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1 1
COST CONTROL ACCOUNTS
(INTEGRAL & NON - INTEGRAL
ACCOUNTING)
Unit structure :
1.0 Objectives
1.1 Introduction
1.2 Non-Integral Accounting/ Interlocking Accounting
System / Cost Ledger Accounting System:
1.3 Integral Accounting System
1.4 Cost Contr ol Accounts
1.5 Solved Problems
1.6 Exercises
1.0 OBJECTIVES
After studying the unit the students will be able to:
Understand the Non-integral Accounting system and solve the
problems
Know the Integral Accounting System and solve the problems.
1.1 INTRODUC TION
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 depe nd 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.
1.2 NON -INTEGRAL ACCOUNTING/ INTERLOCKING
ACCOUNTING SYSTEM/ COST LEDGER
ACCOUNTING SYSTEM
Under non -integral accounting system, two different sets of books are
maintained. One for financial and other for cost accounting purposes.
Since we are concerned only with cost accounting under this system, in
the problem on non-integral accounting, we only need to know how munotes.in
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Cost Accounting
2 the accounts are to be written for cost accounting purposes. In non-
integral system of accounting, we need to make reconciliation statement
for knowing the reasons of difference in the profit which have bee n
calculated in cost accounting system and financial accounting system.
Necessary Accounts to be opened:
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 journ al 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 t he journal
are balance sheet items or both the parts are cost sheet items, then
naturally this account has no use.
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 i s 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 mat erial 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 comple ted 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 si milarly, 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.
5. Wage Control A/C :
On the debit side of this a/c, we write the wages incurred, wheth er
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 overh eads Control A/c.
direct wages are transferred to Work -in-progress account. It is also munotes.in
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Cost Control Accounts
(Integral & Non - Integral
Accounting)
3 possible (in fact, better) to transfer to this account, only direct wages
and to transfer indirect wages directly from GLA A/c to respective
oveheads 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
differen ce should be transfered to the same account to which absorption
is transfered.
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 Distributi on Overheads. The total being cost of sales, we
transfer it to Costing Profit and Loss A/c.
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 thi s A/c, we write the cost of sales and abnormal
losses and on the credit side sales and abnormal gain. Based on the munotes.in
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Cost Accounting
4 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 Adjustm ent accounts and Overhead A/c’s (If the
policy is to carry forwards the difference).
1.3 INTEGRAL ACCOUNTING SYSTEM
Here, the balance sheet is also required and therefore General Ledger
Adjustment Account (dummy A/c) obliviously has no place. If there a re
some items of financial nature (Income Tax, Fine Penalty etc.), then only it
is essential to prepare Costing Profit & Loss A/c, we prepare Profit & Loss
A/c and we write all the items of Financial nature in the profit and loss
A/c. In that case, the net profit that we get in Costing Profit & Loss A/c is
transferred to this Profit and Loss A/c. Final Net profit is then to be
transferred to Reserve and Surplus A/c.
As regards overheads, the under or over-recovery of overheads is to be
transferred to be adj usted in current year only. Then, there are as many
more accounts as the number of balance sheet items in the problem. We
given very normal two effects to every transaction and then close all the
accounts. Finally, we prepare trial balance or, as the case may be, the
balance sheet.
1.4 COST CONTROL ACCOUNTS
14.1 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.
1.4.2 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.
1.4.3 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.
1.4.4 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 munotes.in
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Cost Control Accounts
(Integral & Non - Integral
Accounting)
5 by the use of cost control. Under this system the separate account are
prepared called as Cost Journal and Cost Ledger.
1.4.5 Journal Entries
Financial Account Cost Account
1) Credit Purchase of Material for Stock
Purchases A/c - Dr
To Sundry Creditors
Store ledger control A/c - Dr
To Cost ledger control A/c
2) Cash Purchase of Material for Stock
Purchase Ac - Dr
To cash A/c
Stock ledger control A/c - Dr
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) Payme nt 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 Contr ol 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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Cost Accounting
6 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 Materi al 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 Wag es Control A/c munotes.in
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Cost Control Accounts
(Integral & Non - Integral
Accounting)
7 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
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
munotes.in
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Cost Accounting
8 21) Recording Sales
Debtors / Cash A/c - Dr Cost Ledger Contr ol A/c - Dr
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 & Distributio n 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 munotes.in
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Cost Control Accounts
(Integral & Non - Integral
Accounting)
9 OR
To WIP / Finished Goods / Cost of Sales
OR
Overhead Suspense A/c
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
1.4.6 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 Le dger Control A/c.
munotes.in
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Cost Accounting
10 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)
1.5 SOLVED PROBLEMS
Illustration 1
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 Tran saction 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 Closing Stock of F.G. 1,20,000
Administration expenses 2,40,000
Selling expenses 1,80,000
Sales 18,00,000
munotes.in
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Cost Control Accounts
(Integral & Non - Integral
Accounting)
11 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 Goo ds 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.
Sellings distribution O.H. Control
A/c - Dr
To Cost Ledger Control A/c
1,80,000
1,80,000
10.
Cost Ledger Control A/c - Dr
to Costing P & L A/c
(sales)
18,00,000
18,00,000 munotes.in
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Cost Accounting
12 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 22,50,0 00
Material Control A/c
WIP Control A/c
Finished Goods 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
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. 4,56,000
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 munotes.in
Page 13
Cost Control Accounts
(Integral & Non - Integral
Accounting)
13 Factory O.H. Control A/c
Office & Adin Control A/c
Selling & Distributio n A/c
Salary & Wages A/c
Costing P & L A/c Particulars ` Particulars ` To Material Control A/c 1,20,000 By WIP Control A/c 4,50,00 0
To Wages Control A/c 90,000
To Cost ledger Control 2,40,000
A/c
4,50,000 4,50,000
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
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
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
Particulars ` Particulars ` To Finished Goods 4,00,000 By Cost Ledger A/c 18,00,000
Control a/c
To Admin O.H. 2,40,000
Control A/k
To Selling A/c 1,80,000
To Cost Ledger 2,80,000
Control a/c
18,00,000 18,00,000 munotes.in
Page 14
Cost Accounting
14 Trial Balance
From 31st March 2013 the following balances extracted from the book
of the co.
Trial Balance
Illustration 2:
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 Transfe r To Warehouse 21,30,000 Cost of Goods Sold 21,00,000 Sales 30,00,000 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 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 munotes.in
Page 15
Cost Control Accounts
(Integral & Non - Integral
Accounting)
15 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. a re 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.
Journal Entries
Date Particulars L/F Debit ` Credit ` 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 Finishe d Goods Control A/c 21,00,000 21,00,000 munotes.in
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Cost Accounting
16
11.
Cost Ledger Control A/c - Dr To
Costing P & L A/c 30,00,000 30,00,000
12.
WIP Control A/c - Dr (4,00,000 x
150%)
To Factory O.H. Control A/c 6,00,000 6,00,000
Cost Ledger Cont rol A/c
Store 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 Control A/c
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 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 munotes.in
Page 17
Cost Control Accounts
(Integral & Non - Integral
Accounting)
17 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 21,00,00 0 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
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 munotes.in
Page 18
Cost Accounting
18 Costing P & L A/c
Cost of Sales A/c
Trial Balance
1.6 EXERCISE
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) 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
Particulars ` Parti culars ` To F. G. A/c 21,00,000 By Costing P & L (Bal.) 21,00,000 21,00,000 21,00,000 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 munotes.in
Page 19
Cost Control Accounts
(Integral & Non - Integral
Accounting)
19 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:
Financial Profit and Loss A/c. for The Year Ended 31st March, 2007.
Particulars Rs. Particulars Rs.
Raw Materials:
Opening Stock 56,450 Cost of Goods 8,10,0 00 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
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 Administra tion 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 munotes.in
Page 20
Cost Accounting
20 Reconciliation that 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
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 book s 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 Direct 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 munotes.in
Page 21
Cost Control Accounts
(Integral & Non - Integral
Accounting)
21 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 mate rial 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
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 munotes.in
Page 22
Cost Accounting
22
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 tr ial 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 C ontrol 59
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 Costing Books at
Standard Financial Books at
Actual ` ` Opening Stock:
Raw Materials 1,025 1,050 Work in Progress 1,840 1,825 Finish ed Goods 585 625 Closing Stock:
Raw Materials ? 895 Work in Progress 1,725 1,755 Finished Goods 595 600 munotes.in
Page 23
Cost Control Accounts
(Integral & Non - Integral
Accounting)
23
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.
Follow ing 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 munotes.in
Page 24
24 2
CONTRACT COSTING
Unit Structure :
2.1 Objectives
2.2 Introduction
2.3 Important Concepts
2.4 Different Cost of The Contract
2.5 Profit on Contract
2.6 Format of Contract Account
2.7 Solved Problems
2.8 Exercises
2.0 OBJECTIVES
After studying the unit the students will be able to:
Understand the features of Contract Costing
Explain the important concepts used in Contract costing.
Know the format of Contract Account.
Solve the problems on Contract Costing
2.1 INTRODUCTION
A contract is noth ing but a big job having the following main features:
1) It May be completed within a months or years.
2) It usually for a higher price like lakhs or thousands.
3) The actual work may be take place, or at a site which is away from the
main office of the contra ctor.
Contract costing is the method of costing which is used to find out the cost
or particular contract. It may be generally calculated from the point of
view or the contractor.
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Page 25
Contract Costing
25 2.2 IMPORTANT CONCEPTS
Some of the important terms used in contract co sting: -
1) Contract :-
A contract is an agreement between the contractor and contractee it
include the time period taken to complete the contract, price of the
contract and so on.
2) Contractor :-
A person who undertakes the contract.
3) Contractee : -
A person for whom the job is being undertaken.
4) Contract Price: -
The amount which is to be paid by the contractee to the contractor, for
completing the contract work.
5) Work Certified :-
It is an amount of work done by the contractor and certificated by the
architect as per the terms of contract.
6) Work Uncertified :-
It is an amount of work completed by the contractor but not certified by
the architect at the end of the particular accounting year.
7) Retention Money: -
It is an part of value of work c ertified by the architect which is a retained
by the contractee as a security. It means, the cash paid by the contractee to
the contractor in between the contract period is depend on the value of
work certified by the architect. From this work certified am ount some of
percentage being paid by the contractee and the balance of this is called
as retention money.
For e.g. If the work certified is ` 8,00,000 then the contractee is being
paid the amount is being 90% of ` 8,00,000 as per the agreement and the
balance or 10% of work certified is called as Retention Money.
2.3 DIFFERENT COST OF THE CONTRACT:
1. Material :-
Material which is required for contract is either purchased or issued from
store because contract site is away from the head office of the contractor.
Material May be taken from different way –
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Page 26
Cost Accounting
26 a. Material Issue / Purchased :-
It is debited to contract A/c.
b. Material Transferred: -
If the Materials transferred from one contract to another contract, then
those who received t he material are debited and who gives the material are
credited to the respective contract A/c.
c. If the material is supplied by the contractee then it is not debited to
contract A/c.
d. Material Returned to Store / Supplier: -
If the material is retur n to store or supplier it may be credited to the
contract A/c.
g. Material Lost or Destroyed: -
If the Material Lost or destroy then the cost of material is credited to
costing Profit & Loss A/c.
f. Sale of Material: -
If the material or scrap is sold, then the actual cost of material is credited
to the contract A/c and the difference of any profit or loss may be
transferred to costing Profit & Loss A/c.
2. Labour: -
Any labour charges related to the particular contract is either paid or
outstanding are debite d to the contract Account.
3. Direct Expenses: -
Any direct expenses which are related to the particular contract is either
paid or outstanding are debited to the contract A/c. It includes architect
fees, sanitary fitting, etc.
4. Indirect Expenses: -
Any indirect expenses which are related to the particular contract is either
paid or outstanding are debited to the contract A/c. It induces head office
expenses, general administrative expenses etc.
5. Special Plant: -
Plant which is specialty purchases for a pa rticular contract and it is also
used for that particular contract only, is called as special plant. Plant is also
charged to the contract A/c but only upto the extent of depreciation
amount, which is called as ‘direct Method.’ or otherwise we can use also
capital method. Under capital Method, we debit the opening balance of
plant value to the contract A/c and at the end of the year or contract credit munotes.in
Page 27
Contract Costing
27 the W.D.V. of the plant. It means, we give the debit effect of the
depreciation of the particular plant.
For eg. During a contract plant is purchase for `2,00,000 and at the end
of the contract the valuation of the plant is`1,80,000.
The effect given under Direct Method.
Dr. Contract A/c Cr.
Effects of plant as for capital Method
Dr. Contract A/c Cr.
Under both method the net effect o f appreciation is `20,000.
6. Common Plant: -
A common Plant, it means a plant which is used for any contract whenever
needed. The treatement of the common plant is given in the same way of
special point. It means either we can use ‘Direct Method’ of chargi ng
depreciation or plant on the debit side of the contract A/c of ‘Capital
Method or Debiting the opening value of the plant to the contract A/c and
creating the WDV of the plant at the end of the contract of accounting
year.
7. Work in Progress in Balance Sheet: -
At the end of the accounting year under incomplete contract work in
progress may be appear under Asset side of the Balance Sheet.
Extract of Balance Sheet
Assets Side Amt
Cost of Work Certified xx
(+) Work Uncertified xx
( - ) Profit & Loss A/c (Reserve) xx
xx
( - ) Cash Received from Contracted xx
Work in progress xx
2.4 PROFIT ON CONTRACT
1) Complete Contract :-
If the contract is completed then the profit or loss on co ntract, it may be
debited or credited to the contract A/c. There is no need to transfer the
profit to the reserve, it is entirely transferred to profit and loss a/c. Particular ` Particulars ` To Dept on Sp. Plant 20,000
Particular ` Particulars ` To Special Plant 2,00,000 By WDV of Special Plant 1,80,000
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Page 28
Cost Accounting
28 2) Incomplete Contract: -
If there is an incomplete contract then whatever difference is find
out between the value of work in progress certified (Cr. Side of the
contract A/c) and the cost of work in progress certified (Dr. Side of the
contract A/c) is transfer to national profit.
Then me national profit is distributed between the Profit & Loss A/c
and work in progress (Reserve profit) Firstly we have to find out the
transfer of Profit and Loss A/c. is as under: -
a. If the contract is complete upto 25% - then profit & loss a/c is nil. It
means there is no need to transfer any profit from notional profit to
profit & loss a/c. The entire amount of notional profit is transferred to
work in progress (profit reserve).
b. If the contract is completed between 25% to 50% - Then the profit &
loss is calculated as -
1 RePr & / Pr3Cash ceivedofit LossA c Notional ofitWorkCertified
c. If the contract is co mpleted between 50% to 90% - then the profit &
loss a/c is calculated as,
2 RePr & / Pr3Cash ceivedofit LossA c Notional ofitWork Certified
d. Nearing Completion - If the contract is completed between 90% to 99%
then profit & loss a/c is calculated as,
RePr & PrPrCash ceivedofit Loss Estimated ofitContract ice
OR
Sometimes it is given in the problem.
Contract completed is calculated by comparing with the contract
price to the work certified.
For eg - If the contract price is `10,00,000 and work certified is
`6,00,000 then the percentage of contract completed is calculated as,
Contract Price = 10,00,000 = 100%
Work Certified 6,00,000 = ?
1006,00,000 60%10,00,000
Contract completed is 60% the 2.3 formula can be used to transf er
profit to the profit & loss a/c.
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Contract Costing
29 2.5 FORMAT OF CONTRACT ACCOUNT
Format of Contract A/c
(If Contract is 100% complet)
Material Returned / Sold / Destroyed is credited to the contract A/c only at
original cost whatever profit or Loss is transferred to costing profit and
Loss A/c.
Particulars ` Particulars `
To Material xx x By Material
Returned / Sold /
Destroyed Xx
To Labour xx By WDV of Common Plant
(Capital Method) xx
To Direct Exp. xx By WDV of Special Plant
(Capital Method) xx
To Indirect Exp. xx By Contractee’s A/c (Full
Contract Price) xx
To Common Depreciation
Plant xx By Profit & Loss A/c (If
Loss) xx
(Direct Method) OR xx
Cost of Plant
(Capital Method)
To Special
Plant Depreciation xx
(Direct Method) OR xx
Cost of Special
Plant (Capital Method) Particulars ` Particulars `
To Material xx By Material
To Labour xx Returned / Sales / Destroyed xx
To Direct Expenses xx By WDV of Common Plant
(Capital Method) xx
To Indirect Exp. xx By WDV of Special Plant (CapitalMethod) xx
To Common Plant By Contractee’s A/c (Full Contract Price xxx
Depreciation (Direct Method) xx By Profit & Loss A/c (Loss) xx
Cost (Capital Method) xx
To Special Plant Depreciation xx
(Direct Method) OR xx
Cost (Capital Method)
To Profit & Loss A/c (Profit) xx
xxx xxx
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Page 30
Cost Accounting
30
To Notional Profit c/d (IfProfit) xx
xx xx
To Profit & Loss A/c xx By National Profit b/d
To working Progress c/d to
Balance Sheet (Reserve Profit) xx
xx xx
Under Incomplete contract, if there is profit, it must be transfer to Notional
Profit.
2.6 SOLVED PROBLEMS
Illustration : 1
(Contract Complete Less than 20%).
On 1st October 2013 Arvind Undertook a contract for `5,00,000. The
following information is available in respect oF a contract for the year
ended 31/12/2013
Particulars ` Work Certified 80,000
Wages Paid 30,000
Material Supplied 45,000
Other Expenses 5,000
Work Uncertified 1,800
Material Lying at Sit e 1,500
Wages Outstanding 1,000
Plant 20,000
Provide 10% depreciation on plant p.a. prepare contract A/c in the books
of Arvind.
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Page 31
Contract Costing
31 Solution: -
Dr. Contract A/c (3 Months) Cr.
3. 20000 10% 500 ( 3 )10DeponPlant For Month
Out of Notion al Profit some amount transfer to Profit & Loss A/c is
calculated by comparing work certified with the contract price firstly to
find out now much percentage (%) the contract is completed. Pr 5,00,000 100%80,000 ?
10080,000 16%5,00,000
16 %Contract iceWorkCertified
ContractCompleted
ContractCompleted
Profit Tran sfer to Profit & Loss A/c is Nil. Total notional Profit is
transfer to work in progress (Reserve).
Part iculars ` Particular `
To Material 45,000 By work in Progress
c/d
To Wages 30,000 Material at Site 1,500
( + ) O/s 1,000 31,000
To Other Expenses 5,000 Work Certified 1,800
To Depreciation
on Plant 500 Work Uncertifie d 80,000
To Notional Profit c/d 1,800
83,300 83,300
To Profit & Loss
A/c
Nil
By Notional Profit b/d
1,800 To Work inProgress 1,800
(Reserve)
1,800 1,800 munotes.in
Page 32
Cost Accounting
32 Illustration : 2
In Complete Contract.
M/s. ABC builder undertook a contract for a contract price of
`60,00,000 and commenced the work on 1st July 2013. The following
particulars are available for 9 months ended 31 -03-2014
Particulars ` Material Issued from Stores 4,00,000 Material Bought Directly 20,50,000 Wages Paid 19,00,000 Direct Expenses 3,00,000 Establishment Charges 1,50,000 Plant 6,50,000 Sub - Contract Charges 1,00,000 Scrop Sold 30,000 Work Certified 50,00,000
The following further information was available: -
a) Outstanding wages and direct expenses were `10,000 and `20,000
respectively on 31-03-2014.
b) Material at site at the end of the year is Valued at `1,20,000.
c) Value of work uncertified `2,00,000 on 31.03.2014.
d) Included in wages is the salary paid to supervisor @ `30,000 p.m.
who had devoted half of the time on this contract.
e) Working life of the plant is estimated to be 5 years at th e end or
which it is estimated to be realized `50,000 as scrap value. The plant was
purchased exclusively for this contract only.
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Page 33
Contract Costing
33 Prepare contract A/c for the year ended 31-03-2014
Solution: -
Dr. M/s ABC Builders Cr.
