Cost Accounting – I

[As per Revised Syllabus of B.Com. (Accounting and Finance), Semester I

of Mumbai University with Effect from the Academic Year 2013-2014]

Dr. Nishikant Jha

Winner of “Best Commerce Author – 2013-14” by Maharashtra Commerce Association
ICWA, M.Com., Ph.D., PGDBM (MBA), BEC from Cambridge University,
CIMA Advocate, CIMA London,
International Executive MBA from UBI Brussels, Belgium, Europe,
Assistant Professor in Accounts & Coordinator (HOD), BAF,
Thakur College of Science and Commerce,
UGC Recognised, University of Mumbai.
Visiting Faculty for: M.Phil. & M.Com., Hinduja College, Mumbai University,
MBA in United Business Institutes, Brussels, Belgium, Europe,
CFA & CFP Professional Courses of USA, CIMA Professional Courses of London,
CA & CS Professional Courses of India, M.Phil. & Ph.D. Guide [Research Supervisor] &
Professor for Research Methodology.

Prof. Nirav Goda

M.Com., NCFM, NCMP, PGDFM, M.Phil.
Co-ordinator, BBI, Thakur College, Mumbai.

CA Diya Mukherjee
ACA, M.Com., NET (CBSE), SET
Assistant Professor at Nirmala Memorial Foundation College of Commerce & Science,
Thakur Complex, Kandivali (East), Mumbai - 400101.

MUMBAI z NEW DELHI z NAGPUR z BENGALURU z HYDERABAD z CHENNAI z PUNE

LUCKNOW z AHMEDABAD z ERNAKULAM z BHUBANESWAR z KOLKATA
© Authors
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 Preface

We are happy to present this book “Cost Accounting” Paper – I to the students of F.Y. BAF. In
this edition, an effort has been made to incorporate professional examination questions at relevant places
in the book.

The syllabus contains a list of topics covered in each chapter which will avoid controversies
regarding the exact scope of the syllabus. The text follows the term-wise chapter topics pattern prescribed
in the syllabus. We have preferred to leave the text of the section and rules as it is and thereafter, added
the comments with the intention of explaining the subject to the students in a simplified language. While
making an attempt to explain in a simplified language, any mistake of interpretation might have crept in.
This book is an unique presentation of subject matter in an orderly manner. This is a student-friendly
book and tutor at home. We hope the teaching faculty and students community will find this book of
great use.

We are extremely grateful to students of F.Y. BAF and Mr. K.N. Pandey of Himalaya Publishing
House Pvt. Ltd., for their devoted and untiring personal attention accorded by them to this publication.
I gratefully acknowledge and express my sincere thanks to the following people without whose inspiration,
support and constructive suggestions, this book would not have been possible.

) Mr. Jitendra Singh Thakur (Trustee, Thakur College)

) Dr. Chaitaly Chakraborty (Principal, Thakur College)

) Mrs. Janki Nishikant Jha

) Mrs. Darshita Nirav Goda

We welcome suggestions from students and teachers for further improvement of the book.

AUTHORS
 Our Well-wishers .....
) Dr. A.C. Vanjani (Principal, MMK College)
) Dr. Jayant Apte (Vice-Principal, G.D. Saraf College)
) Mr. Vinod D. Tibrewala (Trustee, SRSS College)
) Mr. Rajubhai Desai (Trustee, St. Rock’s College)
) Dr. S.B. Arya (Principal, KG Mittal College)
) Dr. V.S. Kannan (Vice-Principal, KES College)
) Prof. Baibhav (BAF Coordinator, KES College)
) Prof. Kavita Shah (BMS/BAF/BBI Coordinator, NK College)
) Dr. Ajay Bhamre (Principal, DAV College)
) Dr. Malini Johri (Principal, Chinai College)
) Dr. Chitra Natrajan (Principal, Hinduja College)
) Dr. Minu Madlani (Principal, Adlani College)
) Prof. Smita Shukla & Prof. Sanjeev Thakur (Alkesh Dinesh Modi Institute)
) Prof. Bysi Panikar (BMS Coordinator, Patuk College)
) Prof. Shirley Pillai (BBI Coordinator, St. Andrew’s College)
) Prof. Piyush Shah (Vice-Principal, Burhani College)
) Prof. Prachi Kadam (BMS Coordinator, Gokhale College)
) Prof. Monica Chandiwala (BMS/BAF Coordinator, Balbharti College)
) Prof. Poonam Kakkad (BMS/BAF Coordinator, Nirmala College)
) Dr. Sharda S.C. (Principal, L.N. College)
) Prof. Tiwari (BMS Coordinator, Birla College)
) Prof. Nanda (BMS Coordinator, SRSS College)
) Dr. Shreepad Joshi (G.D. Saraf College)
) Prof. Arvind Dhond (St. Xavier’s College)
) Prof. Rupal Shah (N.M. College)
) Prof. Khayti Vohra (BFM Coordinator, Hinduja College)
) Prof. Leena Nair (Tolani College)
) Dr. Vinita Pimple (Poddar College)
) Prof. Darshan Pagdhre (Lala College)
 Syllabus

Modules at a Glance
Sr. No. Modules/Units No. of Lectures
1 Introduction to Cost Accounting 12
2 Material Cost 14
3 Labour Cost 12
4 Overheads 12
Total 50

Sr. No. Modules/Units

1. Introduction to Cost Accounting
Evolution
Objectives and Scope of Cost Accounting
Importance and Advantages of Cost Accounting
Difference between Cost Accounting and Financial Accounting
Limitations of Financial Accounting
Definitions: Cost, Costing and Cost Accounting
Classification of Cost on Different Bases
Cost Allocation and Apportionment
Coding System
Essentials of Good Costing System
2. Material Cost
Material Cost: The Concept
Material Control Procedure
Documentation
Stock Ledger, Bin Card
Stock Levels
Economic Order Quantity (EOQ)
3. Labour Cost
Labour Cost: The Concept
Composition of Labour Cost
Labour Cost Records
Overtime/Idle Time/Incentive Schemes
4. Overheads
Overheads: The Concept
Classification of Overheads on Different Bases
Apportionment and Absorption of Overheads
 Paper Pattern

Credit Based Evaluation

System Scheme of Examination
(a) Internal Assessment – 25% 25 Marks

Sr. No. Particulars Marks

1 One periodical class test* 20 Marks
2 Active participation in routing class instructional deliveries and overall
conduct as a responsible learner, mannerism and articulation and exhibit
of leadership qualities in organizing related academic activities 05 Marks

(b) Semester End Examinations – 75% 75 Marks

1. Question Paper Pattern for Periodical Class Test for Courses at UG
Programmes Written Class Test 20 Marks

Sr. No. Particulars Marks

1 Match the Column/Fill in the Blanks/Multiple Choice Questions 05 Marks
(½ Marks each)
2 Answer in One or Two Lines (Concept Based Questions) 05 Marks
(1 Mark each)
3 Answer in Brief (Attempt any Two of the Three) 10 Marks
(5 Marks each)
 Question Paper Pattern

Maximum Marks: 75
Questions to be Set: 05
Duration: 2½ Hrs
All Questions are Compulsory Carrying 15 Marks each.

Q.1 Objective Questions 15 Marks

(A) Sub-questions to be asked 10 and to be answered any 08
(B) Sub-questions to be asked 10 and to be answered any 07
(*Multiple Choice/True or False/Match the Columns/Fill in the Blanks)
Q.2 Full Length Practical Question 15 Marks
OR
Q.2 Full Length Practical Question 15 Marks
Q.3 Full Length Practical Question 15 Marks
OR
Q.3 Full Length Practical Question 15 Marks

Q.4 Full Length Practical Question 15 Marks

OR
Q.4 Full Length Practical Question 15 Marks
Q.5 (A) Theory Questions 08 Marks
(B) Theory Questions 07 Marks
OR
Q.5 Short Notes 15 Marks
To be answered 05
To be answered 03

Note: Full length question of 15 marks may be divided into two sub-questions of 08 and 07 Marks.
 Contents

1. Cost Concepts 1 – 47
Introduction — Types of Costs or Cost Classification — Cost Unit — Cost
Centers — Allocation of Overheads — Questions for Self-practice
2. Material Cost 48 – 104
Material Cost: The Concept — Receiving Materials — Correcting Invoices
— Cost of Acquiring Materials/Materials Acquisition Cost — Stores Records
— Materials Costing Methods — Need for Materials Control — Requirements
of a System of Material Control — Stock Control — Re-order Level or
Ordering Point or Ordering Level — Minimum Limit or Minimum Level of
Stock — Danger Level of Materials or Inventory Stock — Questions for
Self-practice
3. Labour Cost 105 – 150
Labour Cost: The Concept — How to Exercise Control over Labour Cost?
— Methods of Time Booking — Labour Turnover — Questions for
Self-practice
4. Overhead Cost 151 – 199
Overhead: The Concept — Classification of Overhead Costs — Element-
wise Classification — Secondary Distribution of Overheads —
Underabsorption and Overabsorption of Overheads — Writing Off to Costing
Profit and Loss Account — Absorption in the Accounts of Subsequent Years
— Accounting and Control of Manufacturing Expenses — Questions for
Self-practice
 1 Cost Concepts

INTRODUCTION
Cost may be defined as the amount of expenditure (actual or notional) incurred on or attributable to
a given item. Cost represents the resources that have been or must be sacrificed to attain a particular
objective. These resources can be either direct or indirect.
Objectives and Scope of Cost Accounting
Cost information can be used for the following purposes:
• The analysis of profitability of individual products, services or jobs.
• The analysis of profitability of different departments or operations.
• The analysis of cost behaviour of various items of expenditure in the organisation can be done.
• It is used to locate differences between actual results and expected results. Such differences
can also be traced to the individual cost center with the efficient cost system.
• It can be used in setting the prices so as to cover cost and generate an acceptable level of profit.
Costing
It means classifying, recording and appropriate allocation of expenditure for the determination of
the cost of goods or services and present action of suitably arranged data for the purposes of control
and guidance of the management.
Cost Accounting
Cost accounting system is used to record, summarise and report cost information. Some cost
information is reported to external users such as shareholders and creditors in the form of income
statements and balance sheets. From the cost accounting system, cost accounting information and
management accounting information are segregated. Cost accounting information is used for the
preparation of balance sheet and income statement whereas management accounting information is used
for the purpose of helping managers in their decision making process.
 2 Cost Accounting – I

Cost Accounting
Information For Balance Sheet and
Income Statement

Cost Accounting
System

To Aid Managers in
Decision Making
Management Accounting
Information

Fig. 1.1

Difference between Financial and Cost Accounting

Sr. No. Basis Financial Accounting Cost Accounting
1 Objective Financial performance and position Ascertain cost and cost control
2 Cost and Profit Shows overall cost and profit/loss Shows details for each product
process, job contract, etc.
3 Control/Report Emphasis on reporting Emphasis on control and
reporting
4 Decision Making Limited use Designed for decision making
5 Responsibility Does not fix responsibility Can effectively fix responsibility
6 Time Frame Focus on historical data Focus on present and future
7 Type of Reports General reports like P&L Account, Can generate special reports
Balance Sheet, Cash Statement and analysis
8 Legal Need Statutory requirement Voluntary, except for some cases
9 Transactions Records external transactions Records internal and external
transactions
10 Reader Everybody Internal management
11 Formats Standard, as per law Tailor-made
12 Access Everybody, except for some Very limited access
13 Unit of Value Monetary Monetary and physical

