared to reconcile profits as revealed by cost account books and financial account books 3.4 ADVANTAGES AND DISADVANTAGES Advantages 1. This system tends to coordinate the functions of different selection of the accounts department since all efforts are integrated and directed towards achievement of one aim that is providing a high level of efficiency,
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20 Cost Accounting -III 2. The accounting procedures can be simplified and the system can be centralized with the object of achieving a greater control over the organization. 3. The system creates conditions which are eminently suitable for the introduction of mechanized accounting 4. There is no possibility of overlooking any expense under the system. 5. As cost accounts are posted straight from the books of original entry, there is no delay in obtaining the data 6. Integrated accounting widens the outlook if the accountant. 7. It can be maintained according to convenience as it need not be statutorily maintained Disadvantages 1. The Financial transactions other than cost incurred are not recorded in the system. 2. Transactions involving payment other than that of cost are not included in the system e.g. loss on fixed assets 3. There is always a difference between the profits reported as per the cost accounting system and the financial accounting system. 3.5 NECESSERY ACCOUNTS REQUIRED TO BE PREPARE 1. General Ledger Adjustment A/c or Cost Ledger Control A/c: This is practically a dummy account and is to be used where one of the two parts of the journal is recorded. One is a cost sheet item and the other is a Balance Sheet item. Since Balance Sheet items have no place in our system, the Balance Sheet part of the Journal, whether debit or credit, is to be replaced by this account. If both the parts of the journal are balance sheet items or both the parts are cost sheet items, then naturally this account has no use.
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21 Non-Integrated system
of Accounts 2. Stores Ledger Control A/C. This is in respect of raw material when raw material is purchased, this account is debited and when raw material is issued to the production department, it is credited to this a/c and debited to Work in-progress a/c. The material issued for repairs and maintenance is also credited to this account and debited to factory overheads account. Likewise, abnormal loss of material is credited to this account and debited to costing profit and loss A/c. 3. Work -In -progress ledger control a/c : On the debit side of this A/c, we write opening balance and factory cost incurred. On the credit side, factory cost of production completed is transferred to finished goods ledger control a/c and balance is closing stock. Also, if there is some abnormal loss, the factory cost of abnormal loss (Prime Cost and Factory Overheads) is credited to this A/c and debited to abnormal loss A/c and similarly, abnormal gain is debited to this a/c and credited to abnormal gain a/c. 4. Finished Goods Ledger Control A/C : On the debit side of this A/c, we write opening stock of finished goods, factory cost of production completed and transferred to warehouse and administration overheads. On the credit side, the production cost of goods sold is transferred to cost of sales a/c and the balance is closing stock of finished goods.
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22 Cost Accounting -III 5. Wage Control A/C : On the debit side of this a/c, we write the wages incurred, whether direct or indirect. On the credit side, the indirect wages could be factory, administration or Selling & Distribution overheads and depending on that, we transfer them to Factory overheads Control A/c, administration Overheads Control A/c or S & D overheads Control A/c. direct wages are transferred to Work-in-progress account. It is also possible (in fact, better) to transfer to this account, only direct wages and to transfer indirect wages directly from GLA A/c to respective overheads accounts. 6. Factory overheads Control A/c, Administrative Overheads Control A/c, Selling and Distribution overheads control a/c: On the Debit side of each of these accounts, we write the amount actually spent. The factory overheads, to the extent recovered, are transferred to Work-in-progress Ledger Control A/c. The administrative overheads are similarly transferred to Finished Goods Ledger Control A/c and Selling & Distribution Overheads are transferred to Cost of Sales a/c. As regards the difference between the amount spent and recovered, if there is some instruction, direct or indirect, it should be followed. In the absence thereof, there are two alternatives. One is to transfer the difference to Costing Profit & Loss A/c and the other is to carry it forward by showing the difference as closing balance. It is also possible to follow supplementary rate system. If opening trail balance is given and such items do appear in it then that means the company follows the policy of carrying forward the difference to the next period. If they do not appear in the opening trial balance then, in the absence of information to the contrary, these A/c’s should be closed by transferring the difference to Costing Profit & Loss A/c. If the supplementary system is to be followed, then, the difference should be transferred to the same account to which absorption is transferred. 7. Cost of Sales A/C : On the debit side of this A/c we write production cost of goods sold (which is transferred from finished goods ledger control a/c) and Selling and Distribution Overheads. The total being cost of sales, we transfer it to Costing Profit and Loss A/c.
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23 Non-Integrated system
of Accounts 8. Sales A/C : On the credit side of this a/c, we write the amount of sales by debiting General ledger Adjustment A/c and we close this A/c by transferring sales to costing Profit and Loss A/c. 9. Abnormal Loss / Gain A/C: These are the a/c’s for recording the transactions of abnormal nature and we close these a/c’s by transferring the balance to profit and Loss A/c. 10. Costing Profit and Loss A/C : On the debit side of this A/c, we write the cost of sales and abnormal losses and on the credit side sales and abnormal gain. Based on the policy as regards overheads, the under / over absorption may also be written on the debit side or as the case may be on credit side. We close this a/c by transferring the profit (loss) to General Ledger adjustment A/c. 11. Trial Balance : Whether asked for or not, it is always advisable to prepare the trial balance. Obviously, the closing balances would be inventory accounts, General Ledger Adjustment accounts and Overhead A/c’s (If the policy is to carry forwards the difference). Non integrated accounting system flow chart
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24 Cost Accounting -III 3.5 JOURNAL ENTRIES AND PREPARING COST CONROL ACCOUNTS

COST CONTROL ACCOUNTS Meaning :- Cost Accounting means the process of accounting for cost from the point at which the expenditure is incurred to the establishment of its ultimate relationship with cost center and cost units.
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25 Non-Integrated system
of Accounts Control and Profitability :- The scope of cost accounting extends to preparation of statistical data or cost control accounts. There are two types of cost accounting integrated and Non-integrated. Integrated System :- It is a system in which the Financial and Cost Account are integrated to insure that all relevant expenditure is absorb into the cost account. Non - Integrated System :- It is a system in which the cost account are different from the Financial account, the two sets of accounts being kept continuously in agreement by the use of cost control. Under this system the separate account are prepared called as Cost Journal and Cost Ledger. Journal Entries Financial Account Cost Account 1) Credit Purchase of Material for Stock Purchases A/c - Dr Store ledger control A/c - Dr To Sundry Creditors To Cost ledger control A/c 2) Cash Purchase of Material for Stock Purchase A/c - Dr Stock ledger control A/c - Dr To cash A/c To Cost ledger Control A/c 3) Purchase of Special Material for Direct Use in a Process or Job Purchase A/c - Dr WIP Control A/c - Dr To Sundry Creditors / Cash A/c To Cost Ledger Control A/c 4) Purchase of Material for Immediate Repair Work Factory O.H. Control A/c - Dr To Cost Ledger Control A/c 5) Material Return of Supplier From Stock Sundry Creditors A/c - Dr Cost Ledger Control A/c - Dr To Purchase Return A/c To Store Ledger Control A/c 6) Payment to Creditors or Supplier Sundry Creditors A/c - Dr No Entry To Cash / Bank A/c 7) Issue of Direct Material for Production to Factory Job WIP Control A/c - Dr To Store Ledger Control A/c 8) Issue of Indirect Material Factory O.H. Control A/c - Dr To Store ledger Control A/c munotes.in

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26 Cost Accounting -III 9) Return of Direct Material to Store Store Ledger Control A/c - Dr To WIP Control A/c 10) Return of Indirect Material Store Ledger Control A/c - Dr To factory O.H. Control A/c 11) Adjustment of normal loss in Material Stock Factory O.H. Control A/c - Dr To Store Ledger Control A/c 12) Adjustment of Normal Surplus in material stock Store Ledger Control A/c - Dr To Factory O.H. Control 13) Payment of Wages Wages A/c - Dr Wages Control A/c - Dr To Insurance A/c To Cost Ledger Control A/c To Tax A/c To PF A/c To Cash A/c 14 Analysis and Distribution of Wages WIP Control A/c (Direct Wage) - Dr Factory O.H. Control (Indirect Wages) – Dr Admin O.H. Control (Office Salary) – Dr Selling & Dis O.H. Control (Sale Staff Salary) – Dr To Wages Control A/c 15) Payment for Expenses Expenses A/c – Dr Factory O.H. Control A/c – Dr To Cash/Bank A/c Admin O. H. Control A/c – Dr Selling & Distribution O. H. Control A/c To Cost Ledger Control 16) Recording Depreciation on Fixed Asst Depreciation A/c - Dr Factory / Admin / Selling Control A/c To Fixed Asset A/c To Cost Ledger Control A/c munotes.in

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27 Non-Integrated system
of Accounts 17) Recording of Manufacturing O.H. applying at departmental Rate WIP Control A/c - Dr To Factory O.H. Control A/c 18 Abnormal Loss Due to Wastage Costing P & L A/c - Dr To WIP Control A/c 19) Scrap Taken on Stock Charge Store Control A/c - Dr To WIP Control A/c 20) Recording Cost of Goods Transfer to Finished Goods Finished Goods Control A/c - Dr To WIP Control A/c 21) Recording Sales Debtors / Cash A/c - Dr Cost Ledger Control A/c - Dr To Sales A/c To Sales (S. P.) A/c To Casting P & L A/c (Profit) 22) Absorption of Admin O.H. Finished Goods Control A/c - Dr To Admin O.H. Control A/c 23) Absorption of Selling & Distribution O.H. Cost of Sales A/c - Dr To Sell & Dist O.H. Control A/c 24) Under absorb Factory, Admin & Selling O.H. Costing P & L A/c - Dr Finished Goods / WIP / Cost of Sales - Dr OR Overheads Suspense A/c - Dr To Factory / Admin / Sell & Dis Control A/c 25) Over absorb Factory, Admin & Selling O.H. Factory / Admin / Sell & dis. O.H. Control - Dr To Costing P & L A/c OR To WIP / Finished Goods / Cost of Sales OR Overhead Suspense A/c munotes.in

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28 Cost Accounting -III 26) Recording Cost of Goods Gold 1) Cost of Sales A/c - Dr To Finished goods A/c 2) Costing P & L A/c - Dr To Cost of Sale Cost Closing of the Ledger accounts: After Completing the Journal Entries then Ledger A/c are closed in the following manner. 1) Factory O.H. Controls A/c: Difference in A/c Transfer to WIP or If the problem said transfer to next month (Closing Bal) by bal. c/d. 2) Admin O.H. Control A/c: Difference in A/c Transfer to Costing P & L or O.H. Adjustment A/c. 3) Selling & Distribution O.H. : Difference in A/c Transfer to Costing P & L A/c or O.H. Adjustment A/c. 4) O.H. Adjustment A/c: Difference in O.H. Adjustment A/c either transfer to costing P&L A/c or if the problem said transfer in trial balance. 5) Cost of Sales: Transfer the difference in this A/c to Costing P & L A/c. 6) Costing P & L A/c: Difference in this A/c Transfer to Cost Ledger Control A/c. 7) Cost Ledger Control A/c / WIP Control A/c / Store Ledger Control A/c / FCI Control A/c: Difference in resection Account Transfer to The Trial Balance (Closing Balance) munotes.in

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29 Non-Integrated system
of Accounts 3.6 PRACTICAL PROBLEMS Illustration 1: From the following details prepare the necessary accounts in the cost ledger. Materials (Rs) Work -in-
process (Rs) Finished stock
(Rs) Op Balance 8,000 5,000 10,000 Cl balance 11,000 9,000 12,000 Transactions during the period: Rs. Materials purchased 25,000 Wages paid (including Rs. 2,000 indirect) 10,000 Overheads incurred 8,000 Overheads absorbed 9,000 Sales 50,000 Adapted from CA Inter Solution: Cost ledgers Cost ledger control accounts Particulars Rs. Particulars Rs. To Cost of Sales A/c 50,000 By Balance b/d
(8000+5000+10000) 23,000 By stores ledger control
a/c 25,000 By wages control a/c 10,000 By overheads control a/c 8000 To balance c/d
(11000+9000+12000) 32,000 To costing profit and loss
a/c (profit) 16,000 82000 82000 Stores ledger control account Particulars Rs. Particulars Rs. To Balance b/d 8,000 By Work -in-process A/c
(balancing figure 22,000 To cost ledger control
a/c 25,000 By balance c/d 11,000 33,000 33,000 munotes.in

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30 Cost Accounting -III Work-in-process control A/c Particulars Rs. Particulars Rs. To Balance b/d 5,000 By Finished stock
(balancing figure) 35,000 To stores ledger
control a/c 22,000 By balance c/d 9,000 To wages control a/c 8,000 To overhead control
a/c 9,000 44,000 44,000 Finished stock account Particulars Rs. Particulars Rs. To Balance b/d 10,000 By Cost of Sales A/c
(balancing figure) 33,000 To work -in-process
control a/c 35,000 By balance c/d 12,000 45,000 45,000 Wages control a/c Particulars Rs. Particulars Rs. To Cost Ledger
Control A/c 10,000 By Work -in-process
Control A/c 8,000 By overheads a/c 2,000 10,000 10,000 Overheads control account Particulars Rs. Particulars Rs. To Cost Ledger
Control A/c 8,000 By Work -in-process
control a/c 9,000 To wages control a/c 2,000 By costing P& L A/c * 1,000 10,000 10,000 *[(overhead incurred + indirect wages)-overhead absorbed] [(8000+2000)-9000]=1000 (under absorption) Cost of Sales Account Particulars Rs. Particulars Rs. To Finished stock
A/c 33,000 By costing p& l a/c 33,000 33,000 33,000 munotes.in

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31 Non-Integrated system
of Accounts Costing P&L Account Particulars Rs. Particulars Rs. To Cost of sales A/c 33,000 By cost ledger control
a/c(sales) 50,000 To overheads control
(under absorption) 1,000 To cost control ledger
a/c (profit) (bal fig) 16,000 50,000 50,000 Illustration 2: From the following figures ascertained from costing records and financial books of a factory, you are required to pass necessary entries in the cost journal (assume that a system of maintaining control accounts prevails in the organization.) Particulars Rs. Purchases 3,90,000 Carriage inward 5,850 Stores issued 3,58,800 Productive wages 3,46,320 Unproductive labour 1,21,680 Works on cost 3,48,400 Material used in repairs 3,120 Cost of completed jobs 12,80,630 CA Final Solution: Cost Journal Particulars Debit
Amount
(Rs.) Credit
Amount
(Rs.) 1 Stores ledger control a/c Dr.
To Financial ledger control a/c
(being the total amount of purchases as
appeared in financial books) 3,90,000 3,90,000 2 Stores ledger control a/c Dr.
To Financial ledger control a/c
(being the total amount of carriage inwards
as per financial books) 5,850 5,850 3 Work -in-progress ledger a/c Dr.
To Stores ledger control a/c
(being the amount of stores issued as per
material abstract) 3,58,800 3,58,800 munotes.in

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32 Cost Accounting -III Particulars Debit
Amount
(Rs.) Credit
Amount
(Rs.) 4 Wages control a/c Dr.
To Financial ledger control a/c
(being the amount of direct wages expended) 3,46,320
3,46,320 5 Work -in-progress ledger a/c Dr.
To Wages control a/c
(Being the amount of direct wages allocated
to jobs) 3,46,320
3,46,320 6 Works overheads a/c Dr.
To Financial ledger control a/c
(Being the amount of indirect labour
allocated to works overhead) 1,21,680
1,21,680 7 Works overheads a/c Dr.
To Financial ledger control a/c
(Being the amount of works expenses other
than indirect wages as per financial books ) 3,48,400
3,48,400 8 Works overheads a/c Dr.
To stores ledger control a/c
(Being the cost of materials used in repairs) 3,120
3,120 9 Finished Goods Ledger control a/c Dr.
To Worl -in-progress ledger a/c
(Being the cost of completed jobs transferred
from work -in progress a/c) 12,80,630
12,80,630 Illustration 3: C Ltd. Maintain a Separate Set of books for financial accounts and cost accounts. The following information is provided for the year 2014. Particulars Amount Material Control A/c 60,000 WIP Control A/c 90,000 Finished Goods Control A/c 1,40,000 Cost Ledger Control A/c 2,90,000 Transaction for the year Material Purchase 6,60,000 Material Issue as Direct Material 4,50,000 Indirect Material 1,20,000 Wages Paid Allocated as Direct Cost 2,70,000 Indirect Cost 90,000 Production Expenses 2,40,000 Value of Finished Goods Produce 10,80,000 munotes.in

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33 Non-Integrated system
of Accounts Closing Stock of F.G. 1,20,000 Administration expenses 2,40,000 Selling expenses 1,80,000 Sales 18,00,000 Prepare the Necessary Control A/c in the books of Costing Records. Journal Entries Date Particulars L/F Debit ₹ Credit ₹ 1. Material Control A/c - Dr
To Cost Ledger Control A/c 6,60,000 6,60,000
2.
WIP Control A/c - Dr
To material Control A/c
4,50,000 4,50,000
3.
Factory O.H. Control A/c - Dr
To Material Control A/c
1,20,000

1,20,000
4.
WIP Control A/c - Dr
To Wages Control A/c
2,70,000 2,70,000
5.
Factory O.H. Control A/c – Dr
To Wages Control A/c
90,000 90,000
6.
Factory O.H. Control A/c - Dr
To Cost Ledger Control A/c
2,40,000 2,40,000
7.
Finished Goods Control A/c - Dr
To WIP Control A/c
1,08,000 1,08,000
8.
Office & admin O.H. Control
A/c - Dr
To Cost Ledge Control A/c
2,40,000 2,40,000

9.
Selling distribution O.H. Control
A/c - Dr
1,80,000 munotes.in

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34 Cost Accounting -III To Cost Ledger Control A/c 1,80,000
10.
Cost Ledger Control A/c - Dr
To Costing P & L A/c (sales)
18,00,000

18,00,000 Cost Ledger Control A/c Particulars ₹ Particulars ₹ To Costing P & L
A/c 18,00,000 By Bal. b/d 2,90,000 By Material Control A/c 6,60,000 By Factory O.H. Control
A/c 2,40,000 By Office & Admin
O.H. 2,40,000 Control A/c To Bal. C/d 4,50,000 By Selling &
Distribution 1,80,000 O.H. Control A/c By Salary Swages
Control 3,60,000 A/c By Costing P & L A/c 2,80,000 22,50,000 22,50,000 Material Control A/c Particulars ₹ Particulars ₹ To Bal. b/d 60,000 By WIP Control A/c 4,50,000 To Cost Ledger 6,60,000 By Factory O.H. Control 1,20,000 Control a/c a/c By Bal. c/d 1,50,000 7,20,000 7,20,000 WIP Control A/c Particulars ₹ Particulars ₹ To Bal. b/d 90,000 By Finished Goods 10,80,000 To Wages Control A/c 2,70,000 By Bal c/d 1,80,000 To Material Control a/c 4,50,000 To Factory O.H. 4,50,000 Control A/c 12,60,000 12,60,000 munotes.in

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35 Non-Integrated system
of Accounts Finished Goods Control A/c Particulars ₹ Particulars ₹ To Bal. b/d 1,40,000 By Costing A/c (Cost 11,00,000 of Sales) To WIP Control A/c 10,80,000 By Bal c/d 1,20,000 12,20,000 12,20,000 Factory O.H. Control A/c Particulars ₹ Particulars ₹ To Material Control A/c 1,20,000 By WIP Control A/c 4,50,000 To Wages Control A/c 90,000 To Cost ledger Control 2,40,000 A/c 4,50,000 4,50,000 Office & Admin Control A/c Particulars ₹ Particulars ₹ To Cost Ledger A/c 2,40,000 By Costing P & L A/c 2,40,000 2,40,000 2,40,000 Selling & Distribution A/c Particulars ₹ Particulars ₹ To Cost Ledger A/c 1,80,000 By Costing P & L A/c 1,80,000 1,80,000 1,80,000 Salary & Wages A/c Particulars ₹ Particulars ₹ To Cost Ledger A/c 3,60,000 By WIP Control A/c
By Factory O.H. 2,70,000
90,000 3,60,000 3,60,000 Costing P & L A/c Particulars ₹ Particulars ₹ To Finished Goods 4,00,000 By Cost Ledger A/c 18,00,000 Control a/c To Admin O.H.
Control A/ c 2,40,000 To Selling A/c 1,80,000 To Cost Ledger 2,80,000 Control a/c 18,00,000 18,00,000 munotes.in