Particulars ` Particulars ` To Material Issued 4,00,000 By Scrop Sold 30,000 From Stores
To Material bought 20,50,000 By Work in Progress 50,00,000 directly Work Certified
To Wages (WN) 17,75,000 Work Uncertified 2,00,000 To Direct Expenses 3,20,000 Material at Site 1,20,000 (WN)
To Establishment 1,50,000
Charges
To Depreciation on 90,000
Plant (WN)
To Sub - Contract 1,00,000
Charges
To Notional Profit & 4,65,000
Loss A/c
53,50,000 53,50,000 To Profit & Loss A/c 3,10,000 By National Profit b/d 4,65,000 (WN)
To Work in 1,55,000
Progress (Reserve)
4,65,000 4,65,000
Working Note: -
i) Wages : -
Wages Paid 19,0 0,000
(+) Outstanding 10,000
19,10,000
(-) Supervisions Salary 1,35,000
half of the time devoted to other
half salary recovered
(30,000 . . 50% 9 )pm Month
Total Wages 17,75,000
ii) Direct Expenses 30,000
(+) Outstanding 20,000
Total Direct Expenses 3,20,000
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Cost Accounting
34 iii) Depreciation on Plant
Contract A/c to be prepared for 9 month (i.e. from 1st July 2013 to 31 -03-
2014) OriginalCost ScropValueDepreciationEstimated Life
6,00,000 50,0001, 20,000 . .5pa
91, 20,000 . . 90,000 912pa for months
iv) Notional Profit = 4,65,000
Out of this transfer to Profit & Loss A/c is calculated by how much %
the contract is completed.
Contract Price = 60,00,000 = 100%
Work Certified = 50,00,000
10050,00,00060,00,000ContractCompleted
Profit & Loss A/c is calculated as 8.33% contract completed then used the
formula.
(50 – 90%)
2& / Pr3
24,65,0003Pr & / 3,10,000P L A c Notional ofitofit Loss A c
v) Work in progress (Reserve) is calculated as
= Notional Profit – Profit & Loss A/c (Profit)
= 4,65,000 – 3,10,000
1,55,000
Illustration : 3
The Maharashtra construction company undertook the construction of a
building at a contract price of `12,00,000. The date of commencement of
contract was 1st April 2013. munotes.in
Page 35
Contract Costing
35 The following cost information is given for the year ended 31 - 03-2014
Particulars `
Material Sent to the site 3,00,000 Wages 4,40,000 Archited Fees 55,500 Office & Administrative Overheads 1,51,000 Work Uncertified 55,000 Material at site at the end of the year 10,000 Cash Received from the Contractee 9,45,000 (Being 90% of the work certified)
Material Destroyed by Five 5,000 Supervisors Salary 60,000 Plant and Machinery at Cost 2,00,000
(Date or Purchase - 1st July 2013. The estimated working life of the
plant - 10 years and its estimated scrap value at the end ` 20,000)
You are required to prepare a contract account for the year ended 31st
March 2014.
Solution:
Maharashtra construction company contract A/c
for the year ended 31-03-2014 (12 months)
Dr. Cr.
Particulars ` Particulars `
To Material Sent to Site 3,00,000 By Material destroy by 5,000 Fire (Profit & Loss A/c)
To Wages 4,40,000 By Work in progress
Work Certified 10,50,000 To Architectures Fees 55,500 Work Uncertified 55,000 To Office and 1,51,000 Material at Site 10,000
Administrative Overhead
To Depreciation on Plant 13,500
(WN)
To Supervisors Salary 60,000
To Notional Profit c/d 1,00,000
11,20,000 11,20,000
To Profit & Loss A/c (wn)
60,000
By Notional Profit b/d
1,00,000
To working Progress 40,000
(Reserve)
1,00,000 1,00,000 munotes.in
Page 36
Cost Accounting
36 Working Note: -
i) Depreciation on Plant: -
(For 9 Months)
(Plant Purchase on 1/7/13 upto 31/03/2014) 2,00,000 20,000 1,80,00010 10
18,000 . .
9
918,000 13,50012OrigionalCost ScrapValueDepreciationEstimated Lifeof PlantDepreciation pa
Depreciation for months
ii) Notional Profit = 1,00,000 it is distributed between profit & Loss A/c
and work i n progress (Reserve). Profit & Loss A/c should be calculated
by how much % contract is completed compare with contract price &
work certified.
Pr 12,00,000 100%
10,50,000 ?
10010,50,000 87.5%12,00,000
87.5%
50 90%)
2 RePr & Pr3Contract ice
WorkCertified
ContractCompleted
FormulausedCash ceivedofit Loss Notional ofitWorkCerti
2 901,00,0003 100
Pr /fiedofit Loss A c
iii) Work in progress (Reserve) =
= Notional Profit – Profit & Loss A/c
= 1,00 ,000 – 60,000
= 40,000
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Page 37
Contract Costing
37 Note: -
Cash Received ` 9,45,000 (being 90% or the work certified) 9, 45,000 90%?
1009, 45,00090WorkCertifiedWorkCertifiedWorkCertified canbecalculated asWorkCertified
Estimated Contract: -
Under Estimated contract we have to find out the total estimated profit
after co mpletion of contract, nothing but if the contract period is more than
one year then the total contract cost deducted from the total contract price
and find out the profit. It is not the actual profit it is our estimation in short
after completion of contra ct we will earn the profit.
Estimated profit is calculated for the purpose of transferring profit to the
profit & Loss A/c.
Illustration : 4
Uddan Constructors Pvt. Ltd. provide you the following information:
a) The project commenced on 1st September 2013 and it was estimated to
be completed by 31st March 2015.
b) The contract price was negotiated at `680 lacs.
c) The actual expenditure upto 31st March, 2014 and subsequent additional
estimated expenditure upto 31st March, 2015 is furnished as under:
Particulars Actual Exp.
During 1-9-13 to
31-3-2014
` Estimated Exp.
during 1-4-14 to
31-3-2015
`
Direct Material 195,60,000 127,40,000
Indirect Material 14,23,000 11,77,000
Direct Wages 42,46,500 41,33,500
Supervision Charges 4,14,400 5,55,600
Archited Fees 8,17,500 12,82,500
Construction Overheads 31,52,600 21,47,400
Administrative 14,16,000 24,34,000
Overheads
Closing Material at Site 7,50,000 --
Work Uncertified at the 13,80,000 --
end of the year
Work Certified during the 350,00,000 330,00,000
year
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Page 38
Cost Accounting
38 The Value of plant and machinery sent to site was `60 Lacs, whereas the
scrap value of the plant and machinery at the end at the project was
estimated to be `3,00,000.
It was decided that the profit to be taken credit for should be that
proportion of the estimated net profit to be realized on completion of the
project which the certified value of work as on 31 - 03-2014, bears to the
total contract price. You are required to prepare contract account for the
period ended 31st March 2014 alongwith the work ing of profit to be
taken credit for.
Solution: -
Uddan Constructors Pvt. Ltd.
Contract A/c
for the Period from 1-9-2013 to 31-3-2014
Dr. Cr.
Particulars ` Particulars `
To Direct Material 195,60,000 By Work Progress To Indirect Material 14,23,000 Work Certified 350,00,000
To Direct Wages 42,46,500 Work Uncertified 13,80,000
To Supervision 4,14,400 Material at Site 7,50,000
Charges To Architect Fees 8,17,500 To Construction 31,52,600 Overheads To Administrative 14,16,000 Overheads To Depreciation on 21,00,000 Plant & Machinery To Notional Profit 40,00,000 c/d 371,30,000 371,30,000
To Profit & Loss A/c 35,00,000 By Notional Profit 40,00,000
b/d To Work 5,00,000 Progress (Reserve) 40,00,000 40,00,000
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Page 39
Contract Costing
39
Dr. Memorandum Contract A/c (1-9-2013 to 31-3-2015) Cr.
Working Note: -
1) Depreciation on Plant & Machinery :- 60,00,000 3,00,000 57,00,00019 19OrigionalCost ScrapValueDepreciationEstimated Lifeof PlantMonths
Depreciation = `3,00,000 p.m . Particulars Actual
Exp. (1-9-
2013 to 31-
3-2014)
7 Month Estimated
Exp. (1-4-14
to 31-3-15)
12 Month Total
7 + 12 = 19
Months Particulars ` To Direct 1,95,60,000 1,27,40,000 3,23,00,000 By 6,80,00,000
Material Contraction’s
A/c (Full
Contract
Price
To Indirect 14,23,000 11,77,000 26,00,000
Material
To Wages 42,46,500 41,33,500 83,80,000
To Super 4,14,400 5,55,600 9,70,00 0
Vision
Charges
To Archited 8,17,500 12,82,500 21,00,000
Fees
To 14,16,000 24,34,000 38,50,000
Administrat
ive on
To Dept on 21,00,000 36,00,000 57,00,000
Plant
To Con 31,52,600 21,47,400 53,00,000
Struct ion
Overheads
Total Exp. 3,31,30,000 2,80,70,000 6,12,00,000
Estimated
68,00,000
Profit
6,80,00,000 6,80,00,000 munotes.in
Page 40
Cost Accounting
40 Depreciation is also calculated for actual and estimated period.
i) Actual Period (from 1 -9-2013 to 31 -3-2014) for 7 months.
.3,00,000 . . 7
21,00,000Dep pm Months
ii) Depreciation for estimatedperiod (from 1 -4-2014 to 31 -3-2015) = 12
months
.3,00,000 . 12
36,00,000Dep pm months
2) Notional profit is `40,00,000 distributed between profit & Less A/c &
Work in progress (Reserve).
Notional Profit is `40,00,000
Estimated Profit is `68,00,000
For Profit & Loss A/c Formula is given in the problem as. 31 3 2014Pr & / PrPr
3,50,00,000
6,80,00,000
Pr & / 35,00,000WorkCertified asonofit Loss A c Estimated ofitTotalContract ice
ofit Loss A c
Illustration : 5
Ratnagiri Construction Pvt. Ltd. provides you the following information:
a) The project commenced on 1st May 2013 and it was estimated to be
completed by 31st January 2015.
b) The contract price was fixed at `2,70,00,000.
c) The actual expe nditure upto 31st March 2014.and subsequent additional
estimated expenditure upto 31st January 2015 is furnished as under:
Other Information: -
Particulars Actual Exp.
1-5-13 to 31-3-14 Estimated Exp. 1-
4-14 to 31-1-15
Work Certified (cumulative) 1,62,00,0 00 2,70,00,000
Cash Received 1,29,60,000 1,40,40,000
Work Uncertified 3,85,000 --
Direct Material 87,14,500 37,92,500
Direct Wages 17,47,500 18,58,500
Direct Expenses 8,44,400 4,32,600
Indirect Material 3,25,600 2,85,500
Supervision Charges 1,98,500 1,65,600
Administrative Overheads 9,47,600 8,54,600
Sub Contract Charges 1,87,900 1,80,200
Material Return to Stores 75,500 --
Architect Fees 3% of W. C. 3% of W.C.
RCC Consultant Fees 4% of W.C. 4% of W.C.
Plant Issued at Commencement 40,00,000 --
Material at site as on 31 -03-2014 1,39,500 -- munotes.in
Page 41
Contract Costing
41 1) The estimated value of the issued plant at the end of the project is to be
`5,35,000.
2) It was decided that the profit to be taken credit for should be that
proportion of the estimated net profit to be realize d on completion of
the contract which the certified value of work as on 31st March 2014,
bears to the total contract price.
Prepare contract A/c for the period ended 31st March 2014 and show
your calculation profit to be credited to Profit and Loss A/ for the
period ended 31st March 2014.
Solution: -
Ratnagiri Construction Pvt. Ltd.
Contract Account
Dr (From 1-5-13 to 31-3-15) 11 Months Cr.
Particulars ` Particulars `
To Direct Material 87,14,500 By Material Return
to 75,500
Store
To Direct Wages 17,47,500 By Work in Progress
To Direct Expenses 8,44,400 Work Certified 1,62,00,000
To Indirect Material 3,25,600 Work Uncertified 3,85,000
To Supervision Charges 1,98,500 Material at Site 1,39,500
To Administrative Overheads 9,47,600
To Sub Contract charges 1,87,900
To Architect Fees (3% of 4,86,000
1,62,00,000)
To RCC Consultant Fees 6,48,000
(4% of 1,62,00,000)
To Depreciation on
Plant 18,15,000
(1,65,000 p.m. x 11)
To Notional Profit c/d 8,85,000
1,68,00,000 1,68,00,000
To Profit & Loss A/c
6,65,700
By Notional Profit
b/d
8,85,000
To Work in
Progress 2,19,300
(Reserve)
8,85,000 8,85,000
munotes.in
Page 42
Cost Accounting
42
Memorandum Contract A/c
Working Note: -
i) Depreciation on Plant OrigionalCost ScropValueDepreciationEstimated Lifeor Plant
Estimated Life of Plant =
1) Actual Life 1 -5-13 to 31 -3-14 = 11 Months
2) Estimated Period 1 -4-14 to 31 -1-15 = 10 Months
21 Months 40,00,000 5,35,000.21Dep
1,65,000 . .1,65,000 11 18,15,0001,65,000 10 16,50,000Depreciation pm
Depreciation for Actual Period
MonthsDepreciation for Estimated PeriodMonths
Particulars Actual Exp.
(1-5-13 to
31-3-14)
11 Months Estimated
Exp. (1-4-14 to 31-1-15)
10 Months Total Exp.
21 Months Particulars ` To Direct
Material 87,14,500 37,92,500 1,25,07,000 By 2,70,00,000 Contractee’s
A/c (Full
Contract
Price)
To Direct Wages 17,47,500 18,58,500 36,06,000
To Direct Exp. 8,44,400 4,32,600 12,77,000
To Indirect
Material 3,25,600 2,85,500 6,11,100
To Supervision 1,98,500 1,65,600 3,64,100
Charges
ToAdministrative 9,47,600 8,54,600 18,02,200
Overheads
To Sub
Contrac t 1,87,900 1,80,200 3,68,100
Charges
To Architect Fees 4,86,000 3,24,000 8,10,000
To RCC Cons. 6,48,000 4,32,000 10,80,000
Fees
To Depreciation
on 18,15,000 16,50,000 34,65,000
Plant
Total Exp. 1,59,15,000 99,75,500 2,58,90,50 0
Estimated Profit 11,09,500
2,70,00,000 2,70,00,000 munotes.in
Page 43
Contract Costing
43 ii) Transfer to Profit & Loss A/c Out of Notional Profit = 8,85,000 31 03 14Pr & / PrPr
1,62,00,000
2,70,00,000
Pr & / 6,65,700WorkCertified asonofit Loss A c Estimated ofitTotalContract ice
ofit Loss A c
) (Re )Pr Pr & / (Re )(1 )iii Workin progress serveNotional ofit ofit Loss A c serveanyContracts Morethan Contractaaatime
Illustration : 6
Mr. Bean Contractor has under taken two contracts one at Mumbai and
another at Thane. The details of the contracts are given below. For the
year ended 31st March 2014.
i) Provide depreciation on plant at 20% p.a.
ii) During the year material costing `10,000 were transferred from Thane
contract to Mumbai Contract.
Particulars Contract at Mumbai Contract at Than e Date of Commencement 01/07/2013 01/10/2013
` `
Contract Price 10,00,000 15,00,000 Direct Labour 2,55,000 1,82,000 Material Issued from Stores 2,20,000 2,00,000 Material Returned to Stores 10,000 15,000 Plant Installed at Site 2,00,000 3,50,000 Direct Expenses 40,000 30,000 Office Overheads 15,000 10,000 Material Sold (Cost `8,000) 10,000 - Material at Site 18,000 16,000 Cash Received from 4,80,000 2,40,000 Contractee
(Representing 80% of
Work Certified)
Work Uncertified 13,000 9,000 Architect Fees 7,000 3,000 munotes.in
Page 44
Cost Accounting
44 You are required to prepare contract A/c of Mumbai and Thane Contract.
Solution :-
Mr. Bean Contractor
Mumbai Contract A/c (1-7-13 to 31-3-14 - 9 Months)
Dr. Cr.
Working Note: -
i) Work Certified -
Cash Received being 80 % of Work Certified - ` 4,80,000
Re 4,80,000 80%100806,00,000Cash ceived
WorkCertified
WorkCertified
WorkCertified
ii) Depreciation on Plant.
Total Contract Period is 9 Months (from 1 -7-13 to 31 -3-14)
92,00,000 20%1230,000Depreciation
Depreciation Particulars ` Particulars `
To Material Issued 2,20,000 By Material Returned 10,000 To Direct Labour 2,55,000 By Material Sold 8,000 To Direct Expenses 40,000 By Work in Progress
c/d
To Office Overhead 15,000 Work Certified (W.N) 6,00,000 To Architect Fees 7,000 Work Uncertified 13,000 To Depreciation on 30,000 Material at Site 18,000 Plant
To Material from 10,000
Thane Contract
To Notional Profit 72,000
Ltd
6,49,000 6,49,000
To Profit & Loss A/c
38,400
By Notional Profit b/d
72,000 To Work in 33,600
progress (Reserve)
72,000 72,000 munotes.in
Page 45
Contract Costing
45 iii) Out of Notional Profit `72,000 transfer to Profit & Loss A/c is
calculated by finding out how much cont ract is completed between work
certified with the contract price.
Contract Price = 10,000,000 = 100%
Work Certified = 6,00,000 = ?
1006,00,00010,00,00060%ContractCompleted
ContractCompleted
Profit & Loss A/c transferred is calculated by following formula
contr act completed between 50 -90%
2R ePr & / Pr3
2 4,80,00072,0003 6,00,000
Pr & 38, 400Cash ceivedofit Loss A c Notional ofitWorkCertifiedofit Loss c
iv) Work in Progress (Reserve) =
Notional Profit – Profit & Loss A/c
72,000 – 38,400 = 33,600
Thane Contract A/c
(From 1-10-2013 to 31-3-2014 - 6 Months)
Dr. Cr.
Particulars ` Particulars ` To Material Issued 2,00,000 By Material Return 15,000
To Direct Labour 1,82,000 By Material Transferred 10,000
to Mumbai Contract
To Direct Expenses 30,000 By Work in Progress c/d
To Office 10,000 Work Certified 3,00,000
Overheads
To Architect Fees 3,000 Work Uncertified 9,000
To Depreciation on 35,000 Material at Site 16,000
Plant
By Profit & Loss
A/c 1,10,000
(Loss)
4,60,000 4,60,000
Working Note: -
i) Calculation of Depreciation on plant.
Contract Period is 6 months.
(From 01-10-2013 to 31 -03-2014) munotes.in
Page 46
Cost Accounting
46 Depreciation = 3,50,000 20%
70,000 . .pa 6. 6 70,00012Dep For months
Depreciation
ii) Calculation of work certified : -
Cash Received `2,40,000 = 80%
Re 2,40,000 80%? 1001002, 40,000803,00,000Cash ceived
WorkCertified
WorkCertified
WorkCertified
Illustration : 7
Ram contractor undertook a contract for `15,00,000 on 1st July 2012. The
contract was completed on 31st March 2014. The contractor prepares his
accounts as on 31st March. The details of the contract are:
Provide depreciation @ 20% on plant. Prepare contract A/c for the year
ended 31-03-2013 and 31-03-2014.
Particulars Period
1-7-12 to 31-3-13 Period
1-4-13 to 31-3-14
Material Issued 1,52,000 3,30,000 Direct Wages 1,25,000 4,65,000 Direct Expenses 30,000 45,000 Material Returned to 22,000 15,000 Stores
Material at Site 20,000 8,000 Uncertified Work 48,000 -- Office Overheads 23,000 66,000 Material Lost by Fire -- 5,000 Work Certified 3,00,000 15,00,000 Plant Issued 3,00,000 1,50,000 munotes.in
Page 47
Contract Costing
47 Solution:
Ram Contractors
Contract Account
(From 1-7-12 to 31-3-13 - 9 Months)
Dr. Cr.
Working Note: -
i) Depreciation on Pl ant :
(Perido or Contract 01 -07-2012 to 31-03-13-9 Months)
Depreciation = 3,00,000 20% . .pa
= 60,000 p.a.
Depreciation for 9 Months = 960,00012
Depreciation for 9 Months = 45,000
ii) Notional Pro fit - `15,000 out of transfer to Profit & Loss A/c is NIL.