TYPES OF COSTS OR COST CLASSIFICATION

The bases of classifying costs are the nature of cost, function, direct/indirect variability, controllability,
normality, capital/revenue, time planning and control, managerial decisions, etc. The classification of
cost is done based on these factors. The concept of cost center refers to the smallest segment of activity
or area of responsibility for which costs are accumulated. A cost unit is nothing but a unit of output in
the production of which the costs are incurred. The techniques of costing can be classified as historical
costing, absorption costing, marginal costing, direct costing, standard costing and uniform costing.
Different Basis for Classification of Cost
Cost classification is the process of grouping costs according to their common characteristics. A
suitable classification of costs is very helpful in identifying a given cost with cost centers or cost units.
Cost Concepts 3

Cost may be classified according to their nature, i.e., material, labour and expenses and a number of
other characteristics. Depending upon the purpose to be achieved and requirements of a particular
concern, the same cost figures may be classified into different categories. The classification of costs
can be done in the following ways:
1. By Nature or Element
2. By Functions
3. As Direct and Indirect
4. By Variability
5. By Controllability
6. By Normality
7. By Capital and Revenue
8. By Time
9. According to Planning and Control
10. For Managerial Decisions
11. Others
1. By Nature or Element or Analytical Classification
The cost are divided into three categories, i.e., materials, labour and expenses. Further
subclassification of each element can be done, for example, material into raw material components, and
spare parts, consumable stores, packing material, etc.
Nature

Material Cost Labour Cost Overheads

2. By Functions
It leads to grouping of costs according to the broad divisions of functions of a business undertaking
or basic managerial activities, i.e., production, administration, selling and distribution. According to this
classification, cost are divided as follows:
Functions

Manufacturing Cost Commercial Cost

Manufacturing and Production Cost: This category includes the total costs incurred in manufacture,
construction and fabrication of units of production.
Commercial Costs: This category includes the total cost incurred in the operation of a business
undertaking other than the costs of manufacturing and production. Commercial cost may further be
subdivided into: (a) administrative cost and (b) selling and distribution cost.
 4 Cost Accounting – I

3. As Direct and Indirect

According to this classification, total cost is divided into direct costs and indirect costs. Direct
costs are those costs which are incurred for and may be conveniently identified with a particular cost
center or cost unit. The common example of direct costs are materials used and labour employed in
manufacturing an article or in a particular process of production. Indirect costs are those costs which
are incurred for the benefit of a number of cost centers or cost units and cannot be conveniently
identified with a particular cost center or cost units. Examples of indirect costs include rent of building,
management salaries, machinery depreciation, etc. The nature of the business and the cost unit chosen
will determine the costs as direct and indirect. For example, the hire charges of a mobile crane used on
site by a contractor would be regarded as a direct cost since it is identifiable with the project/site on
which it is employed, but if the crane is used as a part of the services of a factory, the hire charges
would be regarded as indirect cost because it will probably benefit more than one cost center or department.
The distinction between direct and indirect cost is essential because the direct cost of product or activity
can be accurately identified with the cost object while the indirect costs have to be apportioned on the
basis of certain assumptions about their incidence.
4. By Variability
The basis for this classification is the behaviour of costs in relation to changes in the level of
activity or volume of production. On this basis, costs are classified into three groups, viz., fixed, variable
and semi-variable.
Variability

Fixed Cost Variable Cost Semi-variable Cost

Fixed (or Period) Costs: Fixed costs are those which remain fixed in total with increase or decrease
in the volume of output or activity for a given period of time or for a given range of output. Fixed costs
per unit vary inversely with the volume of production, that is, fixed cost per unit decreases as production
increases and increases as production decreases. Examples of fixed costs are rent, insurance of factory
building, factory manager’s salary, etc. These costs are constant in total amount but fluctuate per unit as
production changes. These costs are known as period costs because these are mostly dependent on time
rather than on output. These costs are also termed as capacity costs.
Variable or Product Costs: Variable costs are those which vary in total directly in proportion to the
volume of output. These costs per unit remain selectively constant with changes in volume of production
on activity. Thus, variable costs fluctuate in total amount but tend to remain constant per unit as
production activity changes. Examples are direct material costs, direct labour costs, power, repairs
etc. Such costs are known as product costs because they depend on the quantity of output rather on
time.
Semi-variable Costs: Semi-variable costs are those which are partly variable. For example, telephone
expenses include a fixed portion of monthly charge plus variable charge according to the number of calls
made thus total telephone expenses are semi-variable. Other examples of such costs are depreciation,
repairs and maintenance of building and plant etc.
Cost Concepts 5

5. By Controllability
On this basis, costs are classified into two categories:
Controllability

Controllable Cost Uncontrollable Cost

Controllable Costs: If the costs are influenced by the action of a specified member of an undertaking,
that is to say, costs which are at least partly within the control of management, they are called controllable
costs. An organisation is divided into a number of responsibility centers and controllable costs incurred
in a particular cost center can be influenced by the action of the manager responsible for the center.
Generally speaking, all direct costs including direct material, direct labour and some of the overhead
expenses are controllable by lower level of management.
Uncontrollable Costs: If the costs are influenced by the action of a specified member of an
undertaking, that is to say, which are not within the control of management, they are called uncontrollable
costs. Most of the fixed costs are uncontrollable. For example, rent of the building is not controllable
and so is managerial salaries. Overhead cost which is incurred by one service, section or department and
is apportioned to another which receives the service is also not controllable by the latter.
Controllability of costs depends on the level of management (top, middle or lower) and the period
of time (long-term or short-term).
6. By Normality
On this basis, the costs are classified into two categories:
Normality

Abnormal Cost Normal Cost

Normal Cost: It is the cost which is normally incurred at a given level of output in the conditions
in which that level of output is normally attained. It is not a part of cost of production.
Abnormal Cost: It is the cost which is not normally incurred at a given level of output in the
conditions in which that level of output is normally attained. It is not a part of cost of production and
charged to Costing Profit and Loss Account.
7. By Capital and Revenue or Financial Accounting Classification
If the cost is incurred in purchasing assets either to earn income or increase the earning capacity of
the business is called capital cost, for example, the cost of a rolling machine in case of steel plant.
Through the cost incurred at one point of time, the benefit accruing from it are spread over a number of
accounting years. Revenue expenditure is any expenditure done in order to maintain the earning capacity
of the concern such as cost of maintaining an asset or running a business. Example, cost of material
used in production, labour charges paid to convert the material into production, salaries, depreciation,
repairs and maintenance charges, selling and distribution charges, etc. While calculating cost revenue,
items are considered whereas capital items are completely ignored.
 6 Cost Accounting – I

8. By Time
Costs can be classified as: (i) Historical costs and (ii) Predetermined costs.
Time

Historical Cost Predetermined Cost

Historical Cost: The costs ascertained after being incurred are called historical costs. Such costs
are available only when the production of a particular thing has already been done. Such costs are only
of historical value and not at all helpful for cost control purposes.
Predetermined Costs: Such costs are estimated costs, i.e., computed in advance of production
taking into consideration the previous periods, costs and the factors affecting such costs. If they are
determined on scientific basis, they become standard cost. Such costs when compared with actual
costs will give the variances and reasons of variance and will help the management to fix the responsibility
and take remedial action to avoid its recurrence in future.
9. According to Planning and Control
Cost Accounting furnishes information to the management which is helpful in discharging the two
important functions of management, i.e., planning and control. For the purpose of planning and control,
costs are classified as budgeted costs and standard costs.
Planning and Control
Marginal Cost
Out-of-pocket Cost
Budgeted Costs Standard Costs Differential Cost
Sunk Cost
Managerial Decisions Imputed Cost
Opportunity Cost
Replacement Cost
Avoidable/Unavoidable Cost

Fig. 1.2

Budgeted Cost: Budgeted costs represent an estimate of expenditure for different phases or segments
of business operations, such as manufacturing, administration, sales and research and development for
a period of time in future which subsequently becomes the written expression of managerial targets to
be achieved. Various budgets are prepared for different phases/segments of business, such as sales
budget, raw material cost budget, labour cost budget, cost of production budget, manufacturing overhead
budget and office and administration overhead budget. Continuous comparison of actual performance
(i.e., actual cost) with that of the budgeted cost is made so as to report the variations from the budgeted
cost of the management for corrective action.
Standard Costs: The Institute of Cost and Management Accountants, London defines standard
cost as “the predetermined cost based on a technical estimate for materials, labour and overhead for a
Cost Concepts 7

selected period of time and for a prescribed set of working conditions.” Thus, standard cost is a
determination, in advance of production, of what should be its cost under a set of condition.
Budgeted costs and standard costs are similar to each other to the extent that both of them represent
estimates of cost for a period of time in future. In spite of this, they differ in the following respects:
• Standard costs are scientifically predetermined costs of every aspect of business activity whereas
budgeted costs are mere estimates made on the basis of past actual financial accounting data
adjusted to future trends. Thus, budgeted costs are projection of financial accounts whereas
standard costs are projection of cost accounts.
• The primary emphasis of budgeted costs is on the planning function of management whereas
the main thrust of standard costs is on control.
• Budgeted costs are extensive whereas standard costs are intensive in their application. Budgeted
costs represent a macro approach of business operations because they are estimated in respect
of the operations of a department. Contrary to this, standard costs are concerned with each and
every aspect of business operation carried in department, budgeted costs are calculated for
different functions of the business, i.e., production, sales, purchase, etc., whereas standard
costs are compiled for various elements of costs, i.e., materials, labour and overhead.
10. For Managerial Decisions
On this basis, costs may be classified into the following categories:
Marginal Cost: Marginal cost is the additional cost incurred if an additional unit is produced. In
other words, marginal cost is the total of variable costs, i.e., prime cost plus variable overheads. It is
based on the distinction between fixed and variable costs.
Out-of-pocket Costs: This is that portion of the cost which involves payment, i.e., gives rise to
cash expenditure as opposed to such costs as depreciation, which do not involve any cash expenditure.
Such costs are relevant for price fixation during recession or when make or buy decision is to be made.
Differential Costs: If there is a change in costs due to change in the level of activity or pattern or
methods of production, they are known as differential costs. If the change increases the cost, it will be
called incremental cost and if the change results in the decrease in cost, it is known as decremental cost.
Sunk Costs: Sunk cost is another name for historical cost. It is a cost that has already been
incurred and is irrelevant to the decision making process. A good example is depreciation on a fixed
asset. Depreciation on a given asset is a sunk cost because the cost (of purchasing the asset) has already
been incurred (when it was purchased) and it cannot be affected by any future action. Though we
allocate the depreciation cost to future period, the original cost of the asset is unavoidable. What is
relevant in this context is the salvage value of the asset not the depreciation. Thus, sunk costs are not
relevant for decision making and are not affected by increase or decrease in volume.
Imputed (or Notional) Costs: These costs appear in cost accounts only. For example, notional
rent charged on business premises owned by the proprietor, interest on capital for which no interest has
been paid. When alternative capital investment projects are being evaluated, it is necessary to consider
the imputed interest on capital before a decision is arrived as to which is the most profitable project.
 8 Cost Accounting – I