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36 Cost Accounting -III Trial Balance Particulars Debit Credit Cost Ledger Control A/c Material
Control A/c WIP Control A/c Finished
Goods 1,50,000
1,80,000
1,20,000 4,50,000 4,50,000 4,50,000 From 31st March 2013 the following balances extracted from the book of the co. Trial Balance Particulars ₹ ₹ Store Ledger Control a/c WIP
FCT
Cost Ledger Control A/c 3,50,000
3,80,000
2,50,000
9,80,000 9,80,000 9,80,000 Illustration 4: Following Transaction took place in March 2013 Particulars ₹ Raw Material Purchases 9,50,000 Return to Supplier 30,000 Issue to Production 9,80,000 Return to Store 30,000 Production Wages 4,00,000 Indirect Labour 2,50,000 Factory O.H. 5,00,000 Selling Distribution O.H. 7,00,000 Cost of Finished Goods Transfer To Warehouse 21,30,000 Cost of Goods Sold 21,00,000 Sales 30,00,000 Factory O.H. are apply to production at 150% of on, any under or our absorbed overheads being carry forward for adjustments in the subsequent month. All selling & distribution O.H. are created as a period cost and charge to the Profit & Loan A/c of the month in which they are incurred. Show the necessary control A/cs, Costing P & L A/c and trial balance. munotes.in

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37 Non-Integrated system
of Accounts Journal Entries Date Particulars L/F Debit Rs. Credit Rs. 1. Store Ledger Control A/c - Dr
To Cost Ledger Control A/c 9,50,000 9,50,000
2.
Cost Ledger Control A/c - Dr
To Store Ledger Control A/c
30,000 30,000
3.
WIP Control A/c - Dr
To Store Ledger Control A/c
9,80,000 9,80,000
4.
Store Ledger Control A/c - Dr
To WIP Control A/c
30,000 30,000
5.
WIP Control A/c - Dr
To Wages Control A/c
4,00,000 4,00,000
6.
Factory O.H. Control A/c - Dr
To Wages Control A/c
2,50,000 2,50,000
7.
Factory O.H. Control A/c - Dr
To Cost Ledger Control A/c
5,00,000 5,00,000
8.
Selling & Distribution
O.H. Control A/c - Dr
To Cost Ledger Control A/c
4,00,000
4,00,000
9.
F. G. Control A/c - Dr
To WIP Control A/c
21,30,000 21,30,000
10.
Cost of Sales A/c - Dr
To Finished Goods Control A/c
21,00,000

21,00,000
11.
Cost Ledger Control A/c - Dr
30,00,000 To Costing P & L A/c 30,00,000
12.
WIP Control A/c - Dr (4,00,000
x 150%)
6,00,000 To Factory O.H. Control A/c 6,00,000 Cost Ledger Control A/c Particulars ₹ Particulars ₹ To Store Ledger 30,000 By Bal. b/d 9,80,000 Control A/c To Costing P & L 30,00,000 By Store Ledger 9,50,000 A/c
To Bal C/d
9,50,000 Control A/c munotes.in

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38 Cost Accounting -III By Factory O.H. 5,00,000 Control A/c By Selling Distribution 4,00,000 A/c By Wages Control A/c 6,50,000 By Costing P & L A/c 5,00,000 39,80,000 39,80,000 Store Ledger Control A/c Particulars ₹ Particulars ₹ To Bal. b/d 3,50,000 By Cost Ledger 30,000 Control A/c To Cost Ledger 9,50,000 By WIP A/c 9,80,000 Control A/c To WIP A/c 30,000 By Bal c/d 3,20,000 13,30,000 13,30,000 WIP Particulars ₹ Particulars ₹ To Bal. b/d 3,80,000 By Store Ledger 30,000 Control A/c To Store Ledger 9,80,000 By Finished Goods 21,30,000 Control A/c Control a/c To Wages Control 4,00,000 By Bal. c/d 2,00,000 A/c To Factory
O.H. 6,00,000 A/c 23,60,000 23,60,000 Finished Goods Particulars ₹ Particulars ₹ To Bal. b/d
To WIP Control A/c 2,50,000
21,30,000 By Cost of Sales By
Bal. c/d 21,00,000
2,80,000 23,80,000 23,80,000 Wages Control A/c Particulars ₹ Particulars ₹ Cost Ledger Control
A/c 6,50,000 By WIP
By Factory O.H.
Control A/c 4,00,000
2,50,000 6,50,000 6,50,000 munotes.in

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39 Non-Integrated system
of Accounts Factory O.H. Control A/c Particulars ₹ Particulars ₹ To Wages Control A/c To
Cost Ledger A/c 2,50,000
5,00,000 By WIP
By Bal. c/d 6,00,000 7,50,000 7,50,000 Selling & Distribution Control A/c Particulars ₹ Particulars ₹ To Cost Ledger A/c 4,00,000 By Costing (Bal) P &
L A/c 4,00,000 4,00,000 4,00,000 Costing P & L A/c Particulars ₹ Particulars ₹ To Selling & 4,00,000 By Cost Ledger A/c 30,00,000 Distribution To Cost of sales 21,00,000 To Cost Ledger A/c 5,00,000 (Profit) (Bal.) 30,00,000 30,00,000 Cost of Sales A/c Particulars ₹ Particulars ₹ To F. G. A/c 21,00,000 By Costing P & L (Bal.) 21,00,000 21,00,000 21,00,000 Trial Balance Particulars Dr. ₹ Cr. ₹ Cost Ledger Control A/c Store
Ledger Control A/c WIP
F. G
Factory O.H. Control A/c
3,20,000
2,00,000
2,80,000
1,50,000 9,50,000 9,50,000 9,50,000 3.7 SUMMARY With this we are ending up our discussion on non-integral system of cost accounting. Where we have learned in detail various journal entries to be munotes.in

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40 Cost Accounting -III reflected into the books of accounts and we have also learned about the treatment of the production overheads, when they are being under recovered and over recovered. Both in the case of seasonal factory and non-seasonal factory. 3.8 QUESTIONS A. Fill in the blanks: 1. Under accounting system, only one set of books of accounts is prepared (integral) 2. Under accounting system, two sets of books of accounts are prepared (non-integral) 3. In integral accounting system the transaction having both the parts of the journal are balance sheet items then this transaction is not recorded in-----------adjustment a/c. (General ledger or Cost Ledger ) 4. It both the parts of the journal entry are cost sheet items, then there is no entry in --.(General ledger or Cost Ledger ) 5. Cost and financial accounts are required to be reconciled under- ------------------------accounting system (non-integral) Short notes 1) Advantages and disadvantages of non integrated system of accounting 2) Features of Non-integrated system of accountings 3) Explain the ledger accounts to be maintained in cost control accounting B. Practical problems Q.1 The financial and cost accounts of XYZ Manufacturing Company for the year ended 31 March, 2007 have been reconciled as below: Particulars ₹ Particulars ₹ Raw Materials: Opening Stock 56,450 Cost of Goods 8,10,000 Manufactured (Trf. To
Trading A/c) Purchase 3,24,560 3,81,010 Less: Closing
Stock 58,060 3,22,950 Production 2,39,370 Overheads Direct Wages 2,47,320 munotes.in

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41 Non-Integrated system
of Accounts Particulars ₹ Particulars ₹ Work in Progress: - Opening Stock 18,620 - Closing Stock 18,260 360 8,10,000 8,10,000 Finished Goods: Opening Stock 1,42,350 Sales 11,03,500 Cost of Goods 8,10,000 Manufactured 9,52,350 Closing Stock 1,46,850 8,05,500 Gross Profit 2,98,000 11,03,500 11,03,500 Administration 1,24,620 Gross Profit 2,98,000 Expenses Selling Expenses 87,380 Discount 1,600 Received Discount Allowed 1,240 Debenture Interest 6,360 Net Profit 80,000 2,99,600 2,99,600 Financial Profit and Loss A/c. for The Year Ended 31st March, 2007. Reconciliation means they are foil non-interned A/c system of financial and cost accounts for the year ending on 31st March, 2007. ₹ ₹ Profit as per Financial 80,000 Profit as per Cost A/c 84,550 A/c Discount Allowed 1,240 Discount Received 1,600 Debenture Interest 6,360 Difference in Stock valuation: Difference in Stock Raw Material: 700 Valuation: Opening Work in progress: 480 Raw Materials : 750 Closing Closing Finished Goods: 720 Work in Progress: 620 Opening Opening Finished Goods: 580 Closing 88,800 88,800 munotes.in

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42 Cost Accounting -III Data in The Cost Accounts Include: ₹ Direct Material Price Variance 3,120 Adverse Direct Material Usage Variance 1,280 Adverse Direct Labour Rate Variance 4,160 Favourable Direct Labour Efficiency Variance 4,470 Favourable Production Overhead Expenditure Variance 4,880 Favourable Production Overhead Volume Variance 1,680 Adverse Administration Overheads Cost Variance 620 Adverse Selling and Distribution Cost Variance 620 Adverse Selling Price Variance 5,000 Favourable Sales Volume Variance 1,500 Adverse You are required from the above data to show the necessary accounts as they should appear in the cost ledger under : a) Partial Plan b) Single Plan Q.2 Upto Date Ltd. which keeps cost control accounts in addition to the normal financial books of accounts is in the habit of preparing half - yearly accounts for ascertaining its performance. From the information supplied hereunder, you are required to write up the cost ledger and prepare a costing profit and loss account showing the appropriate variances for the first half of the current year. Also ascertain the profit of the same period as given by the financial accounts, reconciling this with the profit shown in the cost accounts. In the cost accounts, the balance at the end of the previous year were: At Standard Cost ₹ (000) General Ledger Control A/c. Raw Materials
Work in Progress Finished Goods
1,025
1,840
585 3,450 3,450 3,450 The Summary of Transactions During the first half of the current year is : ₹.(000) Purchase of raw material on credit 4,045 Material Price Variance 95 Adverse Material usage Variance 75 Adverse Direct Wages Actual (6,50,000 hrs.) 3,390 Standard Wages at ₹2.50 per hour 3,275 Indirect Wages 1,155 Indirect Materials and Expenses 965 Depreciation 525 munotes.in

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43 Non-Integrated system
of Accounts ₹.(000) Administration, Selling and Distribution Expenses 2,925 Material Issued to Production at Standard Price 4,000 Factory Overheads absorbed to production at 2,620 ₹2.00 per standard direct labour hour Sales on Credit 15,735 Items of Purely Financial Nature: Debenture Interest Paid 180 Interest Received on Investments 35 Donations and Charities 135 Costing Books at
Standard Financial Books at
Actual ₹ ₹ Opening Stock: Raw Materials 1,025 1,050 Work in Progress 1,840 1,825 Finished Goods 585 625 Closing Stock: Raw Materials ? 895 Work in Progress 1,725 1,755 Finished Goods 595 600 Please take not that the administration, selling and distribution expenses will be charged to Costing Profit and Loss Account. Q.3 Chem-Tech is a firm belonging to chemical industry. It has a system of budgetary control and standard costing in operation. For accounting purposes, in follows integral system. As far as accounting for standard cost goes, it follows single plan. The following trial balance was developed as on 30th April, 2007. L. F. No. Account Head ₹ (000) Debit Credit 101 Raw Material 12 102 Fixed Assets 85 103 Share Capital 200 104 Work in Progress 80 105 Finished Goods 40 106 Creditors Control 23 107 Debtors Control 59 munotes.in

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44 Cost Accounting -III 108 Cash and Bank 19 109 Depreciation Provision 12 110 Reserves 40 111 Material Price Variance 4 112 Labour Cost Variance 8 113 Factory Overhead Variance 2 114 Sales 500 115 Standard Factory Cost of Sales 470 777 777 Following Transactions Took Place in May, 2007 ₹.(000) Purchases on Credit 50 Payment to Sundry Creditors 80 Labour Cost Incurred 22 Indirect factory Expenses 13 Standard Cost of Material Purchased 47 Collection from Customers 65 Stock of Raw Material as on 31 -5-2007 14 Work in Progress as on 31-5-2007 Direct Wages 13 Factory Overheads 8 Factory cost of Production: Material 60 Labour 22 Overheads 12 Sales in May ₹40,000. Opening Balance in WIP A/c. was developed with the help of a statement of equivalent production. This balance included labour cost of ₹15,000 and overheads cost of ₹10,000. Factory cost of sales 33,000. You are required to give effect to the above transactions and prepare the resultant trial balance as on 31st May, 2007. Ignore Taxation.  munotes.in

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45 4 OPERATING COSTING - I Unit Structure 4.0 Learning objectives 4.1 Introduction 4.2 Meaning of Operating Costing 4.3 Transport Costing 4.4 Solved Problems of Operating Costing 4.5 Hospital Costing 4.6 Solved Problems on Hospital Costing 4.7 Hotel Costing 4.8 Solved Problems on Hotel Costing 4.9 Exercise 4.10 Questions 4.0 LEARNING OBJECTIVES After studying this chapter one should able to understand:  The meaning of operating costing.  Process to select cost limit in operating costing.  Procedure in operating costing according to the procedure of a transporter  Accounting procedure of a Hotel  Accounting procedure of a Hospital 4.1 INTRODUCTION Operating Costing method is normally used in service sector. When the service is not completely standardized, it is the cost of producing and monitoring a service. It is a method of costing applied to undertakings which provide service rather than production of commodities. Service may be performed internally and externally. Services are termed as internal when they have to be performed on inter-departmental basis in factory itself e.g. Power house services, canteen service etc. Services are termed as external when they are to be rendered to outside parties. Public utility services like transport, water supply, electricity supply, hospitals are the best example for the service costing. Thus operating costing is a method of cost accumulation which is designed to determine the cost of services. munotes.in

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46 Cost Accounting -III Operating costing is just a variant of unit or output costing. Operating costs are collected periodically like process cost. The cost of rendering the service for particular period is related to quantum of services rendered during the particular period to arrive at cost per unit of service rendered. So the principal of unit costing is used in operating costing. 4.2 MEANING OF OPERATING COSTING Operating costing is a method of ascertaining the cost of providing or operating a service. It is also known as service costing CIMA London, defines Operating Costing as “that form of operation costing which applies where standardized services are rendered either by an undertaking or by a service cost renter with in an undertaking”. 4.2.1 Cost Unit: Determining the suitable cost unit to be used for cost ascertainment is a major problem in service costing. Selection of a proper cost unit is a difficult task. A proper unit of cost must be related with reference to nature of world and the cost objectives. The cost unit related must be simple i.e. per bed in a hospital, per cup of tea sold in a canteen and per child in a school. In a certain cases a composite unit is used i.e. Passenger – Kilometer in a transport company. The following are some of example of cost units used in different organizations Enterprises Cost per unit Passenger transport Kilometer Goods transport Ton – Kilometer Hotel Per room per day Hospital Per bed per day Canteen Per item, per meal Water supply Per 1000 liters Electricity Per kilowatt 4.2.2 Collection of costing data: After determining the cost unit, the cost relating to the service is collected. The collected cost is a presented under the heads suitable for control purpose i.e. fixed expenditure and variable expenditure. The presentation of cost data under difficult categories helps to improve managerial control over cost. 4.3 TRANSPORT COSTING 4.3.1 Meaning Transport costing is method of ascertaining the cost of providing service by a transport undertaking. This includes air, water, road and railways; motor munotes.in

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47 Operating Costing - I transport includes private cars, carriers for owners, buses, taxies, carrier Lorries etc. The objective of motor transport costing may be summarized as follows:  to ascertain the operation cost of running a vehicle  to provide and accurate basis for quotation and fixing of rates  to provide cost companion between own transport and alternative e.g. hiring  to compare the cost of monitoring one group of vehicle with another group  to determine the cost to be changed against departments using the service  to ensure the cost of maintenance and repairs is not excessive 4.3.2 Classification of costs: Costs are classified into the following three heads: 1) Standing or Fixed Charges: These charges are includes whether vehicle is operating or not. Insurance, tax, depreciation and part of driver wages. Interest on capital, general supervision, and salary of operating managers is items come under the category of fixed or standing charges. 2) Maintenance charges: There are semi variable expenses in nature and include wear on tires, repairs and overheads painting etc. 3) Operating and running charges: Running costs are the cost of operations. These charges vary more or less in direct proportion to kilometers etc. These expenses are variable in nature because they are dependent on distance covered and trips made. Though the above three classification is done, in practical it is difficult to distribute. It depends basically on the circumstances of each case e.g. if the salary paid to driver is on monthly basis then it is a fixed charged but if the same is limited to kilometer run then it is a running cost. 4.3.3 Collection of Cost Data: Each vehicle is given a separate unique number and all the basic documents will contain the assigned number of the respective vehicles. A separate daily log sheet for each vehicle is maintains to record the details of trips, running time, capacity, distance cover, cost of petrol / diesel, lubricants, loading and unloading time etc on daily basis. A specimen of log sheet is given below: Daily log sheet Table Vehicle No.: ……………………. Route No.: ………………. Date of Purchase: …………….. Driver: Make and Specification: ……………………. Time of Leaving: ……………. munotes.in

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48 Cost Accounting -III License No.: …………………….. Time of Returning: ……………. Supplies Worker’s time abnormal delays Petrol / diesel ……………Driver ……………Loading / unloading ……… Oil …………………conductor……………….Accident …………………. Grease …………Cleaner…………Traffic Delays……..Others…………... Format of transport operating cost sheet: Operating cost sheet Vehicle No. : ………………….... Period ………………………….……… Cost Unit: ……………………….. No. of Cost units ……………………..
Note: Maintenance expenses can be shown separately also depends on cases. Check Your Progress: 1) Give the format of Transport Operating cost-sheet ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________
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49 Operating Costing - I ____________________________________________________________ 2) Give the specimen of log sheet ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 3) Give the Cost Unit of the following a) Passenger Transport b) Good Transport c) Electricity d) Hospital e) Hotel ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 4) Explain the following terms a) Standing or Fixed Charges b) Maintenance charges c) Operating and running charges d) Transport costing e) Operating costing ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 4.4 SOLVED PROBLEMS OF TRANSPORT COSTING Illustration 1: From the following information calculate fare for passenger KM.