Because contract completed is less than 25%. To find out contract
compl eted compare with work certified to the contract price. Particulars ` Particulars ` To Material Issued 1,52,000 By Material 22,000 Returned to Store
To Direct Wages 1,25,000 By Work in Progress
To Direct Expenses 30,000 Work Certified 3,00,000 To Office Overheads 23,000 Work Uncertified 48,000 To Depreciation on 45,000 Material Site 20,000 Plant
To Notional Profit c/d 15,000
3,90,000 3,90,000
To Profit & Loss A/c
NIL
By Notional Profit
15,000 b/d
To Work in Progress 15,000
(Reserve)
15,000 15,000 munotes.in
Page 48
Cost Accounting
48 Pr 15,00,000 100%
3,00,000 ?
100% 3,00,000 20%15,00,000Contract ice
WorkCertified
of ContractCompleted
Dr. Contract Account Cr.
(From 1 -4-13 to 31 -3-14 - 12 Months)
Working Note: -
i) Depreciation on Pla nt :
Depreciation is calculated on WDV basic.
Plant which was used for 1 Year its Opening Balance is 3,00,000
( - ) Depreciation on 1st Year 45,000
WDV of Plant Particulars ` Particulars ` To Work in
Progress By Work in 15,000 b/d Progress b/d
(Reserve)
Work Certified 3,00,000 By Material 15,000 Returned
Work Uncertified 48,000 By Material at Site 8,000 Material at Site 20,000 By Material Lost by 5,000 Fire
To Material Issued 3,30,000 By Contractee’s 15,00,000 A/c (Full Cont ract
Price)
To Direct Wages 4,65,000
To Direct Expenses 45,000
To Office Overheads 66,000
To Depreciation on 81,000
Plant (WN)
To Profit & Loss
A/c 1,88,000
(Profit)
15,43,000 15,43,000 munotes.in
Page 49
Contract Costing
49 1
1,50,000 20% 51,000
2
1,50,000 20% 30,0002 51,000 30,000 81,000st
ndDepreciationon Plant
Depreciationon Plant
Total Depreciation for yearis
Many Contract (Opening W/P given)
Illustration : 8
Navin Ltd has under taken three Contracts. It furnishes the following
information for the year ended 31st March 2014:
Particulars Goa
Contract Roha
Contract Surat
Contract
1) Balances on 1/4/2013
Material at Site 100 2,000 -- Uncertified Work 25,000 4,000 -- Plant at Site 22,000 3,100 -- Work Certified 19,500 1,400 -- Provision for Contingencies 10,000 600 -- 2) Transactions During the
Year:
Material Issued -- 6,200 8,000 Subcontract Charges 600 11,800 9,000 3) Balances on 31-03-14
Material at Site -- 1,000 800 Uncertified Work -- 1,000 3,850 Plant at Site -- 2,000 950 Work Certified 25,000 30,000 12,000 4) Contract Price 25,000 40,000 50,000 5) Amount Received 25,000 27,000 10,800
6) Value of Plant Transferred from Goa Contract to Surat Contract
` 1,550.
7) The Company consistently adopt the policy of taking credit for the
contract profit considering the proportion of amounts received to the
contract price.
You are required to:
a) Prepare the respective contract accounts for the year ended 31st March
2014.
b) Find the net profit as per profit & Loss A/c.
munotes.in
Page 50
Cost Accounting
50 Solution:
Navin Ltd
Dr. Goa Contract A/c Cr.
Working Note: -
i) Depreciation on Plant.
Dr. Roha Contract A/c Cr.
Working Note: - Particulars ` Particulars ` To Opening Balanc e By Provision for 1,000 Contingencies b/d
Work in Progress By Contractee’s A/c 25,000 (Full Contract Price)
Work Certified 19,500
Work Uncertified 2,500
Material at Site 100
To Sub Contract 600
Charges
To Depreciation on 650
Plant (WN)
To Profit & Loss A/c 2,650
(Profit)
26,000 26,000 Op. Balance of Plant in Goa A/c 2,200 ( - ) Transferred to Surat Contract 1,550 Plant Depreciation of Goa Contract 650 Particulars ` Particulars `
To Opening Balance By Provision for
Contingencies b/d
By Work in Progress b/d
Work Certified
Work Uncertified
Material at Site
By Notional Profit b/d 600 Work in Progress
Work Certified 1,400 30,000 Work Uncertified 4,000 1,000 Material at Site 2,000 1,000 To Material Issued 6,200
To Sub Contract 11,800
Charges
To Depreciation on Plant 1,100
To National Profit b/d 6,100
32600 32,600
To Profit & Loss A/c
4,118
6,100 To Work in Progress 1,982
(Reserve)
6,100 6,100 munotes.in
Page 51
Contract Costing
51 i) Depreciation on Plant at Roha Contract
Opening Balance of Plant 3,100
( - ) Closing Balance of Plant 2,000 Depreciation on Plant 1,100
ii) Notional Profit `6,100, out of that Transfer to Profit & Loss A/c,
specific instruction given in the problem
RePr & / PrPr27,0004,11840,000
Pr & / 4,118Cash ceivedofit Loss A c Notional ofitContract iceofit Loss A c
iii) Work in progress (Reserve) = Notional Profit & Loss
A/c 1982 = 6,100 – 4,118
Dr. Surat Contract Cr.
Working Note: -
i) Depreciation on Plant for Surat Contract -
Particulars ` Particulars `
To Material Issued 8,000 By Work in Progress c/d
To Sub Contract 9,000 Work Certified 12,000 Charges
To Depreciation on Plant 600 Work Uncertified 3,850 (1550 - 950)
Mate rial at Site 800 By Profit & Loss A/c 950 (Loss)
17,600 17,600 Plant Transform from Goa 1,550 Closing Plant at Surat - 950 Depreciation on Plant 600 munotes.in
Page 52
Cost Accounting
52 Dr. Profit & Loss A/c Cr.
2.6 EXERCISE
A. Objecti ves type Questions
Q.1 Multiple Choice Questions.
1. Retention money is
a) Payment received – Work certified
b) Work certified – Cash received
c) Work certified – work uncertified
d) Contract price – Work certified
2. Work in progress is valued at cost plus profit which has been taken to
the
A. Contract A’C B. Profit and loss A’C
C. Contractees A/C D. None of the above
3. If the contract completed 80% then transfer to profit and loss A’C out of
A. NIL B. 1/3 * Notional profit
C. 2/3 * Notional profit D . Entire profit
4. Cost o f normal wastage of materials is
A. Debited to contract A’C B. Credited to contract A/C
C. Debited to P & L A/C D. Credited to P & L A/C
5. Cost of abnormal wastage of materials in a contract is transferred
to the
A. Contract A/C B. Costing profit and loss A/C
C. Profit and Loss A/C D. None of the above
6. Cash received on contract is credited to
A. Contract A/C B. Contractees A/C
C. Profit and Loss A/C D. None of the above
Particulars ` Particulars ` To Surat Contract
(Loss) 950 By Goa Contract
(Profit) 2,650 To Net Profit c/d 5,818 By Roha Contract
(Profit) 4,118 6,768 6,768 munotes.in
Page 53
Contract Costing
53 7. If the contract price is RS. 10,00,000 work certified is 60 %
,the amount of the profi t is 72,000 ,then the reserve will be RS .
A . RS. 33,600 B. RS.30,600
C.RS.32,200 D.RS. 40,000
8. If the contract completed is less than 20% then the amount of profit is
transfer to P & L A/C
A. Full amount B. 50%
C. NIL D. 20%
9. Cash received is calculate d by
A. Work certified - Retention money
B. Work certified x cash received as % of W.C.
C. Contract price x % of W.C. x % of cash received
D. All of the above
10. Notional profit is calculated by
A. Work certified – Cost of Work certified
B. Work certified –Work uncertifie d
C. Work certified – Cash received
D. Any of the above
(Answers : 1.A 2.B 3.C 4.A 5.B 6. B 7. A 8.C 9. D 10. A)
Q .2 True and False
1. Cash received = Value of work certified – Retention money
2. Cost of material transferred from one contract to another contract , the
contract A/C which receives the material is credited to the particular
contract A/C.
3. Contractor is the person who undertakes the contract.
4. Contertee is the person who undertakes the contract.
5. Sale of plant , the sale price is debited to the contract A/C.
6. Under capital method, the amount of depreciaton is debited to contract
A/C.
7. Cash received is credited to the contract A/c.
8. If the contract is 100 % completed ,then the entire profit is transferred
to P & L A/C.
9. The cost of material issued by stores is debited to the contract A/c.
munotes.in
Page 54
Cost Accounting
54 10. Work certified is that portion of the work completed which has
been certified by the contractee’s architect .
(Answers: True : 1,3,8,9,10 False : 2,4,5,6,7.)
B. Practical Problem: -
Q.1 Jai Hind Constructi on Company under took the construction of a
building at a contract price of `2,00,00,000.
The Date of Commencement of contract was 1st May 2013. The following
cost information is given for the period ended 31st March 2014:
1) Direct Material Sent to the Site - 5,000 tons @ `1.50 per kg.
2) Indirect Material `6,50,000.
3) Direct Labour - 12,000 Mandays @ `180 per Monday.
4) Indirect labour charged at 7.5% of Direct Labour.
5) sub Contract Charges Charged at 15% of Indirect Materials.
6) Direct Materials returned to stores 20 tons.
7) Direct Material lost in an accident 5 tons.
8) Supervision charges paid `8,000 per month.
9) Administrative Overheads incurred `12,000 per month.
10) Architect Fees Charged at 2% of Work Certified.
11) Plant & Machinery installed at site on the date of commencement of
contract at a cost of `15,00,000. Which is to be depreciated @ 12%
p.a. under original cost method.
12) Cash received from contractee `1,26,00,000 which is equal to 90% of
work certified.
13) Direct Material at site as on 31st March 2014 - 15.
14) Cost of work done but not certified was `2,04,500 on 31st March
2014.
You are required to prepare a contract Account for the period ended 31st
March 2014, in the books of Jai Hind Construction Company and show
what profit or loss should be taken into account for the period ended 31st
March 2014.
R. Limited commenced a contract on 01 -07-2013. The Total contract price
was `5,00,000 but R Limited accepted the same for `4,50,000. It was
decided to estimate the total profit and to take to the credit of profit & Loss
A/c that proportion of estimated profit on cash basis which the work
completed and certified borne to the total contract. Actual expenditure till
31- 12-2013 and estimated expenditure in 2014 are given below. munotes.in
Page 55
Contract Costing
55
The plant is subjected to annual depreciation @ 20% of original cost. The
contract is likely to be completed on 30 -09-2014.
You are required to prepare the contract A/c for the year ended 31-12-
2013. Working showed be clearly given.
It is the policy or the company to charge depreciation on time basis.
Q. 3 Raj and Company has undertaken two contract viz. A and B. The
following particulars are available for the year ended 31st March 2014.
Particulars Contract A Contract B
Date of Commencement 01-07-2013 01-12-2013 Contract Price 6,00,000 5,00,000 Material Sent to Site 1,60,000 60,000 Material Returned 4,000 2,000 Closing Stock of Material at Site 22,000 8,000 Direct Labour 1,50,000 42,000 Direct Expenses 66,000 35,000 Establishment Expenses 25,000 7,000 Plant Installed at Site 80,00 72,000 Work Uncertified 23,000 10,000 Work Certified 4,20,000 1,35,000 Architect Fees 2,000 1,000
Particulars Accruals ` Estimate for 2014 `
Mate rial 75,000 1,30,000 Labour 55,000 60,000 Plant Purchased (Original Cost) 40,000 -- Miscellaneous Expenses 20,000 35,500 Plant Returned to Stores (at 10,000 25,000 Original Cost)
Material at Site 5,000 -- Work Certified 2,00,000 Full Work Uncerti fied 7,500 -- Cash Received 1,80,000 Full munotes.in
Page 56
Cost Accounting
56 During the year Material Costing `9,000 have been transferred from
contrac t A to contract B. The contractor charges depreciation @ 25% p.a.
on plant.
You are required to prepare contract A/c, working for profits, if any, and
show how the relevant items would appear in the Balance Sheet Assuming
that contractce had paid 90% of the work certified.
Q.4 M/s Jadhav constructions under took contract For
`5,00,00,000 on 1st August 2012. The contract was completed on 31st
March 2014. The contractor closes his accounts on 31st March. The
details of the contract are as fol lows:
Particulars For the Period
ended 31-03-13
` For the Period
ended 31-03-14
`
Material Issued 95,48,500 1,17,65,000 Direct Labour 31,37,800 45,40,000 Sub Contract Charges 7,88,900 28,13,000 Administrative Overheads 15,85,400 31,42,000 Supervision Charges 3,45,600 8,05,500 Material Returned to Stores 1,32,400 2,44,300 Work Uncertified 5,23,200 -- Work Certified (Cumulative) 2,00,00,000 5,00,00,000 Material at Site 1,00,600 -- Cash Received 1,80,00,000 3,20,00,000 Architect Fees 4% of Work 4% of Work Certified Certified
The Plant and Machinery purchased on 01/08/2012 for the contract was
`84,25,000 and the estimated scrap value of the plant and machinery at the
end of the contract was `4,25,000. It realized on completion of contract at
its estimated scrap value.
You are required to prepare:
a) Contract A/c for the period indeed 31st March 2013 and
b) Contract A/c for the year ended 31st March 2014.
Q.6 Parna Kutir Ltd. furnishes you with the following information for the
year ended 31st March 2013 and 31st March 2014. munotes.in
Page 57
Contract Costing
57
To Total contract Price is `1,00,000. The entire amount was received by
31st March 2014. As per the accounting policy adopted by the company no
profit is to b e considered unless the value of the work certified at the year
end excess 25% of the contract price.
Prepare contract account for the years ended 31st March 2013 and 31st
March 2014.
Particulars 31-03-2013 31-03-2014
Material Issued 13,000 24,700
Sub - Contract Charges 4,500 20,000
Value of Work Certified During the 20,000 80,000
year
Closing Stock of Material at Site 3,000 --
munotes.in
Page 58
58 3
PROCESS COSTING
Unit Structure :
3.1 Objectives
3.2 Introduction
3.3 Costing Procedure
3.4 Treatment to Several Items
3.5 Format of Process A/C
3.6 Solved Problems
3.7 Exercises
3.0 OBJECTIVES
After studying the unit the students will be able to:
Understand the meaning and costing procedure of Process Costing
Know how to Normal and Abnormal process losses and Abnormal
Gains.
Calculate Process Cost per unit.
Solve the problems on process costing.
3.1 INTRODUCTION
A process means a difference manufactur ing operation or stages. When a
product is produced, it means a row material will be converted into finished
product it is passes through difference stages, it is called as a process.
Process costing means to find out the cost or each process. For eg. - if a
product passes through 3 processes at that time we have a find out the cost
of each process.
3.2 COSTING PROCEDURE
Under Process Costing following procedures are as follows:
1) Separate Process A/c: -
Under process costing different process accounts are prepared, it means
how many process are given separate process A/c is prepared. munotes.in
Page 59
Process Costing
59 2) Debit Side of Process A/c:-
Under each process the cost of each process divided as follows: -
i) Material : Whatever Material used for each process is debited to a
Particular Accoun t.
ii) Labour : Whatever labour used or wages paid to worker are
debited to the particular process A/c.
iii) Overheads : Whatever expenses or overhead paid for particular
process are debited to that A/c.
3) Credit Side of Process A/c: -
Any sale of scrap related to a particular process are credited to
process A/c.
4) Cost of Process: -
To find out the net cost of process is total of Debit side Less Credit Side
of process A/c which gives the net cost of a particular process i.e.
(Total expenses (Dr. Side) - Sale or scrap (Cr. Side).
3.3 TREATMENT TO SEVERAL ITEMS
3.3.1 PROCESS LOSS :-
In many process, there is a weight loss. It means under any process there is
surety of some % of loss on input. If there are total three process, we
introduced input in process I, then th ere is surety that same % of loss on
that input whatever balance transfer to next process i.e. process II. Again
in process II if there is weight loss, and balance transfer to next process
i.e. process III again in process III there is weight loss what balance is an
actual output.
The loss may be divided into two categories.
i) Normal Loss
ii) Abnormal Loss.
i) Normal Loss :-
Under any process, before production we assume that there is a loss
under each process which is called as normal loss. It is already assume
before production process start.
ii) Abnormal Loss: -
As per above we can say that before production, assume some % of loss
i.e. weight loss or normal loss. But after the production if there is an
increase in normal loss, it means loss is over and above expectatio n is
called as abnormal loss. munotes.in
Page 60
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
60 For e.g. if input is 1000 units, assumed that normal or weight Loss is 5%
before production i.e. 50. It means expected output is 950 units, but after
production actual output is 920 units then these
30 unit (950-920) are calle d as abnormal loss. In short, you expected only
50 units of normal loss but actual wastage is 80 so it is over and above
expected loss as abnormal loss.
3.3.2 Abnormal Gains: -
In some process, there is a normal Loss but the actual productions are
more than expectation. In short, output is over and above expectation, is
called as abnormal gain. For eg - If input is 1000 units, assumed that
normal loss or weight loss is 5% before production i.e. 50 unit. It means,
expected output is 950 units but production a ctual output is 970 units then
these 20 units (970 - 950) are called as abnormal gain. In short, you
expected only 50 units of normal Loss but actual wastage is only 30 units,
so these 20 units are over and above expectation known as abnormal gain.
Cost Per Unit: -
Under each process always find out cost per unit. In short find out net cost
of each process. Firstly take the total of Debit side Minus Credit Side of
Process A/c it is calculated by following
Formula (. ) (. )() ()Total Cost Dr Side Scrap Value of Normal Loss Cr SideCost Per UnitsInput Units Normal Loss Units
3.4 FORMAT OF PRO CESS A/C
Process I A/c
Particulars Units Rate ` Particulars Units Rate ` To Input By Normal
Loss
To Direct By Transfer
to Process II
A/c
Material
To Labour
To
Overheads
To Expenses
munotes.in
Page 61
Process Costing
61
Process II A/c (Abnormal Loss)
P
r
o
c
e
s
s
I
I
I
A
/
c (Abnormal Gain)
Particulars Units Rate ` Particulars Units Rate `
To Transfer
from
Process I By Normal
Loss
To Material By
Abnormal
Loss A/c
To Labour By Transfer
to Process
III A/c
To
Overheads
to Expenses
Particulars Units Rate ` Particulars Units Rate `
To Transfer
from Process
II By Normal
Loss
To Material By Transfer
to Finished
Stock A/c
To Labour
To
Overheads
To
Expenses
To
Abnormal
Gain
munotes.in
Page 62
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
62 Normal Loss A/c
Abnormal Loss A/c
Abnormal Gain A/c
Particulars Units Rate ` Particulars Units Rate `
To
Norma
l Loss By Process
III A/c
To Costing
Profit & Loss
A/c
Quantity Reconciliation
Particulars Units Rate ` Particulars Units Rate `
To Process
I
To Process
II
To Process
III
By Actual Sale
Process I
II
III
By Abnormal
Gain (Process
III)
Particulars Units Rate ` Particulars Units Rate `
To Process II
By Actual Sales
Process II
By Costing P & L A/c
Particulars I II III
Input
( - ) Normal Loss
Expected Output
( - ) Actual Output
Abnormal Loss / Gain munotes.in
Page 63
Process Costing
63 Abnormal Loss = Actual Output is Less than the expected
Output.
Abnormal Gain = Actual output is more than the expecte d output.
3.5 SOLVED PROBLEMS
Illustration : 1
Samar Ltd. manufactures a product which passes through two consecutive
process viz. Purvardha and Uttarardha. The company provides you with
the following information for the year ended 31st March 2014.
Prepare Process A/c and other relevant accounts.
The entire output of Uttarardha process was sold for `30,000.