Opportunity Cost: It is the maximum possible alternative earning that will be foregone if the
productive capacity or services are put to some alternative use. For example, if an owned building is
proposed to be used for a project, the likely rent of the building is the opportunity cost which should be
taken into consideration while evaluating the profitability of the project.
Replacement Cost: It is the cost at which there could be purchase of an asset or material identical
to that which is being replaced or revalued. It is the cost of replacement at current market price.
Avoidable and Unavoidable Cost: Avoidable costs are those which can be eliminated if a particular
product or department with which they are directly related to, is discontinued. For example, salary of
the clerks employed in a particular department can be eliminated, if the department is discontinued.
Unavoidable cost is that cost which will not be eliminated with the discontinuation of a product or
department. For example, salary of factory manager or factory rent cannot be eliminated even if a
product is eliminated.
Other Types of Costs
Other Costs

Future Costs Joint Costs Conversion Committed Costs

Costs
Programmed Costs Discretionary Costs

Future Cost: Future costs are those costs that are expected to be incurred at a later date.
Programmed Cost: Certain decisions reflect the policies of the top management which results in
periodic appropriations and these costs are referred to as programmed cost. For example, the expenditure
incurred by the company under the Jawahar Rojgar Yojana programme initiated by the Prime Minister is
a programmed cost which reflects the policy of the top management.
Joint Cost: Joint cost is the cost of manufacturing joint products up to or prior to the split-off
point. Cost incurred after the split-off point is called separable cost. Joint cost is common to the processing
of joint products and by-products till the point of separation and cannot be traced to a particular product
before the point of split-off.
Conversion Cost: Conversion cost is the cost incurred in converting the raw material into finished
product. It can be calculated by deducting the cost of direct materials from the production cost.
Discretionary Costs: Discretionary costs are those costs which do not have obvious relationship to
levels of capacity or output activity and are determined as part of the periodic planning process. In each
planning period, the management decides on how much to spend on certain discretionary items such as
advertising, research and development, and employee training. These costs are amenable for alteration
by the management.
Cost Concepts 9

Committed Cost: Committed cost is fixed cost which results from the decision of the management
in the prior period and is not subject to the management control in the present on a short-run basis. They
arise from the possession of production facilities, equipment, an organisation set-up, etc. Some examples
of committed costs are plant and equipment depreciation, taxes, insurance premium and rent charges.

COST UNIT
Managers are often interested in knowing the cost of something. The ‘something’ for which the
cost has to be ascertained is known as cost objective or cost object or cost unit. Examples of cost units
include products, activities, department, number of patients treated, sales regions, etc.
For example, if a factory produces motor cars, then the cost unit would be motor car because the
costs are all incurred in producing motor cars.
Let us take up a more complex situation. Consider a bus operator providing bus services to the
public between most of the major cities of the country. Suppose the bus operator wants to fix a cost
unit, what is it?
Note that here there is no production, what is provided is a service.
Each trip between two cities may be taken as a cost unit. Alternatively, cost per kilometre of travel
may be taken as a cost unit. However, neither of the above cost units relates to the passenger who buys
the service.
If the operator wants to fix a price to be charged to each passenger, the above cost units would
have to be adjusted further.
Assume that a bus cover a distance of 700 km per day carrying 30 passengers on an average, the
output is 700 × 30 = 21,000 passenger kilometres per day. On an average, the passenger kilometres
covered by each bus per week is 1,00,000. The total cost of operation per bus per week is ` 80,000.
The cost per passenger kilometre is = ` 0.80.

80,000
Cost per passenger kilometre = = ` 0.80
1,00,000

The implication is that the bus operator must charge, on an average, over ` 0.80 per kilometre to
each passenger in order to make a profit.

COST CENTERS
The smallest segment of activity or area of responsibility for which costs are accumulated. In the
manufacture and sale of a product or in the rendering of a service, several activities may have to be
performed. These activities are usually carried out by different departments or sections of the company.
For example, in a pharmaceutical company, the raw materials may be purchased by a purchase department,
stocked up in a store, processed in one or more processing departments, packed in a packing department
and sold by a sales and distribution department. Hence, cost statistics are conveniently accumulated for
each department. In cost accounting, each department would be called a Cost Center. Typically, cost
centers are departments, but in some instance, one department may contain several cost centers. For
 10 Cost Accounting – I

example, a machining department may contain several cost centers. For example, a machining department
may be under one foreman but it may contain various groups of machines, such as lathes, milling
machines, etc.
As each department is managed by a departmental manager, the cost of a department would be a
measure of how the department’s manager is performing. In fact, by reporting departmental costs to the
concerned managers, they will understand better the cost consequences of their actions so that
departmental performance becomes more cost-effective.
Characteristics of Cost Information
1. Cost accounting provides information that helps in planning, control and decision making.
2. Planning is future-oriented. Hence, cost information generated from historical record has to be
attuned to future changes in the organisation and its environment.
3. Analysis and comparison of the actual and expected results indicate whether there is any need
for control. Hence, costs have to be broken down into various elements and each element of
cost has to be compared with a “norm” or “standard”.
4. Decision making is a future-oriented activity because the impacts of current decisions are
experienced in terms of future costs and benefits. Decision making considers only relevant
costs. But a cost that changes depending upon the alternative chosen is a relevant cost.
5. Cost data is gathered from the information about the operations to determine the costs which
are related to each cost center. The financial accounting system provides the data on expenses,
and these are now treated as costs.
6. General or common costs like depreciation on factory building have to be distributed among the
various cost centers on an equitable basis.
7. The costs accumulated in each cost center are then “loaded” or distributed over the cost units
produced by them.
Cost Allocation
Many costs are incurred in an organisation as a result of activities performed in several responsibility
centers or subunits of the organisation. A collection of costs to be assigned to different subunits is called
a cost pool. The responsibility centers, products or services to which costs are to be assigned are called
cost objects. The process of assigning the costs in the cost pool to the cost objects is called cost
allocation or cost distribution.
Cost on Financial Statement
Generally Accepted Accounting Principles (GAAP) determines how costs are to be classified for
financial reporting. These financial statements are for users outside the organisation and the rules underlying
the classification of costs for reporting in financial statements are not likely to be the rules that should be
used for internal decision making. The main problem in financial reporting is determining when costs
become expensed in the income statement. The calculation of the cost of a product for planning and
cost control purposes may be different from the calculation of the cost of a product for financial
reporting purposes.
Cost Concepts 11

Product costs are identified with goods manufactured or purchased for resale. Product cost on
financial statements include all manufacturing costs, i.e., direct material, direct labour and overheads.
Period costs are identified with a time period rather than a product — selling, administrative and interest
costs are treated as period costs for presenting financial statements.
Techniques of Costing
In addition to the different methods of costing, the following techniques are used to ascertain costs:
1. Historical Costing: By this approach, actual costs are ascertained after they have been incurred.
This is a conventional method of cost ascertainment.
2. Absorption Costing: This approach considers all indirect manufacturing costs (also called
factory overheads), fixed and variable, as inventoriable or product cost, and treats them as
expense only when the products are sold.
3. Marginal Costing: Marginal costing differentiates between fixed and variable costs. Under
marginal costing, fixed costs are not treated as part of the product cost but are treated as period
costs. Marginal cost of a product is its variable cost. And the fixed costs of the period are
written off in full against the revenue of that period. This technique assists and guides
management in taking various policy decisions under different conditions of business, such as,
pricing decisions in times of competition, recession, make or buy decisions, suspension or
continuance of product/product department, selecting profitable product-mix etc.
4. Direct Costing: The ascertainment of direct costs in respect of department, process or product.
This is marginal costs plus fixed cost which is directly chargeable to the department, process or
product. Under absorption costing, all fixed costs — allocable or unallocable (which are apportioned)
are charged to department, product, etc., which more often than not complicate decision making
and therefore, direct costing is an improvement over absorption costing in decision making.
5. Standard Costing: The ascertainment and use of standard costs and measurement and analysis
of variances. Standard cost is a scientifically predetermined cost which is fixed in advance of
production for each element of cost, viz., material, labour and overheads and actual costs are
compared against the standard costs to measure the variances and for exercising control.
6. Uniform Costing: The use of the same costing principles, methods and/or practices by several
undertakings with a view to achieving uniformity in approach and system.
Cost Treatment
• Cost Ascertainment is the process of determining actual costs after they have been incurred.
• Cost Estimation is the process of determining future costs in advance before production starts,
on the basis of actual past cost adjusted for anticipated future changes.
• Cost Allocation is the process of charging the full amount of an individual item or cost directly
to the cost center for which the item of cost was incurred.
• Cost Apportionment is the process of charging the proportion of common items of cost to two
or more cost centers on some equitable basis.
• Cost Absorption is charging cost from cost centers to products or services by means of a
predetermined absorption rate.
12 Cost Accounting – I

Selling and Profit

Distribution
Overheads
Office
Overheads

Selling Price
Cost of Production
Factory

Total Cost
Overheads

Factory Cost
Direct Materials
Prime Cost

Direct Labour

Direct Expenses

Fig. 1.3: Composition of Selling Price

Nature/Features/Characteristics of Cost
1. Cost is an expense incurred, actual or notional.
2. Cost may be notional costs also. A notional cost is a cost which is taken into consideration.
Example, depreciation on fixed assets, but which is actually not paid to anyone.
3. A cost may be cash cost, example, salary paid, rent paid, etc., or it may be a non-cash cost
such as depreciation on fixed assets.
4. A non-cash cost does not result in actual cash outflows from the business firm; whereas a cash
cost results in actual cash outflows immediately or at a later date from a business firm.
5. All costs have to be taken into account in order to determine the total costs.
Cost Object/Objectives of Cost
The objectives of cost are as follows:
1. Determination of total cost: To determine the total cost of manufacturing a product or
providing a service.
2. Helps to fix selling price: On knowing the total cost, a manufacturer will be able to add the
desired profit margin and fix an appropriate selling price.
3. Helps to monitor and control costs: Understanding the costs helps to monitor the costs
periodically as well as reduce the unwanted controllable costs. Thus, it helps in cost control.
4. Helps in comparisons: Costs help to compare the actual costs with the standard predetermined
costs and cut down any excessive costs. Thus, the actual costs can be constantly compared
with the predetermined costs.
Objectives of Cost Accounting
1. Ascertainment of cost.
2. Determination of selling price.
Cost Concepts 13

3. Cost control and cost reduction.

4. Ascertaining the profit of each activity.
5. Assisting management in decision making.
6. To frame various budgets.
Need/Importance/Advantages of Cost Accounting
1. Determination of total cost: Cost accounting helps to account for all the costs incurred in
manufacturing a product or providing a service.
2. To fix selling price: Cost accounting helps to fix the selling price for a product/service after
considering a reasonable profit margin.
3. Cost classification: Cost accounting helps in classifying the costs into Fixed costs and Variable
costs; Direct costs and Indirect costs, Factory costs, Administration costs and Selling and
Distribution costs, etc.
4. Helps to earn profits: Cost accounting classifies the total cost into department-wise, product-
wise and thus, helps to focus on cost reduction areas as well as profitable areas.
Importance of Cost Accounting
1. Control of material cost
2. Control of labour cost
3. Control of overheads
4. Measuring efficiency
5. Budgeting
6. Price determination
7. Curtailment of loss during the off-season
8. Expansion
9. Arriving at decisions
Advantages of Cost Accounting
1. Cost reduction
2. Profit improvement
3. Helps in arriving at decisions
Uses/Benefits/Advantages of Costing
1. Product mix: Costing helps to determine a suitable product mix which will earn reasonable
profits for the firm.
2. Sales mix: Costing helps in determining a suitable sales mix of the products for the firm.
3. Price: Costing helps in determining the total cost and thereby fix an appropriate price for the
product which helps in earning reasonable returns for the organisation.
 14 Cost Accounting – I

4. Managerial decision making: Costing facilitates several types of managerial decision making
in an organisation.
Various Decisions that a Cost and Management Accountant has to Furnish to the Management
1. Choosing the best budget when there are limiting factors restricting production or sales.
2. Make or buy decisions.
3. Accepting or rejecting orders.
4. Extra shift decisions.
5. Cost indifferent point.
6. Profit planning.
7. Differential cost analysis.
8. Adding or deleting departments (or products).
9. Exploring foreign markets.
10. Plant replacement decisions.
11. Shutdown decisions.
12. Preventive maintenance vs. Breakdown maintenance.
13. Further processing of joint products.