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50 Cost Accounting -III The bus will make 3 rounds trips for carrying on the average 40 passenger’s in each trip. Assume 15 % profit on takings. The bus will work on the average 25 days in a month. Solution Operating Cost Statement Bus No. Capacity : 40 persons
Working Note: 1) No. of Km run in a month : 3 x 2 x 20 x 25 = 3000 km 2) No. of passenger km per annum : 3000 x 40 x 12= 14,40,000 3) Diesel and oil : 3000 x 125 / 100 = Rs. 3750 4) Commission & Profits: Commission 10 % of taking + profit 15 % of Taking total = 25 % of taking so the cost Cost is only 75 % Illustration 2 : From the following data relating to two different vehicles A and B, compute cost per running mile.
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51 Operating Costing - I
Charge interest @ 5 % p.a. on cost of vehicles. The vehicles run 20 miles per hour on an average [M. Com. Madurai Kamraj] Solution : Operating cost sheet (cost per mile)
Note : 1) Depreciation is linked with mileage so operating cost. 2) Driver wage is taken as operating since it is paid per hour.
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52 Cost Accounting -III 4.5 HOSPITAL COSTING Hospitals comes under service sector, big companies also maintain hospitals. For costing purpose the hospital service can be divided in two following categories. 1) Outpatient department 2) Wards 3) Medical service departments such as radio therapy ‘X’ ray etc. 4) General Services such as heating, lighting, catering laundry etc. 5) Other services such as transport, dispensary, cleaning etc. 4.5.1 Cost Statement: The expenses of hospital can be broadly divided into two categories i.e. (1) Capital Expenditure and (2) Maintenance Expenditure – this includes salaries and wages, provision, staff uniforms clothing, medical and surgical appliances and equipments, fuel light and power, laundry, water etc. 4.5.2 Format of a cost Sheet of a Hospital:

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53 Operating Costing - I 4.6 SOLVED PROBLEMS ON HOSPITAL COSTING Illustration 3: The following information is available from a intensive care unit. Rent (including repairs) Rs. 10000 p.m. The unit cost consists of 25 beds and 5 more beds can be accommodate when the occasion demands. The permanent staff attached to the unit is as follows: 2 supervisors each at a salary or Rs. 2000 per month. 4 nurse each at a salary of Rs. 1500 per month. 2 ward boys each at a salary of Rs. 1000 per month. Though the unit was open for the patients all the 365 days in a year, security of accounts of 2008 revealed that only 150 days in a year the unit had the full capacity of 25 patients per day and for another 80 days it had on an average 20 beds only occupied per day. But there were occasions when the beds were full, extra beds were hired from outside at a charge of Rs. 10 per bed per day and this did not come to more than 5 beds extra above the normal capacity any one day. The total hire charges for the whole year were Rs. 4000. The unit engaged expert doctor from outside to attend on the patients and the fees were paid on the basis of number of patients attended at time spent by them on an average worked out to Rs. 2000 per month in 2008. The other expenses for the year were as under.
1) If the unit recovered an overall amount of Rs. 200 per day on an average from each patient what is the profit per patient day made by the unit in 2008. 2) The unit wants to work out a budget for 2009, since the number of patients is very uncertain, annuity the same revenue and expenses prevail in 2009, work out the number of patient days required break-even.
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54 Cost Accounting -III Solution : Statement of cost and profit

4.7 HOTEL COSTING Hotel industry is a service industry and covers various activities such as provision for food and accommodation. It also provides other comforts like recreations, business facilities, shopping areas etc. The expenses incurred in a hotel are fixed or variable. Fixed expenses comprises of staff salaries, repairs, interior decoration, laundry contract cost, sundries and depreciation on fixed assets. The variable expenses incurred are lighting, attendants’ salaries, power etc. To find out room rent to be charged from customers a notional profit is added with the cost and divided by the number of rooms
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55 Operating Costing - I available. The number of rooms available is calculated after for considering availability of suits and occupancy. Rooms rent may be different from season to season. Sometime besides accommodation they also provide food. Then the cost of meals, other direct and indirect costs are considered to work out the costs to be charged from customers. Operating cost sheet of a Hotel:
Check Your Progress 1) Give the formats of the following: a) Operating Cost Sheet of a Hospital b) Operating cost sheet of a Hotel ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 2) Enlist the categories of Hospital services. ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________
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56 Cost Accounting -III 3) Which expenditures are included in Maintenance Expenditure in case if hospital costing? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 4) Find out if the following expenses are Fixed expenses or variable expenses in case of Hotel costing:. a) Staff salaries b) Repairs c) Interior decoration d) Laundry contract cost e) Sundries f) Depreciation on fixed assets g) Lighting h) Attendants’ salaries i) Power 4.8 SOLVED PROBLEMS ON HOTEL COSTING Illustration 4: A company runs a holiday home for this purpose it hired a building at a rent of Rs. 10,000 per month along with 5% of total takings. It has three types of suites for its customer’s viz. single room, double room and triple rooms. Following information is given: Types of suite Number Occupancy percentage Single rooms 100 100 % Double rooms 50 80 % Triple rooms 30 60 % The rent of double room’s suite is to be fixed at 2.5 times of the single room and that of triple rooms at twice of the double room suite. The other expenses for the year 2009 are as follows: Rs. Staff salaries 14,25,000 Room attendants wages 4,50,000 Lighting heating and powers 2,15,000 Repairs and renovations 1,23,500 Laundry charges 80,500 Interior decoration 74,000 Sundries 1,53,000 munotes.in

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57 Operating Costing - I Provide profit @ 20 % on total takings and assume 360 days in a year. You are required to calculate the rent to be charged for each type of suite [C. A. PE II] Solution: Calculation of room occupancy Calculation of equalant single room suits occupancy 36,000 x 1 + 14400 x 2.5 + 6480 x 5 = 104400 Calculation of Total Cost :
Rent for a single room = 3521333 ÷ 104400 = Rs. 33.73 Rent for a double room = 33.73 x 2.5 = Rs. 84.325 Rent for a triple room = 84.325 x 2 = Rs. 168.65 4.9 EXERCISE Objective Type Choose the correct answer for the multiple choice questions 1) Classification and accumulation of costs by fixed and variable costs is a distinctive feature of a) Process costing b) Unit costing c) Operating costing d) Batch costing
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58 Cost Accounting -III 2) Composite unit is distinctive feature of a) Single or output costing b) Process costing c) Job costing d) Operating costing 3) Electricity generating company should employ a) Unit costing b) Process costing c) Operating costing d) Multiple costing 4) Cinema houses must adopt a) Operating costing b) Job costing c) Batch costing d) Contract costing 5) For a library the best method of costing suitable is a) Output costing b) Operating costing c) Process costing d) Multiple costing 6) For an educational institutes the right method of costing is a) Output costing b) Job costing c) Operating costing d) Process costing 7) Hospitals must make use of a) Operating costing b) Batch costing c) Process costing d) Multiple costing 8) For hotels the best method of costing is a) Single or output b) Contract costing c) Process costing d) Operating costing 9) Air India Co. must make use of a) Job costing b) Operating costing c) Batch costing d) Process costing 10) Indian Railways must adopt a) Operating costing b) Unit costing c) Batch costing d) Multiple costing 11) Public utility undertakings must invariably adopt a) Operating costing b) Output costing c) Contract costing d) Multiple costing 12) Karnataka Electricity Board must make use of a) Single or output costing b) Job costing c) Process costing d) Operating cost munotes.in

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59 Operating Costing - I 13) The method of costing used in case of a gas company is termed as a) Job costing b) Process costing c) Operating costing 14) Mines ‘A’ and `B’ are at a distance of 10 kms and 15 kms from the factory. The cost per tone-km in case of mine A is Rs. 3 while it is R. 2.5 in case of mine B. The factory should procure coal from a) Mine A only b) Mine B only c) Both from mines A and B in the ration of 3 : 2 15) In case of steam company, the cost per unit is calculated on the basis of a) Total quantity of lbs. produced b) Total quantity of kwh. generated c) Total quantity of tones produced. Answers: 131(c), 2(d), 3(c), 4(a), 5(b), 6 (b), 7(a), 8(d), 9(b), 10(a), 11(d), 12(a) (c), 14 (a), 15(a) 4.10 QUESTIONS Simple Questions 1. Define operating cost 2. Define operating costing 3. Distinguish between operating cost and operating costing 4. What do you mean by a composite unit? 5. List out any eight undertakings which makes use of operating costing. 6. Give the composite unit of the following undertakings : a) Roadways carrying passenger b) Railways carrying goods c) Hospital and d) College. 7. Mention the basis of classifying the cost under operating costing. 8. Mention the basis of classifying the costs under transport costing. 9. What is a log sheet? 10. What do you mean by cost summary performance statement? 11. What do you mean by absolute tone-kilometer? munotes.in

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60 Cost Accounting -III 12. What do you mean by a commercial tone-kilometer? 13. Distinguish between absolute tone-kilometer and commercial tone kilometer. 14. What do you mean by “kilometer run”? 15. What do you mean by “cost per hour” under operating costing? State whether each of the following statement is `True’ or `False’ 1. Operating costing is used in case of service undertaking. 2. Log sheet is prepared in case of power house costing. 3. The unit of cost for production of steam may be per lb. 4. Per man show cost is calculated in case of Canteen costing. 5. Fare in case of taxis is generally based on cost per passenger, km Answer : (1) True (2) False (3) True (4) False (5) False Long answer type 1. What is service costing? Mention the types of business in which the system would be suitable. Describe briefly a system of service costing which you would recommend for use by a passenger taxi service. 2. What are the main objects of motor transport costing? A company owns a fleet of vans and wishes to examine the cost of (a) each van, (b) the fleet as a whole. Prepare a report on the accounting arrangements that are needed and draft specimen of the forms that you recommend for presentation to the directors. Show separate rates for fixed and variable expenditure and state how these should be used. 3. Draw up a proforma cost statement for a canteen serving 1,000 workers in a factory. The canteen is subsidized by the factory. 4. What is “Operating Costing”? State the industries where it is to be used? 5. What is a “Log sheet”? Give its proforma. 6. Your client running a canteen tends to introduce costing system in his organization. How should he classify his costs for the purpose of preparing an Operating Cost Statement?  munotes.in

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61 5 OPERATING COSTING - II Unit Structure 5.0 Objectives 5.1 Problems and Solution 5.2 Exercise 5.0 OBJECTIVES After studying the unit the students will be able to solve the problems on transport costing, Hospital costing and Hotel costing. 5.1 PROBLEMS AND SOLUTION Illustration 1: SAITRAVELS owns a bus and operates a tourist service on daily basis. The bus starts from New City to Rest village and returns back to New City the same day. Distance between New city and Rest village is 250 kms. This trip operates for 10 days in a month. The bus also plies for another 10 days between New city and Shivapur and returns back to New city the same day, distance between these two places is 200 kms. The bus makes local sightseeing trips for 5 days in a month, earning a total distance of 60 kms per day. The following data are given. Cost of bus Rs. 3,50,000 Depreciation 25 5 Driver’s salary Rs. 1,200 p.m. Conductor’s Salary Rs. 1,000 p.m. Part time clerk’s salary Rs. 400 p.m. Insurance Rs. 1,800 Diesel consumption 4 kms per Rs. 8 per litre litre @ Token tax Rs. 2,400 p.m. Permit fee Rs. 1,000 p.m. Lubricant oil Rs. 100 for every 200 kms Repairs and maintenance Rs. 1,500 p.m. Normal capacity Rs. 50 persons While playing to and for Rest village, the bus occupies 90% of the capacity and 80% when it plies between New city to Shivapur (both ways). In the city the bus runs full capacity passenger tax is 20 % of net takings of the “Travels” firm. munotes.in

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62 Cost Accounting -III Calculate the rate to be charged to Rest village and Shivaupr from New city, per passenger, if the profit required to be earned is 33 % of net taking of firm. [I.C.W.A., Intermediate] Solution: Operating cost statement for the month
Charges per passenger: a) to Rest village from New city : 250 x 0.161 i.e. Rs. 40.25 b) to Shivapur from New city : 200 x 0.161 i.e. Rs. 32.20 * total kms covered p.m. Rest village and back 2 x 250 x 10 days 5,000 Shivapur and back 2 x 200 x 10 days 4,000 Local trips @ 60 kms for 5 days 300 9,300 ** Total effective passenger – km per month : Rest village 2 x 250 x 90 % of 50 x 10 days = 2,25,000 passenger km Shivapur 2 x 200 x 80 % of 50 x 10 days = 1,60,000 Local Trips 5 x 60 x 50 = 15,000 4,00,000 Illustration: 2: (Service costing – use own / company cars or hire cars) A company is considering three alternative proposals for conveyance facilities for its sales personal who have to do considerable travelling, approximately 20,000 kilometers every year. The proposals are as follows :
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Operating Costing - I 1) Purchase and maintain its own fleet of cars. The average cost of car is Rs. 1,00,000. 2) Allow the executive use his own car and reimburse expenses at the rate of Rs. 1.60 paise per kilometer and also bear insurance costs. 3) Hire cars from an agency at Rs. 20,000 per year per car. The company will have to bear costs of petrol, taxes and tyres. The following further details are available : Petrol Re. 0.60 per km. Repairs and maintenance Re. 0.20 per km Tyre Re. 0.12 per km Insurance Rs. 1,200 per car annum; Taxes Rs. 800 per car per annum Life of a car : 5 years with Annual milage of 20,000 kms. Resale value: Rs. 20,000 at the end of the fifth year. Work out the relative costs of three proposals and rank them [C.A., Inter] Solution : Alternative proposals


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64 Cost Accounting -III Decision II alternating i.e., use of own car will be the best alternative from company’s point of view. III alternative i.e. hiring the card is 2nd best alternative. I alternative i.e. maintaining the fleet will be costliest alternative. Rs. 1,200 ~ 20,000 kms = Re. 0.06; (Rs. 800 ~ 20,000 kms) = Re. 0.04 @ Rs. 20,000 ~ 20,000 kms = Re. 1/- Illustration 3: The Union Transport Company has been given a twenty kilometer long route to ply a bus. The bus costs the company Rs. 1,00,000. It has been insured at 3 % per annum. The annual road tax amounts to Rs. 2,000. Garage rent is Rs. 400 per month. Annual repair is estimated to cost Rs. 2,360 and the bus is likely to last for five years. The salary of the driver and conductor is Rs. 600 and Rs. 200 per month respectively in addition to 10% of the taking as commission to be shared equally by them. The managers salary is Rs. 1,400 per month and stationery will cost Rs. 100 per month. Petrol and oil will cost Rs. 50 per 100 kilometers. The bus will make three round trips per day carrying on an average 40 passengers in each trip. Assuming 15% profit on takings and that the bus will ply on an average 25 days in a month. Prepare operating cost statement on a full year basis and also calculate the bus fare to be charged from each passenger per kilometer [C.A., Inter] Solution: Union Transport Company Statement showing operating cost of the bus per annum

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Operating Costing - I Calculation of bus fare to be charged: Effective passenger kilometers: (2 x 20 km x 3 trips x 40 passengers x 25 days x 12 months) = 14, 40,000 Rate to be charged per km from each passenger Rs. 1, 03,680 ~ 14,40,000 = Re. 0.072 Calculation of total distance covered (20 km 2 x 3 x 25 x 12) = 36,000 km per annum Illustration 4: (Transport Costing) Prakash Automobiles distributes its goods to a regional dealer using a single lorry. The dealers’ premises are 40 kilometers away by road. The lorry has a capacity of 10 tons and makes the journey twice a day fully loaded on the outward journeys and empty on return journey. The following information is available for a four weekly period during the year 1990. Petrol consumption 8 km per liter Petrol Cost Rs. 13 per liter Oil Rs. 100 per week Driver’s wages Rs. 400 per week Repairs Rs. 100 per week Garage Rent Rs. 150 per week Cost of Lorry (excluding tyres) Rs. 4,50,000 Life of Lorry 80,000 kilometers Insurance Rs. 6,500 per annum Cost of tyres Rs. 6,250 Life of tyres 25,000 kilometers Estimated sale value of lorry at end of its life Rs. 50,000 Vehicle license cost Rs. 1,300 per annum The lorry operates on five day week Rs. 41,600 per annum Required: a) A statement to show the total cost of operating the vehicle for four-weekly period analyzed into running costs and fixed costs. b) Calculate the vehicle cost per kilometer and per ton kilometer [C.A., Inter] Solution: a) Before computing the total cost, it is necessary to find out the basic data s under : 1) Distance travelled in 4 week period; 40 km one way x 2 (return) x 2 trips x 5 days x 4 weeks = 3200 km munotes.in

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66 Cost Accounting -III 2) For tone km working = empty on return and as such for tone km = 3200 ÷ 2 = 1,600 3) Total consumption in weeks = 3,200 km ÷ 8 km = 400 lt 4) Tyre cost = (Rs. 6,250 ÷ 25,000 km) x 3,200 km = Rs. 800 5) Depreciation of lorry in 4 weeks = (Rs. 4, 50,000 - Rs. 50,000 km) ÷ 80,000 x 3,200 = Rs. 16,000 Operating cost statement f a lorry of M/s. Prakash Automobiles (for the 4 week period)
(b) Cost per tone – km = Rs. 28,800 ~ (1600 x 10 tons) Rs. 1.80 Illustration 5 : A company presently brings coal to its factory from a nearby yard and the rate paid for transportation of coal from the yard located 6 kms. Away to factory is Rs. 50 per ton. The total coal to be handled in a month is 24,000 tones. The company is considering proposal to buy its own trucks and has the option of buying either a 10 ton capacity or a 8 ton capacity trucks. The following information is available:

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Operating Costing - I Each truck will daily make 5 trips (to and fro) on an average for 24 days in a month. Cost of diesel Rs. 15/- per liter. Salary of driver Rs. 3,000/-, p.a. month. Two drivers will be required per truck. Other staff expenses Rs. 1,08,000 p.a. Present a comparative cost sheet on the basis of above data showing transport cost per ton of operating 10 ton and 8 ton Truck at full capacity utilization. [C.A. Final] Solution : Comparative statement of operating cost sheet :
Conclusion : A comparison of cost per ton by using 10 ton trucks is more economical. The cost paid for bringing coal per ton presently viz. Rs. 50/- is the highest. Working Note :

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68 Cost Accounting -III Illustration.6: You are required to calculate a suggested fare per passenger – km from the following information for a mini bus. i) Length of route 30 km ii) Purchase price Rs. 4,00,000. iii) Part of above cost meet by loan, annual interest Rs. 10,000 p.a. iv) Other annual charges : Insurance Rs. 15,000, Garage Rent Rs. 9,000, Road Taxes Rs. 3,000, Repairs and Maintenance Rs. 5,000. Administrative charges Rs. 5000. v) Running expenses : Driver & Conductor Rs. 5000 p.m., Repairs / Replacement of tyre tube Rs. 3600 p.a. Diesel and Oil cost per Km Rs. 5/- vi) Effective life of vehicle is estimated at 5 years at the end of which it will have a scrap value of Rs. 10,000. vii) Mini Bus has 20 seats and is planned to make six two way trips for 25 days / p.m. viii) Provide profit @ 20 % of total revenue. [C.A., Final] Solution :


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Operating Costing - I Rate per passenger km : Rs. 36937.50 / 1,80,000 passenger km = 0.4274305 or 0.43 paise Workings: Total distance travelled by mini bus in 25 days = 60 km x 6 trips x 25 days = 9000 km Total passenger km = 9000 km x 20 seats = 1,80,000 passengers km Illustration 7 : Krishna Transport Ltd. Charges Rs. 150 per ton for its 10 ton lorry load from city A to city B. the charges for the return journey are Rs. 140 per ton. No concession is made for any delivery of goods at intermediate station ’C’ in January 2008. The truck made 10 outward journeys for city B with full load of which 2 ton were unloaded twice at city ‘C’. The truck carried a load of 12 ton in its return journey for 4 times but once caught by police and Rs. 1500 was paid as fine. For the remaining trips it carried full load out of which all the goods on load were unloaded once at city ‘C’. The distance from city A to city A and city ‘B’ are 150 km and 250 km respectively. Annual fixed cost are Rs. 1,20,000 and maintenance cost is Rs. 15,000. Running charges spent during January 2008 are Rs. 3500. Calculate the cost per tone-kilometer and the profit for January 2008. Solution : Operating Cost and Profit Statement of Krishna Transport Ltd.