Solution :-
Quantity Reconciliation
Particulars Purvardha Uttarardha Basic Material 5000 units -- Rate Per Unit `2.20 -- ` ` Process Material 4,000 3,000 Wages 3,000 4,000 Factory Overheads 2,000 2,630 Process Loss as percentage of input 10% 10% Scrap Value of process loss (per 100 40 60 units)
Particulars Purvardha Uttarardha
Input 5,000 4,500 ( - ) Normal Loss 500 450 Expected / Actual Output 4,500 4,050 munotes.in
Page 64
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
64 Purvardha Process A/c
20,000 200 19,8004.405,000 500 4,500Total Cost Scrap Value or Normal LossCost Per UnitsInput Normal Loss
Uttarardha Process A/c Particulars Units Rate ` Particulars Units Rate `
To Material 5,000 2.20 11,000 By Normal 500 0.40 200 Loss
To Process 4,000
Material
To Wages 3,000 By Transfer 4,500 4.40 19,800 to
Uttarardha
Process
To Factory 20,000
Overheads
5,000 20,000 5,000 20,000
Particulars Units Rate ` Particulars Units Rate `
To Transfer 4,500 4.40 19,800 By
Norma
l 450 0.60 270 from Loss
Purvardha
Process
To Process 3,000 By Output 4,050 7.20 29,160 Material c/d
To Wages 4,000
To Factory 2,630
Overheads
4,500 29,430 4,500 29,430
To Output
4,050
7.20
29,160
By Sale
4,050
30,000 b/d
To Costing 840
P/L A/c
4,050 30,000 4,050 30,00 0 munotes.in
Page 65
Process Costing
65 Total Cost Scrop Value of Normal LossCost Per UnitsInput Normal LossUnits 29,430 270 29,1604,500 450 4,050 `7.20
Illustration : 2
Y Ltd. Manufacture a Chemical product which passes through three
process. The cost records show the following particulars for the year ended
30th June 2014.
Particulars Proce ss I Process II Process III Material 48,620 1,08,259 1,03,345 Labour 32,865 84,553 77,180 Expenses 2,515 10,588 16,275 Normal Loss 20% 15% 10% Scrop Value Per Unit 1 2 3 Actual Output (Units) 18,000 16,000 15,000
Input to Process I 20000 Units @ `28 per unit. Prepare Process Accounts,
Abnormal gain / Loss A/c Also show process cost per unit for each
process.
Solution: -
Quantity Reconciliation
Particulars I II III
Input 20,000 18,000 16,000 ( - ) Normal Loss 4,000 2,700 1,600 Expected Output 16,000 15,300 14,400 ( - ) Actual Output 18,000 16,000 15,000 Abnormal 2,000 Gain 700
Gain 600
Gain munotes.in
Page 66
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
66
Process I A/c
6,44,000 4,000 6,40,0004020,000 4,000 16,000Total Cost Normal Loss Scrap ValueCost Per UnitsInput Normal Loss Units
Process II A/c
Particulars Units Rate ` Particular s Units Rate `
To Input 20,000 28 5,60,000 By Normal 4,000 1 4,000 Loss
To Material 48,620 By 18,000 40 7,20,000 Transfer
To
Process II
To Labour 32,865
To 2,515
Expenses
To 22,000 40 80,000
Abnormal
Gain
22,000 7,24,000 22,000 7,24,000
Particulars Units Rate ` Particulars Units Rate `
To Transfer By Normal 2,700 2 5,400 Loss
From
Process I 18,000 40 7,20,000 By Transfer 16,000 60 9,60,000 to Process
III A/c
To Material 1,08,259
To Labour 84,553
To Expenses 10,588
To
Abnormal 700 60 42,000
Gain
18,700 9,65,400 18,700 9,65,400 munotes.in
Page 67
Process Costing
67
9,23,400 5, 400 9,18,0006018,000 2,700 15,300CPU
Process III A/c
Particulars Units Rate ` Particulars Units Rate `
To Transfer 16,000 60 9,60,000 By Normal 1,600 3 4,800 from Process II Loss
To Material 1,03,345 By Output 15,000 80 12,00,000 (Finished
Stock A/c)
To Labour 77,180
To Expenses 16,275
To Abnormal 600 80 48,000
Gain
16,600 12,04,800 16,600 12,04,800
11,56,800 4,800 11,52,0008016,000 1,600 14,400CPU
Normal Loss A/c
Particulars Units Rate ` Particulars Units Rate `
To Process I 4,000 1 4,000
To Process II 2,700 2 5,400 2,000 1 2,000 To Process III 1,600 3 4,800 2,000 2 4,000 1,000 3 3,000
2,000 1 2,000 700 2 1,400 600 3 1,800 8,300 14,200 By Actual Sale
Process I
II
III
By Abnormal Gain
Process I
II
III
8,300 14,200
munotes.in
Page 68
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
68 Abnormal Gain A/c
Particulars Units Rate ` Particular s Units Rate `
To Normal
Loss A/c
Process I 2,000 1 2,000 2,000 40 80,000 II 700 2 1,400 700 60 42,000 III 600 3 1,800 600 80 48,000 To Costing 1,64,800
Profit &
Loss A/c
3,300 1,70,000 By Actual
Sales
Process I
II
III
3,300 1,70,000
Illustration : 3
Product A is manufactured after it passes through three distinct processes.
The following information is obtained from the records of a company for
the year ended 31st December 2013.
Product Overheads are `9,000. 1000 Units a t `5 each were introduced to
process I. There was no stock or materials or work in progress at the
beginning and at the and of the year. The output of each process passes
direct to the next process and finally to the finished stock A/c. Production
overhead s are recovered on 100% of direct wages.
Prepare Process Cost Accounts and Abnormal Gain or Loss Account for
the year ended 31st December, 2013.
Particulars Process I Proce ss II Process III
Direct Material 2,500 2,000 3,000 Direct Wages 2,000 3,000 4,000 Output during the week 950 840 750 Percentage of Normal Loss 5% 10% 15% to Input
Value or Scrap Per Unit ` 3/- 5/- 5/- munotes.in
Page 69
Process Costing
69 Solution: -
Quantity Reconciliation
Process I A/c
Particulars Process I Process II Process
III
Input 1,000 950 840 ( - ) Normal Loss 50 95 126 Expected Output 950 855 714 ( - ) Actual Output 950 840 750 Abnormal NIL
Loss 15
Gain 36
Particul rs Units Rate ` Particulars Units Rate `
To Input 1,000 5 5,000 By Normal 50 3 150 Loss
To Direct 2,500 By Transfer 950 11.95 11,350 Material to Process
II A/c
To Wages 2,000
To 2,000
Product
Overhead
s
(100% of
Wages)
1,000 11,500 1,000 11,500 munotes.in
Page 70
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
70 11,500 150 11,35011.951,000 50 950Total Cost Normal Loss Scrop ValueCost Per UnitsInput Normal Loss Units
Process II A/c
19350 475 1887522.07950 95 855Cost Per Unit
Process III A/c
Particulars Units Rate ` Particulars Units Rate `
To Transfer 950 11.95 11,350 By Normal 95 5 475 from Loss
Process I
To Material 2,000 By Abnormal 15 22.07 331 Loss
To Wages 3,000 By Process III 840 22.07 18,544 A/c Transfer
To Product 3,000
Overheads
950 19,350 950 19,350
Particulars Units Rate ` Particulars Units Rate `
To Transfer 840 22.07 18,544 By Normal 126 5 630 from Process Loss
II
To Material 3,000 By Finished 750 40.49 30,372 Stock A/c
To Wages 4,000
To Product 4,000
Overheads
To Abnormal 36 40.49 1,458
Gain
876 31,002 876 31,002 munotes.in
Page 71
Process Costing
71 29,544 630 28,91440.49840 126 714Cost Per Unit
Normal Loss A/c
Abnormal Loss A/c
Abnormal Gain A/c
Particulars Units Rate ` Particulars Units Rate `
To Process 50 3 150 By Actual
I Sales
To Process 95 5 475 Process I 50 3 150 II
To Process 126 5 630 Process II 95 5 475 III
Process III 90 5 450 By 36 5 180 Abnormal
Gain
Process III
271 1,255 271 1,255 Particulars Units Rate ` Particulars Units Rate `
To Process 15 22.07 331 By Actual 15 5 75 II Sales
Process II 256 By Costing
Profit &
Loss A/c
15 331 15 331 Particulars Units Rate ` Particulars Units Rate `
To Actual 36 5 180 By Process 36 40.49 1.458 Sale III
Process III
To Costing 1,278
Profit &
Loss A/c
36 1,458 36 1,458 munotes.in
Page 72
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
72 PARTLY OUTPUT - TRANSFER / STOCK / SALE
After completing each and every process, partly material either sold or
transfer to next process and finally from last process 100%. material or
output will be sold or transfer to warehouse.
Illustration : 4
M/s XYZ and company manufacture a chemical which passes through
three processes. The following particulars gathered for the month of
January, 2014.
Particulars Process I Process II Process III Material (Litre) 400 208 168 Material Cost `38,400 `18,800 `6,000 Wages `7,680 `7,600 `2,200 Normal Loss (% of input) 4% 5% 5% Scrap Sale Value -- ` 3 Per Ltr. -- Output Transferred to Next 50% 40% -- Process
Output Transferred to ware 50% 60% 100% houses
Overheads are charged @ 50% of Direct Wages. You are required to
prepare Process Account.
Solution: -
Quantity Reconciliation
Particulars Process I Process II Process III
Transf er from Process - 192 152 ( + ) Input 400 208 168 Total 400 400 320 ( - ) Normal Loss 16 20 16 384 380 304 Transfer to Next Process 192 152 -- Transfer to Warehouse 192 228 304 munotes.in
Page 73
Process Costing
73 Process I A/c
49,920 49,920. . . 130400 16 16Total Cost ScrapValue of Normal LossCost Per UnitInput Normal Loss Units
NilCP U
Process II A/c
55,160 60 55,100145 /400 20 380Cost Per Unit
Particulars Ltr Rate ` Particulars Ltr Rate `
To Material
To Wages
To Overheads
(50% of
wages) 400 38,400
7,680
3,840 By Normal Loss
By Transfer to
Next Process
(50%)
By Transfer to
Warehouse
(50%) 16
192
192 --
130
130 --
24,960
24,960
400
49,920 400 49,920
Particulars Ltr Rate ` Particulars Ltr Rate `
To Transfer
from
Process II
To Material
To Wages 192
208 130 24,960
18,80 0
7,600 By Normal
Loss
By Transfer
To Next
Process III
(40%)
By Transfer
to Warehouse
(60%) 20
152
228 3
145
145 60
22040
33,060 To
Overheads
(50%
of wages) 3,800
400 55,160 400 55,160 munotes.in
Page 74
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
74 Proces s III A/c
31,340 31,340103.09320 16 304NilCost Per Unit
Output Partly Sold and Partly Transferred to Next Process.
Illustration : 5
KT Ltd. provides you the following information for the year ended
31st March 2014.
Particulars Process A Process B Process C
Raw Material (Units) 12,000 2,440 2,600 Cost of Raw Material Per Unit 5 5 5 (`)
Direct Wages ` 34,000 24,000 15,000 Production Overheads ` 16,160 16,200 9,600 Normal Loss (% of Total No. of 4% 5% 3% Units entering to the process)
Wastage (% of Total No. of 6% 5% 4% Units Entering to the Process)
Scrap Per Unit of Wastages ` 3 4 5 Output Transferred 70% 60% -- Subsequent Process
Out Sold at the End of the 30% 40% 100% Process
Selling Price Per Unit ` 12 16 17 Particulars Ltr Rate ` Particulars Ltr Rate `
To Transfer 152 145 22,040 By Normal 16 -- -- from Process Loss
II
To Material 168 6,000 By Transfer
to 304 103.09 31,340 Warehouse
(100%)
To Wages 2,200
To Overheads 1,100
(50% of
wages)
320 31,340 320 31,340 munotes.in
Page 75
Process Costing
75 Prepare Process A, B and C.
Solution: -
Quantity Reconciliation
Process A A/c
Particulars Units Rate ` Particulars Units Rate `
To Material 12,000 5 60,000 By Normal
Loss 480 -- -- To Wages 34,000 By Wastage 720 3 2,160 To
Production
Overheads 16,160 By Output c/d 10,800 10 1,08,000 12,000 1,10,160 12,000 1,10,160
To Output
b/d
10,800
10
1,08,000
By Transfer to
Process B (70%)
7,560
10
75,600 To Costing
Profit & Loss
A/c (Profit) 6,480 By Sold
(30%) 3,240 12 38,880 10,800 1,14,480 10,800 1,14,480
Particulars Process A Process B Process C
Input 12,000 2,440 2,600 (+) Transfer from Process -- 7,560 5,400 Total 12,000 10,000 8,000 (-) Normal Loss 480 500 240 (-) Wastage 720 500 320 10,800 9,000 7,440 Transfer to Next Process 7,560 5,400 -- Partly Sold 3,240 3,600 7,440 Sold munotes.in
Page 76
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
76 Process B A/c
Process C A/c
Illustration : 6
Assemblers Ltd. have three Assembly shop viz. General Assembly, Lower
Assembly and Higher Assembly. Part of the output is transferred to the Particulars Units Rate ` Particulars Units Rate `
To Process A 7,560 10 75,600 By Normal 500 -- -- Loss
To Material 2,440 5 12,200 By 500 4 2,000 Wastage
To Wages 24,000 By Output 9,000 14 1,26,000 c/d
To Overheads 16,200
1,000 1,28,000 10,000 1,28,000
To Output b/d
9,000
14
1,26,000
By Transfer
5,400
14
75,600 to Process
C / 60%)
To Costing 7,200 By Sold 3,600 16 57,600 Profit & Loss (40%)
A/c (Profit)
9,000 1,33,200 9,000 1,33,200 Particulars Units Rate ` Particulars Units Rate `
To Process B 5,400 14 75,600 By Normal 240 -- -- Loss
To Material 2,600 5 13,000 By 320 5 1,600 Wastage
To Wages 15,000 By Sales 7,440 17 1,26,480 To Overheads 9,600
To Costing 14,880
Profit & Loss
A/c (Profit)
8,000 1,28,080 8,000 1,28,080 munotes.in
Page 77
Process Costing
77 next assembly and part is sold d irectly. The company furnished the
following in formations.
Particulars General Lower Higher
Raw Material (In Ltrs) 5,000 1,920 3,576 Material Cost Per Ltr. `60 `40 `80 Labour Cost 4,28,000 1,06,000 2.10.000 Direct Expenses 88,000 2,85,200 1,04,800 Wastage as percentage of 4% 5% 10% Total input
a) Output Transferred
To Lower Assembly 60% -- -- To Higher Assembly -- 40% -- b) Output Sold in Market 40% 60% 100% Sales Price Per Ltr. `200 `205 `250
Administrative Overheads - `36,000
Market ing Overhead - `48,000
Prepare Various Assembly A/c and costing Profit & Loss A/c
Solution :
Quantity Reconciliation
Particulars General Lower Higher
Input 5,000 1,920 3,576 (+) Transfer from Process -- 2,880 1,824 Total 5,000 4,800 5,400 (-) Normal Loss 200 240 540 Actual Output 4,800 4,560 4,860 (-) Sold Out 1,920 2,736 4,860 (-) Transfer to Next Process 2,880 1,824 -- munotes.in
Page 78
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
78 General Process A/c
Lower Assembly A/c
Particulars Ltrs Rate ` Particulars Ltrs Rate `
To Material 5,000 60 3,00,000 By Normal
Loss
(Wast age) 200 -- -- To Labour 4,28,000 By Output c/d 4,800 170 8,16,000 To Direct
Exp. 88,000
5,000 8,16,000 5,00 8,16,000
To Output b/d
4,800
170
8,16,000
By Transfer
to Lower
2,880
170
4,89,600 To Costing
P/L A/c
(Profit) 57,600 By Sales 1,920 200 3,84,000 8,73,600 8,73,600 Particulars Ltrs Rate ` Particulars Ltrs Rate `
To General
Assembly
Transfer
To Material 2,88`0
1,920 170
40 4,89,600
76,800 By
Wastage
By Output
c/d 240
4,560 --
210 --
9,57,600 To Labour
To Direct Exp 1,06,000
2,85,200
4,860 9,57,600 4,860 9,57,600 To Output b/d 4,560 210 9,57,600 By Transfer
to Higher
By Sales
By Costing
P/L A/c
(Loss) 1,824
2,736 210
505 3,83,040
5,60,880
13,680 4,560 9,57,600 4,560 9,57,6 00 munotes.in
Page 79
Process Costing
79 Higher Assembly A/c
()
8,16,000
5,000 200
8,16,0001704,800
9,57,600Total Cost Normal Loss ScrapValueCost Per UnitInput Normal Loss Units
NilGeneral Assembling
NLower Assembly
4,800 240
9,57,6002104,560
9,83,920
5, 400 540
9,86,920
4,860il
NilHigher Assembly
Particulars Ltrs Rate ` Particulars Ltrs Rate `
To Lower 1,824 210 3,83,040 By 540 -- -- Assembly A/c Wastage
(Transfer)
To Material 3,576 80 2,86,080 By Output 4,860 202.45 9,83,920 c/d
To Labour 2,10,000
To Direct Exp. 1,04,800
5,400 9,83,920 5,400 9,83,920
To Output b/d
4,860
202.45
9,83,920
By Sales
4,860
250
12,15,000 To Costing 2,31,080
P/L A/c
(Profit)
4,860 12,15,000 4,860 12,15,000 munotes.in
Page 80
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
80 Costing Profit & Loss A/c
Process Stocks :-
Under Process Costing, Whatever output of each and every process is
transfer to next process or sold out partly or entirely transfer to next
process and after completion of process at the end the output is sol d. But
when there is process stock given then the entire output of a particular
process would be transfer to particular process stock A/c, then added
opening stock and deducting closing stock whatever balance remain it
transfer to next process. For eg. In a process a input are 1000 units normal
loss is 50 units. Process stock A/c shows opening balance 100 units,
closing stock is 150 units then transfer to next process is calculated as
Input
(-) Normal Loss - 1000
- 50
Expected Output
(+) Opening Stoc k - 950 Actual Output
- 100
(-) Closing Stock 1,050
- 150
900 - Transfer to Next Process
Illustration : 7
Reliance Yarn Ltd. manufactures a yarn product. The product passes
through three consecutive pr ocesses F.Y., S. Y., and T. Y., Relevant
details for the months of March 2014 are as under:
` Particulars `
To Lower Assembly 13,680 By General Assembly 57,600 To Administrator Overheads 36,000 By Higher Assembly 2,31,080 To Marketing Overheads 48,000
To Net Profit c/d 1,91, 000
2,88,680 2,88,680 munotes.in
Page 81
Process Costing
81 Particulars F. Y. S. Y. T. Y.
Quantitative in Formation in Kg.
Basic input kg @ 10 Per Kg. 2000 -- -- Output during the month 1950 1925 1679 Stock of Process
- On 1st March 2014 200 300 100 - On 31st March 2014 150 400 59 % of Normal Loss to input in process 2% 5% 8% Monetary Information ` ` ` Process Material 9000 2100 2716 Wages 9064 1860 4000 Value or Opening Stock 3880 6720 2800 Scrap Value per kg `1 `2 `4
Closing Stock is to be valued at the respective cost of each process.
Prepare process A/c, Process Stock A/c, Abnormal Loss and Abnormal
Gain A/c. Find out the costing profit, when the sales out of T.Y. Process
Stock are made at `40 per kg.
Solution:
Quantity Reconciliation
Particulars F. Y. S. Y. T. Y.
( - ) Input
Normal Loss 2000 40 2000
100 1825
146
Expected Output 1960 1900 1679 ( - ) Actual Output 1950 1925 1679 Abnormal Loss / Gain 10 (Loss) (25) Gain - Actual Output 1950 1925 1679 ( + ) Opening Stock 200 300 100 ( - ) Closing Stock (150) (400) (59) Transfer to Next Process 2000 1825 1720 Sold
munotes.in
Page 82
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
82 F. Y. Process A/c
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Input
To Material
To Wages 2000 10 20,000
9,000
9,064 By Normal Loss
By Abnormal
Loss
By Transfer
To F.Y.
Process
Stock A/c 40
10
1950 1
19.40
19.40 40
194
37,830 2000 38,064 2000 38,064
38064 40 3802419.402000 40 1960Total Cost Normal Loss ScrapValueCost Per UnitInput Normal Loss Units
F. Y. Process Stock A/c
S. Y. Process A/c Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Balance b/d 200 19.40 3,880 By Transfer
to S. Y.
Process A/c 2000 19.40 38,800
To Transfer
From F. Y.
Process 1950 19.40 37,830 By Balance
c/d 150 19.40 2,910
2150 41,710 2150 41,710
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Transfer
from F. Y.