ALLOCATION OF OVERHEADS
[Note: Same Concept is Required for Chapter 4 Overhead Cost. Therefore, we have not explained
these concept there.]
Allocation of overheads is to assign the entire item of cost if it is directly related to a cost center.
Apportionment of Overheads
Apportionment means distribution. To apportion means to distribute. Apportionment of overheads
is distribution of overheads on an equitable basis to more than one cost centers. Overheads are to be
apportioned to different cost centers based on following two principles:
(a) Cause and Effect: In this case, it is guided by the relationship between cost object and cost. It
is a more rational method. Cause is the process or operation or activity and effect is the incurrence
of cost.
(b) Benefits Received: In this case, overheads are to be apportioned to the various cost centers in
proportion to the benefits received by them.
Primary Distribution of Overheads
Following the above two principles, basis of primary apportionment of items of production overheads
is to be selected to distribute them among the cost centers. The basis of apportionment used to distribute
overheads must be rational. Once the base is selected, it is to be followed consistently and uniformly.
However, in circumstances such as change in technology, degree of mechanisation, product mix, etc.,
the change in the basis for apportionment can be adopted.
Cost Concepts 15

Table 1.1: Primary Distribution

Sr. No. Items of Overheads Basis of Apportionment
1. Amenities to Employees No. of Employees
2. Canteen Expenses No. of Workers
3. Depreciation Value of Assets
4. Electricity Light Points
5. Employer’s Insurance Liability Wages
6. General Overheads Direct Wages Paid
7. Insurance Value of Stock
8. Insurance Value of Machinery
9. Labour Welfare No. of Employees
10. Lighting No. of Light Points
11. Lighting Floor Area
12. Motive Power Units
13. Overheads Wages
14. Power KWh
15. Power Value of Plant
16. Power of Machinery Horse Power of the Machines
17. Rent Area Occupied
18. Rent and Taxes Area Occupied
19. Rent, Rates, etc. Floor Area
20. Repairs and Maintenance Value of Assets
21. Stores Overheads Direct Materials Consumed
22. Supervision No. of Workers

Secondary Distribution of Overheads

Secondary distribution of overheads can be done by following the reciprocal basis or non-reciprocal
basis.
1. Reciprocal Basis: In reciprocal secondary distribution, the cost of service cost centers are
apportioned to production cost centers as well as to other service cost centers since the services
rendered by certain service cost centers are also utilised by other service cost centers. In this
case, any one of the following three methods may be followed:
(a) Repeated Distribution Method
Steps
(i) The proportion at which the costs of a service cost centers are to be distributed to
production cost centers and other service cost centers are determined.
(ii) The costs of first service cost centers are to be apportioned to production cost
centers and service cost centers in the proportion as determined in step (i).
 16 Cost Accounting – I

(iii) Similarly, the cost of other service cost centers is to be apportioned.

(iv) The process as stated in (ii) and (iii) are to be continued till the figures remaining
undistributed in the service cost centers are negligible and very insignificant. Such
negligible small amount left with service center may be distributed to production
cost centers.
(b) Trial and Error Method
This method is followed when the question of distribution of costs of service cost centers
which are interlocked among them arises. Firstly, gross cost of services of service cost
centers are determined and then the costs of service centers are apportioned to production
cost centers.
Distinguish between Direct Cost and Indirect Cost
Direct Cost Indirect Cost
1. Direct cost means that cost which can be 1. Indirect cost means that cost which cannot be
identified with and allocated to cost centers allocated but which can be absorbed by, or
or cost units. apportioned to cost centers or cost units.
2. Those cost which can be directly identified 2. Those cost which cannot be identified with cost
with cost centers, production units or centers or cost units and therefore they are to be
processes are regarded as direct costs. distributed on some equitable basis are termed as
indirect costs.
3. Costs which can be conveniently associated 3. Costs which cannot be associated or connected
wholly with a particular unit of a final product with a particular unit of the final product is termed
is termed as direct costs. as indirect costs.
4. Examples are: 4. Examples are:
(a) Materials which form part of the finished (a) Cost of consumable stores.
product.
(b) Wages payable to worker who is directly (b) Salaries of factory manager, supervisor,
involved in production, etc. foreman.
(c) Rent, rates, telephone expenses, printing and
stationery expenses, etc.

Overheads
Overheads means indirect costs. Overheads are also termed as “On costs”. Overheads is an aggregate
of indirect materials, indirect labour and indirect expenses.
(a) Factory overheads,
(b) Administrative overheads, and
(c) Selling and distribution overheads.
1. Factory Overheads: Also known as manufacturing overheads or production overheads or
works overheads or factory burden. Factory overheads is defined as the cost of indirect materials,
indirect labour and indirect expenses.
(a) Indirect Materials: Refers to materials that are needed for the completion of the product but
whose consumption with regard to the product is so small that it would be inappropriate to treat
it as an item of direct materials.
Cost Concepts 17

Examples: Cotton waste, lubricants, oil, grease, hand tools, stores and spares, works stationery,
cost of nails, fevicol and glue in case of furniture making, cost of buttons and thread in case of
garment industry, etc.
(b) Indirect Labour: Is the labour cost of production-related activities that cannot be conveniently
traced to specific products via physical observation.
Examples: Salaries and wages paid to supervisors, foremen, shop clerks, general helpers, cleaners,
material handlers, factory watchmen, plant guards, timekeeper, drawing and design office, toolroom
department, employees engaged in maintenance work or other service work, etc.
(c) Indirect Expenses: Covers all expenditure incurred by manufacturing enterprise from the time
production has commenced to its completion and its transfer to the finished goods store.
Examples: Rent, rates and taxes of factory building, depreciation on factory assets, heat, light,
power, plant repairs and maintenance, medical aid to workers, etc.
2. Administrative Overheads: Also known as office overheads. They are the cost of indirect
materials, indirect labour and indirect expenses which are incurred in the course of administration of the
enterprise. Administrative overheads includes all costs which cannot be charged either to production
department or sales department. Administrative overheads includes the costs of planning and controlling
the general policies and operations of a business enterprise.
(a) Indirect Materials: Refers to the materials that are needed for office and administration activities.
Examples: Office stationery like pen, pencil, writing pad, computer printer cartridge, typewriter
ribbon, etc.
(b) Indirect Labour: Is the labour cost incurred towards office staff.
Examples: Salaries to office staff — clerks, officers, executives and manager.
(c) Indirect Expenses: Covers all expenditure incurred by office.
Examples: Office rent, rates, taxes and insurance, depreciation and repairs of office furniture
and building, lighting of office, audit fees, director’s fees, etc.
3. Selling and Distribution Overheads: Such expenses are generally incurred when the product
is in saleable condition. It covers the cost of making sales and delivering/despatching products. Selling
and distribution overheads includes the cost of all indirect materials, indirect labour and indirect expenses
incurred in sales and in delivering goods from warehouse to customers. Selling and distribution overheads
includes:
(i) Selling Cost: Refers to the cost incurred in securing orders.
(ii) Publicity Cost: Represents the cost incurred in advertising and promotion.
(iii) Distribution Cost: Refers to the cost incurred in warehousing saleable products and in delivering
products to customers.
(a) Indirect Materials: Refers to all materials that are required for selling and distribution
activities.
Examples: Secondary packing materials like wooden boxes, sales stationery, advertising
materials, catalogues, etc.
18 Cost Accounting – I

(b) Indirect Labour: Is the labour cost related to selling and distribution activities.
Examples: Salesmen’s salaries and commissions, salary to sales manager, sales clerical
staff, delivery staff, wages to drivers of delivery vehicles, etc.
(c) Indirect Expenses: Covers all expenditure incurred by selling and distribution department.
Examples: Advertising in newspapers, radio, TV and Internet, rent, rates, taxes and
insurance of sales office, fuel, maintenance and depreciation of delivery vehicles, etc.
Cost Center Cost Unit
1. Cost Center is a department, a location, a 1. Cost unit is per unit for which costs are
person or an equipment for which cost is ascertained.
ascertained.
2. All costs are collected cost center wise in 2. Cost unit is the actual output, which may be
order to study the profitability of the tangible or intangible as the case may be, for
respective cost center. which costs are identified.
Areas of applicability Selection of cost units
1. Passenger Transport 1. Cost per passenger per kilometre
2. Goods Transport 2. Cost per tonne per kilometre
3. Restaurants 3. Cost per dish
4. Electricity company 4. Cost per kilowatts
5. Hospitals 5. Cost per patient/per bed/per operation
6. Hotels 6. Cost per guest/per room
7. Coaching classes 7. Cost per student
Cost Statement (Cost Sheet)
Units Produced = xxx `)
Total (` `)
Per Unit (`
Units Sold = xxx
A. Direct Material:
Opening Stock of Raw Material x
Add: Purchase of Raw Material x
Add: Carriage Inward x
Less: Closing Stock of Raw Material x xx x
B. Direct Wages xx x
C. Direct Expenses xx x
D. Prime Cost [A + B + C] xxx x1
E. Work Overheads/Factory
Overheads/Production Overheads x
Less: Net Value of Normal Scrap of x
Indirect Material
Adjustment on Account of Stock of WIP:
Add: Opening Stock of Work-in-progress x
Less: Closing Stock of Work-in-progress x xx x
F. Works Cost [D + E] xxx x1
G. Add: Office and Administration Overheads xx x1
H. Cost of Goods Produced [F + G] xx x1
Cost Concepts 19

I. Adjustment on Account of Stock of

Finished Goods:
Add: Opening Stock of Finished Goods xx
Less: Closing Stock of Finished Goods xx xx
Cost of Goods Produced
× Closing Stock (Units ) x
No. of Units Produced
J. Cost of Goods Sold [H + I] xxx x2
K. Add: Selling and Distribution Overheads xx x2
L. Cost of Sales [J + K] xx x2
M. Add: Profit xx x2
N. Sales [L + M] xxx x2

1. These amounts are ascertained by dividing the respective total by the number of units produced.
2. These amounts are ascertained by dividing the respective total by the number of units sold.
Notes:
(i) Unless otherwise stated, closing stock of finished goods should be valued at current cost of
production assuming that the first-in-first-out method of inventory valuation is in use.
(ii) Items of financial nature like Income Tax, Cash Discount, Interest on Capital/Bank Overdraft,
Donations, Dividend, Preliminary Expenses/Goodwill w/o, Provision for Doubtful Debts, Transfer
to Reserves, etc., are ignored while preparing Cost Sheet/Production Statement/Account.
[Note: As such cost statement is not there in the syllabus of F.Y. BAF Sem. I but to
understand cost classification, few illustrations on cost statement are required.]