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70 Cost Accounting -III Illustration 8 : Mr. Sampath owns a fleet of taxies and the following information is available from the records maintained by him. 1) Number of Taxis – 10 2) Cost of each Taxi – Rs. 2,00,000 3) Salary of manager Rs. 6000 p.m. 4) Salary of Accountant Rs. 5000 p.m 5) Salary of cleaner Rs. 3000 p.m. 6) Salary of Mechanic Rs. 4000 p.m. 7) Garage Rent Rs 7000 p.m. 8) Insurance premium 5 % 9) Annual Tax Rs. 6000 per taxi 10) Drivers Salary Rs. 4000 p.m. 11) Annual Repairs Rs. 15,000 per taxi Total life of a taxi is about 2,00,000 kms. A taxi runs in all 3000 kms. in a month of which 25 % its runs empty. Petrol consumption is one liter for 10 kms @ Rs. 40 per liter. Oil and other sundries are Rs. 10 per 100 kms. Calculate the cost of running a taxi per km. Solution: Operating cost sheet

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Operating Costing - I Illustration 9: A lodging home is being run in a small hill station with 50 single rooms. The home offers concessional rate during six off season months in a year. During this period, half of the full room rent is charged. The management profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details for the year ending 31st March, 1996 (assume a month to be of 30 days) a) Occupancy during the season is 80%, while in the off season is 40% only. c) Annual depreciation is to be provided for building at 5% and on furniture and equipments at 15% on straight line basis. d) Room attendants are paid Rs. 5/- per room-day on the basis of occupancy of the rooms in a month. e) Monthly lighting charges are Rs. 120 per room, expect in four months of winter when it is Rs. 30 per room and this cost is on the basis of full occupancy for a month and f) Total investments in the home are Rs. 100 lakhs of which Rs. 80 lakhs relate to buildings and balance for furniture and equipments. You are required to work out the room rent chargeable per day both during the season and the off-season months, on the basis of the foregoing information. [I.C.W.A., Intermediate Solution: Total estimated costs for the year ending 31.03.1996

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72 Cost Accounting -III During season room rent is Rs. 197 and during off-season room rent is Rs. 98.50 * Attendant’ salary For 10,800 room days @ Rs. 5 per day = Rs. 54,000 ** Total light bill Light bill during 8 months at Rs. 120 per month or 120 ÷ 30 = Rs. 4 Per room day. Light bill during 4 months of winter at Rs. 30 per month or 30 ÷ 30 = Re. 1 per Room day. Total light bill for full one year Rs. During season @ Rs. 4 for 7,200 days 28,800 During 2 months of off-season @ Rs. 4 for 1,200 days (2 ÷ 6 x 3,600) 4,800 During 4 months of winter at Re. 1 For 2,400 days (4 ÷ 6 x 3,600) 2,400 Total 36,000 *** Number of room days in a year : Seasons occupancy for 6 months@80% (50 x 0.8 x 6 x 30) = 7,200 room days Off season’s occupancy for 6 months @ 40 % (50 x 0.4 x 6 x 30) = 3,600 room days Total room days during the Year 10,800 Total full room days in terms of rate Season 7,200 Off Season (in terms of 50 % rate on 3,600 days) 1,800 Total Full room days 9,000 per annum Illustration 10: Elegant Hotel has a capacity of 100 single rooms and 20 double rooms. It has a sports centre with a swimming pool which is also used by persons other than residents of the hotel. The hotel has a shopping arcade at the basement and a specialty restaurant at the roof top. The following information is available: 1) Average occupancy : 75 % for 365 days of the year 2) Current costs are : Variable cost Fixed cost Single room 400 200 Double room 500 250 3) Average sales per day of restaurant Rs. 1, 00,000; contribution is at 30 %. Fixed cost Rs. 10, 00,000 per annum. munotes.in

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Operating Costing - I 4) The sports centre / swimming pool is likely to be used by 50 non –residents daily; average contribution per day per nonresident is estimated at Rs. 50; fixed cost is Rs. 5,00,000 per annum. 5) Average contribution per month from the shopping arcade is Rs. 50,000; fixed cost is Rs. 6, 00,000 per annum. You are required to find out: a) Rent chargeable for single and double room per day, so that there is a margin of safety of 20 % on hire of rooms and that the rent for a double room should be kept at 120 % of a single room. b) Evaluate the profitability of restaurant, sports centre and shopping arcade separately. [C. A. Final] Solution: (a) Statement for calculating the rent chargeable for single and double room per day.
Rent per day of single room 9in Rs.) 756 (approx) (Refer to working note 2) (Rs. 2, 56,64,062 / 33,945) Rent per day of double room (in Rs.) 907 (approx) (Rs. 756 x 1.2 times)

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74 Cost Accounting -III Working Note : 1) Single room occupancy days in a year = 100 room x 365 days x 75% = 27,375 Double room occupancy days in a year = 20 rooms x 365 days x 75% = 5,475 2) In terms of single room total room occupancy days in a year = 27,375 + 1.20 % x 5,475 = 27,375 + 6,570 = 33,945 Illustration 11: Following are the information given by an owner of a hotel. You are requested to advice him that what rent should be charge from his customers per day so that he is able to earn 25 % on cost other than interest. 1) Staff salaries Rs. 80,000 per annum 2) Room attendant’s salary Rs. 2 per day. The salary is paid on daily basis and services of room attendant are needed only when the room is occupied. There is one room attendant for one room. 3) Lighting, heating and power. The normal lighting expenses for a room if it is occupied for the whole month is Rs. 50. Power is used only in winter and normal charge per month if occupied for a room is Rs. 20. 4) Repairs to building Rs. 10,000 per annum 5) Linen etc. Rs. 4,800 per annum 6) Sundries Rs. 6,600 per annum 7) Interior decoration and furnishing Rs. 10,000 annually 8) Cost of building Rs. 4,00,000; rate of depreciation 5 % 9) Other equipments Rs. 1,00,000; rate of depreciation 10 % 10) Interest @ 5% may be charged on its investment of Rs. 5,00,000 in the building and equipment 11) There are 100 rooms in the hotel and 80 % of the rooms are normally occupied in summer and 30 % of the rooms are busy in winter. You may assume that period of summer and winter is six month each. Normal days in a month may be assumed to be 30. munotes.in

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Operating Costing - I Solution : Operating cost sheet Rent per day

5.2 EXERCISE Practical problems Illustration 1 : A Mineral is transported from two mines – “A” and “B” and unloaded at plots in a Railway Station. Mine A is at a distance of 10kms. And B is at a distance of 1 5kms. from the mines. Records reveal that the lorries average a speed of 30 kms. per hour, when running and regularly take 10 minutes to unload at the railhead. At mine “A” loading time averages 30 minutes per load while at mine “B” loading time averages 20 minutes per load.
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76 Cost Accounting -III Drivers’ wages, depreciation, insurance and taxes are found to cost 9 per hour operated. Fuel, oil, tyres, repairs and maintenance cost 1.20 per km. Draw up a statement, showing the cost per tonne-kilometer of carrying mineral from each mine. (M.Com. Oct. 01) (Ans.: Cost per tonne Km. Mine A: Rs. 0.72, Mine B: Rs.0.66) Illustration 2 : A transport company maintains a fleet of bus as follows : Number of Buses Carrying Capacity 20 50 passengers each 10 40 passengers each Each bus makes 5 trips a day, covering a distance of 10 Km. in each trip. On an average 80% of the seats are occupied in each trip and 5 buses are under repair every day. Assuming that the company operates its fleet daily, ascertain the operating cost per passenger-Km. from the following : Wages of 30 Drivers ₹ 3,000 each per month Wages of 30 Cleaners ₹ 1,000 each per month Petrol ₹ 20,000 per month Oil, Grease etc. ₹ 5,000 per month Tyres, Tubes etc. ₹ 2,000 per month Repairs ₹ 30,000 per year Garage Rent ₹ 40,000 per year Road Licences ₹ 20,000 per year Taxes ₹ 5,000 per half year Permit Fee ₹ 25,000 per year Salary of Operating Manager ₹ 5,000 per month Office Overheads ₹ 10,000 per year (M.Com, Oct 2000) Ans: (Total Operating Cost: Rs. 19,59,000, Cost per passenger Km.: Rs.0.1 15) munotes.in

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Operating Costing - I Illustration 3 : A company presently brings coal to its factory from a nearby yard which is located 6 kms. away to factory and the rate paid ₹ 50 per ton for transportation. The total coal to be handled in month in 24,000 tons. The company is considering proposal to buy its own trucks and has the option of buying either a 10 ton or a 8 ton capacity trucks. The flowing information is available :
Each Truck will daily make 5 trips (to and fro) on an average for 24 days in a month. Cost of Diesel ₹16 per litre. Salary of Drivers ₹3,000 per month and two drivers will be required for a Truck. Other staff expenses ₹1,08,000 p.a. Present a Comparative Cost Sheet on the basis of above data showing transport cost per ton of operating 10 ton and 8 ton Truck at full capacity utilization. (M.Com. Mar. 02, adapted) Ans: (Total Operating Cost: 10 Ton Truck: Rs. 49,635 8 Ton Truck Rs.41,381, Cost per Ton: 10 Ton Truck: Rs. 41.36, 8 Ton Truck: Rs.43.1 1) Illustration 4 : The following were the expenses incurred by CALL and MALL Company in operating two lorries (for the conveyance of Raw Materials) and a bus (for the conveyance of Staff) during the month of February, 2006 :
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78 Cost Accounting -III
The above vehicles carried the following Raw materials and Passengers during the month : Lorry C 100 Tonnes of Raw Material Lorry M 120 Tonnes daily for 25 days Respective mileage of the vehicles during the month : Lorry C 3,000 Lorry M 4,500 Bus 2,000 From the above statistics prepare an Operating Cost Sheet in summary for the three vehicles. Also explain the unit of costing selected. (M.Com., April 06, adapted) Ans: (Total Operating Cost: Lorry C: Rs. 1,178, Lorry M: Rs. 1,135, Bus: Rs. 955,Total Tonnes or Passenger Miles: Lorry C: 12,000, Lorry M: 21,600, Bus: 50,000) Illustration 5: An entrepreneur owns a bus which runs from Mumbai to Pune and back for 25 days in a month. The distance from Mumbai to Pune is 170 kms. The bus completes the trip from Mumbai to Pune and back on the same day. Calculate the fare to be charged to the following further information is available :
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Operating Costing - I
The bus usually runs full upto 90% of its capacity both ways. Permit fee is payable on the cost of bus at 10% p.a. (M.Com. April 05) Ans: (Total Operating Cost: Rs. 3,08,295, Total passenger Km.: 45,90,000) Illustration 6 : KKK Automobiles distributes its goods to a regional trader using a single lorry. The trader’s premises are 40 kms away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day fully loaded on the outward journeys and empty on return journeys. Your are given data for 4 weekly periods during the year 2003. Petrol consumption 8 kms per litre Petrol cost Rs. 13 per litre Oil Rs. 100 per week Driver’s wages Rs. 400 per week Repairs Rs. 100 per week Garage rent Rs. 150 per week Cost of lorry Rs. 4,50,000 (excluding tyres) Life of lorry 80,000 kms. Insurance Rs. 6,500 p.a. Cost of tyres Rs. 6,250 Life of tyres 2,500 kms Estimated Scrap value of lorry at the end of its life ₹50,000 Vehicle licence cost Rs. 1,300 p.a.
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80 Cost Accounting -III Other overhead cost Rs. 41,600 p.a. The lorry operates on a Five-day week Required : a) A statement to show the total cost of operating the vehicle for the 4 weekly periods analysed into running costs and fixed costs. b) Calculate vehicle cost per km. and per tonne km. (M. Com, Oct. 04, adapted) Ans: (Total Operating Cost: Rs. 28,800, Effective Km- Tonne .:16,000 Effective Km. 1600) Illustration 7 : A person owns a bus which runs between Delhi and Chandigarh and back for 10 days in a month. The distance between Delhi and Chandigarh is 150 kms. The bus completes the trip from Delhi and Chandigarh and back on the same day. The bus goes to Agra for another 10 days. The distance between Delhi and Agra is 120 kms. The trip is also completed on the same day. For the rest 4 days of its operation, it runs in Delhi. The daily distance covered is 40 kms. Calculate the charges to be made if a profit of 33(1/3)% is to be earned on his takings. The other available information given to you is : Cost of the bus Rs. 60,000. Depreciation 20% p.a. Salary of Driver Rs. 350 p.m. Salary of Conductor Rs. 350 p.m. Salary of Cleaner Rs. 160 p.m. Insurance Rs. 1,680 p.a. Diesel consumption is 4 kms per litre. Diesel costs Rs. one per litre. The token tax is Rs. 600 p.a. Lubricants Rs. 10 per 100 kms; repairs and maintenance Rs. 300 p.m.; permit fee Rs. 284 p.m. and the normal capacity is 50 persons. The bus generally has 90% of its capacity occupied when it goes to Chandigarh, 80% when it goes to Agra. It is always full when it runs within the city. Passenger tax is 20% of his net takings. (M. Com, Oct. 04, adapted) munotes.in

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Operating Costing - I Ans: (Total Operating Cost per month: Rs. 4,580, Cost per passenger Km. Rs.0.034) Illustration 8 : A person owns a bus that runs between Mumbai and Lonavala and back, for 10 days in a month. The distance from Mumbai to Lonavala is 150 kms. The bus completes the trip from Mumbai to Lonavala and return in the same day. The bus goes another 10 days in a month towards Alibagh. The distance from Mumbai to Alibagh is 120 kms. The trip is also completed on the same day. For the rest 4 days of its operation in a month it runs locally in Mumbai, covering daily distance of 40 kms. Calculate the rate that the person should charge from passenger when he wants to earn the profit of 25% on his takings and also calculate the charge per passenger for both the out-station trips. The other information is given as follows : Cost of the bus (Depreciation @ 20% p.a.; Normal Capacity : 50 persons) 6,00,000 Salary : Driver 5,000 per month Salary : Conductor 5,000 per month Fixed Office Overheads 2,000 per month Insurance 7,200 per month Fuel (Consumed @ 4 kms/litre) 35 per litre R.T.O. tax 600 per annum Lubricant Oil 10 per 100 kms Repairs and Maintenance 500 per month Permit Fee 300 per month Passenger tax is 20% of the net takings. The bus is occupied 90% of its capacity while on Lonavala trip and 80% of its capacity while on Alibagh trip, but is fully occupied in its local journey. (M. Com, April 08, adapted) Ans: (Total Operating Cost: Rs. 72,656, Total Passenger Km. 2,39.000, Cost per passenger Km.: Rs.48.64) Illustration 9 A transport company supplies the following details in respect of a truck of 5 tonne capacity which carries goods to an from the city covering a distance of 50 kms each way. munotes.in

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While going to the city, freight is available for a full load of the truck and on its return journey it can fetch freight only upto 20 percent of its capacity. On the assumption that the trucks runs on an average 25 days a month, you are required to determine the following : i) Operating cost per tone-km, ii) Rate per tone per trip that the company should charge if profit if 50 percent on cost is to be earned, and iii) What freight should the company charge if one wants to engage the truck for one day for a trip to the city and back? (M.Com , April 09, adapted) Ans: (Total Operating Cost: Rs. 8,250, Cost per Tonne Km.: Rs.1.100) Illustration 10 : From the following information relating to a Hotel, calculate the room rent to be charged to give a profit of 25% on cost excluding interest charged on Loan for the year ended 31st March, 2008 : 1) Salaries of office staff Rs. 50,000 per month. 2) Wages of the room attendant: Rs. 20 per day per room when the room is occupied. 3) lighting, Heating and Power : a) The normal lighting expenses for a room for the full month is Rs. 500, when occupied. b) Power is used only in winter and the charges are 200 for a room, when occupied. 4) Repairs to Beds and other furniture: Rs. 30,000 per annum. 5) Repairs to Hotel building: Rs. 50,000 per annum. 6) Licence fees: Rs. 12,400 per annum.
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Operating Costing - I 7) Sundries: ₹ 10,000 per month. 8) Interior decoration and furnishing: Rs. 1,00,000 per annum. 9) Depreciation @ 5% p.a. is to be charged on Building costing 20,00,000/- and @ 10% p.a. on Equipments. 10) There are 200 rooms in the Hotel, 80% of the rooms are generally occupied in summer, 60% in winter and 30% in rainy season. The period of summer, winter and rainy season may be considered to be of 4 months in each case. A month may be assumed of 30 days of an average (M. Com. Oct. 08, adapted) Ans: (Total Earnings: Rs. 33,18,000, Total Room Days: 40,800.Cost per Day: Rs.81 .32) Illustration 11: Relax Hotel has a capacity of 100 single rooms and 20 double rooms. The average occupancy of both single and double rooms is expected to be 80% throughout the year of 365 days. The rent for the double room has been fixed at 125% of the rent of the single room. The costs are as under: Variable Costs : Single rooms Rs. 220 each per day Double rooms Rs. 350 each per day Fixed Costs : Single rooms Rs. 120 each per day Double rooms Rs. 250 each per day Calculate the rent chargeable for single and double rooms per day in such a way that the hotel earns on overall profit of 20% on hire charges of rooms. (M. Com. April 09, adapted) Ans: (Total Earnings: Rs. 1,67,90,000, Total Room Days: Single room: 29,200 Double room : 5,840.) Illustration 12: A hospital is run by a Company. For this purpose it has hired a building at a rent of Rs. 5,000 per month plus it would bear the repair charges also. The hospital is having 25 beds and 5 more beds can be accommodated when the need arises. The staff of the hospital is as follows : 2 Supervisors each at a salary of Rs. 500 per month 4 Nurses each at a salary of Rs. 300 per month 2 Ward boys, each at a salary of Rs. 150 per month munotes.in

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84 Cost Accounting -III Although the hospital is open for patients all the 365 days in a year, records for the year 2004 disclose that only for 120 days in the year, the unit had the full capacity of 25 patients per day and when the beds were full, extra beds were hired at a charge of ₹ 5 per bed per day and this did not come to more than 5 beds extra above the normal capacity on any one day. The total hire charges for the extra beds incurred for the whole year were Rs. 2,000. The Unit engaged expert doctors from outside to attend on the patients and the fees was paid on the basis of the number of patients attended and time spent by them which on an average worked out to Rs. 10,000 per month in 2004. The other expenses for the year were as under: Repair and Maintenance Rs. 3,600 Food supplied to patients Rs. 44,000 Sanitary and Other services for patients Rs. 12,500 Laundry Charges Rs. 28,000 Medicines supplied Rs. 35,000 Cost of oxygen, X-ray, etc. other than directly borne for treatment of patients Rs. 54,000. General Administration Charges allocated to hospital Rs. 49,550. If the hospital recovered an amount of Rs. 100 per day on an average from each patient, compute the profit per patient – day made by the hospital as per operating cost sheet for the year 2004. (M. Com. Oct.06, adapted) Ans: (Total Earnings: Rs.61 ,350, Total Number of Patient days: 5000.)  munotes.in

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85 6 PROCESS COSTING Unit Structure 6.0 Learning Objectives 6.1 Introduction 6.2 Meaning of process costing 6.3 Distinction between job costing and process costing 6.4 Costing Procedure 6.5 Solved illustrations 6.6 Valuation of Work-in-progress 6.7 Questions 6.8 Exercise 6.0 LEARNING OBJECTIVES After studying this chapter you should able to understand  the meaning of Process Costing and its importance  the distinction between job costing and process costing  the accounting procedure of process costing including normal loss abnormal loss (or) gain  the valuation of work-in-progress, using FIFO, LIFO average and weighted average methods  the steps involved in inter process transfer 6.1 INTRODUCTION Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of industries also. It is assumed in process costing that the average cost presents the cost per unit. Cost of production during a particular period is divided by the number of units produced during that period to arrive at the cost per unit. 6.2 MEANING OF PROCESS COSTING Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process. munotes.in

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86 Cost Accounting -III 6.2.1 Definition: CIMA London defines process costing as “that form of operation costing which applies where standardize goods are produced” 6.2.2 Features of Process Costing: (a) The production is continuous (b) The product is homogeneous (c) The process is standardized (d) Output of one process become raw material of another process (e) The output of the last process is transferred to finished stock (f) Costs are collected process-wise (g) Both direct and indirect costs are accumulated in each process (h) If there is a stock of semi-finished goods, it is expressed in terms of equivalent units (i) The total cost of each process is divided by the normal output of that process to find out cost per unit of that process. 6.2.3 Advantages of process costing: 1. Costs are be computed periodically at the end of a particular period 2. It is simple and involves less clerical work that job costing 3. It is easy to allocate the expenses to processes in order to have accurate costs. 4. Use of standard costing systems in very effective in process costing situations. 5. Process costing helps in preparation of tender, quotations 6. Since cost data is available for each process, operation and department, good managerial control is possible. 6.2.4 Limitations: 1. Cost obtained at each process is only historical cost and are not very useful for effective control. 2. Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control. 3. Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations. 4. The computation of average cost is more difficult in those cases where munotes.in