Process
Stock
To Material 2000 19.40 38,800
2,100 By Normal Loss
By Transfer
To S. Y.
Process
Stock A/c 100
1925 2
22.40 200
43,120 To Wages
To Abnorm al
Gain
25
22.40 1,860
560
2025 43,320 2025 43,320 munotes.in
Page 83
Process Costing
83 S. Y. Process Stock A/c
42760 200. . Pr2000 100
4256022.401900S Y ocess
T. Y. Process A/c
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Transfer
from S. Y.
Process
Stock A/c 1825 22.40 40,880 By Normal
Loss 146 4 584 To Material 2,716 By Transfer
To T. Y.
Process
Stock A/c 1679 28 47,012 To Wages 4,000
1825 47,596 1825 47,596
T. Y. Process Stock A/c
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Balance b/d 300 22.40 6,720 By Transfer
To T. Y. Process 1825 22.40 40,880
To Transfer
from S. Y.
Process 1925 22.40 43,120 By Balance
c/d 400 22.40 8,960
2225 49,840 2225 49,840
Particulars Kgs. Rate ` Particulars Kgs. Rate `
1679
100 47,012
2,800 1720
59 48,160
1,652 To Transfer
from T. Y.
Process A/c
To Bal b/d
1779 28
28 49,812 By Transf er
to Costing
P/L A/c
By Balance c/d 1779 28
28 49,812 munotes.in
Page 84
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
84 47596 584 47012. .Pr 281825 146 1679Total Cost Normal Loss ScrapValueCost Per UnitInput Normal Loss Units
T Y ocess
Normal Loss A/c
Abnormal Loss A/c
Abnormal Gain A/c
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To F. Y. Process 40 1 40 By Actual Sales
To S. Y. Proce ss 100 2 200 F. Y. Process 40 1 40 To T. Y. Process 146 4 584 S. Y. Process 75 2 150 T. Y. Process 146 4 584 By Abnormal
Gain
Process S. Y. 25 2 50 286 824 286 824 Particulars Kgs. Rate ` Particulars Kgs. Rate `
To F.Y. 10 19.40 194 By Actual 10 1 10 Process Sales
By Costing 184 P/L A/c
10 194 10 194 Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Normal 25 2 50 By S. Y. 25 22.40 560
Loss Proces s A/c
To Costing 510
P/L A/c
25 560 25 560 munotes.in
Page 85
Process Costing
85 Costing Profit & Loss A/c
Illustration : 8
Satyug Times Ltd. submits the following information in respect of its
product which passes through 3 consecutive process viz Ingestion process,
Idigestion process and Assimilation process for the month ended 31st
January, 2014. Particulars ` Particulars `
To TY Process Stock 48,160 By Abnormal Gain 510 A/c A/c
To Abnormal Loss A/c 184 By Sales (1720 x 40) 68,800 To Net Profit c/d 20,966
69,310 69,310
Particulars Ingestion Digestion Assimilation Quantitative
Information (kgs)
Basic Raw 80,000 -- -- Material @ `40
per kg.
Normal Yield 80% 60% 70% Output during the 62,000 36,000 21,000 month
Stock of Process
Output:
31-12-2013 8,000 8,000 5,000 31-01-2014 10,000 4,000 4,000 Other Additional
Informational
Process Material `3,45,000 `8,26,000 `6,17,000 Labour Mandays 2,400 1,500 1,000 Labour Rate Per `80 `100 `150 Manday
Machine 60% of Wages 50% of Process `2,34,000 Overheads Material
Other 2,75,800 1,63,000 1,27,000 Manufacturing
Overheads
Value of Opening `60 `140 `300 Stock Per Kgs.
Scrap Value Per `10 `15 `20 Kgs. munotes.in
Page 86
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
86 Finished Stock of assimilation process was sold at `350 per kg.
Prepare the process A/c, Process Stock A/c, Normal Loss A/c and the
Abnormal Gain / Loss A/c.
Ingestion Process A/c
Ingestion Process Stock A/c
Particulars Kgs. Rate ` Particular s Kgs. Rate `
To Input 80000 40 32,00,000 By Normal 16000 10 1,60,000 Loss
To Process 3,45,000 By 2000 62 1,24,000 Material Abnormal
Loss
To Labour (2400 1,92,000 By 62,000 62 38,44,000 x 80) transfer to
Process
Stock A/c
To Machine 1,15,200
Overheads
(60% of Lab our)
To Manufacturing 2,75,800
Overheads
80000 41,28,000 80,000 41,28,000 Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Balance b/d
To Transfer from
Ingestion Process
A/c 8000
62000 60
62 4,80,000
38,44,000 By Transfer to
Digestion
Process
By Balance c/d
60,000
10000
62 37,04,000
6,62,000
70,000 43,24,000 70,000 43,24,000 munotes.in
Page 87
Process Costing
87 Digestion Process A/c
Digestion Process Stock A/c
Partic ulars Kgs. Rate ` Particulars Kgs. Rate `
To Transfer 60000 37,04,000 By Normal 24000 15 3,60,000
from Loss
Ingestion
Process
Stock
To Process 8,26,000 By Transfer 36,000 136 48,96,000
Material to Process
Stock A/c
To Labour 1,50,000
(1500 x 100)
To Machine 4,13,000
Overheads
(50%
Process
Material)
52,56,000 52,56,000
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Balance b/d 8,000 140 11,20,000 By Transfer to
Assimilation
Process A/c 40,000 54,72,000
To Transfer
From Digestion
Process A/c 36,000 136 48,96,000 By Balance c/d 4000 136 5,44,000
44000 60,16,000 44000 60,16,000 munotes.in
Page 88
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
88 Assimilation Process A/c
Assimilation Process Stock A/c
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Transfer 40000 54,72,000 By Normal 20000 20 4,00,000 from Loss
Digestion
Process
Stock A/c
To Process 6,17,000 By Transfer 21000 310 65,10,000 Material To Process
Stock A/c
To Labour 1,50,000
(1000 x
150)
To 2,34,000
Machine
Overheads
To 1,27,000
Manufactur
ing
Overheads
To 1000 310 3,10,000
Abnormal
Gain
41000 69,10,000 41000 69,10,000 Particulars Kgs. Rate ` Particular s Kgs. Rate `
To Bal b/d 5000 300 15,00,000 By Sales 22000 350 77,00,000 To Transfer 21000 310 65,10,000 By 4000 310 12,40,000 from Balance
Assimilation c/d
Process
Stock A/c
To Costing 9,30,000
P/L A/c
26000 89,40,000 26000 89,40,000 munotes.in
Page 89
Process Costing
89 Normal Loss A/c
Abnormal Loss A/c
Abno rmal Gain A/c
Particulars Kgs. Rate ` Particu lars Kgs. Rate `
To Ingestion 16000 10 1,60,000 By Actual
Sales
To 24000 15 3,60,000 Ingestion 16000 10 1,60,000
Digestion
To 20000 20 4,00,000 Digestion 24000 15 3,60,000
Assimilation
Assimilation 19000 20 3,80,000
By
Abnormal
Gain
Assimilation 1000 20 20,000
60,000 9,20,000 60,000 9,20,000
Particulars Kgs. Rate ` Particulars Kgs. Rate `
To Ingestion 2000 62 1,24,000 By Actual 2000 10 20,000 Process Sale
By Costing 1,04,000 P/L A/c
(Loss)
2000 1,24,000 2000 1,24,000 Particulars Kgs. Rate ` Particulars Kgs. Rat e `
To Normal 1000 20 20,000 By 1000 310 3,10,000 Loss A/c Assimilation
Proces s A/c
To Costing 2,90,000
P/L A/c
(Profit)
1000 3,10,000 1000 3,10,000 munotes.in
Page 90
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
90 Costing Profit & Loss A/c
4128000 160000 39,68,0006280,000 16,000 64,000
52,56,000 3,60,000 48,9
60,000 24,000Total Cost ScrapValues of Normal LossCost Per UnitInput Normal LossUnits
Ingestion
Digestion
6,00013636,000
6600000 400000 62,00,00031040000 20000 20,000Assimilation
Quantity Reconciliation:
Particular Ingestion Digestion Assimilation
Input 80,000 60,000 40,000 (-) Normal Loss 16,000 24,000 20,000 Expected 64,000 36,000 20,000 Output
(-) Actual Output 62,000 36,000 21,000 Abnormal Loss
/ gain 2,000 (Loss) Nil 1,000 (Gain) Actual Output 62,000 36,000 21,000 (+) Opening Stock 8,000 8,000 5,000 (-) Closing Stock (10,000) 4,000 4,000 Transfer 60,000 40,000 22,000 Output Sold
* Instead of Normal Loss, Normal Yield is given. It means total input
- Normal Yield = Normal Loss.
If input is 100% Ingestion Process Normal Yield is 80% Normal Loss = Input - Normal Yield Particulars ` Particulars `
To Abnormal Loss 1,04,000 By Assimilation 9,30,000 Process A/c
To Net Profit c/d 11,16,000 By Abnormal Gain 2,90,000 12,20,000 12,20,000 munotes.in
Page 91
Process Costing
91 = 100 - 80 Normal Loss = 20%
Input of Ingestion Process 80,000 x 20% = 16,000
Some way of Digestion & Assimilation Process.
3.6 EXERCISE
A. Objective Questions
Q.1 Multiple Choice Questions
1. The cost of units of abnormal Loss is
A. Credited to the process A/C
B. Debited to the process A/C
C. Credited to the normal Loss A/C
D. Debited to the normal Loss A/C
2. The cost of units of abnormal loss is
A. Credited to the normal loss A/C
B. Debited to the normal loss A/C
C. Credited to the process A/C
D. None of the above
3. The cost of units of abnormal gain is
A. Debited to the process A/C
B. Debited to profit and loss A/C
C. Credited to the process A/C
D. None of the above
4. Normal loss is calculated as
A. Actual output –Normal output
B. Normal output – Actual output
C. Input x % of Normal loss
D. None of the above
5. Normal output is equal to
A. Input – normal loss
B. Input – abnormal loss
C. Input –abnormal gains
D. None of the above
munotes.in
Page 92
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
92 6. Abnormal loss is equal to
A. Input –Actual output
B. Actual output – Normal output
C. Normal output – Actual output
D. Actual output – input
7. Abnormal gain is equal to
A. Actual output – Normal output
B. Normal output –Actual output
C. Actual output – Input
D. Input –Actual output
8. Cost Per Unit is calculated as
A. Total Cost /Normal output
B. Normal cost/ Total cost
C. Cost of process –sale value of normal loss / Input – Normal Loss
D. Total cost/ Total Output
9. Allocation of joint cost deals with ----------------------------------
A. CAS -3
B. CAS -5
C. CAS -4
D. CAS -2
10. Sale of residue or scrap is ---------------------------------
A. Credit ed to process A/C
B. Credited to P & L A/C
C. Credited to Abnormal Loss A/C
D. None of the above
(Answers :- 1. A 2.C 3.A 4. C 5. B 6. C 7. A 8.C 9. C 10. A)
Q.2 True and False
1. The cost of good units is increased by the abnormal gain in
process costing.
2. The cost of units of abnormal loss is debited to the process A/C.
3. Invisible waste has sale value .
4. The cost of units of abnormal gain is credited to the process A/C.
5. The sale value of residue is credited to the process A/C.
6. Under contribution margin method , variable costs apportion on the
basis of units produced.
7. Joints products are of unequal importance. munotes.in
Page 93
Process Costing
93 8. Under Net Realizable value method, the estimated profit margin
deducted.
9. The proportion of joint products can be changed at the will of the
management.
10. Joint products are produced from the different processes.
(Answer: True :- 1, 5, 6, 8. False :- 2, 3, 4, 7, 9, 10.)
B. Practical Problems:
1) Product x is obtained after it is processed through 3 distinct
processes: -
The following information is available f or the month of March 2014.
2000 Units at `4 per unit were introduced in process A. Production
overheads to be distributed as 100% on direct labour. The actual output
and normal loss of the respective process are :
There is no stock or work in progress in any process. You are required to
prepare process a/c
2) Product ‘A’ is obtained after it is processed through
process x, y and z .
The following cost information is available for the month ended 31st
March, 2014.
Particulars Process A Process B Process C Total
Material Consumed 10,400 8,000 4,100 22,500
Direct Labour 9,000 14,720 5,600 29,320
Production Overhead - - - 29,320
Particulars Output in
Units Normal Loss on
Input Value of Scrap
Per Unit
Process A 1800 10% 2.00
B 1360 20% 4.00
C 1080 25% 5.00 munotes.in
Page 94
Ac & fin cost accounting
(Methods of Costing) ii -
Work Order
94
There is no stock in any process. You are required to prepare the Process
A/c.
3) The product of a company process through of distinct
processes to completion. These process or known as x, y and z .
From the past experience, it is ascertained that wastage is incurred in each
process as under - process x 2% , Process y - 4%, Process z - 10%
The Wastage at each process possess scrap value. The wastage of process
x and y is sold at `2.50 per unit, and that of process z at `5.00 per unit.
The output of each process passes immediately to the next process and
finished units are transferred from process z into stock. The following
information is obtained.
50,000 units were put in process x at a cost of `10/- per unit. There is no
stock of work in progress in any process. Prepare process A/c.
Abnormal Loss and Gain A/c.
4) A product of a manufacturing concern passes through two process viz A
and B and then to finished stock. The following figure s have been taken
from its books for the year ended 31st March 2013.
Particulars x y z
Number of Units introduced in the 500 -- -- process
Rate per unit of units introduced ` 04 -- -- Cost of Material 2,600 2,000 1,025 Direct Wages 2,250 3,680 1,400 Production Overheads 2,250 3,680 1,400 Normal Loss (% on Units Introduced of 10% 20% 25% each Process)
Value of Scrop per Unit 2/- 4/- 5/- Output in Units 450 340 270
Particulars x y z
Material 2,70,000 2,60,000 1,20,000 Wages 4,30,000 2,40,000 1,30,000 Direct Expenses 1,37,500 1,45,000 1,80,000 Output of each process (in 48,750 47,000 42,000 units) munotes.in
Page 95
Process Costing
95
Prepare Process A/c, Abnormal Loss and Abnormal Gain A/c.
5) ABC and Co. manufactures a chemical which passes through three
processes. The following particulars garnered for the month of January
2014.
Overheads are charged @ 50% of Direct Wages. You are required to
prepare Process A/c.
Particulars Process A Process B
Raw Material Introduced in Process (Units) 10,000 700 Cost of Raw Material introduced (per unit `) 125 200 Wages (`) 2,80,000 1,00,000 Machine Expens es (`) 20,000 10,000 Direct Expenses (`) 10,000 10,000 Other Factory Expenses (`) 45,000 22,500 Indirect Material (`) 5,000 10,000 Normal Loss in Weight 5% 5% (% of total units introduced in each process)
Normal Scrap (% on total Units Introduced in each 10% 10% process )
Realizable Value of Scrap (per 10 units) (`) 800 (`) 2,000 Output (Units) 8,300 7,800
Particulars Process I Process II Process III
Material (Litre) 4000 208 168 Material Cost `38,400 `18,800 `6,000 Wages `7,680 `7,600 `2,200 Normal Loss (% of input) 4% 5% 5% Scrap Sale Valu e -- `3 per Ltr. -- Output Transferred to Next 50% 40% -- Process
Output Transferred to 50% 60% 100% Warehouse munotes.in
Page 96
96 4
INTRODUCTION TO MARGINAL
COSTING
Unit Structure :
4.0 Objectives
4.1 Introduction
4.2 Marginal Cost Equations and Basic Concepts
4.3 Solved Problems
4.4 Exercises
4.0 OBJECTIVES
After studying the unit the students will be able to:
Distinguish between Marginal Costing and Absorption Costing.
Understand the equations and basic concepts in Marginal Costing.
Solve the practical problems on Marginal Costing.
4.1 INTRODUCTION
Marginal costing is defined as the ascertainment of cost by differentiating
between fixed and variable costs and also find out the effect on profit
changes whenever change in the volume as well as type of output.
Marginal cost is the aggregate of all variable cost excluding fixed
expenses. It is increased by adding every extra unit. If ou tput increase the
marginal cost increases.
Absorption Costing :-
It refers to the analysis of the total cost for the purpose of distribution of
cost unit wise. All fixed as well as variable cost charged to products.
munotes.in
Page 97
Introduction to Marginal
Costing
97 4.2 MARGINAL COST EQUATIONS AND BASIC
CONCEPTS
1) Sales - Variable = Contribution
2) Contribution - Fixed Cost = Profit
3) Sales - Variable = Fixed Cost + Profit
4) Pr 100Contributionofit Volume RatioSales
5) Contribution Sales PV Ratio
6) ContributionSalesPV Ratio
7) ()Fixed CostBEP InUnitsContribution Per Unit
8) BEP (in `) Fixed CostPV Ratio
OR
BEP (in `) Fixed CostSalesContribution
9) Required Sales
(`) PrFixed Cost Desired ofitPV Ratio
10) PrRe ( )Fixed Cost Desired ofitquired Sales inUnitsContribution Per Unit
11) PrFixed Cost ofitActual SalesPV Ratio
12) Margin or Safety ( `) =Actual Sales B P Sales
13) Margin of Safety (in Units) = Actual Sales (in Units) - ()B P inUnits
14) Pr argofit M in of Safety PV Ratio
munotes.in
Page 98
Cost Accounting
98 Contribution: -
Contribution is the profit b efore deducting fixed cost and after deducting
variable cost.
Profit Volume Ratio: -
Marginal costing is the ascertainment of cost as well as the effect on profit
of changes in value and type of output. Such impact of changes in volume
of output on profit i s called as profit volume ratio.
Break Even Point: -
()BP BP Means the point at which no profit and no loss. Whatever
total cost = total income. Total cost include fixed as well as variable cost.
There is no profit, no loss.
4.3 SOLVE D PROBLEMS
Illustration 1
1) From the following data, calculate Break -even Point ( B ∈ P )
Selling Price Per Unit `40/-
Variable Cost Per Unit `30/-
Fixed overheads `40,000.
If sales are 20% above B∈ P , calculate the net profit.
Solution: -
i) 100ContributionPV RatioSales
Contribution = Selling Price - Variable Cost
= 40 – 30
= 10
10100 25%40PV Ratio
ii) BP (in `) Fixed OverheardsPV Ratio
40,0001,60,00025%
iii) If sales are 20% above B ∈ P , then profit is,
B ∈ P = 1,60,000 + (20%) 32,000 = 1,92,000 munotes.in
Page 99
Introduction to Marginal
Costing
99 Sales - 1,92,000
(-) Variable Cost 1,44,000 75%
Contribution 48,000 (-) Fixed Cost 40,000 Profit 8,000 If PV Ratio = Contribution
Then 100% - PV Ratio = variable Cost
i.e. 100 – 25 = 75%
Illustration 2
From the following data compute -
1) P / V Ratio
2) B ∈ P in Rupees and Unit.
3) Number of Units to be sold to earn a profit of `7,50,000.
Sale Price - `20 per unit.
Direct Material - `5 per unit.
Direct Wages - `6 per unit
Variable Administrative overheads - `3 per unit
Fixed Factory Overhead `6,40,000 per year
Fixed Administrative Overhead s `1,52,000 per year.
Solution: -
Total Variable Cost = Dire ct Material + Variable Adm. Overhed + Direct
Wages 14 = 5+6+3
Total Fixed Overheads = Fixed Factory Overhead + fixed Adm.
Overheads
7,92,000 = 6,40,000 + 1,52,000
Pr
6 20 14Contribution Per Unit Selling ice Variable Cost
i) 100ContributionPV RatioSales
6100 30%20
munotes.in
Page 100
Cost Accounting
100 ii) BP in ` & Unit
BP (in `) & Unit 7,92,0002,64,00030%Fixed CostPV Ratio
BP (in Unit) 7,92,0006Fixed OverheadsContribution Per Unit
Unit
iii) Number of Un its Sold to earn a profit of `7,50,000
Required Sales (in Units) PrFixed Cost Desired ofitContribution Per Unit
7,92,000 7,50,0006
= 2,57,000 Units
Illustration 3
The Following Figures relates to M/s. Deepak Industries:
Fixed Overheads `2,40,000
Variable Overheads `4,00,000
Direct Wages `3,00,000
Direct Material `8,00,000
Sales `20,00,000
Calculate (1) PV Ratio (2) B ∈ P (3) Margin of Safety.