Illustration 1
The accounts of Zeneeth Ltd. for the year ended 31st December, 2014, shows the following:
Particulars `)
(`
Work Office Salaries 6,500
Administrative Office Salaries 12,600
Cash Discounts allowed 2,900
Carriage Outward 4,300
Carriage Inward 7,150
Bad debts written off 6,500
Repairs to Plant and Machinery 4,450
Rent, rates, taxes, insurance etc.
Factory 8,500
Office 2,000
Sales 4,61,000
20 Cost Accounting – I

Stock of Raw materials:

1st Jan., 2014 48,000
31st Dec., 2014 62,800
Materials Purchased 1,85,000
Travelling Expenses 2,100
Traveller’s Salaries and Commission 7,700
Productive Wages 1,26,000
Depreciation on Plant and Machinery 6,500
Depreciation on Office Furniture 300
Director’s Fees 6,000
Gas and Water (Factory) 1,200
Gas and Water (Office) 400
Manager’s Salary (1/4 Office and 3/4 Factory) 10,000
General Expenses 3,400

You are required to prepare a cost statement for the year ended 31st December, 2014.
[MU, T.Y.B.Com., Modified]
Solution
Zeneeth Ltd.
Cost Statement for the year ended 31st December, 2014
Particulars ` `
Raw Materials Consumed:
Stock of Raw Materials as on 1st Jan., 2014 48,000
Add: Materials Purchased 1,85,000
Add: Carriage Inward 7,150
Less: Stock of Raw Materials as on 31st Dec., 2014 (62,800)
Raw Materials Consumed 1,77,350
Productive Wages 1,26,000
PRIME COST 3,03,350
Add: Works/Factory Overheads:
Work Office Salaries 6,500
Repairs to Plant and Machinery 4,450
Rent, Rates, Taxes, Insurance etc. – Factory 8,500
Depreciation on Plant and Machinery 6,500
Gas and Water (Factory) 1,200
Manager’s Salary (3/4) 7,500
Works or Factory Overheads 34,650
WORKS/FACTORY COST 3,38,000
Cost Concepts 21

Add: Office and Administration Overheads:

Administrative Office Salaries 12,600
Rent, Rates, Taxes, Insurance etc. – Office 2,000
Depreciation on Office Furniture 300
Director’s Fees 6,000
Gas and Water (Office) 400
Manager’s Salary (1/4) 2,500
General Expenses 3,400
Office and Administration Overheads 27,200
COST OF PRODUCTION/COST OF GOODS SOLD 3,65,200
Add: Selling and Distribution Overheads:
Carriage Outward 4,300
Travelling Expenses 2,100
Traveller’s Salaries and Commission 7,700
Selling and Distribution Overheads 14,100
TOTAL COST OF SALES 3,79,300
Add: Profit (Balancing Figure) 81,700
SALES 4,61,000

Illustration 2
From the following data, prepare a cost sheet for the year 2014.
Particulars `
Opening Stock of Raw Materials 3,00,000
Purchases 8,00,000
Closing Stock of Raw Materials 4,00,000
Carriage Outward 50,000
Wages: Direct 7,00,000
Indirect 1,00,000
Chargeable Expenses 2,00,000
Rent and Rates: Factory 40,000
Office 5,000
Indirect Materials 15,000
Drawing Office Salaries 10,000
Depreciation: Plant 5,000
Office Furniture 1,000
Salary: Office 25,000
Salesmen 20,000
W.I.P.: 1-1-2014 20,000
31-12-2014 10,000
22 Cost Accounting – I

Sale of by-product 10,000

Other Factory Expenses 57,000
Other Office Expenses 9,000
Managing Director's Remuneration 1,20,000
Other Selling Expenses 10,000
Art Work Charges 40,000
Stock of Finished goods: 1-1-2014 10,000
31-12-2014 50,000
Travelling Expenses of Salesmen 11,000
Carriage Inward 10,000
Sales 30,00,000
Advance Income Tax paid 1,50,000
Advertisement 20,000

M.D.’s remuneration to be allocated as ` 40,000 to factory, ` 20,000 to office and ` 60,000 to

sales. [MU, T.Y.B.Com., Modified]
Solution
Cost Statement for the year ended 2014
Particulars ` `
Rew Materials Consumed:
Opening Stock of Raw Materials 3,00,000
Add: Purchases 8,00,000
Add: Carriage Inward 10,000
Less: Closing Stock of Raw Materials (4,00,000)
Raw Materials Consumed 7,10,000
Wages Direct 7,00,000
Chargeable Expenses 2,00,000
PRIME COST 16,10,000
Add: Works/Factory Overheads:
Wages – Indirect 1,00,000
Rent and Rates – Factory 40,000
Indirect Materials 15,000
Drawing Office Salaries 10,000
Depreciation – Plant 5,000
Other Factory Expenses 57,000
Managing Director’s Remuneration 40,000
Add: W.I.P. as on 1-9-2014 20,000
Less: W.I.P. as on 31-12-2014 10,000
Less: Sale of By-product 10,000
Cost Concepts 23

Works or Factory Overheads 2,67,000

WORKS/FACTORY COST 18,77,000
Add: Office and Administration Overheads:
Rent and Rates – Office 5,000
Depreciation – Office Furniture 1,000
Salary – Office 25,000
Other Office Expenses 9,000
Managing Director’s Remuneration 20,000
Office and Administration Overheads 60,000
COST OF PRODUCTION 19,37,000
Add: Stock of Finished Goods as on 1-1-2014 10,000
19,47,000
Less: Stock of Finished Goods as on 31-12-2014 50,000
COST OF GOODS SOLD 18,97,000
Add: Selling and Distribution Overheads:
Carriage Outward 50,000
Salary – Salesmen 20,000
Other Selling Expenses 10,000
Art Work Charges 40,000
Travelling Expenses of Salesmen 11,000
Advertisement 20,000
Managing Director’s Remuneration 60,000
Selling and Distribution Overheads 2,11,000
TOTAL COST OF SALES 21,08,000
Add: Profit 8,92,000
SALES 30,00,000

Illustration 3
Hindustan Machine Tools Ltd. furnishes for March, 2014 the following information for a department:
Deluxe wristwatches manufactured 1,000 pieces.
Cost and other data `
Opening stock
Raw materials 4,50,000
Finished goods (200 pieces) 3,30,000
Closing stock
Raw materials 5,00,000
Finished goods (300 pieces) ?
Purchases of raw material 7,00,000
24 Cost Accounting – I

Direct labour 4,00,000

Indirect labour factory 1,00,000
Consumption of stores and spares 90,000
Sales 21,60,000

Other overheads Factory Office Sales Depot

` ` `
Salary 1,00,000 2,00,000 1,50,000
Electricity 25,000 2,000 10,000
Stationery and Printing 10,000 25,000 20,000
Travelling expenses 3,000 10,000 50,000
Rent 5,000 5,000 5,000
Showroom and Exhibition expenses – – 10,000
Miscellaneous expenses 15,000 25,000 20,000

The stock of finished goods is valued at current month’s cost of production.

(a) You are required to prepare a cost sheet for the month of March, 2014 and ascertain the
amount of profit.
(b) What should be the selling price in order to earn additional profit on sales?
[MU, T.Y.B.Com., Modified]
Solution
Cost Statement for the Month of March, 2014
Particulars Units Total Total Cost Per
` ` Unit `
Raw Materials Consumed:
Opening Stock of Raw Materials 4,50,000 450.00
Add: Purchase of Raw Materials 7,00,000 700.00
Less: Closing Stock of Raw Materials (5,00,000) 500.00
Raw Materials Consumed 6,50,000 650.00
Direct Labour 4,00,000 400.00
PRIME COST 1,000 10,50,000 1,050.00
Add: Works/Factory Overheads:
Indirect Labour Factory 1,00,000 100.00
Consumption of Stores and Spares 90,000 90.00
Salary 1,00,000 100.00
Electricity 25,000 25.00
Stationery and Printing 10,000 10.00
Travelling Expenses 3,000 3.00
Rent 5,000 5.00
Miscellaneous expenses 15,000 15.00
Cost Concepts 25

Works or Factory Overheads 1,000 3,48,000 348.00

WORKS/FACTORY COST 1,000 13,98,000 1,398.00
Add: Office and Administration Overheads:
Salary 2,00,000 200.00
Electricity 2,000 2.00
Stationery and Printing 25.000 25.00
Travelling Expenses 10.000 10.00
Rent 5,000 5.00
Miscellaneous expenses 25,000 25.00
Office and Administration Overheads 1,000 2,67,000 267.00
COST OF PRODUCTION 1,000 16,65,000 1,665.00
Add: Opening Stock of Finished Goods 200 3,30,000 1,650.00
1,200 19,95,000 1,662.50
Less: Closing Stock of Finished Goods
(Valued at Cost of Production) (300) (4,99,500) 1,665.00
COST OF GOODS SOLD 900 14,95,500 1661.66
Add: Selling and Distribution Overheads:
Salary 1,50,000 166.66
Electricity 10,000 11.11
Stationery and Printing 20,000 22.22
Travelling expenses 50,000 55.55
Rent 5,000 5.55
Showroom and Exhibition expenses 10,000 11.11
Miscellaneous expenses 20,000 22.22
Selling and Distribution Overheads 900 2,65,000 294.44
TOTAL-COST OF SALES 900 17,60,500 1,956.11
Add: Profit (Balancing figure) 900 3,99,500 443.89
SALES 900 21,60,000 2400.00

Illustration 4
From the following data, prepare a Cost Sheet for the year 2014. Number of Units produced:
10,000 units.
Particulars `
Opening Stock of Raw Materials 3,00,000
Purchase of Raw Materials 8,00,000
Closing Stock of Raw Materials 1,00,000
Carriage Outward 8,000
Wages Indirect 20,000
26 Cost Accounting – I

Salary:
Office 50,000
Sales Office 40,000
Other Factory Expenses 50,000
Trade Fair Expenses 20,000
Depreciation:
Factory 30,000
Office 20,000
Selling 20,000
Direct Salary 50,000
Advance Interest Received 40,000
Custom Duty Paid for Purchase of Raw Material 5,00,000
Debenture Interest Paid 50,000
Freight Inward 20,000
Custom Duty Paid for Purchase of Plant 50,000
Direct Wages 2,00,000
Other Direct Charges 50,000
Goodwill Written-off 5,000

Number of units sold 8,000 units at cost plus 18% Profit.