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Process Costing more than one type of products is manufactured and a division of the cost element is necessary. 5. Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable. 6.3 DISTINCTION BETWEEN JOB COSTING AND PROCESS COSTING Job order costing and process costing are two different systems. Both the systems are used for cost calculation and attachment of cost to each unit completed, but both the systems are suitable in different situations. The basic difference between job costing and process costing are Basis of
Distinction Job order costing Process costing 1. Specific order Performed against
specific orders Production is contentious 2. Nature Each job many be
different. Product is Homogeneous
and standardized. 3. Cost
determination Cost is determined for
each job separately. Costs are compiled for
each process for
department on time basis
i.e. for a given
accounting period. 4. Cost
calculations Cost is compiled when a
job is completed. Cost is calculated at the
end of the cost period. 5. Control Proper control is
comparatively difficult
as each product unit is
different and the
production is not
continuous. Proper control is
comparatively easier as
the production is
standardized and is more
suitable. 6. Transfer There is usually not
transfer from one job to
another unless there is
some surplus work. The output of one process
is transferred to another
process as input. 7. Work -in-
Progress There may or may not be
work -in-progress. There is always some
work -in-progress
because of continuous
production. 8. Suitability Suitable to industries
where production is
intermittent and
customer orders can be
identified in the value of
production. Suitable, where goods
are made for stock and
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88 Cost Accounting -III 6.4 COSTING PROCEDURE For each process an individual process account is prepared. Each process of production is treated as a distinct cost center. 6.4.1 Items on the Debit side of Process A/c. Each process account is debited with – a) Cost of materials used in that process. b) Cost of labour incurred in that process. c) Direct expenses incurred in that process. d) Overheads charged to that process on some pre-determined. e) Cost of ratification of normal defectives. f) Cost of abnormal gain (if any arises in that process) 6.4.2 Items on the Credit side: Each process account is credited with a) Scrap value of Normal Loss (if any) occurs in that process. b) Cost of Abnormal Loss (if any occurs in that process) 6.4.3 Cost of Process: The cost of the output of the process (Total Cost less Sales value of scrap) is transferred to the next process. The cost of each process is thus made up to cost brought forward from the previous process and net cost of material, labour and overhead added in that process after reducing the sales value of scrap. The net cost of the finished process is transferred to the finished goods account. The net cost is divided by the number of units produced to determine the average cost per unit in that process. Specimen of Process Account when there are normal loss and abnormal losses. Dr. Process I A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Basic Material Xxx xx By Normal Loss xx xx To Direct Material xx By Abnormal Loss xx xx To Direct Wages xx By Process II A/c. xx xx To Direct Expenses xx (output transferred to To Production
Overheads xx Next process) To Cost of
Rectification of
Normal Defects xx By Process I
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Process Costing 6.4.4 Process Losses: In many process, some loss is inevitable. Certain production techniques are of such a nature that some loss is inherent to the production. Wastages of material, evaporation of material is un avoidable in some process. But sometimes the Losses are also occurring due to negligence of Labourer, poor quality raw material, poor technology etc. These are normally called as avoidable losses. Basically process losses are classified into two categories (a) Normal Loss (b) Abnormal Loss 1. Normal Loss: Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and production process under normal conditions. It is normally estimated on the basis of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness. It may occur at any time of the process. No of units of normal loss: Input x Expected percentage of Normal Loss. The cost of normal loss is a process. If the normal loss units can be sold as a crap then the sale value is credited with process account. If some rectification is required before the sale of the normal loss, then debit that cost in the process account. After adjusting the normal loss the cost per unit is calculates with the help of the following formula: Cost of good unit: Total cost increased – Sale Value of Scrap Input – Normal Loss units 2. Abnormal Loss: Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness, accident etc. such losses are in excess of pre-determined normal losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are more than expected losses. The units of abnormal losses in calculated as under: Abnormal Losses = Actual Loss – Normal Loss The value of abnormal loss is done with the help of following formula: Value of Abnormal Loss: Total Cost increase – Scrap Value of normal Loss x Units of abnormal loss Input units – Normal Loss Units Abnormal Process loss should not be allowed to affect the cost of production as it is caused by abnormal (or) unexpected conditions. munotes.in

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90 Cost Accounting -III Such loss representing the cost of materials, labour and overhead charges called abnormal loss account. The sales value of the abnormal loss is credited to Abnormal Loss Account and the balance is written off to costing P & L A/c. Dr. Abnormal Loss A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process A/c. xx xx By Bank xx xx By Costing P & L
A/c. xx xx xx xxx xx xx 3. Abnormal Gains: The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process industries in normal conditions) and slight differences are bound to occur between the actual output of a process and that anticipates. This difference may be positive or negative. If it is negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss is less than the normal loss then it is called as abnormal gain. The value of the abnormal gain calculated in the similar manner of abnormal loss. The formula used for abnormal gain is: Abnormal Gain Total Cost incurred – Scrap Value of Normal Loss x Abnormal Gain Unites Input units – Normal Loss Units The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a Real Gain. Dr. Abnormal Gain A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Normal
Loss A/c. xx xx By Process A/c. xx xx To Costing P
& L A/c. xx xx xx xxx xx xx munotes.in

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Process Costing Check Your Progress: 1. Define the following terms a. Process costing b. Normal Loss c. Abnormal Loss 2. Give the formulas of following a) Cost of good / normal unit b) Value of Abnormal Loss 6.5 SOLVED ILLUSTRATIONS Illustration 1: (Normal / Abnormal Loss) Prepare a Process Account, Abnormal Loss Account and Normal Loss Account from the following information.
Solution : Dr. Process – I A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Raw material @
20 1000 20000 By Normal Loss To Direct
Material 4200 (5% on
1000) 50 400 To Direct Wages 6000 By Abnormal
Loss A/c. 50 To Production BY Process – II
A/c. Overheads 6000 (output
transferred) 900 1000 36200 1000 36200
1000 units @ Rs. 20 per unit Rs. 4,200/- Rs. 6,000/- Rs. 6,000/- 900 units 5% Rs. 8/-
Input of Raw material Direct Material Direct Wages Production Overheads Actual output transferred to process II Normal Loss munotes.in

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92 Cost Accounting -III Dr. Abnormal Loss A/c. Cr.
Dr. Normal Loss A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process – I
A/c. 50 400 BY Bank 50 400 Working Notes: (1) Cost of abnormal Loss : = Total Cost increased – Sales value of Scrap x abnormal units Input units – Normal Loss Units = 36200 – 400 x 50 1000 – 50 (2) It has been assumed that units of abnormal loss have also been sold at the same rate i.e. of Normal Scrap Illustration 2: (Normal / Abnormal Loss and Abnormal Gain) The product of a company passes through 3 distinct process. The following information is obtained from the accounts for the month ending January 31, 2008. Particulars Process – A Process – B Process – C Direct Material 7800 5940 8886 Direct Wages 6000 9000 12000 Production Overheads 6000 9000 12000 3000 units @ Rs. 3 each were introduced to process – I. There was no stock of materials or work in progress. The output of each process passes directly to the next process and finally to finished stock A/c. Particulars Units Rs. Particulars Units Rs. To Process – I
A/c. 50 By Bank A/c. 50 400 By Costing P & L
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Process Costing The following additional data is obtained : Process Output Percentage of Normal
Loss to Input Value of Scrap
per unit (Rs.) Process – I 2850 5 % 2 Process – II 2520 10 % 4 Process – III 2250 15 % 5 Prepare Process Cost Account, Normal Cost Account and Abnormal Gain or Loss Account. Solution: Dr. Process – A A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Units
introduced 3000 9000 By Normal Loss
A/c. 150 300 To Direct
Material 7800 By Process – B
A/c. 2850 28500 To Direct Wages 6000 (Units transferred To Production @ Rs. 10/-) Overheads 6000 3000 28800 3000 28800 Dr. Process – B A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process – I A/c. 2850 28500 By Normal Loss
A/c. 285 1140 To Direct
Material 5940 By Abnormal
Loss A/c. 45 9000 To Direct Wages 9000 By Process – C
A/c. 2520 50400 To Production Overheads 9000 2850 52440 2850 52440 munotes.in

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94 Cost Accounting -III Dr. Process – C A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process – II
A/c. 2520 50400 By Normal Loss
A/c. 378 1890 To Direct
Material A/c 8886 By Finished
Stock A/c. 2250 85500 To Direct Wages 12000 To Production Overheads 12000 To Abnormal
Gain A/c. 108 4104 2628 87390 2628 87390 Dr. Abnormal Gain A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Normal Loss
A/c. 108 540 By Process – C
A/c. 108 4104 To Costing P&L
A/c. 3564 108 4104 108 4104 Dr. Normal Loss A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process – A
A/c. 150 300 By Bank A/c.
(Sales) To Process – B
A/c. 285 1140 Process – A A/c. 150 300 To Process – C
A/c. 378 1890 Process – B A/c. 285 1140 Process – C A/c. 270 1350 By Abnormal
Gain A/c. 108 540 813 3330 813 3330 6.6 INTER PROCESS PROFITS Normally the output of one process is transferred to another process at cost but sometimes at a price showing a profit to the transfer process. The transfer price may be made at a price corresponding to current wholesale market price or at cost plus an agreed percentage. The advantage of the method is to find out munotes.in

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95
Process Costing Whether the particular process is making profit (or) loss. This will help the management whether to process the product or to buy the product from the market. If the transfer price is higher than the cost price then the process account will show a profit. The complexity brought into the accounting arises from the fact that the inter process profits introduced remain a part of the prices of process stocks, finished stocks and work-in-progress. The balance cannot show the stock with profit. To avoid the complication a provision must be created to reduce the stock at actual cost prices. This problem arises only in respect of stock on hand at the end of the period because goods sold must have realized the internal profits. The unrealized profit in the closing stock is eliminated by creating a stock reserve. The amount of stock reserve is calculated by the following formula. Stock Reserve = Transfer Value of stock x Profit included in transfer price Transfer Price Illustration 3 : A product passes through three processes before its completion. The output of each process s charged to the next process at a price calculated to give a profit of 20% on transfer price. The output of Process III is transferred to finished stock account on a similar basis. There was no work-in-progress at the beginning of the years. Stock in each process has been valued at prime cost of the process. The following data is available at the end of 31st March, 2009. Process I Process
II Process
III Finished
Stock Rs. Direct Material 20000 30000 10000 -- Direct Wages 30000 20000 40000 -- Stock on 31st March
2009 10000 20000 30000 15000 Sale during the year -- -- -- 180000 From above information prepare: 1. Process Cost Account showing the profit at each stage. 2. Actual realized profit and 3. Stock Valuation as would appear in the balance sheet Solution: Dr. Process – I A/c. Cr. Particulars Total
Rs. Cost
Rs. Profit
Rs. Particulars Total
Rs. Cost
Rs. Profit
Rs. To Materials 20000 20000 -- By Process
II A/c.
(Transfer) 50000 40000 10000 munotes.in

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96 Cost Accounting -III Particulars Total
Rs. Cost
Rs. Profit
Rs. Particulars Total
Rs. Cost
Rs. Profit
Rs. To Wages 30000 30000 -- Total 50000 50000 -- Les Closing Stock c/d 10000 10000 -- Prime Cost 40000 40000 -- To Gross Profit 10000 -- 10000 (20% on Transfer Price) 50000 40000 10000 50000 40000 10000 To Stock B/d. 10000 10000 -- Dr. Process – II A/c. Cr. Particulars Total
Rs. Cost
Rs. Profit
Rs. Particulars Total
Rs. Cost
Rs. Profit
Rs. To Process
– I A/c. 50000 40000 10000 By Process -
III A/c. 100000 72000 28000 To Material 30000 30000 -- (Transfer) To Wages 20000 20000 -- 100000 90000 10000 Less :
Closing Stock C/d. 20000 18000 2000 Prime Cost 80000 72000 8000 To Gross
Profit (20% on Transfer
Price) 20000 -- 20000 100000 72000 28000 100000 72000 28000 To Stock
B/d. 20000 18000 2000 munotes.in

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97
Process Costing Process III A/c Particulars Total
Rs. Cost
Rs. Profit
Rs. Particulars Total
Rs. Cost
Rs. Profit
Rs. ToprocessII 100000 72000 28000 By
Finished 150000 97600 52400 A/c stock A/c To Material 10000 10000 To Wages
TOTAL
Less.Closing 40000 40000 ------- 150000 122000 28000 stock
To Gross
profit 30000 24400 5600 120000 97600 22400 (20%of
transfer
price) 30000 -------- 30000 150000 97600 52400 150000 97600 52400 To Stock b/d 30000 24000 5600 Finished stock A/c Particulars Total
Rs. Cost
Rs. Profit
Rs. Particulars Total
Rs. Cost
Rs. Profit
Rs. To process 115000 97600 52400 By Sales 180000 87840 92160 III A/c (-)Stock 15000 9760 5240 To gross
profit 135000 87840 92160 45000 --- 45000 180000 87840 92160 180000 87840 92160 To Stock
A/c 15000 9760 5240 Calculation of profit on closing stock Profit included in stock = Profit included in transfer price x Value of stock Transfer price Process I = No profit Process II = 10000 x 20000=2000 100000 Process III =28000x30000=5600 150000 Finished stock= 52400x15000=5240 150000 munotes.in

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98 Cost Accounting -III Illustration 4 : A product process through three process A, B and C. The details of expenses incurred on the three process during the year 2008 were as under : Process A Process B Process C Units introduced 10000 Cost per unit is Rs. 50/ - Rs. Rs. Rs. Sundry Material 6000 9000 3233 Labour 18000 48000 39000 Direct Expenses 3000 11000 18000 Selling price per unit of output 70 100 200 Management expenses during the year were Rs. 80000 and selling were Rs. 5000. There are not allocable to the processes. Actual output of the three process were A – 9300 units, B – 5400 units and C 2100 units. Two-thirds of the output of process A and one half of the output of process B was passed on to the next process A and one-half of the output of process B was passed on to the next process and the balance was sold. The entire output of process C was sold. The normal losses of the three process, calculated on the input of every process was : Process A – 5%, B – 15% and C – 20%. The loss of process A was sold @ Rs. 3 per unit, that of B @ Rs. 5 per unit and of process C @ Rs. 10 per unit. Prepare process A, B and C account and the Profit and Loss Account. Solution : Dr. Process A A/c. Cr. Particulars Units Rs. Particulars Units Rs. ToUnits
Introduced
@RS.50 10000 5,00,000 By Normal
Loss 500 1,500 By Abnormal
loss 200 11063 ToSundry
Materials 6,000 By process B 6,200 342958 To Labour 18,000 By output sold 3,100 171479 ToDirect
Expenses 3,000 10000 5,27,000 10000 5,27,000 munotes.in

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Process Costing Dr. Process B A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process A
A/c. 6200 342958 By Normal Loss 930 4650 ToSundry
Materials 9000 By Process C
A/c. 2700 2,08,165 To Labour 48000 By output sold 2700 2,08,165 To Direct
Expenses 11000 ToAbnormal
Gains 100221 A/c. (@ 77.19) 6330 420980 6,330 4,20,980 Dr. Process C A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process B
A/c. 2700 208165 By Normal Loss 540 5400 ToSundry
Materials 3233 By Abnormal
Loss 60 7305 To Labour 39000 By output sold 2100 255693 To Direct
Expenses 18000 (@ 12.76) 2700 268398 2700 268398 Dr. Profit & Loss A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process A
A/c. 3100 171479 By Sales( @ Rs. 70) 3100 217000 To Process B
A/c. 2700 208165 By Sales(@Rs. 100) 2700 270000 To Process C
A/c. 2700 265693 BySales(@Rs.2000) 2700 420000 To
Management
Expenses A/c. 80000 BY Abnormal Gain
A/c. 9372 To Selling
Expenses 50000 To Abnormal
Loss A/c. 17168 To Net Profit 133867 916372 916372 munotes.in

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100 Cost Accounting -III Dr. Abnormal Loss A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process A A/c. 200 11063 By Bank Sales To Process B A/c. 60 7305 (@ Rs. 30) 200 600 By Bank (@ Rs. 10) 60 600 By P & L A/c. 17168 260 18368 260 18368 Dr. Abnormal Gain A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Normal Loss
A/c. 130 650 By Process B /c. 130 10022 To Costing P & L
A/c. 9372 130 10022 130 10022 Illustration 5 Mahesh Ltd process a material which passes through three processes. Figures relating to production for the first 6 months of 2009 are as follows. Proce ss A Proce ss B Proce ss C Raw material used 1000 tones
@ Rs. 200 Manufacturing Wages Rs. 40000 Rs. 30000 Rs. 7000 Expenses Rs. 32500 Rs. 10800 Rs. 3710 Scrap sold @ Rs. 50 per tone 50 tones 30 tones 51 tones Selling price per tone Rs. 320 Rs. 450 Rs. 800 Weight Loss 5% 10% 20% Management expenses were Rs. 10500, selling expenses Rs. 8000 and interest on borrowed capital Rs. 2000. Two third of process I and one half of process 2 are passed on to the next process and the balance are sold. Prepare Process Account, Process Stock Account and Costing Profit & Loss A/c. Solution Dr. Process No. 1 A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Material @
Rs. 200 1000 200000 By Normal Loss
(sale of Scrap) 50 2500 To Wages 40000 By Weight Loss 50 -- To Expenses 32500 By Process I Stock
A/c.(@300per tone) 900 270000 1000 272500 1000 272500 munotes.in

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Process Costing Dr. Process No. 1 Stock A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process I A/c. 900 270000 By Bank (@ 320) 300 96000 To Costing Profit
& Loss A/c. 6000 ByProcessNo.2
A/c. 600 180000 900 276000 900 276000 Dr. Process No. 2 A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process 1
Stock A/c. 600 180000 By Normal Loss
(@ Rs. 50) 30 1500 To wages 30000 To Expenses 10800 By Weight Loss 60 -- By Process 2
Stock A/c(@ Rs. 430) 510 219300 600 220800 600 220800 Dr. Process No. 2 Stock A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process 2 A/c. 510 219300 By Bank To Costing P&L
A/c. 5100 (sale @ 450) 255 114750 By Process 3 A/c. 255 109650 510 244400 510 244400 Dr. Process No. 3 A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process 2
Stock A/c. 255 109650 By scrap 51 2550 To wages 7000 By Weight Loss 51 -- To Expenses 3710 By Process 3
stock A/c 153 117810 255 120360 255 120360 Dr. Process No. 3 Stock A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Process 3 A/c. 153 117810 By Bank To Costing P & L
A/c. 4590 (sale @ 800) 153 122400 153 122400 153 122400 munotes.in

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102 Cost Accounting -III Dr. Costing Profit & Loss A/c. Cr. Particulars Rs. Particulars Rs. To Management Expenses 10500 By Process 1 Stock A/c. 6000 To Selling Expenses 8000 By Process 2 Stock A/c. 5100 To Interest on Capital 2000 By Process 3 Stock A/c. 4590 By Net Loss 4810 20500 20500 6.7 VALUATION OF WORK-IN-PROGRESS 6.7.1 Meaning of Work-in-Progress: Since production is a continuous activity, there may be some incomplete production at the end of an accounting period. Incomplete units mean those units on which percentage of completion with regular to all elements of cost (i.e. material, labour and overhead) is not 100%. Such incomplete production units are known as Work-in-Progress. Such Work-in-Progress is valued in terms of equivalent or effective production units. 6.7.2 Meaning of equivalent production units : This represents the production of a process in terms of complete units. In other words, it means converting the incomplete production into its equivalent of complete units. The term equivalent unit means a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress, when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity. The principle applies when operation costs are apportioned between work in progress and completed units. Equivalent units of work in progress = Actual no. of units in progress x Percentage of work completed Equivalent unit should be calculated separately for each element of cost (viz. material, labour and overheads) because the percentage of completion of the different cost component may be different. 6.7.3 Accounting Procedure: The following procedure is followed when there is Work-in- Progress 6.7.3.1 Find out equivalent production after taking into account of the process losses, degree of completion of opening and / or closing stock. 6.7.3.2 Find out net process cost according to elements of costs i.e. material, labour and overheads. 6.7.3.3 Ascertain cost per unit of equivalent production of each element of cost separately by dividing each element of costs by respective equivalent production units. munotes.in

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Process Costing 6.7.3.4 Evaluate the cost of output finished and transferred work in progress The total cost per unit of equivalent units will be equal to the total cost divided by effective units and cost of work-in- progress will be equal to the equivalent units of work-in- progress multiply by the cost per unit of effective production. In short the following from steps an involved. Step 1 – prepare statement of Equivalent production Step 2 – Prepare statement of cost per Equivalent unit Step 3 – Prepare of Evaluation Step 4 – Prepare process account The problem on equivalent production may be divided into four groups. 6.7.3.4.1 when there is only closing work-in-progress but without process losses 6.7.3.4.2 when there is only closing work-in-progress but with process losses 6.7.3.4.3 when there is only opening as well as closing work-in- progress without process losses 6.7.3.4.4 when there is opening as well as closing work-in- progress with process losses Situation I : Only closing work-in-progress without process losses : In this case, the existence of process loss is ignored. Closing work-in-progress is converted into equivalent units on the basis of estimates on degree of completion of materials, labour and production overhead. Afterwards, the cost pr equivalent unit is calculated and the same is used to value the finished output transferred and the closing work-in-progress Situation II: When there is closing work-in-progress with process loss or gain. If there are process losses the treatment is same as already discussed in this chapter. In case of normal loss nothing should be added to equivalent production. If abnormal loss is there, it should be considered as good units completed during the period. If units scrapped (normal loss) have any reliable value, the amount should be deducted from the cost of materials in the cost statement before dividing by equivalent production units. Abnormal gain will be deducted to obtain equivalent production. Situation III: Opening and closing work-in-progress without process losses. Since the production is a continuous activity there is possibility of opening munotes.in