Solution: -
Total Vari able Overheads = Variable Overheads + Direct Wages + Direct
Material
15,00,000 = 4,00,000 + 3,00,000 + 8,00,000 Contribution Sales Total Variable Cost
i) 100ContributionPV RatioSales
5,00,00025% 10020,00,000 munotes.in
Page 101
Introduction to Marginal
Costing
101 2) BP (in `) 2, 40,0009,60,00025%Fixed CostPV Ratio
MOS = 10,40,000
Illustration 4
Following Particulars are available for A Ltd and B Ltd.
Calculate for each company.
i) Break even Point.
ii) Margin of Safety.
iii) Sales required to earn a profit of `90,000.
i) BP(in `) Fixed CostPV Ratio
90,0003,60,00025%
80,000
20%A Ltd
Ltd
ii) Margine of Safety = Actual Sales = BPSales
A Ltd = 6,00,000 – 3,60,000
= 2,40,000
B Ltd = 6,00,000 – 4,00,000 = 2,00,000
iii) Sales Required to earn a profit of `90,000
PrReFixed Cost Desired ofitquired SalesPV Ratio
A Ltd = 90,000 90,00025%
B Ltd = 80,000 90,0008,50,00020% Particulars A Ltd. B Ltd
Sales 6,00,000 6,00,000 PV Ratio 25% 20% Fixed Cost 90,000 80,000 munotes.in
Page 102
Cost Accounting
102 * Whenever 2 periods or 2 years are given in the problem then PV Ratio
is calculated as,
Pr100Changes in ofitPV RationChanges in Sales
All other formula’s are same as it is.
Illustration 5
From the following particulars you are required to calculate:
1) Profit Volume Ratio,
2) B P
3) Profit when sales is `2,00,000
4) Sales required to earn a profit of `40,000,
5) Margin of Safety in the 2nd year.
Year Sales ` Profit ` I 2,40,000 18,000
II 2,80,000 26,000
You may assume that the cost structure and selling price remain
constants in two years.
i) Pr100Changes in ofitPV RatioChanges in Sales
26,000 18,0001002,80,000 2, 40,000
8,000100 20%40,000
ii) Fixed CostBPPV Ratio
munotes.in
Page 103
Introduction to Marginal
Costing
103
Sales 2,40,000 2,80,000 ( - ) Variable Cost (80%) 1,92,000 2,24,000 Contribution (20%) 48,000 56,000 ( - ) Fixed Cost 30,000 30,000 Profit 18,000 26,000
30,0001,50,00020%Fixed CostBPPV Ratio
iii) Profit when Sales are `2,00,000
Sales 2,00,000
(-) Variab le Cost (80%) 1,60,000
Contribution (20% ) 40,000
(-) Fixed Cost 30,000
Profit 10,000
iv) Required Sales to earn a profit of `40,000.
PrRe
30,000 40,000
20%Fixed Cost Desired ofitquired SalesPV Ratio
v) Margin of Safety (2nd Year) = Actual Sales -BP Sales
= 2,80,000 – 1,50,000
= 1,30,000
Illustration 6
The following data have been extracted from the book s or Alfa Ltd.
Year Sales Profit
2012 5,00,000 50,000 2013 7,50,000 1,00,000 1st Year 2nd Year
munotes.in
Page 104
Cost Accounting
104 You are required to calculate :-
i) PV Ratio
ii) Fixed Cost
iii) Break even sales
iv) Profit on Sales of `4,00,000
v) Sale to earn a Profit of `1,25,000.
i) Pr100Changes in ofitPV RatioChanges in Sales
1,00,000 50,0001007,50,000 5,00,000
50,000100 20%2,50,000
ii) Fixed Cost -
iii) Fixed CostBreak Even SalesPV Ratio
50,0002,50,00020%
iv) Profit on Sales of `4,00,000.
2012 2013
Sales 5,00,000 7,50,000 ( - ) Variable Cost (80%) 4,00,000 6,00,000 Contribution (20%) 1,00,000 1,50,000 ( - ) Fixed Cost 50,000 50,000 Profit 50,000 1,00,000
Sales 4,00,000 ( - ) Variable Cost (80%) 3,20,000 Contribution (20%) 80,000 ( - ) Fixed Cost 50,000 Profit 30,000 munotes.in
Page 105
Introduction to Marginal
Costing
105 v) Sales to earn a Profit of `1,25,000
PrRe
50,000 1,25,0008,75,00020%Fixed Cost Desired ofitquired SalesPV Ratio
Illustration 7
Z Ltd. produces and sells a single article at `10 each. The marginal
cost of production is `6 each and Fixed Cost is `400 per annum.
Calculate: -
i) PV Ratio
ii) The break even Sales (in `. and Nos.)
iii) The Sales to earn a Profit of `500.
iv) Profit at Sales of `3,000.
v) New break even point if sales price is reduced by 10%
vi) Margin of Safety at sales of `1,500 and
vii) Selling price per unit if the break even point is reduced to 80 units.
Solution: -
Contribution = Sales – variable Cost (Marginal Cost)
4= 10 - 6
i) 100ContributionPV RatioSales
440% 10010
ii) Break in Point (in `) = Fixed CostPV Ratio
= 400100040%
()
4001004Fixed CostB P inUnitsContribution Per UnitUnit
munotes.in
Page 106
Cost Accounting
106 iii) Sales to earn a profit of `500
Required Sales (in `) = PrFixed Cost Desired ofitPV Ratio
400 50040% `2,250
iv) Profit at Sales or `3,000
Sales 3,000
(-) Variable Cost (60%) 1,800
Contribution (40%) 1,200
(-) Fixed Cost 400
Profit 800
v) New B P if Sales Price is reduced by 10%
S.P. (Original) - 10
(-) Reduced by 10% 1
New S. P. 9
Contribution = Sales – Variable Cost
3 = 9 – 6 10031009ContributionPV RatioSales
B 40033.33%Fixed CostPV Ratio `1,200
vi) Margin of Safety at Sales of `1,500.
a) Old MOS = Actual Sales - B P Sales
= 1,500 - 1,000
= 500
munotes.in
Page 107
Introduction to Marginal
Costing
107 b) New MOS = Actual Sales - B P Sales
300 = 1,500 - 1,200
vii) Selling Price per unit if the break even point is reduced to 80 units.
)
400
5
Pr
11 5Fixed CostB P inUnitsContribution Per Unit
CPU
CPUNew Selling ice Contribution Variable Cost
New Se lling Price `11
4.4 EXERCISE
A. Objective Questions
Q.1 Multiple Choice Question
1. When variable cost per unit increases then the break even
point will
A. Increase B. Decrease
C. Remain Constant D. None of these
2. If a company increases fixed costs, then the break even point will be
A. Lower B. Higher
C. Remain Constant D. None of these
3. Contribution is equal to fixed cost is the point
A. Break even point B. Margin of safety
C. PV Ratio D. None of these
4. A decrease in variable cost per unit then PV Ratio also
A. Increase B. Decrease
C. Remain Constant D. None of these
5. A decrease in the contribution margin then the PV Ratio
A. Increase B. Decrease
C. Remain Constant D. None of these
6. An increase in the selling price per unit then the PV Ratio
A. Increase B. Decrease
C. Remain Constant D. None of these
munotes.in
Page 108
Cost Accounting
108 7. Sales -Variables cost =
A. Contribution B. Profit
C. Fixed Cost D. None of these
8. Margin of safety is expressed as
A. Profit/PV Ratio B) Actual Sales - B E P Sales
C.Actual Sales – B E P Sales) / Actual Sales D. All of the above
9. The B E P units is equal to
A. Profit/Volume B. Contribution/Sales
C. Profit/Contribution D. Profit/Sales
10. Profit volume ratio i s improved by reducing ------------
A.variable Cost B. Fixed Cost
C. Both of them D. None of these
(Answers : - 1. B 2. A 3. A 4. A 5. B 6. A 7. A 8.D
9. B. 10. A.)
Q.2 True and False
1. Contribution equals to sales minus variable cost.
2. Fixed factor y overhead costs is not deducted from sales revenue in
computation of contribution.
3. The selling price per unit less the variable cost per unit is the fixed
cost per unit.
4. PIV Ratio is equal to Profit/Contribution.
5. Profit volume ratio is improved by reducing variable cost.
6. The break even point in units is equal to Fixed cost * SaleTotal
Contribution
7. When the fixed cost increase, the break even point increase.
8. When the variable cost decrease then the break even point decreases.
9. When the selling price decreases, the break even point increases.
10.When sales increase then break even point increases.
Answer: True :- 1, 2, 5, 7, 8, 9. False :- 3, 4, 6, 10.
A. Practical Problem: -
1) K. T. and Co. has prepared the following budgets estimates for the
year 2002 - 2003. Sales 15,000 units, Sales Value
`1,50,000, Fixed expenses `34,000. Variable Cost per unit
`6/-. You are required to find: munotes.in
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109 i) Profit Volume Ratio,
ii) Break Even Point,
iii) Margin of Safety.
Also calculate revised Profit Volume Ratio, Break Even Point and
Margin of Safety, if the selling price per unit is reduced by 10%.
2) A product is sold at `80 per unit. Its Variable Cost is `60, Fixed
Cost is `6,00,000.
Compute the following:
1) PV Ratio, 2) Break Even Point, 3) Margin of Safety at a sale of
50,000 Units, 4) At What sale the producer will earn profit at 15% on
sales?
3) The following is the cost structure or a product selling price `100
unit.
Variable Cost Per Unit
Material `38
Labour `14
Direct Expenses `8
Fixed Overheads for the year
Factory Overheads `2,80,000
Office Overheads `2,80,000
No of units produced and sold 40,000.
Calculate :-
1) PV Ratio,
2) B P in Units
3) Martin of Safety Amount
4) B P if fixed overheads increased by 20%.
5) Revised PV Ratio when selling price increased by 20%.
4) A company produces and sells 1500 units of a commodity at
`20 each. The variable cost of produc tion is `12 per unit and Fixed
Cost `8,000 per annum.
Calculate: -
1) PV Ratio
2) Sales at B P and
3) Additional Sales required to earn the same amount of profit if
selling price is reduced by 10%. munotes.in
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110
5) You are given the following information: -
Selling Price `40 Per Unit.
Variable Cost `30 Per Unit
Fixed Cost `1,80,000
Calculate: -
1) PV Ratio
2) B P (in `. and units)
3) Profit at Sales `9,60,000
4) New B P Sales in `. if sale price is reduced by 10%.
6) Following information is available in respect of G. Ltd and D. Ltd.
Calculate: -
1) P/V Ratio of Both Companies.
2) Fixed Cost of Both Companies.
3) Sales to earn profit of `2,10,000 by each company.
4) Break Even Point of Both Companies.
5) Margin of Safety of ‘D’ Ltd.
7) M/s. EAR Enterprises furnish the following information: -
From the above calculate the following
i) PV Ratio
ii) Fixed Cost
iii) B P
iv) Sales to Earn Profit of `2,00,000.
v) Margin of Safety of 2014.
Particulars G. Ltd (`) D Ltd. (`)
Sales 11,00,000 14,00,000 Variable Cost 8,80,000 10,50,000 Profit 1,20,000 2,00,000 Year Sales (`) Profit (`)
2013 6,00,000 60,000
2014 8,00,000 1,00,000 munotes.in
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111 8) From the following particulars, you are required to calculate: -
i) Fixed Cost
ii) Profit volume Ratio.
iii) Break E ven Sales
iv) Sales to Earn Profit or `6,00,000.
v) Margin of Safety of the year 2012.
Hint :- First Find out Profit by Sales - Total Cost.
Particulars 2012 (`) 2013 (`)
Total Cost 12,96,000 18,72,000
Sales 14,40,000 21,60,000
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112 5
INTRODUCTION TO STANDARD
COSTING
Unit Structure
5.0 Objectives
5.1 Introduction
5.2 Material Variances
5.3 Labour variances
5.4 Fixed Factory Overheads
5.6 Variances: (Based on
5.7 Absorption Costing)
5.8 Variable Factory Overheads Variances:
5.9 Sales Variances
5.10 Profit Variances
5.11 Formulas Used in Standard Costing
5.12 Solved Problems
5.13 Exercises
5.0 OBJECTIVES
After studying the unit the students will be able to:
Understand the meaning of Standard Costing and how it to be apply.
Explain how to calculate Material Variances, Labour Variances,
Overhead Variances, Sales Variances and Profit Variances.
Solved the practical problems on calculating Variances.
5.1 INTRODUCTION
In corporate sector, there is a separation of ownership from management.
The owners do not manage the business and the managers are not the
owners. Even in non -corporate sector, with gigantic business affairs, it is
almost impossible for the owners to manage the business themselves.
Accordingly, owners are compelled to delegate authority to the managers.
Since the managers have no proprietory interest in the business, it is quite munotes.in
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113 possible that they may tend to be inefficient and a bit careless and because
of this, the sales may come dow n, cost and rejection may increase resulting
thereby in substantial loss of profit.
For this reason, the owners fell, and rightly so, that the performance of
various managers should be subjected to some degrees of stringent control.
There is a need to foll ow carrot and stick approach.
Control always presupposes some yardstick or standard. Accordingly, well
before the period commences, detailed standards are laid down for various
managers. These standards clearly show what is expected of the concerned
manage rs. For example, in respect of sales, we lay down for sales
manager, the types of products to be sold, the quantity of each of them to
be sold and the price to be charged. At the end of the relevant period the
actual results are compared with the expected ones (the standards) and the
difference, known as VARIANCE, is analysed to throw light on the
precise factors responsible for the variation. As far as the examination is
concerned, this is the end. In real life, further investigation is undertaken,
if the variance amount is varied significant and corrective actions are taken
so as to prevent adverse past from repeating itself in future.
We apply Standard Costing Technique to Six Area in all.
They are as follows: -
1. Material Cost
2. Labour Cost
3. Variable Overheads
4. Fixed Overheads
5. Sales Profit
5.2 MATERIAL VARIANCES
Explanation of the method followed in the solution:
The following is the chart of the Material Cost Variances.
Total Material Cost Variance
Material Price Variance Material UsageVariance
Material Mix Variance Material Yield / Quantity /
Sub - usage Variance munotes.in
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114 Check
5.2.2 Detailed Explanation:
i) Setting the Standards:
As we saw, the actual results are to be compared with the Standards and
for this purpose, we must have comparable Standards.
The material cost is a variable cost item and the amount of cost that one
incurs entirely depends on the quantity of output. thus, if the standard
material cost per unit is `5, and if the actual output is 100 units, then, the
standard cost is `500. In other words in the case of material cost, the
standards are always for the actual output. It the production manager has
produced, say, 1000 units, then we should find out the cost that he should
have incurred for 1000 units and this cost should be com pared with the
actual cost to get the variance.
Example:
Standards For 1 Unit of Product X:
The production manager has produced 1000 units and incurred the cost as
shown below.
Very obviously, the given standards which are for the output level of 1 unit
(`40) can’t be compared with the actual for 1000 u nits (`42,740). The
given standards are to be revised to make them represent actual output
level, so that they become comparable . Total Material Cost
Variance = Material Price Variance+Material usage
Variance
Material Usage Variance = Material Mix Variance+Material Yield
Variance
Material Quantity Price Per Unit Total Cost (`)
A
B 5 Kgs.
10 Kgs 2
3 10
30
15 Kgs. 40
Material Quantity Price Per Unit Total Cost (`) A
B 4,800 10,600 2.5
2.9 12,000
30,740
15,400 42,740 munotes.in
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115 This process of revising the standards is extremely simple. Since the cost
is variable in nature, the quantity figures and therefore the total cost
figures are just to be revised proportionately. For example, 1 unit of X
needs 5 Kgs. of Material A and therefore 1000 units should need 5000
Kgs. of material A. The revised standard are shown below.
In order to solve the problem, one should first pick up the information
about the output level represented by the given Standards. One should,
then pick up the actual output figure. I f these two are some, then they are
comparable and one should proceed further to calculate the variances. If
they are not same, then given the Standards are to be proportionately
revised to make them represent actual output level. Thus, whether the
given Standard need to be revised or not depends on whether the output
levels are some or not.
5.2.3 Calculation of Variances:
1. Total Material Cost Variance:
This variance shows the total loss or gain because of change in the total
material cost. The variance is the difference between the total Standard
material cost (obviously for actual output) and the total actual material
cost.
2. Material Price Variance : (See also notes on Single / Partial Plans)
This variance accounts for that part of the total material cos t variance
which comes into being because of change in the material purchase price.
Here, our aim is to know the total gain or loss because of change in the
material purchase price.
The loss / gain per unit purchased and consumed can be calculated by
simpl y comparing standard purchase price with the actual purchase price.
However, we want to know the total gain or loss. The total loss / gain
depends on the actual quantity purchased and consumed.
Thus the Price Variance is:
Actual Quantity X (Standard Price - Actual Price)
3. Material Usage Variance:
This variance accounts for that part of the total material cost variance
which comes into being because of change in the consumption of raw
material. Here, our aim is to know the total gain / loss because of the Material Quantity Price Per Unit Total Cost (`) A
B 5,000 10,000 2
3 10,000
30,000
15,000 40,000 munotes.in
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116 difference between material quantity consumed and the material quantity
that should have been consumed.
Obviously, therefore, we have to compare the standard material quantity
with the actual material quantity, the difference being the quantity of
material lost or gained. In order to quantity this loss in money terms, we
need to multiply this difference by the price of raw material.
We have two prices: Standard Price and the Actual Price.
Which price should be used?
We have to use standard price for this. This is based on the following
reasons.
It is possible that there is some difference between the standard price and
the actual price. However, it is the job of the price variance to take care of
that difference and once that is taken care of, we are left with standard
price alone. The difference between the two prices always gets transferred
to profit & loss account.
In the organisation, there is division of labour. For change in the price,
purchase manager is answerable whereas for changes in the consumpti on
of raw material, production manager is accountable. Now, if we multiply
the quantity difference by the actual price, then the efficiency or otherwise
of the purchase manager would affect the variance for the production
manager. The price, therefore, has to remain constant and only standard
price remains constant.
The standards are developed well before the period commences and we let
our production manager know the quantity of raw material that he should
consume and in case the actual consumption is mo re (or less) then we also
let time know the rate at which the penalty, or reward, will be calculated.
That means the price has to be known to the production manager well
before the budget period commence. Obviously only the standard price can
be known in advance.
Thus the usage Variance is:
Standard Material Price X (Standard Raw Material
Quantity - Actual Raw Material Quantity)
4. Material Mix Variance and Material yield Variance
These two variances, put together account for the total material usage
varian ce. If the raw material consumed is not same as standard, then, that
could be because of two reasons in all. Either the mix of the input may
change and / or the absolute quantity of material may change. Consider
the following example:
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117
As can be seen, in the first case, through the total input quantity is same as
the standard, 10 Kgs. of Y have replaced 10 Kgs. of X. Thus tota l quantity
remaining same, the mix of input has changed. In the second case,
though the mix of input items (1:1) has remained the same as the
standard mix, the absolute quantity has gone up by 10 Kgs. Thus, mix
remaining constant, this time the actual quan tity has changed. In the third
case, the mix and the absolute quantity, both, have changed. In other
words, change in the mix and / or change in the quantity account for total
material usage variance. For the purpose of calculation of these variances,
each of them is to be calculated by keeping the other of them
constant. Thus, when we speak about the mix variance, we presume that
the quantity consumed is quite upto the mark and when we take -up yield
variance, we presume that the mix is quite upto the mark .
5. Material Mix Variance:
Here our aim is to know whether the actual input of raw materials is as
per standard or has changed. For this we pick up the figure of total
actual input and we apply the standard mix ratio to it and we get the mix
that ought to be, given the actual input. We compare this standard mix
with the actual mix and multiply the difference by the standard material
price.
6. Material Yield Variance:
This variance accounts for that part of the usage variance that comes into
being because o f change in the quantity of raw material consumed, the
mix remaining constant. There are four methods for the calculation of this
variance, as shown below:
1) Based on Input:
We just compare the total Standard input quantity with the total actual
input qu antity an we multiply the difference by the standard average cost.