Direct Salary is to be allocated to factory. Office and Selling in the ratio of 2 : 1 : 2.
[MU, T.Y.B.Com., Modified]
Solution
Cost Statement for the year ended 2014
Particulars Units Total Total Cost Per
` ` Unit `
Raw Materials Consumed:
Opening Stock of Raw Materials 3,00,000 30.0
Add: Purchase of Raw Materials 8,00,000 80.0
Add: Custom Duty Paid for Purchase of Raw Materials 5,00,000 50.0
Add: Freight Inward 20,000 2.0
Less: Closing Stock of Raw Materials 1,00,000 10.0
Raw Materials Consumed 15,20,000 152.0
Direct Wages 2,00,000 20.0
Other Direct Charges 50,000 5.0
PRIME COST 10,000 17,70,000 177.0
Add: Works/Factory Overheads:
Wages Indirect 20,000 2.0
Other Factory Expenses 50,000 5.0
Cost Concepts 27

Depreciation – Factory 30,000 3.0

Direct Salary – Factory (2/5) 20,000 2.0
Works or Factory Overheads 10,000 1,20,000 12.0
WORKS/FACTORY COST 10,000 18,90,000 189.0
Add: Office and Administration Overheads:
Office Salary 50,000 5.0
Depreciation – Office 20,000 2.0
Direct Salary – Office (1/5) 10,000 1.0
Office and Administration Overheads 10,000 80,000 8.0
COST OF PRODUCTION 10,000 19,70,000 197.0
Less: Closing Stock of Finished Goods
[Valued as per work cost] 2,000 3,78,000 189.0
Cost of Goods Sold 8,000 15,92,000 199.0
Add: Selling and Distribution Overheads:
Carriage Outward 8,000 1.0
Salary – Sales Office 40,000 5.0
Trade Fair Expenses 20,000 2.5
Depreciation – Selling 20,000 2.5
Direct Salary – Sales (2/5) 20,000 2.5
Selling and Distribution Overheads 8,000 1,08,000 13.5
TOTAL COST OF SALES 8,000 17,00,000 212.5
Add: Profit @ 18% 3,06,000 38.25
SALES VALUE 8,000 20,06,000 250.75
Illustration 5
The following particulars are extracted from the books of a company relating to commodity Alpha
for the half year ending 30th June, 2014.
`
Purchase of raw materials 1,30,000
Direct wages 1,00,000
Rent, rates, insurance and works on cost 45,000
Carriage inward 1,500
Stock on 1-1-2014
Raw materials 20,000
Finished products (1,600 tonnes) 17,600
Stock on 30-6-2014
Raw materials 25,000
Finished products (3,200 tonnes) 37,600
Work-in-progress on 1-1-2014 4,500
 28 Cost Accounting – I

Work-in-progress on 30-6-2014 16,000

Factory supervision 10,000
Sales – Finished product 3,00,000
Advertising discount allowed and selling cost at ` 0.50 per tonne sold. 25,000 tonnes of commodity
was sold during the period.
You are required to ascertain:
1. Prime Cost
2. Factory Cost
3. Cost of Sales
4. Profit
5. No. of tonnes of the commodity sold.
Solution
Cost Sheet of Commodity Alpha for the period ending 30-6-2014
Particulars ` `
Raw Materials Consumed
Opening stock 20,000
Add: Purchases 1,30,000
1,50,000
Add: Carriage Inwards 1,500
1,51,500
Less: Closing stock (25,000)
Raw Materials Consumed 1,26,500
Direct wages 1,00,000
Prime cost 2,26,500
Rent, rates, insurance and works 45,000
Cost of factory supervision 10,000
55,000
Add: Opening Work-in-progress 4,500
Less: Closing Work-in-progress (16,000)
Factory Cost 2,70,000
Add: Opening stock of finished goods (1,600 tonnes) 17,600
Less: Closing stock of finished goods (3,200 tonnes) (37,600)
Cost of goods sold 2,50,000
Add: Advertising and selling cost @ ` 0.50 per tonne on 25,000 tonnes 12,500
Cost of sales 2,62,500
Profit (Balancing figure) 37,500
Sales 3,00,000
Cost Concepts 29

Illustration 6
Prepare a cost sheet showing the total and per tonne cost of paper manufactured by Times Paper
Mills Ltd. for the month of March, 2014. There were 26 working days in the month. Also find the profit
earned by the company. The details are as under:
Direct Raw materials:
Paper pulp 6,000 tons @ ` 900 per tonne
Direct labour:
280 Skilled workmen ` 250 per day
300 Semiskilled workmen ` 150 per day
470 Unskilled workmen ` 100 per day
Direct expenses:
Special equipment hire charges ` 12,000 per day
Special dyes ` 250 per tonne of total raw material input
Work overheads: Variable @ 50% of direct wages
Fixed ` 2,70,000 p.m.
Administration overheads @ 12% of works cost
Selling and distribution overheads ` 80 per tonne sold
Opening stock of paper 500 tonnes valued @ ` 2,501.60 per tonne
Closing stock of paper 300 tonnes valued at cost of production

The paper is sold @ ` 3,000 per tonne.

[CS Modified]
Solution
Times Paper Mills Ltd.
[Working Days: 26]
Cost Sheet for the month of March, 2014
Particulars Tons Total Cost per
` ` `)
Unit (`
Direct Raw Materials:
Paper Pulp 6,000 54,00,000 900.00
Direct Labour:
Skilled Workmen (280 × 250 × 26) 18,20,000 303.33
Semiskilled Workmen (300 × 150 × 26) 11,70,000 195.00
Unskilled Workmen (470 × 100 × 26) 12,22,000 203.66
Direct Labour 42,12,000 702.00
Direct Expenses:
Special Equipments Hire Charges (12,000 × 26) 3,12,000 52.00
Special Dyes 6,000 15,00,000 250.00
Direct Expenses 18,12,000 302.00
 30 Cost Accounting – I

PRIME COST 6,000 1,14,24,000 1,904.00

Add: Works/Factory Overheads:
Variable 21,06,000 351.00
Fixed 2,70,000 45.00
Works/Factory Overheads 23,76,000 396.00
Works or Factory Cost 6,000 1,38,00,000 2,300.00
Add: Office and Administration Overheads:
Administration Overheads 16,56,000 276.00
Cost of Production 6,000 1,54,56,000 2,576.00
Add: Opening Stock of Paper 500 12,50,800 2,501.60
6,500 1,67,06,800 2,570.27
Less: Closing Stock of Paper (300) (7,72,800) 2,576.00
Cost of Goods Sold 6,200 1,59,34,000 2,655.66
Add: Selling and Distribution Overheads 6,200 4,96,000 80.00
Total Cost of Sales 6,200 1,64,30,000 2,650.00
Add: Profit (Balance figure) 6,200 21,70,000 350.00
Sales Value 6,200 1,86,00,000 3,000.00

Illustration 7
Dunkel Ltd. started a factory in Navi Mumbai on 1st April, 2013. Following details are furnished
about its activity during the year ended 31st March, 2014.
Raw Material consumed – 40,000 units @ ` 7 per unit.
Direct Wages:
(a) Skilled worker ` 9 per unit.
(b) Unskilled worker ` 6 per unit.
Royalty (On raw material consumed) @ ` 3 per unit.
Works overheads @ ` 8 per machine hour.
Machine Hours Worked 25,000.
Office Overheads at 1/3rd of works cost
Sales Commission @ ` 4 per unit.
Units produced 40,000.
Stock of units at the end 4,000 units to be valued at cost of production per unit.
Sale price is ` 60 per unit.
Prepare Cost sheet showing the various elements of cost, both in total and per unit.
[CA Modified]
Cost Concepts 31

Solution
Dunkel Ltd.
Cost Sheet for the year ended 31st March, 2014
Particulars Units Total Cost per
` ` `)
Unit (`
Raw Materials Consumed 40,000 2,80,000 7
Direct Wages:
Skilled Workers Wages 3,60,000 9
Unskilled Workers Wages 2,40,000 6
Total Direct Wages 6,00,000 15
Direct Expenses:
Royalty on Raw Material Consumed 1,20,000 3
Prime Cost 10,00,000 25
Add: Works/Factory Overheads:
Works Overheads (8 × 25,000) 2,00,000 5
Works/Factory Cost 12,00,000 30
Add: Office and Administration Overheads:
Office Overheads 4,00,000 10
Cost of Production 40,000 16,00,000 40
Less: Closing Stock 4,000 1,60,000 40
Cost of Goods Sold 36,000 14,40,000 40
Add: Selling and Distribution Overheads
Sales Commission 36,000 1,44,000 4
Total Cost of Sales 36,000 15,84,000 44
Add: Profit (Balance figure) 36,000 5,76,000 16
Sales Value 36,000 21,60,000 60

Illustration 8
Indicate whether the following materials are direct or indirect with reference to the final
product:
(a) Oil used for lubricating machines.
(b) Wire for making electric motors.
(c) Bottles used for filling in a soft drink.
(d) Gunny bags used for filling in sugar.
(e) Ingots used by a foundry making castings.
(f) Cushion seats to be fixed in a passenger car.
(g) Sugarcane used for making sugar.
(h) Speakers in a radio set.
 32 Cost Accounting – I

(i) Paper used for printing a book.

(j) Nails used in a shoe.
(k) Milk used for making ice-cream.
Solution
Direct materials: (b), (c), (d), (e), (f), (g), (h), (i), (j) and (k)
Indirect materials: (a)
Illustration 9
State whether the following items should be classified as direct or indirect labour:
(a) Overtime premium paid for specific jobs.
(b) Wages paid to piece workers.
(c) Wages paid to maintenance workers.
(d) Directors’ fees.
(e) Salesmen’s commission.
(f) Salaries paid to sweepers.
Solution
Direct wages – (a) and (b)
Indirect wages – (c), (d), (e) and (f).
Illustration 10
(a) Define the terms — cost center and cost unit.
(b) Given below is a list of ten industries. Give the method of costing and the unit of cost against
each industry:
(i) Nursing home
(ii) Road transport (goods)
(iii) Steel
(iv) Coal
(v) Bicycles
(vi) Bridge construction
(vii) Interior decoration
(viii) Advertising
(ix) Furniture
(x) Sugar company having its own sugarcane fields
(xi) Road transport (passenger)
(xii) Electricity boards
(xiii) Canteen.
Cost Concepts 33

Solution
(a) Cost Center: The term cost center is defined “as a location, person or an item of equipment or
a group of these for which costs may be ascertained and used for the purposes of cost control.”
Cost centers can be personal cost centers, impersonal cost centers, operation cost centers and
process cost centers.
(b) Cost Unit: The term unit is defined “as a unit of quantity of product, service or time (or a
combination of these) in relation to which costs may be ascertained or expressed. It can be for
a job, batch, or product group.”
Industry Method of Costing Unit of Cost
(i) Nursing home Operating Per bed per week or per day
(ii) Road transport (Goods) Operating Per tonne Kilometer or per mile
(iii) Steel Process Per tonne
(iv) Coal Single per tonne
(v) Bicycles Multiple Each unit
(vi) Bridge construction Contract Each contract
(vii) Interior decoration Job Each job
(viii) Advertising Job Each job
(ix) Furniture Multiple Each unit
(x) Sugar company having Process Per quintal/tonne
its own sugarcane fields
(xi) Road transport (passenger) Operating Per passenger-km
(xii) Electricity boards Operating Per KWH or per unit
(xiii) Canteens Operating Per dish or per meal