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104 Cost Accounting -III as well as closing work-in-progress. The procedure of conversion of opening work-in-progress will vary depending on the method of apportionment of cost followed viz, FIFO, Average cost Method and LIFO. Let us discuss the methods of valuation of work-in-progress one by one. (a) FIFO Method: The FIFO method of costing is based on the assumption of that the opening work-in-progress units are the first to be completed. Equivalent production of opening work-in-progress can be calculated as follows: Equivalent Production = Units of Opening WIP x Percentage of work needed to finish the units (b) Average Cost Method: This method is useful when price fluctuate from period to period. The closing valuation of work-in-progress in the old period is added to the cost of new period and an average rate obtained. In calculating the equivalent production opening units will not be shown separately as units of work-in-progress but included in the units completed and transferred. (c) Weighted Average Cost Method: In this method no distinction is made between completed units from opening inventory and completed units from new production. All units finished during the current accounting period are treated as if they were started and finished during that period. The weighted average cost per unit is determined by dividing the total cost (opening work-in-progress cost + current cost) by equivalent production. (d) LIFO Method: In LIFO method the assumption is that the units entering into the process is the last one first to be completed. The cost of opening work-in-progress is charged to the closing work-in-progress and thus the closing work-in- progress appears cost of opening work-in-progress. The completed units are at their current cost. (1) Format of statement of Equivalent Production : Input Output Equivalent Production Particulars Units Particulars Units Material Labour Overheads % Units % Units % Units Opening
Stock xx Units
completed xx xx xx xx xx Units
Introduced xx Normal
Loss xx -- -- -- -- Abnormal
Loss xx xx xx xx xx xx Equivalent
Units xx xx xx xx xx xx Xx munotes.in

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Process Costing (2) Statement of cost per Equivalent Units : Element of costing Cost Rs. Equivalent
Units Cost per
Equivalent Units
Rs Material Cost (Net) Xx Xx Xx Labour Cost Xx Xx Xx Overheads Cost Xx xx Xx xx Xx (3) Statement of Evaluation Particulars Element of cost Equivalent
Units Cost per
equivalent
units
Rs. Cost
Rs. Total
Cost
Rs. Units completed Material xx xx xx Labour xx xx xx Overheads xx xx xx Xx Closing WIP Material xx xx xx Labour xx xx xx Overheads xx xx xx Xx Abnormal Loss Material xx xx xx Labour xx xx xx Overheads xx xx xx Xx Illustration 6: (Average Costing) Prepare a statement of equivalent production, statement of cost, process account from the following information using average costing method. Opening Stock 50000 Units Material Rs. 25000 Labour Rs. 10000 Overheads Rs. 25000 Units Introduced 2000000 Units Material Rs. 100000 Wages Rs. 75000 Overheads Rs. 70000 During the period 1,50,000 units were completed and transferred to Process II. munotes.in

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106 Cost Accounting -III Closing stock 1,00,000 units. Degree of completion.
Statement of Cost : Element Opening
cost Rs. Current
cost Rs. Total
Cost Rs. Equivalent
units Cost
per
unit Material 25,000 1,00,000 1,25,000 2,50,000 0.500 Labour 10,000 75,000 85,000 2,00,000 0.425 Overheads 25,000 70,000 95,000 1,90,000 0.500 60,000 2,45,000 3,05,000 1.425 Statement of Apportionment of Cost Particulars Units Cost per
unit Cost Total cost 1. Units introduced &
transferred 1,50,000 1.425 213750 2. Closing work -in-progress Material 1,00,000 0.500 50,000 Labour 50,000 0.425 21,250 Overheads 40,000 0.500 20,000 91,250 3,05,000 Dr. Process I A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Opening
Stock 50,000 60,000 By Units
completed To Materials 2,00,000 1,00,000 & transfer 50,000 2,13,750 To Labour 75,000 By Closing Stock 50,000 91,250 To
Overheads 70,000 2,50,000 3,05,000 2,50,000 3,05,000 Material 100 % Labour 50 % Overheads
Solution : 40 % Input Output Equivalent Production Particulars Units Particula rs Units Material Labour Overheads % Units % Units % Units Opening Units Stock 50,000 Produced 150000 100 150000 100 150000 100 150000 Introduced 200,000 Closing Stock 100000 100 100000 50 50000 40 40000 250000 250000 250000 200000 190000 munotes.in

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Process Costing Illustration 7: (FIFO Method) From the following information relating to KKN Company Ltd. Prepare Process Cost Account for Process III for the year 2008. Opening Stock IN Process III 5000 units of Rs. 36,000 Transfer from Process II 2,13,000 units of Rs. 8,27,000 Direct Material added in Process III Rs. 4,01,800 Direct Wages Rs. 1,98,100 Production Overhead Rs. 99,050 Units Scrap 11,000 units Transferred to Process IV units 1,89,000 Closing Stock 18,000 units There was a normal loss of 5% production and unit scraped were sold at Rs. 1.50 Solution : Input Output Equivalent Production Particular s Units Particulars Units Material Labour Overheads % Units % Units % Units Opening Normal Stock 5,000 Loss 10000 Process II Op. Stock Transfer 213,000 Processed 5000 - - 30 1500 50 2500 Introduces
&
Completed 184000 100 184000 100 184000 100 184000 Abnormal Loss 1000 100 1000 100 1000 80 800 Closing Stock 18000 100 18000 80 14400 60 10800 218000 218000 203000 200900 198100 Note : Units Produced: Opening stock + units introduced – closing stock : 5000 +213000 – 18000 = 200000 Normal Loss : 5 % of 200000 = 10000 units Degree of Completion : Opening Stock Closing Stock Scrap Material 70 % 80 % 100 % Labour 50 % 60 % 80 % Overhead 50 % 60 % 80 % munotes.in

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108 Cost Accounting -III Statement of Cost Particulars Cost Rs. Equivalent
Units Rs. Cost
Per
Unit
Rs. Material – I Transfer process
From Previous 8,27,000 Less – (normal) Value of
scrap 15,000 8,12,000 2,03,000 4.00 Material – II Added+ in the process 4,01,800 2,00,900 2.00 Direct Wages 1,98,100 1,98,100 1.00 Overheads 99,050 1,98,100 0.50 7.50 Statement of Apportionment of Cost Particulars Elements Equivalent
Units Cost
Per
Unit
Rs. Cost Rs. Total
cost Rs. Op. Stock
Processed Material I -- -- Material II 1,500 2.00 3,000 Wages 2,500 1.00 2,500 Overheads 2,500 0.50 1,250 6,750 Units introduced
and Material I 1,84,000 4.00 7,36,000 Completed Material II 1,84,000 2.00 3,68,000 Wages 1,84,000 1.00 1,84,000 Overheads 1,84,000 0.50 92,000 13,80,000 Closing stock Material I 18,000 4.00 72,000 13,86,750 Material II 14,400 2.00 28,800 Wages 10,800 1.00 10,800 Overheads 10,800 0.50 5,400 1,17,000 Abnormal loss Material I 1,000 4.00 4,000 Material II 1,000 2.00 2,000 Wages 800 1.00 800 Overheads 800 0.50 400 7,200 TOTAL 15,10,950 munotes.in

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Process Costing Dr. Process III A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Balance
b/d. 5,000 36,000 By Normal
Loss 10,000 15,000 To Process II
A/c. 2,13,000 8,27,000 By Process
IV A/c. 1,89,000 14,22,750 To Materials 4,01,800 By
Abnormal
Loss 1,000 7,200 To Wages 1,98,100 By Closing
Stock 18,000 1,17,000 To
Overheads 99,050 2,18,000 15,61,950 2,18,000 15,61,950 Note : Cost of goods transferred to Process IV : Value of Opening Stock 36,000 Cost incurred in this process for Opening Stock 6,750 Cost incurred for the units introduced & Processed 13,80,000 Total 14,22,750 Illustration 8 The following information is given in respect of Process costing 10 : 3 for the month of January 2009. Opening stock – 2,000 units made up of Rs. Direct Material – I 12,350 Direct Material – II 13,200 Direct Labour 17,500 Overheads 11,000 Transferred from Process 2 – 20,000 units @ Rs. 6 per unit. Transferred to Process 4 – 17,000 units Expenditure incurred in process – 3 Rs. Direct Material 30,000 Direct Labour 60,000 Overheads 60,000 Scrap:1,000 units-Direct Materials 100%,Direct Labour 60%, Overheads 40%. Normal Loss 10 % of Production. Scrapped units realized Rs. 4/- per unit Closing stock : 4,000 units – Degree of completion. Direct Materials 80 %, Direct Labour 60 % and Overheads 40 %. munotes.in

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110 Cost Accounting -III Prepare Process 3 Account using average price method along with necessary supporting statements. [C. A. – Inter, May 2001] Solution : Statement of Equivalent Production (weighted Average cost Material) Particulars Total
Units Material –
I Material –
II Labour Overheads % Units % Units % Units Units
Completely Processed 17000 100 17000 100 17000 100 17000 100 17000 Normal Loss 1800 -- 10% of (2000
+ 20000 –
4000) Abnormal
Gain 800 100 800 100 800 100 800 100 800 Closing
Stock 4000 100 4000 80 3200 60 2400 40 1600 22000 20200 19400 18600 17800 Statement of Cost Particulars Cost Rs. Equivalent
Units Rate /
Equivalent
Units Rs. Material – I : Opening balance 2000 units 12,350 Cost of 20000 units @ Rs. 6 Per unit 1,20,000 1,25,150 20,200 6.1955 Material – II : Opening Stock 13,200 In Process II 30,000 43,200 19,400 2.2268 Labour : Opening Labour 17,500 In Process II 60,000 77,500 18,600 4.1667 Overheads : Opening Stocks 11,000 In Process II 60,000 71,000 17,800 3.9888 Total cost per unit 16.5778 munotes.in

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Process Costing Valuation of Equivalent Unit Rs. Finished goods
Abnormal Units
Workinprogress
Material I
Material II
Labour
Overheads (17000 units x Rs. 16.5778)
(800 units x Rs. 16.5778)

(4000 units x Rs. 6.1955)
(3200 units x Rs. 2.2268)
(2400 units x Rs. 4.1667)
(1600 units x Rs. 3.9888)

24,782
7,126
10,000
6,382 2,81,822
13,262



48,290 Dr. Process III A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Opening
WIP 2,000 57,050 By Normal Loss 1,800 7,200 To Process 2 20,000 1,20,000 By Finished Goods To Direct Units 17,000 2,81,822 Material II 30,000 By Closing Balance 4,000 48,290 To Direct
Labour 60,000 To Overheads 60,000 To Abnormal
Gain 800 13,262 22,800 3,37,312 22,800 3,37,312 Illustration.9 The finished product of a factory pass through two processes.The entire material being placed in process at the beginning of the first process. From the following production and last data relating to the first process, work out the value of the closing inventory and the value of the materials transferred to the second process. Process I Rs. Opening inventory 10,000 Material 27,500 Labour 50,000 Manufacturing Overheads 40,000 Opening inventory (25 percent complete) 4,000 Put into Process 12,000 Transferred to II Process 10,000 Closing inventory (20 percent completed) 5,000 Spoilage during process 1,000
[I.C.W.A., Final] munotes.in

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112 Cost Accounting -III Solution : Process I A/c Particulars Kg. Amount
Rs. Particulars Kg. Amount
Rs. Opening
Inventory 4,000 10,000 Transferred to
Process II 10,000 1,15,750 Material 12,000 27,500 Normal Loss 1,000 -- Labour 50,000 Closing
Inventory 5,000 11,750 Manufacturing Overheads 40,000 16,000 1,27,500 16,000 1,27,500 Working Note : Statement of Equivalent Production Units Particulars Output
Kg. Material Labour Overheads Qty. % Qty. % Qty. % Opening Stock
Processed 4,000 3,000 75 3,000 75 3,000 75 Completely
Processed 6,000 6,000 100 6,000 100 6,000 100 Normal Loss 1,000 -- -- -- -- -- -- Closing
Inventory 5,000 1,000 20 1,000 20 1,000 20 16,000 10,000 10,000 10,000 Statement of Element of Cost on the basis of Equivalent Production Particulars Cost Rs. Equivalent
Units Cost per Unit
Rs. Material 27,500 10,000 2.75 Labour 50,000 10,000 5.00 Overheads 40,000 10,000 4.00 Total 11.75 Statement of Apportionment of Cost Particulars Elements Equivalent
Units Cost
Per
Unit
Rs. Cost Rs. Total cost
Rs. Op. Stock
Processed Material 3,000 2.75 8,250 Labour 3,000 5.00 15,000 Overheads 3,000 4.00 12,000 35,250 Completely
Processed Material 6,000 2.75 16,500 munotes.in

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Process Costing Particulars Elements Equivalent
Units Cost
Per
Unit
Rs. Cost Rs. Total cost
Rs. Labour 6,000 5.00 30,000 Overheads 6,000 4.00 24,000 70,500 Closing
Inventory Material 1,000 2.75 2,750 Labour 1,000 5.00 5,000 Overheads 1,000 4.00 4,000 11,750 TOTAL 1,17,500 Value of goods transferred to next process Rs. Units Value of opening stock (given) 10,000 Additional cost on opening stock 35,250 4,000 Value of completely processed units 70,500 6,000 1,15,750 10,000 Illustration 10 ABC Limited manufactures a product ‘2X’ by using the process normally R. T. for the month of May 2009, the following data is available. Process R. T. Material Introduced 16,000 units Transfer to next process 14,000 units Work-in-Process 4,000 units At the beginning of the month (4/5 completed) 3,000 units At the end of the month (2/3 completed) Cost records: Work-n-Process at the beginning of the month Material Rs. 30,000 Conversioncost Rs. 29,200 Cost during the month Materials Rs. 1,20,000 Conversion cost Rs. 1,60,800 Normal spoiled units are 10% of goods finished output transferred to next process. Defects in these units are identified in their finished state. Materials for the product is put in the process at the beginning of the cycle of operation, whereas labour and other indirect cost flow evenly over the year. It has no realizable value for spoiled units. munotes.in

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114 Cost Accounting -III Required : (1) Statement of equivalent production (average cost method) (2) Statement of cost and distribution of cost (3) Process accounts [C.A. PCE. Nov. 2007] Solution : Statement of Equivalent Production (average cost method) Input
units Particulars Output
Units Equivalent Production Materials Conversion cost %
completed Equivalent
Units %
Complet
ed Equivalent
Units 4000 Opening WIP -- -- 16000 Introduced
and 14,400 100 14,400 100 14,400 Completed to
next Normal
spoilage 1,440 100 1,440 100 1,440 Abnormal
spoilage 1,160 100 1,160 100 1,160 Closing WIP 3,000 100 3,000 66.67 2,000 20000 20000 20000 19000 Statement showing cost of each element Particulars Materials Conversio n cost Opening 30,000 29,200 Cost in process 1,20,000 1,60,800 Total (a) 1,50,000 1,90,000 Equivalent Units (b) 20,000 19,000 Cost per unit (a ÷ b) 7.50 10.00 Statement showing distribution of cost Particulars Equivalent
Units Cost per
unit (Rs.) Units completed Materials 14,400 7.50 1,08,000 Conversion cost 14,400 10.00 1,44,000 2,52,000 Normal spoilage 1,440 17.50 25,200 (10 %) munotes.in

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Process Costing Particulars Equivalent
Units Cost per
unit (Rs.) Closing stock : Material 3,000 7.50 22,500 Conversion cost 2,000 10.00 20,000 42,500 Abnormal Stock: Material 1,160 7.50 8,700 Conversion Stock 1,160 10.00 11,600 20,300 Dr. Process A/c. Cr.
Illustration.11 GH & Co. manufactures a product. The process costing is followed and work-in-progress stocks at the end of each month are valued at FIFO basis. At the beginning of the month of June, the inventory of work- in-progress showed 400 units, 40% complete, valued as follows: Rs. Material 3,600 Labour 3,400 Overheads 1,000 Total 8,000 In the month of June, materials were purchased for Rs. 75,000. Wages and overheads in the month amounted to Rs. 79,800 and Rs. 21,280 respectively. Actual issue of material to production was Rs. 68,500. Finished stock in the month was 2500 units. There was no loss in process. All the end of the month, the work-in-process inventory was 500 units, 60 percent complete as to labour and overheads and 80 % complete as to materials. Prepare a Process Account for recording the month’s transactions and prepare a Process Cost Sheet showing total and units costs [I.C.W.A., Final] Particulars Rs. Particulars Rs. To Opening WIP 59,200 By Profit and Loss A/c. To Material 1,20,000 (abnormal) 20,300 Introduced To Conversion cost 1,60,800 By Transfer to Next 2,77,200 Incurred Process By Closing WIP 42,500 340000 3,40,000 munotes.in

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116 Cost Accounting -III Solution: Dr. Process A/c. Cr. Particulars Units Rs. Particulars Units Rs. To Opening 400 8,000 BY Transfer to Stock To Material 2,600 68,500 Finished stock 2,500 1,56,094 To Labour 79,800 By Work -in- To Overheads 21,280 Progress 500 21,486 3000 1,77,580 3000 1,77,580 Working Note : Statement of Equivalent Production (Units) Input Particulars Outp
ut Material Labour Overhead Qty. % Qty. % Qty. % 400 Opening
Stock
Completely
Processed
Work -in-
Progress 400 240 60 240 60 240 60
2600
2,100
2,100
100
2,100
100
2,100
100 500 400 80 300 60 300 60 3000 3,000 2,740 2,640 2,640 Working Note : (1) For opening stock also equivalent production has been calculated as it was partly complete and it has to be converted into finished product in this period. They were completed 60 % in this period. (2) Total units produced in a month are 2,50 units. Out of this 400 units of opening stock has been deducted because they have been partly processed in this particular month and we have already calculated equivalent units of opening stock. Only, 2,100 units have been introduced and completed in the particular period. (3) For closing stock also equivalent production in terms of total units completed has been calculated. Statement of Element of cost on the basis of Equivalent Units Cost Rs. Equivalent
Units Cost per unit
Rs. Material 68,500 2.740 25.000 Labour 79,800 2.640 30.2273 Overheads 21,280 2.640 8.0606 munotes.in

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Process Costing Statement of Apportionment of Cost Particulars Equivalent
Units Cost
Per Unit
Rs. Details
Rs. Total Rs. Op. Stock Material 240 25.0000 6,000 Processed Labour 240 30.2273 7,255 Overheads 240 8.0606 1,935 15,190 Completely Material 2,100 25.0000 52,500 Processed Labour 2,100 30.2273 63,477 Overheads 2,100 8.0606 16,927 1,32,904 Work -in- Material 400 25.0000 10,000 Process Labour 300 30.2273 9,068 Overheads 300 8.0606 2,418 21,486 TOTAL 1,69,580 Total Cost of 2500 units Rs. Cost of opening stock 8,000 Additional cost of opening stock processed 15,190 Cost of completely processed 1,32,904 1,56,094 Illustration 12 The following data is available in respect of Process I for February 1990. (1) Opening stock of work-in-process 800 units at a total cost of Rs. 4,000. (2) Degree of completion of opening work in process Materials 100 % Labour 60 % Overheads 60 % (3) Input of materials at a total cost of Rs. 36,800 for 9,200 units (4) Direct wages incurred Rs. 16,7540 (5) Production overheads Rs. 8,370 munotes.in

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118 Cost Accounting -III (6) Units scrapped 1,200 units. The stage of completion of these units was Materials 100 % Labour 80 % Overheads 80 % (7) Closing work-in-process : 900 units. The stage of completion of these units was : Materials 100 % Labour 70 % Overheads 70 % (8) 7,900 units were completed and transferred to the next process. (9) Normal Loss is 80 % of the total input (opening stock plus units put in) (10) Scrap value is Rs. 4 per unit You are required to : (a) Compute equivalent production (b) Calculate the cost per equivalent unit for each element (c) Calculate the cost of abnormal loss (or gain), closing work in process and the units transferred to the next process using the FIFO method. (d) Show the Process Account for February 1990 [C.A., Inter] (a) Statement of Equivalent Production (FIFO Method) input
Units Output
Units Equivalent Particulars Particulars Material Labour &
Overheads Units % Units % Op. Stock Units of completed W.I.P. 800 Work on Op. 800 -- 320 40 stock Units New units 7100 7100 100 7,100 100 9,200 Closing stock 900 900 100 630 70 Introduced Normal Loss 800 -- -- Abnormal 400 400 100 320 100 Loss 10,000 10,000 8,400 8,370 munotes.in

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Process Costing (b) Statement of cost per equivalent units for each element Particulars Cost Rs. Equivalent
Unit Cost Per
Unit Material 36,800
Less : Scrap realization
(800 units @ Rs. 4) 3,200
Labour
Overheads