The standard average cost is the total standard cost divided by the total
standard input quantity.
2) Based on Process Loss:
Based on the actual input quantity, we find out the Standard process loss
and we compare that with the actual process loss. The difference is
output lost / gained because of excess / less rejection. We multiply this
difference by the Standard average cost per unit of output. Material Standard Quantity Actual Quantity
(1) (2) (3)
X 50 Kgs. 40 55 55 Y 50 Kgs. 60 55 60 Total 100 Kgs. 100 110 115 munotes.in
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118 3) Based on Yield / Output:
Based on the act ual input quantity, we find out the Standard output and we
compare that with the actual output. The difference is the output lost /
gained. We multiply this difference by the Standard average cost per unit
of output.
4) Based on Mix:
This time we compare t he Standard Mix of Standard Input with the
Standard Mix based on actual input (developed for the purpose of mix
variance) and we multiply the difference by the Standard Price of relevant
material item.
5.3 LABOUR VARIANCE
5.3.1 Labour Cost Variances
Check:
Total Labour Cost Variance=Rat of Pay Variance+Labour Time Variance
Labour Time Variance=Mix Variance+Idle Time Variance+Efficiency
Variance
5.3.2 Detailed Explanation
i) Setting the Standard:
Like Material Cost, even this cost is also a variable c ost item and
therefore, like material cost, here also the Standard are to be for actual
output. This means if the given Standards for labour cost do not
represent actual output level, then, they must be proportionately revised
to make them represent actual output level.
Rate of Pay Variance
OR
Wage Rate Variance Labo ur Time Variance
Labour Mix
Variance
OR
Gang Composition Variance Idle Time Variance Labour Yield OR
quantity OR
Effciency Variance
OR Productivity
Variance TOTAL LABOUR COST VARIANCE munotes.in
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119 ii) Calculation of Variances:
The variance chart here almost resembles material variance chart with
minor changes. In most of the cases the cost changes from material to
labour and the variances are same. Accordingly, the explanations
provided in respect of material cost variances is equally applicable to
labour cost variances and therefore these details are not repeated.
5.3.3 Calculation of Variances
1. Total Labour Cost Variance:
This variance is the difference between the total Standard labour Cost (for
actual output) and total actual labour cost.
Rate of Pay Variance:
This is just like material price variance. The Variance is actual number of
hours paid for multiplied by the wage rate difference.
In other words, it is:
Actual Hours X (Standard Rate - Actual Rate)
2. Labour Time Variance:
This is just like material usage variance. The variance is Standard wage
rate multiplied by the difference between Standard hours and actual hours
paid for.
3. Idle Time Variance:
This is abnormal idle hours fo r various categories multiplied by applicable
standard wage rates if there are two or more categories, then category wise
break -up of idle time would, normally, be given. If not given, we must put
presumption to get the break up. Preferably, the presumptio n should be
that idle hours were in standard ratio.
4. Labour Mix Variance:
This is just like material mix variance. Thus, we apply the Standard
mix ratio to the actual input of hours worked and we get Standard Mix for
actual total hours. If there is idle time, it should be deducted from the gross
input hours and the Standard ratio should be applied to the actual or
productive hours paid for. This is because, out of gross hours, Idle time
variance accounts for idle hours. Therefore, we now have to account for
new hours worked.
5. Labour Efficiency Variance:
This is just like material yield variance based on input. We compare total
standard hours with the total actual (but net i.e. excluding idle time) input
hours and we multiply the difference by Standard average rate per hour
(Total Standard Cost, Standard input hours) munotes.in
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120 5.4 FIXED FACTOR OVERHEADS VARIANCES:
(BASED ON ABSORPTION COSTING) :
5.4.1 Chart
The following is the chart of the fixed factory overheads cost variances
under absorption costing:
Check:
Total Cost Variance=Expendure Variance+Volume Variance
Volume Variance=Calender Variance+Capacity Variance +Ideitem Variance+Efficience
Variance
5.4.2 Detailed Explanation:
i) Setting the Standard:
Unlike the Raw Material Cost, this cost does not depend on the output.
Rather, it depends on the period because it is a period cost. Obviously,
therefore, the standards or, say budgets, are always for a period. Very soon
well shall see that for calculating variances, we sometimes compare days,
hours, expenditur e and output figures for the given period and therefore we
should know budgets as regards these items.
ii) Basic Explanation about fixed Overheads Variance:
For setting the selling price of a product, we generally add profit margin to
the total cost. The total cost is the sum total of variable cost and fixed cost.
Variable cost per unit is reasonably simple to get because it depends on the
output. However, the fixed cost has nothing to do with the output, and the
total cost remains constant irrespective of the quantity of the product that
we produce. Then, how do we get the fixed cost per unit?
For this we have a system of recovering the overheads. Well before the
budget period commences, we make an estimate as regards fixed
overheads to be incurred and the quan tity of the product to be produced
Though there is no nexus between the cost and the output, after all the
output that we are going to have, must bear the charge of overheads cost TOTAL FIXED OVERHEADS COST VARIANCE Fixed Overhea ds Expenditure/Budet Variance Volume Variance
Calender
Variance Capacity
Variance Idle time
Variance Efficience or
productivity
Variance
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121 that we are going to incur. Thus, we lay down nexus between the two and
divide the budgeted overheads by the expected output and we get
overheads per unit.
Once, we get the Fixed Overheads rate per unit, every time we produce a
unit we charge the overheads at this predetermined rate. If everything goes
as per our expectation, then, we notice at the end of the period that
overhead amount charged to the output is exactly equal to the overheads
cost incurred and thus, there is no variance. In other words, the overheads
cost variance comes into being if the overheads charged or, say, recovered
are not some as overheads incurred.
5.4.3 Calculation of Variances:
1. Fixed Overheads Cost Variances:
This variance comes into being if there is some difference between
overheads recovered (obviously, on the basis of actual output) and
overheads cos t incurred. Thus, this variance is under or over absorption of
overheads.
Consider the following example:
In situation A, the amount recovered is `96,000 (24,000 X 4) whereas
amount spent is 1,00,000. The amount spent is more which means there is
under -recovery of overheads and the variance comes into being. Here,
whereas fixed overheads, h ave remained constant, the output has changed.
In situation B, the amount recovered is `1,00,000 whereas amount spent is
`90,000. There is over recovery of overheads and the variance comes into
being. Here, whereas output has remained the same, the overhea ds have
changed.
In situation C, the amount recovered is `96,000 whereas the amount spent
is `1,10,000. Again, there is under recovery of overheads. This time
overheads and output, both, have changed but not proportionately.
In situation D, though overhead s and output, both, have changed, there is
still not variance because the amount spent (`96,000) and the amount
recovered (24,000 X 4) are same.
This should suggest that the total overheads cost variance comes into
being, if either only overheads change, output remaining constant, or Actua ls
Fixed Overheads ` Output (units) Budget
1,00,000 25,000 A
1,00,000 24,000 B
90,000
25,000 C
1,10,000 24,000 D
96,000
24,000
Absorption rate per unit `4
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122 only output changes, overheads remaining constant, or both of them
change, but not in the due proportion. Under -absorption implies that the
actual fixed overheads cost per unit is more than the standard cost
whereas over-absorp tion implies that the actual fixed overheads cost per
unit is less then the standard cost. Absence of under / over absorption
implies that the actual fixed overheads cost, per unit is same as standard
cost. Accordingly, under -absorption is an adverse varia nce whereas over
absorption is a favourable variance.
In other words, if output and overheads, both remain constant or both of
them change but just in due proportion, then, there is no overheads cost
variance at all.
To conclude, one should compare the amo unt of overheads recovered with
the amount of overheads spent and the difference is the variance. Over -
recovery signifies the favourable variance whereas under recovery
signifies the adverse variance.
2. Fixed Overheads Expenditure Variance:
We just compare t he volume or the output figures and the difference is to
be multiplied by the recovery rate per unit. If the actual output is more
than the budgeted output, the variance is favourable (because higher output
reduces the overheads cost per unit) and if the a ctual output is less, the
variance is adverse.
The analysis of volume variance is required to know the precise factors
responsible for change in the output. The output depends on so many
factors like number of working days, number of hours in working days,
unproductive (idle) time and efficiency level.
Consider the following budget:
Now if, instead of working for 250 days, the workers work for 251 days,
then, other factors remaining constant, hours would increases by 500 and
the output would increase by 100. The variance that comes into being
because of change in number of day is called calend ar Variance. We
should compare the number of days as per budget with actual number of
days and the difference should be multiplied by the recovery rate per day.
If the actual number of days is more, then, the variance is favourable
because the more the days, the more the hours and the more the output.
No. of days 250 Hours per day 500 Hours per unit 5 Total Hours p.a. 1,25,000 Total Output p.a. 25,000 munotes.in
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123 Now, days remaining constant, if the workers work for more or less than
500 hours per day, then, again the output would change. The variance that
comes into being because of change in such capacity utilizati on is known
as capacity Variance. We find out the number of hours that should have
been paid for in actual number of days and we compare this with the
actual number of hours paid for. The difference is multiplied by the
recovery rate per hour. If the actua l number of hours is more, then, the
result variance is favourable because the more the hours, the more the
output.
Sometimes in the problem, the student is not given information about
number of days. In such cases, the calendar variance cannot be calcula ted.
Even the capacity variance, in the manner shown above, cannot be
calculated. In such cases, we compare budgeted hours with actual hours
paid for. The difference is to be multiplied by the recovery rate per hour.
This comparison takes care of calendar and capacity both. Therefore, if the
information about days is not given, then, we calculate this variance and
call it capacity variance. If the information about days is given, then we
calculate calendar variance and capacity variance in a normal way but we
use this variance (direct comparison of hour) as crosscheck. This variance
has to be equal to calendar variance plus capacity variance.
The idle time variance is calculated by multiplying idle hours by recovery
rate per hour.
The Efficiency Variance can be calculated in one of the two possible
ways, as shown below:
i) We find out the number of units that should have been produced in
actual number of hours (net, excluding idle time). We compare this with
the actual output and the difference is to be multipli ed by the recovery
rate per unit.
OR
ii) We find out the number of hours that should have been taken for the
actual production and we compare this with actual number of hours (net,
excluding idle time) taken. The difference is to be multiplied by the
recover y rate per hour.
5.5 VARIABLE FACTORY OVERHEADS VARIANCES
5.5.1 Chart
TOTAL VARIABLE OVERHEADS COST VARIANCE Variable Overhead
Spending / Budget OR
Expenditure Variance Variable Overheads Utilization
OR
Efficiency Variance munotes.in
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124 Check:
Total Variable Overheads Cost Variance = Spending Variance + Utilization Variance
5.5.2 Detailed Explanation:
i) Setting the Standards:
This cost, being variable in nature, depends on the actual output and
therefore, like material cost and labour cost, the Standards are always for
actual output.
5.5.3 Calculation of Variances:
1. Total Variable Overheads Cost Variance:
This is the difference between total Standard Variable Cost and total
actual variable cost.
2. Variable Overheads Spending Variance:
This is just like labour rate of pay variance. Thus, we multiply the rate
difference by the actual labour hours paid for.
3. Variable Overheads Utilization Variance:
This is just like labour time variance. Thus, we multiply the labour hours
differenced by the standard variable overheads rate per hour.
Here, the actual n umber of hours to be used should be gross number of
hours if the variable overheads cost is incurred during the idle time. If it is
not incurred during the idle time, then, we should use net number of hours.
Note:
Though the analysis of Variable Overheads Cost variance, as explained
above is possible, normally people calculate only the total variable
overheads cost variance. The other variances are not calculated normally.
There are some obvious reasons for this. The Spending Variance is rarely
controllable . (Example: Increase in the electricity rate). The Utilization
Variance comes into being if workers take more or less time and this
factor is looked into when we calculate labour time variance. There is no
point, in real life situation, in repeating the in vestigation. Thus, once
workers take more time, variable overheads utilization also increases.
Therefore, the people are not interested in analysing the total variable
overheads cost variance.
It may also be noted that labour hours are common for labour cost
variances and variable overheads cost variance.
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125 5.6 SALES VARIANCES
5.6.1 Chart
The chart is as shown below:
Notes :
1) Budget for Comparison : The sales targets are always for a period.
The budget to be compared with the actual result has to be for the
same period for which the actual results are given. Thus whenever
the budget is for the same period for which the actual results are given,
the given budget itself is comparable with the actual and no revision is
required. On the other hand, if the budget is not for the same period for
which the actual results are given, the given budget has to be revised
to make it represent the same period for which the actual results are
given. Since we are talking about revenue and not the expenses, it is
obvious that if actual quantity or price is more than the budget, then it
gives us favourable variance.
5.6.2 Calculation of Variances
1. Total Sales Value Variance: This is the difference between the
budgeted sales and the actual sales.
2. Sales Price V ariance: This is just like material price variance and we
get it by multiplying the sales price difference by actual quantity sold.
3. Volume Variance: This is just like material usage variance and we get
it by multiplying the sales quantity difference of each product by
standard selling price.
4. Sales Mix Variance: This is very usual mix variance. Accordingly, we
apply standard ratio to the actual total quantity sold and we develop
standard sales mix. TOTAL SALES VALUE VARIANCE (1)
Sales Price Variance (3) Sales Volume Variance
(4) Sales Mix Variance (5) Sales Qty/Sub -volume Variance (6) Market
Share -Variance
(7) Market
Size-Variance
(8)
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126 We compare this with the actual sales mix and the difference is to be
multiplied by standard selling price of each product.
5. Sales Qty./Sub -volume Variance: This is just like material yield
variance based on input and we get it by multiplying the total sales
quantity difference by the standard average se lling price per unit.
6. Market Share Variance: This is the change in total sales quantity due
to change in market share. We multiply the actual market size by standard
market share percentage to get standard sales quantity figure. We compare
this with actual sales quantity and multiply he difference by standard
average sales price per unit.
7. Market Size Variance: This is the change in total Sales quantity due to
change in market size, multiplied by standard average sales per unit. We
multiply the market size difference by standard market share percentage
to get the change in total sales quantity.
5.7 PROFIT VARIANCES
The Chart is as shown on the last page of notes on this chapter.
NOTES:
1) Like Sales, the profit targets are also for the period and whenever the
given budget is not for the same period for which the actuals are given,
the given budget has to be revised. Also, the actual profit being more
would be a favourable variance.
5.7.1 Calculation
1. Total Profit Variance: This is the differenc e between total budgeted
profit and actual profit.
2. Profit Variance due to Change in Sales: This part of the chart is very
similar to sales value variance chart. The only difference being the
sales quantity difference is to be multiplied by standard sales p rice in
sales value chart whereas the same quantity difference is to be
multiplied by standard profit per unit in this part of the chart. The
quantity variances in the two charts would be different only because of
the difference between standard sales price and standard profit. The
sales price variance in both charts is the same.
3. Profit Variance due to change in S. P.: This is usual price variance
which we get by multiplying actual sales quantity by the sales price
difference.
4. Profit Variance Due to Change i n Sales Volume: We get this
variance by multiplying the sales quantity difference of each product
by the standard profit per unit.
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127 5. Profit Variance Due to Change in Sales Mix: This is usual mix
variance and we get in by multiplying standard profit by t he mix
difference.
6. This is usual quantity variance and we get it by multiplying the total
sales quantity difference by standard average profit per unit.
(a) (b) : These Variances are same as those in the sales chart, the only
difference being, we multiply the quantity difference by standard
average net profit per unit.
7. Profit Variance Due to Change in Cost: If only the total standard cost
and actual cost per unit are given without breakup into material cost,
labour cost etc., then we calculate only the total variance in the same
way as we calculate sales price variance. Thus we get it my
multiplying the cost difference by the actual quantity Produced per
unit.
It the break -up of cost is given then all variances in respect of each cost
item are to be calculate b y following usual principles applicable to a
particular cost item.
8. Change in Material Cost: These are usual material cost variances and
we compare the standards for actual output with the actuals and get
normal Material Cost Variances.
9. Change in labour Cos t: We follow usual principles applicable to
labour cost variances and get the normal variances.
10. Change in Variable Cost: We follow usual principles applicable to
Variable Overheads cost Variances and get the normal variances.
11. Change in Fixed Overheads Cost : We follow usual principles
applicable to fixed overheads cost variances and get the normal
variances.
12. Change in Administration / Fixed A & D Overheads : (under
financial accounting) As regards fixed expenses, we calculate only
one variance which is Fixed Overheads expenditure variance. We
calculate the same by comparing budgeted fixed overheads with actual
Fixed Overheads. It should be noted that whereas fixed production
overheads cost variance is to be analysed into expenditure and volume
variance, under absorption costing, the admn. and S & D fixed cost
variance is only in respect of expenditure and there is nothing like
volume variance here.
Under marginal costing, there would be only expenditure variance for all
types of fixed overheads.
If there is va riable S & D overheads given then we develop the standards
for actual quantity sold and the standard S & D variable cost would be
compared with actual S & D cost to get Total variable S & D cost
variance. munotes.in
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Cost Accounting
128 5.8 FORMULAS USED IN STANDARD COSTING
Materi al Cost Variance Standard Material Cost Less
Actual Material Cost
Material Price Variance (Standard Price Less Actual Price) X
Actual Quantity Purchased or Used.
Material usage Variance (Standard Quantity for Actual Output
Less Actual Quantity) X Standar d Price
Material Mix Variance (Actual Mix Less Standard Mix) X
Standard Price
Material Yield Variance (Standard Yield Less Actual
Yield) X Standard Cost
Labour Cost Variance Standard Wage Cost Less
Actual Wage Cost
Labour Rate Variance (Standard Rate Less Actual
Rate) X Actual Hours
Labour Efficiency Variance (Standard Hours for Actual Output Less
Actual Hours Worked) X Standard Rate
Idle Time Variance Idle Time X Standard Rate
Variable Production Cost
Variance Standard Variable Overh ead
Less Actual Variable Overhead
Variable Overhead Expenditure
Variance (Standard Overhead Rate Less Actual
Overhead Rate) X Actual Hours
Fixed Overhead Cost Variance Overhead Absorbed Less
Overhead Incurred
Fixed Overhead Expenditure
Variance (Budgeted Fixed Overhead
Less Actual Fixed Overhead)
Fixed Overhead Volume Variance (Budgeted Volume -Actual
Volume) X Standard Absorption Rate
Fixed Overhead Capacity
Variance (Budgeted Hours -Actual Hours) X
Standard Absorption Rate
Fixed Overhead Productivity
Variance (Standard Hours for Actual
Output -Actual Hours Worked) X
Standard Absorption Rate munotes.in
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129
5.9 SOLVED PROBLEMS
Q.1 From the following information Compute Fixed Overhead
Variances.
Standard Actual
Days 50 54 Hours 5,000 5,500 Idle Hrs ....... 200 Units 5,000 5,100 Overheads 1,00,000 1,15,000
Sales value Variance (Budgeted Quantity X Standard Selling
Price) Less (Actual Quantity X Actual
Selling Price)
Sales Price Variance (Standard Selling Price -Actual Selling
Price) X Actual Quantity Sold
Sales Volume Variance (Budgeted Quantity - Actual Quantity) X
Standard Selling Price or Standard Profit
or Standard Contribution
Sales Margin Variance (Budgeted Quantity X Standard Profit) -
(Actual Quantity X Actual Profit)
Sales Contribution Variance (Budgeted Quantity X Standard
Contribution) - (Actual Quantity X Actual
Contribution)
Sales Allowance Variance (Budgeted Allowance -Actual Allowance)
X Actual Quantity Sold
Sales Mix Variance (Standard Mix-Actual Mix) X Standard
Selling Price or Standard Profit or
Standard Contribution
Sales Quantity Variance (Budgeted Quantity -Actual
Quantity in Standard Mix) X Standard
Price or Standard Profit or Standard
Contribution
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130 Also compute ratios for fixed overheads.