Illustration 11
State which method of costing you would recommend for use in the following industries:
(a) Chemical works, (b) Steel owning iron ore mines, (c) Constructional engineer, (d) Cement,
(e) Soap, (f) Railways, (g) Shipbuilders, (h) Readymade garments, (i) Telephone, (j) Cotton Textiles,
(k) Hospital, (l) Aluminium, (m) Hosiery mill, (n) Paper mill, (o) Oil refinery, (p) Furniture manufacturer,
(q) Meat packing, (r) Air-conditioners, (s) Baby food, (t) Locomotives, (u) Tyres and tubes, (v) Leather,
(w) Pianos, (x) Toys and novelties, (y) Radio receivers.
Solution
(a) Process, (b) Process, (c) Contract, (d) Process, (e) Process, (f) Operating, (g) Contract,
(h) Batch, (i) Operating, (j) Process, (k) Operating, (l) Process, (m) Batch, (n) Process, (o) Process,
(p) Job, (q) Process, (r) Multiple, (s) Batch, (t) Multiple, (u) Process, (v) Process, (w) Batch,
(x) Batch, (y) Multiple.
Illustration 12
Suggest the method of costing and the unit of cost against each of the following industries:
(a) Building, (b) Chemical, (c) Cement, (d) Automobile, (e) Cable, (f) Gas, (g) Power, (h) Brewery,
(i) Soft drinks, (j) Oil extraction.
 34 Cost Accounting – I

Solution
Statement Showing the Method of Costing and Unit of Cost
Industry Method of Costing Unit of Cost
(a) Building Job Per square foot
(b) Chemical Process Per tonne, per kg
(c) Cement Process Per tonne
(d) Automobile Process Each unit
(e) Cable Process Per metre
(f) Gas Process Per cubic foot/metre
(g) Power Operating Per Kwh/per unit
(h) Brewery Process Per dozen bottle/per gallon of drought brew
(i) Soft drinks Process Per bottle/per can
(j) Oil extraction Process Per gallon/litre/tonne

Illustration 13
(a) Match the following
(i) Total fixed cost 1. What cost should be?
(ii) Total variable cost 2. Incurred cost
(iii) Unit variable cost 3. Increases in proportion to output
(iv) Unit fixed cost 4. Cost of conversion
(v) Standard cost 5. What costs are expected to be?
(vi) Period cost 6. Decreases with rise in output
(vii) Actual cost 7. Remains constant in total
(viii) Labour and overhead 8. Remains constant per unit
(ix) Incremental cost 9. Cost not assigned to products
(x) Budgeted cost 10. Added value of a new product

(b) Indicate whether the following statements are True or False

(i) All costs are controllable.
(ii) Conversion cost is equal to direct wages pus factory overhead.
(iii) Variable cost per unit varies with the increase or decrease in the volume of output.
(iv) Depreciation is an out-of-pocket cost.
(v) An item of cost that is direct for one business may be indirect for another.
(vi) Fixed cost per unit remains fixed.
Solution
(a) Correct matchings are indicated as below
(i) Total fixed cost: Remains constant in total. ....(7)
(ii) Total variable cost: Increases in proportion to output. ....(3)
Cost Concepts 35

(iii) Unit variable cost: Remains constant per unit. ....(8)

(iv) Unit fixed cost: Decreases with rise in output. ....(6)
(v) Standard cost: What cost should be. ....(1)
(vi) Period cost: Cost not assigned to products. ....(9)
(vii) Actual cost: Incurred cost. ....(2)
(viii) Labour and overhead: Cost of conversion. ....(4)
(ix) Incremental cost: Added value of a new product. ....(10)
(x) Budgeted cost: What costs are expected to be. ....(5)
(b) (i) False, (ii) True, (iii) False, (iv) False, (v) True, (vi) False.
Illustration 14
Classify the following items on the basis of cost
(a) On the basis of functions:
(i) Trade Fair Expenses
(ii) Lawyer’s Fees
(iii) Fuel and Oil
(iv) Market Research Expenses
(b) On the basis of traceability to the product:
(i) Customs duty on purchases
(ii) Bank charges
(iii) Carriage expenses on raw materials
(iv) Secondary packaging material
(c) On the basis of relation to change in the level of activity:
(i) Telephone charges of ` 1,500
(ii) Factory Insurance
(iii) Depreciation of plant
(iv) Cost of raw materials
Solution
(a) (i) Selling and Distribution Cost
(ii) Office and Administration Cost
(iii) Works or Factory Cost
(iv) Selling and Distribution Cost
(b) (i) Direct Cost
(ii) Indirect Cost
(iii) Direct Cost
(iv) Indirect Cost
 36 Cost Accounting – I

(c) (i) Semi-fixed Cost

(ii) Fixed Cost
(iii) Fixed Cost
(iv) Variable Cost
Illustration 15
(a) Classify the following items on the basis of traceability to product
(i) Cost of cotton in textile industry.
(ii) Carriage expenses for raw material.
(iii) Cost of gunny bags in cement manufacturing unit.
(iv) Factory security staff wages.
(b) Classify the following on the basis of behaviour to change in level of activity
(i) Office insurance charges
(ii) Customs duty on raw materials
(iii) Cost of raw material
(iv) Manager’s salary
Solution
(a) (i) Direct Cost
(ii) Direct Cost
(iii) Direct Cost
(iv) Indirect Cost
(b) (i) Fixed Cost
(ii) Variable Cost
(iii) Variable Cost
(iv) Fixed Cost
Illustration 16
Classify the following on the basis of functions
(i) Salesmen’s salary
(ii) Printing and stationery
(iii) Exhibition expenses
(iv) Depreciation on furniture
Solution
(i) Selling and Distribution Cost
(ii) Office and Administration Cost
Cost Concepts 37

(iii) Selling and Distribution Cost

(iv) Office and Administration Cost
Illustration 17
(a) Classify the following items into Direct and Indirect Cost
(i) Advertisement
(ii) Overtime wages
(iii) Productive wages
(iv) Carriage inward
(b) Classify the following items into Fixed Cost or Variable Cost or Semi-fixed Cost or
Semi-variable Cost
(i) Manager’s salary ` 24,000
(ii) Direct labour ` 8,250
(iii) Sales travelling expenses ` 600
(iv) Electricity expenses ` 9,000
(c) Classify the following items into Factory Overheads, Office and Administration Overheads
and Selling and Distribution Overheads
(i) Depreciation to delivery van
(ii) Bank charges
(iii) Counting house wages
(iv) Drawing office salary
Solution
(a) (i) Advertisement Indirect Cost
(ii) Overtime wages Direct Cost
(iii) Productive wages Direct Cost
(iv) Carriage inward Direct Cost
(b) (i) Manager’s salary ` 24,000 Fixed Cost
(ii) Direct labour ` 8,250 Variable Cost
(iii) Sales travelling expenses ` 600 Fixed Cost
(iv) Electricity expenses ` 9,000 Semi-variable Cost
(c) (i) Depreciation to delivery van Selling and Distribution Overheads
(ii) Bank charges Office and Administration Overheads
(iii) Counting house wages Office and Administration Overheads
(iv) Drawing office salary Factory Overheads
 38 Cost Accounting – I

Illustration 18
(a) Classify the following items into Direct and Indirect Cost
(i) Cost of cotton in a textile unit
(ii) Lighting and heating
(iii) Postage
(iv) Carriage inwards
(b) Classify the following items into Fixed or Variable or Semi-variable Cost
(i) Direct Material
(ii) Phone Charges
(iii) Foremen’s Wages
(iv) Works Manager’s Salaries
(c) Classify the following items into Factory or Office and Administration or Selling and
Distribution Cost
(i) Office Rent ` 600
(ii) Audit Fees ` 1,200
(iii) Depreciation of Delivery Van ` 400
(iv) Salesmen’s Commission ` 850
Solution
(a) (i) Cost of cotton in a textile unit Direct Cost
(ii) Lighting and heating Indirect Cost
(iii) Postage Indirect Cost
(iv) Carriage inwards Direct Cost
(b) (i) Direct Material Variable Cost
(ii) Phone Charges Semi-variable Cost
(iii) Foremen’s Wages Wages Fixed Cost
(iv) Works Manager’s Salaries Fixed Cost
(c) (i) Office Rent ` 600 Office and Administration Cost
(ii) Audit Fees ` 1,200 Office and Administration Cost
(iii) Depreciation of Delivery Van ` 400 Selling and Distribution Cost
(iv) Salesmen’s Commission ` 850 Selling and Distribution Cost

QUESTIONS FOR SELF-PRACTICE

(I) Theory Questions

1. Describe in brief Classification of Overheads.
2. Which are the different ways by which the cost can be analysed?
Cost Concepts 39

3. Explain the essentials of classifications of cost in cost accounting.

4. How is the cost analysed?
5. Explain Fixed and Variable cost.
6. What is cost? How would you classify cost?
7. What is meant by elements of cost and divisions of cost?
8. Give examples of each of factory overheads and office overheads.
9. What are chargeable expenses? Give three examples.
10. What do you understand by variable cost, fixed cost and semi-variable cost?
11. Distinguish between product cost and period cost.
12. Write short notes on:
(a) Controllable Cost.
(b) Conversion Cost.
(c) Avoidable Cost.
(II) Multiple Choice Questions
1. Product cost means
(i) Variable cost (ii) Fixed cost
(iii) Prime cost (iv) Indirect cost
2. Notional cost is also known as
(i) Imputed cost (ii) Opportunity cost
(iii) Out-of-pocket cost (iv) Variable cost
3. Cost which can be identified with the output is called as
(i) Product cost (ii) Direct cost
(iii) Fixed cost (iv) Variable cost
4. Cost of designing is
(i) Production cost (ii) Indirect cost
(iii) Direct material (iv) Direct charges
5. Interest on capital is
(i) Imputed cost (ii) Sunk cost
(iii) Direct cost (iv) Indirect cost
6. Payment to other parties is called as
(i) Out-of-pocket cost (ii) Book cost
(iii) Future cost (iv) Postponable cost
7. Cost which is relevant for decision making is
(i) Relevant cost (ii) Past cost
(iii) Opportunity cost (iv) Imputed cost
40 Cost Accounting – I