33,600
16,740
8,370

8,400
8,370
8,370

4.00
2.00
1.00 I Statement showing cost of abnormal loss, closing WIP and units transferred to the next process : Particulars Cost per
unit Rs. Equivalent
unit Total cost
Rs. Abnormal Loss Materials 4.00 400 1,600 Labour 2.00 320 640 Overheads 1.00 320 320 2,560 Closing WIP Material 4.00 900 3,600 Labour 2.00 630 1,260 Overheads 1.00 630 630 7900 units transferred to next 5,490 Process (i) Cost of opening WIP (80 units) 4,000 (ii) Cost incurred on opening WIP Material -- -- Labour 2.00 320 640 Overheads 1.00 320 320 960 (iii) Cost of completing 7100 units Material 4.00 7100 28400 Labour 2.00 7100 14200 Overheads 1.00 7100 7100 49700 Total (I + ii + iii) 54600 munotes.in

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120 Cost Accounting -III Dr. Process A/c. for February 1990 Cr. Particulars Units Rs. Particulars Units Rs. To Opening 800 4000 By Finished 7900 54660 WIP Goods To Materials 9200 36800 By Closing WIP 900 5490 To Labour -- 16740 By Normal Loss 800 3200 To Overheads -- 8370 By Abnormal 400 2560 Loss 10000 65910 10000 65910 6.8 EXERCISE 6.8.1 Objective type Answer in Brief 6.8.1.1 State any four features of process costing. ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.2 Define process costing, ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.3 What do you mean by normal loss? How is it treated in process cost accounts? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.4 What do you mean by abnormal loss? How is it treated in process cost accounts? ____________________________________________________________ munotes.in

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Process Costing ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.5 Distinguish between normal loss and abnormal loss. ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.6 What do you mean by abnormal effective? How is it treated in process cost accounts? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.7 What do you mean by inter process profit? What purpose does it serve? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.8 What do you mean be equivalent production? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.9 Name any four industries in which process costing is applicable? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ munotes.in

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122 Cost Accounting -III 6.8.1.10 Enumerate any two advantages of process costing. ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.11 Enumerate any two disadvantages of process costing. ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.1.12 What do you meant by equivalent units? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 6.8.2 Multiple Choice Questions 1. The type of spoilage that should not affect the cost of inventories is (a) Abnormal spoilage (c) Seasonal spoilage (b) Normal spoilage (d) Indirect spoilage 2. Materials may not be put into process (a) At the beginning of an operation (b) Continuously (c) At the end of the operation (d) In the shipping department. 3. Process cost method is especially suitable for (a) Custom production (c) FIFO (b) Standard costs (d) LIFO 4. In process costing, costs follow (a) Price rise (c) Product flow (b) Price declines (d) Finished goods munotes.in

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Process Costing 5. When average costing is used, the opening inventory costs are (a) Kept separate from the costs for the new period (b) Added to the costs of the new period (c) Subtracted from the new costs (d) Averaged with other costs to arrive at total cost. 6. A disadvantage of FIFO costing is that (a) The first units produced cannot be distinguished from later production. (b) Several units costs are used at the same time. (c) The units have to be kept separate (d) The shipping costs are higher 7. Which of the following method of costing can be used in a large oil refinery? (a) Process costing (c) Unit costing (b) Operating costing (d) Job costing 8. Which of the following paid is odd : (a) Construction-Contract costing (b) Ship-building-Job costing (c) Brick manufacturing – Process costing (d) Transport undertaking – Operating costing 9. A product which has practically no sales or utility value is (a) Waste (c) Spoilage (b) Scrap (d) Defectives 10. Trimmings in timber industry should be treated as a : (a) Waste (c) Spoilage (b) Scrap (d) Defectives 11. The type of process loss that should not affect the cost of inventory is (a) Abnormal loss (c) Seasonal loss (b) normal loss (d) standard loss 12. The stage where joint products are separated from each other is known as (a) break-even point (b) angle of incidence (c) split-off point munotes.in

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124 Cost Accounting -III 13. Fifty units are put in a process at a total cost of Rs. 90. Wastage is normally 10% without any scrap value. If output is 40 units the amount of abnormal loss would be (a) Rs. 80 (c) Rs. 10 (b) Rs. 8 (d) Rs. 9 14. Abnormal loss is charged to (a) process account (b) costing profit and loss account (c) Normal loss account (Answers: 1(a), 2 (d), 3 (b), 4(c), 5(a), 6(b), 7(a), 8(c), 9(a), 10(b).)11 (a), 12(c), 13 (c), 14(b) ) 6.8.3 Short notes 6.8.3.1 Write a short note-Inter process profits.(Apr-08) 6.8.3.2 Write a Short Note-Treatment of losses in Process.(Apr 07) 6.8.3.3 Write a short Note-Equivalent Production. (Apr-07) 6.8.3.4 Describe the main features of process costing. 6.8.3.5 Explain the features of process costing 6.8.3.6 How would you treat abnormal gain? 6.8.4. Long questions 1. What do you mean by inter-process profits in process cost accounts. 2. Explain the methods to be adopted in the treatment of joint products and by-products in process account. 3. What do you understand by `Normal’ and `Abnormal’ Wastage during the process of manufacture? 4. Describe briefly the method known as Process Costing, stating four types of manufactures which would be suitable for its application. A description of the method of dealing with by- products is not required. 5. Explain the concept of Equivalent Production. Discuss the two methods of its valuation. Practical Problems Illustration 1: During a particular period 2,000 units at a cost of ` 60,000 were introduced into Process ‘A’ (at the beginning). The normal loss was estimated at 5% of the input. At the end, 1,400 units were produced and transferred to the Process ‘B’, 460 units being partially completed and 140 units scrapped. The partially completed units had reached the following state of production: munotes.in

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Process Costing Materials 100% complete Labour 50% complete Overheads 50% complete Additional costs incurred during the process were: Materials Rs. 17,000 Labour Rs.33, 400 Overheads Rs. 16,700 The units scrapped realised Rs.10 per unit. Prepare Process ‘A’ A/c with all relevant statements. (Ans.: Equivalent Units, Material: 1,900, Labour: 1670, Overheads: 1,670 Transfer to Process B 1,400 units @Rs. 70 p.u.) (M.Com. Mar. 2002) Illustration 2 : XYZ Ltd. is engaged in process industry. During the month August 2000, 2000 Units were introduced in process ‘X’. The normal loss was estimated at 5% of input. At the end of the month 1,400 units had been produced and transferred to process ‘Y’. 460 units were incomplete and 140 units, after passing through fully the entire process had to be scrapped. The incomplete units had reached the following state of completion: Materials 75% Completed Labour 50% Completed Overheads 50% Completed Following are the further information on the process ‘X’ : Cost of the 2000 units Rs. 58,000 Additional Direct materials Rs. 14,400 Direct Labour Rs. 33,400 Direct Overheads Rs. 16,700 Units scrapped realised Rs. 10 each Prepare statement of equivalent production, statement of cost, statement of evaluation and process ‘X’ account. (M.Com. Mar. 2005) Ans. (Equivalent Units, Material: 1,785, Labour: 1,670, Overheads: 1,670) Illustration 3 : (FIFO) The following information is available for Process IV of Swastik Fabrications Ltd. for the month of March 2005. Opening Stock: 4,800 units @ Rs.16,500 munotes.in

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126 Cost Accounting -III Degree of Completion: Material 70% Labour 60% Overheads 60% Transfer from Process III: 30,600 units @ Rs. 30,600 Transfer to Process V: 27,600 units Direct Material introduced in Process IV: Rs. 13,440 Direct Labour introduced in Process IV: Rs. 39,420 Production overheads incurred Rs. 52,560 Units scrapped: 2,400 Degree of completion: Material 100% Labour 70% Overheads 70% Closing stock 5400 units
Degree of completion:
Material
60% Labour 40% Overheads 40% There was a normal loss of 10% of production in the process. Unites scrapped were realised at Re. 1 per unit. From the above information prepare: 6.8.3.7 Statement of equivalent production 6.8.3.8 Cost of equivalent unit for each element of the cost, the loss, the work-in-process, etc. 6.8.3.9 Process account using FIFO method. (M.Com. Oct. 2005) Ans. (Equivalent Units, Material I: 27,600, Material II: 26,880, Labour: 26,460, Overheads: 26,460) Illustration 4 : (FIFO) The following data pertains to Process I for March 2003 of Beta Limited: Particulars Units Rs. Opening Work -in-Progress … … … … . 1,500 15,000 Degree of completion : Materials 100%; Labour and overheads 33⅓% Input of Materials … … … … . 18,500 52,000 Direct Labour … … … … . 14,000 Overheads … … … … . 28,000 Closing Work -in-Progress … … … … . 5,000 munotes.in

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Process Costing Degree of Completion Materials 90% and Labour and Overheads 30%. Normal Process Loss is 10% of total input (opening work in progress units + units put in). Scrap value 2.00 per unit. Units transferred to the next process 15,000 units. You are required to: 1) Compute equivalent units of production. 2) Compute cost per equivalent unit for each cost element i.e., materials, labour and overheads. 3) Compute the cost of finished output and closing work-in- progress. 4) Prepare the process and other Account. Assume: i) FIFO Method is used by the Company. ii) The cost of opening work-in-progress is fully transferred to the next process. (M.Com. Mar.2006) Ans. (Equivalent Units, Material: 16000, Labour:14,000, Overheads: 14,000) Illustration 5: (Weighted Average) From the following details prepare Statement at Equivalent Production, statement of Cost and find the value of: (a) Output transferred and (b) Closing work in progress Opening work in progress (units) 2,000 Materials (100% Complete) 7,500 Labour (60 % Complete) 3,000 Overheads (60% Complete) 1,500 Units introduced into this process 8,000 There are 2,000 units in process at the end and the stage of completion is estimated to be : Materials 100% Labour 50% Overheads 50% 8,000 units are transferred to next process. The process costs for the period are: Materials Rs. 1, 00,000 Labour Rs.78,000 Overheads Rs. 39,000 (M.Com. Oct. 2006) munotes.in

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128 Cost Accounting -III Ans. (Equivalent Units, Material:10,000, Labour: 9,000, Overheads: 9,000) Illustration 6 : (Average) Shete and Shete Pvt. Ltd. gives the following particulars relating to process ‘P’ in its plants for the month of January 2007 : Particulars Rs. Rs. Work -in-Progress (500 units)
on 01-01-2007 Material (100%) … … … … 12,000 - Degree of Completion Labour (50%) … … … … 7,200 - Overheads (50%) … … … … 16,000 35,200 Units introduced during the Month January, 2007 – Units – 19,500 … … … … - - Processing Cost incurred during
the Month January, 2007 Materials … … … … 4,65,500 - Labour … … … … 1,80,000 - Overheads … … … … 2,64,800 9,10,300 Particulars Units Output transferred to Process Q … … … … 18,200 Units Scrapped (Degree of Completion Material 100%, 1,400 Labour 80% and Overheads 80%) … … … … 400 Work -in-Progress (Closing Balance) … … … … (Degree of Completion -Materials 100%, Labour and
Overheads 50%) Normal loss in processing is 5% of total input and scrapped units fetch 2.50 each. Prepare the following statements for Process ‘P’ for January, 2007 : a) Statement of Equivalent Production b) Statement of Cost and Statement of Evaluation c) Process ‘P’ A/c d) Abnormal Loss A/c Use Average Method (Mar. 07, adapted) Ans. (Equivalent Units, Material: 19,000, Labour: 18,720, Overheads: 18,720) munotes.in

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Process Costing Illustration 26 : (FIFO – No Losses) Avdoot Ltd., a manufacturer of a specialized product, is have a process costing system. The stock of work-in-progress at the end of each month is valued on First in First Out (FIFO) basis. At the beginning of January 2008 the stock of work-in-progress was 2000 units (40% completed) which was valued as : Material Rs. 18,000 Labour Rs. 17,000 Overheads Rs. 5,300 During the month of January 2008, actual issue of materials for the production purpose was Rs. 3,42,500. wages and overheads in the month of January, 2008 amounted to Rs. 4,02,600 and Rs. 1,12,200 respectively. Finished production taken into the stock in the month was 12,500 units. There was no loss in the process. At the end of the month of January, 2008 the stock of Work-in-Progress was 2500 units (60% complete as to Labour and Overheads and 80% complete as to materials). Prepare the following statements for January, 2008. a) No. of units introduced in the process b) Statement of Equivalent Production c) Statement of Cost d) Statement of Evaluation e) Process Account. (Apr. 08, adapted) (Equivalent Units, Material: 13,700, Labour: 13,200, Overheads: 13,200) Illustration 27 : (FIFO – Process A/c with Abnormal Loss) From the following information prepare Process account as per FIFO assumption: Opening stock Degree of completion 80 units @ Rs. 6 per unit Rs. 4,800 Material 60% Labour 40% Overheads 40% Transfer from previous process : 12,000 units costing Rs. 16,350 Transfer to next process : 9,700; Units scrapped 1,300 units Normal loss 10%; Closing stock : 1,800 units munotes.in

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130 Cost Accounting -III Degree of completion For units scrapped : For closing stock : Material 100% Material 60% Labour 50% Labour 50% Overheads 50% Overheads 50% Scrap realised Re. 1.00 per unit Other information Rs. Material 10,500 Labour 20,760 Overheads 16,470 (M.Com, Oct. 2008, adapted) (Ans. Equivalent Units, Material I: 10,900, Material II: 10,500, Labour: 10,380, Overheads: 10,380)  munotes.in

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131 7 ACTIVITY BASED COSTING Unit Structure 7.0 Introduction 7.1 Types of cost 7.2 Cost driver 7.3 Methods of allocation of cost 7.4 Step Down Method 7.5 Reciprocal Method of cost allocation 7.6 Activity Based costing 7.7 Difference between Traditional Cost System and ABC system 7.8 Illustrations 7.0 INTRODUCTION Cost Allocation or cost assignment is the process of identifying and assigning costs to the various cost objects. These cost objects could be those for which the company needs to find out the cost separately. A few examples of cost objects can be a product, customer, project, department, and so on. The need for cost allocation arises because some costs are not directly attributable to the particular cost object. In other words, these costs are incurred for various objects, and then the sum is split and allocated to multiple cost objects. These costs are generally indirect. Since these costs are not directly traceable, an accountant uses their due diligence to allocate these costs in the best possible way. It results in an allocation that could be partially arbitrary, and thus, many refer cost allocation exercise as the spreading of a cost. Cost allocation is the process of identifying, accumulating, and assigning costs to costs objects such as departments, products, programs, or a branch of a company. It involves identifying the cost objects in a company, identifying the costs incurred by the cost objects, and then assigning the costs to the cost objects based on specific criteria. When costs are allocated in the right way, the business is able to trace the specific cost objects that are making profits or losses for the company. If costs are allocated to the wrong cost objects, the company may be assigning resources to cost objects that do not yield as much profits as expected. 7.1 TYPES OF COSTS There are several types of costs that an organization must define before allocating costs to their specific cost objects. These costs include: 1. Direct cost Direct costs are costs that can be attributed to a specific product or service, and they do not need to be allocated to the specific cost object. munotes.in

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132 Cost Accounting -III It is because the organization knows what expenses go to the specific departments that generate profits and the costs incurred in producing specific products or services. For example, the salaries paid to factory workers assigned to a specific division is known than does not need to be allocated again to that division. 2. Indirect Cost Indirect costs are costs that are not directly related to a specific cost object like a function, product, or department. They are costs that are needed for the sake of the company’s operations and health. Some common examples of indirect costs include security costs, administration costs, etc. The costs are first identified, pooled, and then allocated to specific cost objects within the organization. Indirect costs can be divided into fixed and variable costs. Fixed costs are costs that are fixed for a specific product or department. An example of a fixed cost is the remuneration of a project supervisor assigned to a specific division. The other category of indirect cost is variable costs, which vary with the level of output. Indirect costs increase or decrease with changes in the level of output. 3. Overhead costs Overhead costs are indirect costs that are not part of manufacturing costs. They are not related to the labor or material costs that are incurred in the production of goods or services. They support the production or selling processes of the goods or services. Overhead costs are charged to the expense account, and they must be continually paid regardless of whether the company is selling goods or not .Some common examples of overhead costs are rental expenses, utilities, insurance, postage and printing, administrative and legal expenses and research and development costs. 7.2 COST DRIVER A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign overhead costs to the number of produced units. It can also be used in activity-based costing analysis to determine the causes of overhead, which can be used to minimize overhead costs. A large number of cost drivers may be used within an activity-based costing system. If a business is only concerned with following the minimum accounting requirements to allocate overhead to produced goods, then just a single cost driver should be used. It is an activity that is the root cause of why a cost occurs. It must be applicable and relevant to the event that is incurring a cost. A cost driver assists with allocation expenses in a systematic manner that results in more accurate calculations of the true costs of producing specific products. Cost pool: It is an aggregate of all the costs associated with performing a particular business activity. munotes.in

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Activity Based Costing An activity cost driver refers to actions that cause variable cost to increase or decrease for a business. Therefore, identifying what product/service is causing particular costs can help the business to become more profitable by better understanding the specific activities that are driving the costs. Allocating cost drivers appropriately is important in accurately determining the cost of producing a good or service, as well as making financial projections. Activity cost drivers are specific activities that cause variable expenses to be incurred. One variable expense can comprise more than a single activity cost driver. For example, machine hours and labor hours can be activity cost drivers in the manufacturing of a product. All variable expenses can be broken down and looked at by one or several activity cost drivers, which can also be influenced by several factors. For example, if the minimum wage increases, it can cause the cost of producing a product to also increase. Examples of Activity Cost Drivers  Direct labour hours  Machine setups required  Number of customer contacts  Number of customer change orders
7.3 METHODS OF ALLOCATING COST Direct method of cost allocation The direct method is considered the most simple method of allocating the cost of service departments to operating departments. In the direct method, interactions between service departments are ignored and costs are allocated just to operating departments. Under this method, the costs incurred by
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134 Cost Accounting -III service departments are not allocated to each other; rather, they are directly allocated to operating departments using some appropriate allocation base. In other words, we can say that the direct method of departmental cost allocation ignores the service provided by a service department to itself and to other service departments. A firm generates various expenses that can be assigned to a specific “cost item” — such as a commodity, program, function, or service. These costs include anything from mop floors to functional equipment. You should, however, generate enough income to pay such corporation overhead expenditures. This means that revenue must surpass total costs. The direct allocation technique is one of numerous cost allocation strategies used to allocate indirect costs to activities. It is one of the most often used techniqueThe direct technique is the easiest in terms of cost allocation, even though it has several shortcomings. Nevertheless, because of its simplicity of using it, it became one of the most widely applied cost allocation techniques in recent years. In a nutshell, it assumes that service departments do not give facilities or services to each other, and it merely distributes the service departments’ costs in the company’s manufacturing departments. The direct approach of transferring service department costs to the operational department is the simplest way of allocating costs between divisions. As a result of this technique, the expenses involved by service departments are not assigned to one another. Still, they are instead allotted straight to operational departments using a suitable rate of allocation. The direct approach assigns the expenses of all the support departments to every other manufacturing unit calculated based on the rates of each operational department rates. Services that other support departments receive are not considered in this method of cost allocation. With the help of this approach, it is possible to completely charge operational departments with the overhead expenditures for which they are accountable. Firms that use the direct method completely transfer excess costs from service departments to inventories, even though there may be cross-costs across service departments, because of the nature of the business. For instance, the cleaning crew offers services to sanitize all business buildings. In contrast, the maintenance department oversees the firm’s machinery, and the information technology department oversees maintaining the organization’s computer networks. Assume that a service Department 1 utilizes a few of the facilities provided by Service Department 2. Such services will be excluded from consideration throughout the cost allocation procedure. Because such services are not assigned to certain other service divisions, many cost auditors think that the direct approach is not as precise as other methods. Advantages and disadvantages Many organizations use direct method for allocating departmental costs because it is very simple and easy to employ. munotes.in