Std Rate
1) Abs Rate P.U . = `20 = 10,00,0005,000
2) Abs Rate P.H. = `20 = 1,00,0005,000
3) Abs Rate P. Day = `2,000/ - =1,00,0005,000
4) Std Hrs Per Day = 100 hrs 5,00050
5) Std Hrs Per Unit = 1 hr 5,0005,000
Calculation of Variances
FOH Cost Var = Actual FOH – FOH Abs
= 1,15,000 5,100 20
= 13,000 A
FOH Exp….. Var = Budg FOH – Actual FOH
= 1,00,000 – 1,15,000 = 15,000 A
FOH Volume Var =
//Budg ActualAbsRatwPUOp Op
= 5,000 5,000 20
= 2,000 F
Check = 15,000 A + 2,000 E
Calender Var = .Budg Days ActualDays .Abs RatePerDay
= 50 54
= 8,000 F
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131 OR
Calender V ar .4inno of days
400.. 1/ ( ) 400...Stdhrs perday
Innoof hours
StdhrsPU
ino p Units
RPU
`8,000 F
Budgeted Out Put 5,000 Calender + 400 Capacity + 100 Idle Time Var - 200 Efficiency - 200 Actual Output 5,100
Capicity Var iances :
.Stdhrsin ActualAct Days Hours ..ARPerhr 5,400 5,500 202,200 F
OR . 100..
/inno of hours
StdhrsPU
ino pF
If No of Days Are Not Given
/.
12,000 15,000 70 /12 17,500
18,000 17,500SalesQtyVar SubVol VarTotalStd SalesQty Total ActualSalesQtyStdWeighted AvgSP
F
FF
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Cost Accounting
132 Budgt ActualCapicityVarHrs Hrs ...ARPerHr
5,000 5,000 20 10,000F
.
10,000 2000CapVarBy Calender CapVarByAlternate VarNormalMethod
FF F
6) . .IdleTimeVar IdleTimes AbsRateP H
OR ( 200..
/( )
...400IdleTime HrsStd HrsPU
ino p Units
RPU
//7)/Stdo p inActualFOH EfficiencyVarActualNethr OP ...Ab RatePU 5,300 20 4,000
.
11
5300
2000 8,000 2,000 4A
WNI Std PActualNethrs
Hrs Unit
Std
units
FFF
,000 4,000AA
/1) 100/
51001005000102%Actualo pFOHVolumeRatioBudgeo p
2) 1005410050108%ActualDaysCalenderRatioBudgied Days
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133 3) 10055001005400ActualhrsCapacityRatioStdhrsinactualdays
IF NO. OF DAYS NOT GIVEN
100
55001005000
110%
/100/ActHrsCapRatioBudgHrs
Actualo pFOH EFF RatioStdo pinActNethrs
5100100530096.23%
Q.2 In department A the following data is submitted for the week ended
31st October.
Standard output for 20 hours per week 700 Unit
Standard fixed overheads `700/-
Actual output 600 Units
Actuals hours worked 16
Actuals Fix ed overheads `750/-
Prepare a Statement of Variances and ratio in respect fixed
overheads.
1 Week
Budget 1 Week
Actual Std Rate
Output (Units) 700 600 1 Abs Rate P.O.
Hours 20 10 35 Abs Rate P. H.
FOH (`) 700 750 Std o/p P. Hrs = 35
unit p. hrs
Output Std hrs. 20 hrs 17.14285 hrs munotes.in
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Cost Accounting
134 Calculation Variances : -
1)750 (600 1) 150FOHCostVar Actual FOH
FOH AbsA
2) .
700 750FOH ExpVar udgeted ctualFOH FOH
.//
700 600 1 100
150Budgeted ActualFOHVol Var AbsRateop op
A
Check A
4) . .
20 16 35
140CapacityVar Budg Hrs Act Hrs AbsRateA
/5) ./
. 560 600 11 3516 560Stdo p for ActualEfficiencyVariances AbsRate puActualNetms o p
HrsUnitStdF
(We are comparing low much o/p should her been produce in actual net
has & how much o/p is actual produced)
../
1 35 17.14285 16 35
17.14285 600 40
1Stdhrs for ctualFOH EFF A R PerhrsActo p Nethrs
Hrs Unit
F
Check
00 140AA F
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135 Q.3 From the following information about state calculate necessary sales
variances.
The company’s budgeted market share was 20% and the actual market
size was 90,000 units. TotalSales Std Sales ActualSalesValueVar
F
.5 6 6,000
6 5 5,000 5,000
7 8 4,00SPVariances Std SP ActSP ActualSalesQtyAF
A
C
0 4,000 F
5,000 6,000 5 5,000
4,000 5,000 6 6,000SalesVolV Std SalesQs ActSalesQty Std SPAF
F
C
3,000 4,000 7 7,000
23,000 5,000 18,000
...
6,250 6,0F
Check F F F
Std MixFor ActualSalesMixVar Std SPActS Qty Mix
A
00 5 1250
5,000 5,000 6
3,750 4,000 7 1,750
15,000 500A
B
CF
F
Product Standard Actual
Nos Rate in `P.U Total ` Nos Rate in
`P.U. Total `
A
B
C 5,000 4,000 3,000 5
6
7 25,000
24,000
21,000 6,000
5,000
4,000 6
5
8 36,000
25,000
32,000
12,000 70,000 15,000 93,000
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136
/.
12,000 15,000 70 /12 17,500
18,000 17,500SalesQtyVar SubVol VarTotalStd SalesQty Total ActualSalesQtyStdWeighted AvgSP
F
FF
7) Mkt Share Variance Units
Actual Mkt Size 90,000
X Std Mkt sh are 20%
Expected Sale 18,000
(-) Actued Sales 15,000
in Mkt share 3,000
x Std wt Avg sp 70/12
17,500 A
6) Mkt Size Variances
Budget Mkt Size = 60,000
Act Mkt Size = 90,000
in Mkt (Units) = 30,000
Std Mkt Share 20%
in Sales due to
in Mkt Size 6,000
x Std wt Avg pr 5.83
35,000 F Budget Mkt Budget Mkt
Share Size
20 100
1200 2 (66,000 Units
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137 5.10 EXERCISE
A. Objective Questions
Fill in the blanks:
1. Material Price Variances + Material Usage variances = -------------
----.(Total Material Cost Variances)
2. Material Mix Varian ces + Material Yield Variances = ------------
(Material Usage Variances).
3. Difference between the budgeted sales and the actual sales is --
--------- (Total Sales value variances)
4. Change in total Sales quantity due to change in market size * standard
average sales per unit = (Market Size Variance)
5. The difference between total Standard Variable Cost and total actual
variable cost means ------- (Total variable overheads cost variance)
B. Practical Problems
1. X Ltd. manufactures product X which requires 2 hours of skilled men,
3 hours of semi -skilled men and 5 hours of unskilled men, per unit at
`5, 3 & 2 per hour respectively. During April 2003, the production
department reported output of 2500 units of product X. The labour cost
incurred was as detailed below :
The total hours paid for included 500 idle hours due to machine break
down etc., out of which 250 hours pertained to skilled men, 200 hours
pertained to semi -skilled men and the balance to unskilled men.
Required:
1) Calculate the labour cost variances.
2) Recalculate the labour cost variances, given that the break up of 500
idle hours is not given. Type of labour Hours paid for Rate per hour
Skilled 4,500 `7.00
Semi - Skilled 8,500 `2.75
Unskilled 15,000 `1.50
28,000 munotes.in
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138 2. Given the following data, compute the variances.
Skilled Semi -Skilled Unskilled
Number in Standard gang 16 6 3
Standard Rate Per Hour 3 2 1
Actual Number in Gang 14 9 2
Actual Rate of Pay 4 3 2
In a 40 hours week, the gang as a whole produced 900 standard hours.
3. From the following information compute fixed overhead variances.
Standard Actual
Days 50 54 Hrs. 5,000 5,500 Idle Hrs. ---- 200 Units 5,000 5,100 Overheads 1,00,000 1,15,000 Also compute ratios for fixed overheads.
4. From the following information about sales, calculate necessary sales
variances.
Product Standard Actual
Nos Rate in ` Per Unit Total ` Nos Rate in `
Per Unit Total `
A
B
C 5,000 4,000 3,000 5
6
7 25,000
24,000
21,000 6,000
5,000
4,000 6
5
8 36,000
25,000
32,000
12,000 70,000 15,000 93,000
The company’s budgeted market share was 20% and the actual market
size was 90,000 units.
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139 5. The Company has Budgeted the following data for a month.
Budgeted Market size of the industry in which company is operating
is 5000 units. The actual data for the month was:
Product SP Cost Per Unit Qty.
A 12 5 800
B 19 13 700
Actual market share of the company was 25%.
Required:
1) Sales Variances
2) Profit Variances
3) Reas ons for Sales mix variance being favourable but profit
mix variance being adverse.
6. single product company operates a system of standard costing. The
following data relate to actual output, sales, costs and variances for a
month:
Actual Output
Actua l Sales and costs incurred:
Sales 18,000 units `
12,15,000 Direct Materials Purchased and Used 63,000 2,04,750 kg.
Direct Wages 2,12,040 Variable Overheads 2,77,020 Fixed Overheads 3,25,000 Total Costs 10,18,810 Profit 1,96,190 Product SP Cost Per Unit Units
A 10 4 600
B 20 15 400
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140 Standard wage rate is `6 per hour. Budgeted output for the month is
20,000 units. Variance are:
Required:
i) Present the original budget alongwith cost sheet showing the standard
cost and profit per unit.
ii) Calculate the sales gross margin volume and fixed overheads
volume variances.
iii) Prepare an operating statement reconciling the budgeted profit
with actual profit.
(Direct Materials - Price Variance 15,750 A - Usage Variance 27,000 A Direct Labour - Rate Variance 6,840 A - Efficiency Variance 10,800 F Variable Overheads - Efficiency Variance 14,400 F - Expense Variance 3,420 A Fixed Overheads - Expense Variance 25,000 A Sales Price Variance 45,000 F) munotes.in
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141 6
SOME EMERGING CONCEPTS OF COST
ACCOUNTING
Unit Structure
6.0 Objectives
6.1 Introduction
6.2Target Costing
6.3 Life Cycle Costing
6.4 Bench Marking
6.5 Activity based costing (ABC)
6.6 Exercises
6.0 OBJECTIVES
After studying the unit the students will be able to:
Explain the meaning and stages involved under target costing.
Know the Meaning of Life cycle Costing and Phases of product life
cycle.
Understand the meaning, steps and important terms in Activity Based
Costing
Explain the meaning, Steps and types of Bench Marking
6.1 INTRODUCTION
There are number of drawback in traditional costing. Under traditional
costing we have to differential between direct cost and material cost,
which also induce in material, Labour and overhead. Under this method ,
the profit and overhead are distributed as per volume and labour hours or
machine hours of particular product but we have to also consider non
volume factor. Therefore due to this traditional costing leads to over
costing or under costing.
Total Cost of the product is required to calculate the profit, which is also
required to find out the total revenue. To make a profit, total revenue
must exceed total costs in the long term. Due to all above there is a need to
study the different concept of emerging cost accounting.
A) Target Costing.
B) Life Cycle Costing
C) Bench Marking
D) Activity Based Costing (ABC) munotes.in
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142
6.2 TARGET COSTING
6.2.1 Meaning
Target Costing is a process of developing costs for a product or service
based on Market driven considerations. It is a method that allows firms
to provide customers with product that they want, a price that they can
afford, and also earn desired financial returns.
Target costs are derived from target selling price is follows: Target cost or
a product (or service) = Target Selling Price Less Target Profits.
By using above formula, a firm can find out back ward from a product’s
selling price to arrive at target costs. It becomes goal for designer and
production personnel. It is also standard costs but the significance of tar get
costing is how these standard are developed. Target costs are market
driven standards.
6.2.3 Steps involved
The following steps / stages are involved under target costing -
i) Design and develop a product that customer desire.
ii) Determine the target price of the product based on customers’
perceived value for it and competitive market price.
iii) Determine the desired profit margin.
iv) Derive target costs by detecting desired margin from target selling
price.
v) Perform value engineering to advice target cost.
6.3 LIFE CYCLE COSTING
6.3.1 Meaning
Life Cycle costing is a technique which takes account of total cost of
making a product or owing a physical asset, during its economic life. The
product life cycle concept is very useful concept in sales forecasting,
planning and control, as current company products cannot hold the market
position indefinitely.
The concept of life cycle costing involves: -
a) Identifying product life cycle and estimating number of units to be
produced per period over the life cycle of the product.
b) Estimating the costs involved for the same and.
c) Determining the overage cost of production over the product
life.
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143 6.3.2 Phase of Product Life Cycle: -
Each and every product has a product life cycle. It will change from a few
months to several years. It can be divided into five phases.
1) Development
2) Introduction
3) Growth
4) Maturity
5) Decline
1) Development: -
Each and every product is passes trough development stage, at which
the costs to be paid but there is no any generation of revenue.
2) Introduction: -
Under this stage, a product is introduced in the market. Then the
company would find out the potential consumer for the product. The
company will paid more amount on advertisement to make more aware
of the product as well as to capture more market.
3) Growth: -
At this stage, Customers are more aware of the product as well as they
buy the product at maximum level which gives more profit to the
company.
4) Maturity: -
Under this stage the demand for the product slow down, which result in
profitab ility but at minimum level. The product may be modified or
improved, as a means of sustaining its demand.
5) Decline: -
At this stage, the market will have bought enough of the product and it
will therefore reach ‘saturation Point:’ Demand will start to fall.
Decline in sales volume, will leads to the last phase of the product life
cycle.
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144
6.4 BENCH MARKING
6.4.1 Meaning
A bench marking is a target fixed based on the best practice. It may be a
financial or non financial measure or both. Bench marki ng is the
continuous process of measuring products, service or activities against the
best levels of performance that may be found either inside or outside the
organization. It is a process or comparing a firms activities with best
practices. The process involves establishments of bench marks or targets,
through use of which the level of performance of the company is sought to
be improved. It is a tool for continuous improvement because after
identifying a best practice performance it becomes a target to beat.
6.4.2 Steps
The steps in bench marking are as follows: -
i) Together relevant data of participating departments, establish the bench
marks based on the best practices and communicate them to the
relevant departments or participating units.
ii) Measure actual performance to compare with the bench marks.
iii) Analyse the reasons for variations and report than to the management
for taking preventive and corrective actions.
iv) Review the existing bench marks to set new targets for continuo’s
improvements.
Types of Bench Marking: -
1) Strategic Bench Marking: -
Strategic Bench Marking involves considering nigh level aspects such
as core competencies, developing new products and improving
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145
2) Performance or Competi tive Benchmarking: -
It involves the comparison of competitors product, processes and
business result with own product, processes and results. This type of
analysis is done through trade association or third parties to protect
confidentiality.
3) Process Benc h Marking: -
It involves the comparison of in organizations critical business
processes and operations against best practice organization in the same
field. It also focus on improving specific critical processes and
operations.
4) Functional Bench Marking or Generic Bench Marking: -
It is used when organisations look to bench mark with partners
drawn from different business sectors or areas of activity to find ways
of improving similar functions or work process.
5) Internal Bench Marking: -
It involves see king partners from within the same organisation, for
example, from business units located in different areas. It also involves
bench marking business or operations from within the same
organisation e.g. Branches in different countries.
6) Global or International Bench Marking: -
It is bench marking through which distinction in international culture,
business process and trade practices across companies are bridged and
their ramification / branches for business process improvement are
understood and utilized.
7) External Bench Marking: -
It involves seeking help of outside organisation that are known to be
best in class. It also provides opportunities of learning from those who
are at the leading edge. It must be remembe red that not every best
practice solution can be transferred to others.
6.5 ACTIVITY BASED COSTING (ABC)
6.5.1 Meaning
According to CIMA ABC is defined as “Cost attribution to Cost units
on the basis of benefits received from indirect activates i.e. ordering,
setting up, assuming quality etc. ABC is a costing technique that assign
costs to products, based on the activities those products require. It
includes such as ordering material, processing purchase orders, and
setting up machines.
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146 6.5.2 Import ant Terms
Important terms used in Activity Based Costing are defined below: -
1. Activity: -
An activity means an aggregate of closely related tasks having some
specific functions which are used for completion of goals or objectives.
2. Resources: -
Resources are elements that are used for performing the activities or
factors helping in the activities.
3. Cost: -
Cost is amount paid for resource consumed by the activity.
4. Cost Object: -
It refers to an item for which cost measurement is required.
5. Cost Pool: -
A cost pool is a term used to indicate grouping of costs incurred on a
particular activity which drives them.
6. Cost Driver: -
Any clement that would cause a change in the cost of activity is cost
driver. Actually cost drivers are basis of char ging cost of activity to cost
object. They are used to trace cost to product by using a measure of
resources consumed by each activity.
6.5.3 Different Stags/Steps in ABC: -
1) Activities: -
An organisation can identify major activities.
2) Cost Drivers: -
Ident ify the factors which determine the size of the cost of an activity
because the cost of an activity, which are known as cost drivers.
3) Cost Pool: -
Collect the costs associated with each cost driver into what are
known as cost pools.
4) Overheads Rate (OH Rate) :-
Calculate the overheads Rate for each and every activity (Cost
Pool - Cost Driver)
5) Total Cost: -
Charge costs to products on the basis of their usage of the
activity (OH Rate x Usage of Activity)
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147 6.6 EXERCISE
1. What is Target costing? Which are the stages involved in Target
Costing?
2. Write a Short Note on Product Life Cycle.
3. What are the phase in Product Life Cycle explain in detail?
4. What is Bench Marking, what are its types.
5. Write Short Note on ABC analysis.
6. What is Activity Based Costing ? What are steps under ABC
taken by an organisation?
7. Objective Questions
Q.1 Multiple Choice Questions.
1. The management process responsible for identifying, anticipating and
satisfying customers requirements profitably is the
A. Target Costing B. Life cycle costing
C. Benchmarking D. Activity Based Costing
2. Cost allocation bases in activity based costing should be
A. Cost drivers B. Cost pools
C. Activity centres D. Resources
3. In activity based costing, final cost allocations assign costs to
A. Departments B. Process
C. Products D. Activities
4. Relative to traditional product costing, activity based costing
differs in the way cost are
A. Processed B. Allocated
C. Benchmarked D. Incurred
5. A batch level activity is
A. Assembling B. product design
C. Engineering changes D. Purchase ordering
6. A unit level Activity is a
A. Painting B. Purchase ordering
C. Inspection D. Material handing
7. It is not included in a facility level activity
A. Plant depreciation B. Property taxes
C. Engineering changes D. Utilities
8. It is not a unit level activity
A. Drilling B. Cutting
C. Sanding D. Inspecting
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148 9. Providing the power required to run production equipment is an
example of
A. Unit level activity
B. Batch level activity
C. Product level activity
D. Organization sustaining activity
10. In an activity based costing s ystem, direct materials used would
typically be classified as a
A.Unit level cost B. Batch level cost
C. Product sustaining cost D. Facility level cost
Answers : - 1. A, 2. A, 3. C, 4.B 5. D, 6. A, 7. C, 8. D, 9. A,
10. A.
Q .2 True and False
1. Property taxes is a facility level activity.
2. Purchase ordering is a batch level activity.
3. Product design is a product level activity.
4. Inspecting is not a unit level activity.
5. Assembling is a branch level activity.
6. Material bonding is a product level activity.
7. Product line activity is the cost of designing products.
8. Unit levels activity is the cost of processing purchase orders.
9. ABC is a method of allocating indirect costs.
10. Cost pool is a collection of overhead costs related to a cost
object.
Answer: True :- 1, 2, 3, 4, 7, 9, 10. False :- 5, 6, 8,
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T.Y.B.Com Sem VI
Financial Accounting and Auditing Paper X
(Cost Accounting)
Question Paper Pattern
Maximum Marks: 100
Questions to be set: 05
Duration: 3 Hours
All Questions are Compulsory Carrying 20 Marks Each Question No Particular Marks Q-1
Objective Questions
A) Sub Questions to be asked 12 and to be answered 10 B) Sub Questions to be asked 12 and to be answered 10 (*Multiple Choice/True or False/Fill in the blanks/Match the
column)
20 Marks
Q-2 Q-2 Practical Question OR Practical Question 20 Marks
20 Marks Q-3
Q-3 Practical Question OR Practical Question 20 Marks
20 Marks Q-4 Q-4 Practical Question OR Practical Question 20 Marks
20 Marks Q-5
A) Theory Questions
B) Theory Questions
OR Short Notes To be asked 06 To be answered 04 10 Marks
10 Marks
20 Marks Note: Practical questions of 20 marks may be divided into two s ub questions of 10 marks
each.
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