8. Overheads which are incurred in connection with factory are

(i) Factory overheads (ii) Office overheads
(iii) Selling overheads (iv) Prime cost
9. Cost which does not require current cash payment is
(i) Book cost (ii) Product cost
(iii) Cash cost (iv) Opportunity cost
[Ans. 1. (i), 2. (i), 3. (ii), 4. (iv), 5. (i), 6. (i), 7. (i), 8. (i), 9. (i)]
(III) Objective Questions
A. State whether the following statements are True or False.
1. Direct cost cannot be allocated to the cost unit.
2. Indirect cost can be allocated to the cost unit.
3. Marginal cost is variable cost.
4. Overheads are direct cost.
5. Direct material is an indirect cost.
6. Conversion cost is equal to direct wages and factory overheads.
7. Interest on capital is an imputed cost.
8. Fixed cost changes according to the level of activity.
9. Lubricants are direct materials.
10. Packing charges are distribution cost.
11. Trial run cost is called as pre-production cost.
12. Replacement cost is the cost of replacing an asset.
13. Relevant cost helps the manager in taking a right decision.
14. Depreciation is a book cost.
15. Maintenance of building is a postponable cost.
[Ans. True: (2, 3, 6, 7, 10, 11, 12, 13, 14, 15). False: (1, 4, 5, 8, 9)]
B. State whether the following statements are True or False. Give Reason in one sentence only.
1. Variable cost per unit varies with the increase in the volume of output.
2. Depreciation is a non-cash cost.
3. Fixed cost per unit remains constant.
4. Freight on raw materials purchased is an indirect cost.
5. A cost statement is also termed as cost sheet.
6. Material accounts for a major portion of cost of production in a manufacturing concern.
7. Labour turnover can be reduced.
Cost Concepts 41

8. Break-even point helps to break the costs into variable and fixed costs.
9. Indirect costs are termed as overheads.
10. There is no difference between a cost sheet and an income statement.
[Ans. True: (2, 5, 6, 7, 9). False: (1, 3, 4, 8,10)]
C. Match the Following
Column ‘A’ Column ‘B’
1. Wages of machine operator (a) Direct costs
2. Wages of foreman (b) Indirect labour
3. Overheads (c) Distribution
4. Semi-finished Goods (d) Direct labour
5. Apportionment (e) Work-in-progress
(f) Indirect costs
[Ans. 1. (d), 2. (b), 3. (f), 4. (e), 5. (c)]
Group A Group B
1. Direct material (i) Variable Cost
2. Marginal Cost (ii) Indirect Cost
3. Overheads (iii) Benefit forgone by selection of one
alternative
4. Relevant Cost (iv) Cost actually incurred
5. Opportunity Cost (v) Direct Cost
6. Sunk Cost (vi) Important for decision-making
7. Book Cost (vii) Depreciation
8. Direct Expenses (viii) Administrative Cost
9. Staff Salary (ix) Sales Commission
(x) Cost of Production
[Ans. 1. (v), 2. (i), 3. (ii), 4. (vi), 5. (iii), 6. (iv), 7. (vii), 8. (x), 9. (viii)]
Practical Questions

1. The following figures are extracted from the Trial Balance of Gogetter Co. on 30th September,
2014.
Particulars `
Inventories
Finished goods 80,000
Raw Materials 1,40,000
Work-in-progress 2,00,000
Office Appliances 17,400
Plant & Machinery 4,60,500
Buildings 2,00,000
42 Cost Accounting – I

Sales 7,68,000
Sales Return & Rebates 14,000
Materials Purchased 3,20,000
Freight Incurred on Materials 16,000
Purchase Returns 4,800
Direct Labour 1,60,000
Indirect Labour 18,000
Factory Supervision 10,000
Repairs & Unkeep – Factory 14,000
Heat, Light, & Power 65,000
Rates & Taxes 6,300
Miscellaneous Factory Expenses 18,700
Sales Commission 33,600
Sales Travelling 11,000
Sales Promotion 22,500
Distribution Dept. Salaries & Expenses 18,000
Office Expenses 8,600
Interest on Borrowed Funds 2,000

Further details are available as follows:

(i) Closing Inventories:
Finished Goods 1,15,000
Raw Materials 1,80,000
Work-in-progress 1,92,000
(ii) Accrued Expenses on:
Direct Labour 8,200
Indirect Labour 1,200
Interest on Borrowed Funds 2,000
(iii) Depreciation to be provided on:
Office Appliances – 5%, Plant and Machinery – 10%, Buildings – 4%.
(iv) Distribution of the following costs:
Heat, Light and Power to Factory, Office and Distribution in the ratio 8 : 1 : 1.
Rates and Taxes two-third to Factory and one-third to office.
Depreciation on Building Factory, Office and Selling in the ratio 8 : 1 : 1.
With the help of the above information, you are required to prepare cost sheet for Gogetter Co.
for the year ended 30th September, 2014.
[Ans.: Total Cost: 7,14,220; Net Profit: 39,780]
Cost Concepts 43

2. From the following data, relating to the manufacturing of a standard product during September
2014, prepare a statement showing cost and profit per unit:
`
Raw material used 1,20,000
Direct wages 72,000
Man hours worked 10,000 hours
Man hours rate for recovering works overheads ` 10 per hour
Office overheads 25% on work cost
Selling overheads ` 1.50 per unit
Unit produced 42,000; units sold 40,000 @ ` 25 per unit.
[Ans.: (i) Total Cost – ` 4,07660; Cost per Unit – 10.17,
(ii) Net profit – ` 5,92,380; Cost per Unit – 14.83]
3. X, Y and Z carry on business as engineers in partnership, sharing profits and losses equally,
Z devotes to the business only so much time as he thinks fit. Y acts as works manager and X
as office manager. The following figures for the month of March, 2014 are available:
[MU, T.Y.B.Com., Modified]
Particulars `
Purchases of materials 74,250
Works wages Direct 48,000
Indirect 6,000
Office salaries 14,085
Carriages inward 450
Carriages outward 42,000
Sales 2,40,000
Opening stock of Materials 26,250
Finished goods (600 units) 6,750
Work-in-progress 9,750
Travelling expenses (25% administrative: 75% sales) 1,800
Interest on capital (equally to X, Y and Z) 4,500
Advertising 4,500
Power 1,575
Income tax 14,250
Agent’s commission 6,750
Plant maintenance 5,490
Lighting (90% for factory, 10% for sale) 1,500
Discount received 450
Bad debts 750
44 Cost Accounting – I

Sundry expenses (Factory) 2,100

(Office) 3,900
Factory Building’s repairs 750
Partner’s salaries X 1,500
Y 1,800
Depreciation Plant 2,850
Factory Building 1,200
Sale of Scrap 600

On 31st March, 2014, Materials on hand totalled ` 24,000 whereas the work-in-progress was
estimated as ` 8,500. 1800 units were produced out of which 650 remained unsold. Prepare
cost sheet and show the profit earned. [Ans.: ` 70,001]
4. From the following information, prepare a cost statement showing maximum possible break up
of cost and total profit:
`
Sales for January 2014 30,00,000
Cost of goods sold 24,80,000
Administration expenses 1,80,000
Selling expenses 40,000
1.1.14 31.1.14
` `
Raw material stock 3,20,000 4,00,000
Work-in-progress 3,20,000 4,80,000
Finished goods 4,20,000 3,40,000
Direct wages were 30% of prime cost
Raw materials consumed were 50% of prime cost
Direct expenses were 20% of prime cost
Factory overheads were 20% of prime cost. [MU, T.Y.B.Com., Modified]
[Ans.: (i) Total Cost – ` 25,20,000
(ii) Net Profit – ` 4,80,000]
5. The following particulars relating to the year 2014 are taken from the book and records of a
chemical works manufacturing and selling a standardised mixture:
Kgs. `
Stock in 1-1-2014 (Opening) Raw Materials 2,000 2,000
Finished Mixtures 500 1,750
Factory Stores 7,250
Raw Materials 1,60,000 1,80,000
Cost Concepts 45

Purchase
Factory Stores 24,250
Finished Mixtures 1,53,050 9,18,000
Sales Factory Scrap 8,170
Factory wages 1,78,650
Power 30,400
Machinery depreciation 18,200
Salaries Factory 72,220
Office 37,220
Selling 41,500
Expenses Direct 18,500
Office 18,200
Selling 18,000
Interest on capital Factory 7,000
General 3,000
Advertising 1,40,000
Cash discount on sales 14,500
Bank Interest paid 1,250
Stock on 31-12-2014 Raw Materials 1,200 ?
Finished Mixtures 450 ?
Factory Stores 5,550

The wastage in raw material is normal. The purchase price of raw materials remained unchanged
through 2009. The stock of finished mixture at the end of the year is to be valued at factory
cost. Raw materials are consumed on FIFO basis. From the above information, you are required
to prepare a cost statement shoeing the prime cost, works cost and total cost of the mixture
produced during the year. [CA Modified]
[Ans: Prime Cost – ` 3,77,800; Works Cost – ` 5,16,200; Total Cost – ` 16,89,797]
6. The following figures are extracted from the Trial Balance of Gogetter Co. on 30th September,
2014.
Particulars `
Inventories:
Finished goods 80,000
Raw Materials 1,40,000
Work-in-progress 2,00,000
Office Appliances 17,400
Plant & Machinery 4,60,500
Buildings 2,00,000
Sales 7,68,000
46 Cost Accounting – I

Sales Return & Rebates 14,000

Materials Purchased 3,20,000
Freight incurred on Materials 16,000
Purchase Returns 4,800
Direct Labour 1,60,000
Indirect Labour 18,000
Factory Supervision 10,000
Repairs & Unkeep – factory 14,000
Heat, Light, & Power 65,000
Rates & Taxes 6,300
Miscellaneous Factory Expenses 18,700
Sales Commission 33,600
Sales Travelling 11,000
Sales Promotion 22,500
Distribution Dept. Salaries & Expenses 18,000
Office Expenses 8,600
Interest on Borrowed Funds 2,000

Further details are available as follows:

(i) Closing Inventories:
Finished Goods 1,15,000
Raw Materials 1,80,000
Work-in-progress 1,92,000
(ii) Accrued Expenses on:
Direct Labour 8,200
Indirect Labour 1,200
Interest on Borrowed Funds 2,000
(iii) Depreciation to be provided on: Office Appliances 5%, Plant &
Machinery 10%, Building 4% Shared by factory, office and selling Department in 8:1:1.
With the help of the above information, you are required to prepare cost sheet for Gogetter Co.
for the year ended 30th September, 2014. [MU, T.Y.B.Com., Modified]
[Ans.: (i) Total Cost – ` 7,14,220; (ii) Net Profit – ` 39,780]
7. The following is the trading and profit and loss account of a manufacturing company for the
quarter ended 30th June, 2014:
` `
To Opening stock By Sale of finished goods 2,75,000
Raw materials 5,000 By Sale of factory scrap 5,000
Work-in-progress 10,000 By Income from Investments 10,000
Cost Concepts 47

Finished goods 25,000 40,000 By Closing stock

To Purchase of Raw Materials 1,00,000 Raw material 15,000
Work-in-progress 20,000
To Wages (75% direct & 25% indirect) 60,000 Finished goods 10,000 45,000
To Factory expenses 20,000
To Administrative expenses 15,000
To Selling & distribution expenses 30,000
To Interest 20,000
To Income tax 25,000
To Net Profit 25,000
3,35,000 3,35,000

Finished goods costing ` 5,000 were used for free samples and those costing ` 10,000 were
donated to a charitable institution. However, no accounting entries have been passed for the
same. Further, no accounting entry has been passed for the material costing ` 5,000 destroyed
by fire while it was being worked in the factory. You are required to prepare a cost sheet.
[Ans.: Total Cost – ` 2,25,000 and Profit – ` 50,000]

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