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Activity Based Costing The major disadvantage of direct method is that it ignores interdepartmental services and can therefore lead to distorted products and services cost. Moreover, it is commonly considered a less accurate method when compared with other methods available for departmental cost allocation. There is, however, a disadvantage to using this approach. Direct allocation does not enable companies to shift expenditures from one support department to another support department and vice versa. Depending on the nature of your company, this is a possibility. Assume that there is an HR and maintenance department. Allowing for the possibility that almost all the HR and maintenance department support expenditures are assigned to an operational unit through direct allocation. As a result, HR and maintenance department expenses are completely depleted. Q.1) The Murphy Company has two service departments and two operating departments as shown below:
The two service departments provide service to each other as well as to operating departments. The department A’s cost is allocated on the basis of employee hours and department B’s cost is allocated on the basis of square feet occupied. Required: Allocate the cost of service departments to operating departments using direct method of cost allocation. Solution
Department A’s cost has been allocated on the basis of employee hours: 9,000 hours + 15,000 hours = 24,000 hours.
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136 Cost Accounting -III Allocated to department X: $180,000 × (9/24) = $67,500 Allocated to department Y: $180,000 × (15/24) = $112,500 Department B’s cost has been allocated on the basis of spaces occupied: 3,000 square feet + 22,000 square feet = 25,000 square feet. Allocated to department X: $45,000 × (3/25) = $5,400 Allocated to department Y: $45,000 × (22/25) = $39,600 On the other hand, the human resources department assists the maintenance department throughout the same time frame. It goes without saying that the maintenance department should bear a portion of the costs of human resources. However, the expenditures of the maintenance department have already been transferred in whole to another operating unit. 7.4 STEP DOWN METHOD In the step down method, one service department’s costs are allocated to another service department as well as operating departments that use it. Any amount of the allocation base attributable to the service department whose cost has already been allocated is ignored. Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments. The step technique of distributing service department expenses is the second way of allocating costs. As part of a sequential process, service expenses are allocated to operational departments and other service departments by using this approach. The following are the critical phases in the allocation process: 1. Service departments that offer services to the greatest number of other service departments or that have the greatest proportion of their expenses used by the other service departments receive priority in allocating their expenses to certain other service departments. It also distributes the remainder of its expenses across the operational divisions. 2. The service department that offers services to the second-highest number of other services departments or has the second-highest proportion of its expenses absorbed by other service departments, oversees allocating its expenses towards the other service departments. At this point, all the company’s other expenses have been assigned to the operational divisions. 3. Till the service department offering services to the fewest amount of other service departments or having the lowest proportion of its expenses absorbed by the other service departments is assigned its expenses, the procedure is repeated. The procedure comes to an end when all the allotment has been accomplished. munotes.in

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Activity Based Costing Advantages This technique is easy and uncomplicated to execute and can be finished quickly. Due to the higher level of convenience, supervisors willing and eager to reduce the time spent on record keeping and forming accounting reports are far more likely to select it, even though the precision offered is not the highest in this cost allocation. Q.1) The TCS Company uses the step method for allocating the costs of its service departments to operating departments. The company has two service departments and two operating departments. The selected information for the four departments is given below:
The company uses employee hours as the base for allocating the cost of department A and space occupied for allocating the cost of department B. Required: Allocate the cost of service departments to operating departments using step down method. Solution
Allocation of department A’s cost: Allocation ratio: Department B: 3,000/(3000 + 9000 + 15,000 ) = 3,000/27000 or 3/27 Department X: 9,000/(3000 + 9000 + 15,000 ) = 9,000/27000 or 9/27 Department Y: 15,000/(3000 + 9000 + 15,000 ) = 15,000/27000 or 15/27 Allocated to department B: $180,000 × (3/27) = $20,000 Allocated to department X: $180,000 × (9/27) = $60,000 Allocated to department Y: $180,000 × (15/27) = $100,000
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138 Cost Accounting -III Allocation of department B’s cost: Allocation ratio: Department X: 3,000/(3,000 + 22,000) = 3,000/25,000 or 3/25 Department Y: 22,000/(3,000 + 22,000) = 22,000/25,000 or 22/25 Total cost of department B: $45,000 + $20,000 = $65,000 Allocated to department X: $65,000 × (3/25) = $7,800 Allocated to department Y: $65,000 × (22/25) = $57,200 Q.2) The Religare Company provides the following selected data about its three service and two operating departments:
The order and bases for allocating service department costs is given below: 1. Department A; allocation base is “number of employees”. 2. Department B; allocation base is “space occupied”. 3. Department C; allocation base is “hours of time”. Required: Allocate the cost of service departments to operating departments using step down method of cost allocation. Solution

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Activity Based Costing 7.5 RECIPROCAL METHOD OF COST ALLOCATION Reciprocal method is a method of allocating service department costs to other departments that gives full recognition to interdepartmental services .Although it is the most accurate, it is also the most complicated. In the reciprocal method, the relationship between the service departments is recognized. This means service department costs are allocated to and from the other service departments. The reciprocal method gives full recognition to interdepartmental services. Under the step method, only partial recognition of interdepartmental services is possible. The step method always allocates costs forward never backward. The reciprocal method, by contrast, allocates service department costs in both directions. The reciprocal allocation requires the use of simultaneous equations.Other names for the reciprocal method are simultaneous solution method, cross allocation method, matrix allocation method and double distribution method. Under this method the true cost of the service departments are computed first with the help of simultaneous equations and these are then distributed to producing departments on the basis of given percentage or ratio. Remember that true cost of the service department means the cost of the service department which includes original cost of the department plus the share of the other service department. The main advantage of this method is to have an accurate distribution in a single step in the distribution summary. Use of Reciprocal Method This method is rarely used in practice for two reasons. First, the computations are relatively complex. Although the complexity issue could be overcome by use of computers, there is no evidence that computers have made the reciprocal method more popular. Second, the step method usually provides results that are a reasonable approximation of the results that the reciprocal method would provide. Thus, companies have little motivation to use the more complex reciprocal method. Q.1) A company has two service and two producing departments. The two service departments serve not only to producing departments but also to each other. The departmental estimates for the next year are as follows. Producing departments:
A
B
Service departments:

X
Y 50,000
40,000

10,000
8,800 munotes.in

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140 Cost Accounting -III The service departments costs are to be distributed as under:
Cost of X : 50% to A, 40% to B, and 10% to Y
Cost of Y : 40% to A, 40% to B, and 20% to X Required:
Transfer the service departments costs to each other and to producing
departments. Solution:
Now we solve the given illustration first using the simultaneous equation
method as follows: Original costs of service departments:
X = Rs.10,000
Y = Rs. 8,800
After getting the share from distribution of service departments:
X = Rs. 10,000 + 20% Y
Y = Rs. 8,800 + 10% X
By putting the value of Y in equation (1)
X = Rs. 10,000 + 20%(Rs.8,800 + 10%X)
X = Rs. 10,000 + 1760 + 0.2X
X – 0.02X = Rs. 10,000 + Rs.1,760
0.98X = Rs. 11,760
X = 11760 / 0.98
= Rs. 12,000
By putting the value of X in equation (2)
Y = Rs. 8,800 + 10%(Rs. 12000)
Y = Rs. 8,800 + Rs. Rs. 1,200
= Rs. 10,000 Distribution Summary Department Producing Service Original costs
Distribution
of service
department
costs:
X
Y
Total
departmental
overheads A
Rs
50,000
6,000
4,000
——-
60,000
===== B
Rs
40,000
4,800
4,000
——
48,800
===== X
Rs
10,000
(12,000)
2,000
——-
Nil
===== Y
Rs
8,8001,200
(10,000)
——-
Nil
===== munotes.in

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Activity Based Costing 7.6 ACTIVITY BASED COSTING Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities. ABC works best in complex environments, where there are many machines and products, and tangled processes that are not easy to sort out. Conversely, it is of less use in a streamlined environment where production processes are abbreviated, so that costs are easy to assign. Activity based costing is basically a change in accent. People perform activities and activities use resources. Thus, by controlling activities the manager is making sure that costs are controlled at their source. A wise manager will not focus on how to estimate product costs, but will focus more on why the costs were there in the first place. When intending an activity based costing system this should be utilized as a departure point. Advantages of Activity Based Costing System  The first and most significant benefit is the accuracy in the procedure of costing with regards to the product line, the consumers of the product, the stock-keeping units employed by the administration and the channel and group which streamline the flow of the product from the maker to the consumer.  This system better helps in the procedure of understanding the concept of overhead costs i.e. the distribution of common business resources as they are utilized by particular product lines and their association to particular cost driver.  The system is simple to interpret and understand is it is available, useable and specifically implement capable across all norms of business set-ups.  This procedure consumes unitary cost, or marginal cost as the calculation base in comparison to the conventional cost accounting techniques which employ total cost.  This system is specifically useful in recognizing and ear-marking some of the matters business activities which are a stress or burden on the business i.e. wasteful or non value adding services..  This procedure permits firms to implement costing policies across another diagonal of the company as business procedures, supply chains and value addition channels are capably and optimally analyzed in this procedure. munotes.in

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142 Cost Accounting -III  This system mimics the actual business procedure as the appropriation of common pool resources takes place in the same way as common resources are utilized in the business.  Disadvantages of Activity Based Costing System  Data collection procedure for this system is very time consuming.  The capital expense on the activity based system and its subsequent running costs can be a road block for companies.  The system is very apparent which some managers would not authorize of as they would like to keep some things out of the view of the owners of the firm.  ABC Costing System is very costly to implement and maintain in a manufacturing and serving departments. Data concerning numerous activity measures must be collected, checked, and entered into the system.  ABC costing systems produces the reports that are different from the profit and loss reports produced through traditional costing systems.  As most of the companies are using , traditional costing systems, so because of the difference in the costing basis the costing and financial reports of the two companies of the same industry could not be compared for performance evaluation purposes.  Adaptability of ABC Costing System is not suitable for all kind of companies because small companies have not many resources to ad  Data Produced through ABC Costing System can easily misinterpret and can lead towards wrong decisions. So manager should use the data produced through ABC Costing System with extreme care and should assign the costs that are relevant to the products, customers and should not consider the other cost objects that are irrelevant.  ABC costing system does not comply with the GAAP and a company has to produce its reports for internal and external purposes by using traditional and ABC costing system both at a time.  In ABC costing system costs are allocated on the base of cost drivers and activities undertaken to manufacture the product, definitely, it provides the accurate and proper allocation of the costs to the products but there is a danger of over or under costing of the products when irrelevant cost drivers or activities are assigned to the products or services produced. Steps in ABC  Identify which activities are necessary to create a product  Separate each activity into its own cost pool munotes.in

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Activity Based Costing  Assign activity cost drivers to each cost pool  Divide the total overhead in each cost pool by the total cost drivers to get your cost driver rate  Compute how many hours, parts, units, etc. that the activity used and multiply it by the cost driver rate to find total cost  Calculate Cost per Unit by dividing the Total Cost by Total Units produced. Uses of ABC  Identification of necessary activities: The ABC system shows how overhead is used, which helps to determine whether certain activities are necessary for production.  Focus on Value adding activities: The Activity Based Costing helps the management on focusing the forces on value adding activities and eliminate non-value adding activities.  Ensuring profit margin: The specific allocation of costs also helps to set prices that produce a healthy small business profit margin.  Product pricing: With an ABC system, the business can assign costs to each activity in the production process, allowing it to more accurately set a price that accounts for how much it costs to create a product.  Measures to improve productivity: The accurate cost information helps the management to adopt productivity improvement approaches like Total Quality Management (TQM), Business Process Re-engineering (BPR) etc.  Help in deciding Make or Buy: The management can take make or buy decisions by considering the cost of manufacture of a product or sub contract the same with an outside agency through Activity Based Costing analysis. 7.7 DIFFERENCE BETWEEN TRADITIONAL COST SYSTEM AND ABC SYSTEM Basis Traditional ABC 1. Cost pools One or limited number Many 2. Applied Rate Volume based Activity Based 3. Applied for Labour Intensive Capital Intensive 4. Benefits Simple, Inexpensive Accurate product
costing, identification
of necessary activities
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144 Cost Accounting -III Basis Traditional ABC 5. Cost assignments Primary and secondary
distribution of Overhead
and then allocation of
Overhead as per the
suitable rate Allocation of cost pool
based on cost drivers
then allocation of costs
to product or service
based on the drivers
used by the particular
product or service 6. Focus Departments or
responsibility centres Processes and activities 7.8 PRACTICAL SUM Problems involving calculations of Total cost and CPU under both Traditional and ABC methods. Question: Amrit Company produces 3 products A, B and C. The company follows Activity Based Costing system. Information related to various costs of these products for the last year: Particulars A B C Production and Sales (Units) 15000 12000 18000 Selling Price p.u. (Rs.) 7.5 12 13 Raw Material Usage (kg) p.u. 2 3 4 Direct labour hours p.u. 0.1 0.15 0.2 Machine Hours p.u. 0.5 0.7 0.9 No. of Production runs p.a. 16 12 8 No. of purchase orders p.a. 24 28 42 No. of deliveries to retailers p.a. 48 60 32 The price of Raw materials remained constant through out the year at Rs.1.2 per kg and the labour cost was Rs.14.8 per hour. The annual Overhead costs are as follows: Overheads Rs Machine set up costs 26550 Machine running costs 66400 Procurement Costs 48000 Delivery costs 54320 munotes.in

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Activity Based Costing Solution: Traditional Method a) Calculation of Total Overhead Overheads Rs Machine set up costs 26550 Machine running costs 66400 Procurement Costs 48000 Delivery costs 54320 Total 195270 b) Calculation of Overhead Absorption rate Particulars A B C Total Production Volumes 15000 12000 18000 Labour hours p.u. 0.1 0.15 0.2 Total Labour hours 1500 1800 3600 6900 Overhead absorption rate = 195270/6900 = Rs.28.30 per hour. c) Calculation of Cost p.u. Particulars A B C Raw material cost (Usage * Rs.1.20) 2.4 3.6 4.8 Direct Labour Cost (Labour hours * Rs.14.80) 1.48 2.22 2.96 Overhead (Labour hours * Rs.28.30) 2.83 4.25 5.66 CPU 6.71 10.07 13.42 ABC Method a) Calculation of Overhead Absorption rate Cost Pool Rs. Cost
Driver Rate of OH per
activity (Rs.) Machine
costs setup 26550 No. of
Production
runs p.a. (16+12+8) = 36 runs 26550/36=
737.50 per run Machine
costs
running 66400 No. of
Machine
Hours p.a. (7500+8400+16200)#
= 32100 hours 66400/32100 =
2.0685 per hour Procurement
Costs 48000 No. of
purchase
orders p.a. (24+28+42)
orders = 94 48000/94=
510.6383per
order Delivery
costs 54320 No. of
deliveries
to retailers
p.a. (48+30+62)
deliveries = 140 54320/140=
388 per
delivery # Total Machine hours p.a. = Machine hours p.u. * Total units produced A = 0.5*15000 = 7500 munotes.in

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146 Cost Accounting -III B = 0.7*12000 = 8400 C = 0.9*18000 = 16200 b) Calculation of Cost p.u. Particulars A B C Material
Cost 2.4 3.6 4.8 Labour Cost 1.48 2.22 1.96 Overhead:## Machine
Setup Costs (737.50*16)/
=15000
0.7867 (737.50*12)/
=12000
0.7375 (737.5*8)/ = 18000
0.3278 Machine
running
Costs (2.0685*7500)/ =
15000
1.034 (2.0685*8400)/
=12000
1.4479 (2.0685*16200)/
=18000
1.8616 Procurement
Costs (510.6383*24)/
=15000
0.817 (510.6383*28)/
=12000
1.1915 (510.6383*42)/ =
18000
1.1915 Delivery
costs (388*48)/ =
15000
1.2416 (388*30)/ =
12000
0.97 (388*62)/ = 18000
1.3364 Total CPU 7.7593 10.1669 11.4773 ## Overheads p.u. for products A, B and C = (Overhead absorption rate* No. of cost drivers used by the individual products p.a.)/ No. of units produced Multiple Choice Question 1. Activity-based costing: a) Uses a plant-wide overhead rate to assign overhead b) Is not expensive to implement c) Typically applies overhead costs using direct labor-hours d) Uses multiple activity rates 2. Assigning overhead using ABC often: a) Shifts overhead costs from high-volume products to low-volume products b) Shifts overhead costs from low-volume products to high-volume products c) Provides the same results as traditional costing d) Requires one predetermined overhead rate munotes.in

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Activity Based Costing 3. Painting the product would be an example of which activity level groups a) Facility-level activity b) Product-level activity c) Unit-level activity d) Batch-level activity 4. X Company uses activity-based costing for Product B and Product D. The total estimated overhead cost for the parts administration activity pool was Rs.550,000 and the expected activity was 2000 part types. If Product D requires 1200 part types, the amount of overhead allocated to product D for parts administration would be: a) Rs.275,000 b) Rs.300,000 c) Rs.330,000 d) Rs.345,000 5. Plant depreciation is an example of which activity-level group? a) Unit-level activity b) Facility-level activity c) Batch-level activity d) Product-level activity 6. B Company uses activity-based costing and has the following activity cost pools and estimated overhead cost for each pool: Machine related Rs.350,000 Handling material Rs.240,000 Processing purchase orders Rs.720,000 General factory Rs.500,000 The amount of total estimated overhead is: a) Rs.13,10,000 b) Rs.10,90,000 c) Rs. 850,000 d) Rs.18,10,000 7. Product design is an example of which activity-level group? a) Product-level activity b) Facility-level activity c) Batch-level activity d) Unit-level activity munotes.in

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148 Cost Accounting -III 8. One of T Company’s cost pools is parts administration. The expected overhead cost for that cost pool was Rs.380,000 and the expected activity was 5,000 part types. The actual overhead cost for the cost pool was Rs.420,000 at an actual activity of 6,000 part types. The activity rate for that cost pool was: a) Rs.63 per part type b) Rs.76 per part type c) Rs.70 per part type d) Rs.84 per part type 9. P Company produces three types of products- product A, product B and product C. Product A requires 200 machine setups and machine hours used on it were 1,000. Product B requires 400 machine setups and machine hours used on it were 500. Product C requires 620 machine setups and machine hours used on it were 1,500. The company has defined an activity cost pool machine setups for which the cost driver is number of machine setups. The total overhead cost assigned to that cost pool was Rs.183,000. The machine setups overhead assigned to each of the products was: a) Rs.61,000 for A; Rs.61,000 for B; Rs.61,000 for C b) Rs.61,000 for A; Rs.30,500 for B; Rs.91,500 for C c) Rs.30,000 for A; Rs.60,000 for B; Rs.93,000 for C d) Rs.30,000 for A; Rs.63,000 for B; Rs.90,000 for C 10. L Company produces two products- calculators and games. The company planned to produce 4,000 calculators and 8,000 games. The company uses ABC costing, and one of the activity cost pools was assembly, which had a cost driver of total parts. The total amount of estimated overhead for the assembly cost pool was Rs.748,000. The calculator required 16 parts, and the games required 52 parts. What would the overhead cost per unit be as it relates to the assembly cost pool for games? a) Rs.44.00 b) Rs.62.33 c) Rs.71.50 d) Rs.82.00 munotes.in

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Activity Based Costing Theoretical Questions: 1. Define the following terms a. Cost Driver b. Activity cost pool 2. What is Activity Based Costing? How are product costs determined in ABC 3. What are the benefits of ABC 4. What are the limitations of ABC 5. Describe various level of activities under ABC Self Examination Question Q.1 A Company manufactures three products namely A,B, C in a factory. The following cost data for the month of March,2023 are as under Activity A B C Unit Produced 10,000 15,000 20,000 Direct labour hrs
per unit 3 4.5 4 Machine hrs per
unit 6 4 5 Set-up of
machines 20 25 30 Number of
Orders 15 12 10 Machine operating cost (Rs.) 34,50,000 Machine set -up cost (Rs.) 4,36,000 Oreder Processing Cost (Rs.) 2,56,000 Required: i) Identify cost pool, cost drivers ii) Calculate cost driver rate iii) Calculate overheads rate per unit using ABC Q.2 XYZ pens Ltd. Manufactures two products- “Gel Pen” and “ Ball Pen”. It furnishes the following data for the year 2023 Product Annual
Output Total
Machine
Hrs Total No. of
Purchase
Order Total No.
of Set -ups Gel Pen 5,500 24,000 240 30 Ball Pen 24,000 54,000 448 56 munotes.in

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150 Cost Accounting -III Annual overheads are as under: Particulars Amount (Rs.) Volume related activity costs 4,75,020 Set up related cost 5,79,988 Purchase related cost 5,04,992 Calculate the overhead cost per unit of each product on the basis of : i) Traditional method of charging overheads ii) Activity Based Cosing Method iii) Find out difference in cost per unit between both the method.  munotes.in