CMA INTERMEDIATE

COST
ACCOUNTING

NOTES
Let’s Break the Cost

Relevant for New

Syllabus Students By Hardik Mishra
 Index
Chapter Number Chapter Name Page Number
1. Cost sheet 1-3
2. Material cost 4-7
3. Labour cost 8 - 11
4. Overheads 12 - 15
5. Budget & Budgetary control 16 - 17
6. Contract costing 18 - 21
7. Process costing 22 - 27
8. Joint product By product 28 - 30
9. Standard costing 31 - 34
10. Marginal costing 35 - 40
11. Cost accounting systems + ROCFA 41- 45
12. Service costing 46
13. Job and Batch Costing 47

All rights reserved no part of this book should be copied, reproduced, stored in retrieval system, or
transmitted in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise,
without obtaining prior permission in writing from the authors.

All disputes are subject to Bilaspur jurisdiction only.

end Chapter 1
re Cost sheet
1

Cost sheet
A Cost sheet is a statement which represents the various cost incurred at different
stages of business operations in a tabular form. It determines the total cost of
expenditure made by the organisation along with the Cost incurred on each unit of a
product or service in a particular period.

Expenses

Material Expenses
Labour

Direct Indirect Direct Indirect

Direct Indirect

Prime Cost Overheads

Factory/works Office and Selling and

administrative distribution

Particulars Prime Cost Factory Cost Conversion Cost

Direct Material
Direct Labour
Direct Expenses
Factory Overheads

Items Excluded from Cost sheet: financial Nature Items

For Ex - Cash Discount, Interest Expenses, Income Tax Paid. Provision for tax,
Provision for Bad Debts, Dividend Paid, Etc.

HARDIK MISHRA
 2
Cost sheet

Format

Particulars Amount

Direct material consumed:

Opening stock of raw material XXX
+ purchases XXX
+ carriage inwards XXX
+ Any other direct expenses on purchases XXX
- closing stock of raw material (XXX) XXX
Direct/productive wages XXX
Direct or chargeable expenses XXX
Prime cost XXX
Add: Works and factory overheads XXX
Less: sale of scrap XXX
Factory/Works cost on FG and WIP XXX
Add: Opening stock of WIP XXX
Less: Closing stock of WIP XXX
Factory/Works cost on FG XXX
Add: Office and Administrative Overheads XXX
Cost of Production XXX
Add: Opening stock of FG XXX
Less: Closing stock of FG XXX
Cost of Goods Sold XXX
Add: Selling and Distribution Overheads XXX
Cost of sales XXX
Add: Profit XXX
Sales XXX

Calculation of closing Stock

Opening stock is not given Opening Stock is given

Per Unit Cost = Cost of production FIFO Weighted

No. Of units produced Method Average
Method

Per unit cost = Cost of opening stock + Cost of production

Opening Stock Units + Units Produced
Closing stock = units in closing stock * Cost/Unit

HARDIK MISHRA
 3
Cost sheet

Absorption Rates
Used for the calculation of indirect Nature Expenses based on previous period Data

Absorption Rate = Factory/Administrative/Selling & distribution Overheads

Suitable Basis

Generally Question will provide you with suitable basis but in silent cases take basis
as follows
For Factory Overheads - Direct labour
For Administrative Overheads - Factory Cost
For Selling Overheads - Cost of Goods Sold

Bifurcation of variable and fixed cost from semi variable cost

Variable Cost per Unit = Change in Cost

Change in Units

Fixed Cost = Total cost - No. of Units * Variable cost/Unit

F
HARDIK MISHRA
'MrkEfBg☆Ba
4
Chapter 2
Material Costing

Material Costing
Topic 1: Valuation of material receipt

Items Treatment
Trade discount Subtract from cost
Cash discount Do not Subtract
Quantity discount Subtract from cost
GST tax Subtract from cost if ITC available
Custom duty Included in cost
Subsidy and grants Subtract from cost
Toll tax Included in cost
Demurrage/fines/detention charges Exclude from cost
Freight inwards Included in cost
Insurance Included in cost
Commission on Purchase Included in cost
Cost of non returnable containers Included in cost
Cost of returnable containers If full amount is refunded then do not include in cost
If on return amount received less than cost paid then
include amount paid - refund received
Normal loss (shortage) Absorbed by good units
Abnormal loss (shortage) Transfer to costing profit and loss account
* Cost/unit = Total cost/No of units
Topic 2: Economic order quantity

How much quantity to be ordered in a Ordering cost - cost of placing an order

single order so that the cost is minimum. to supplier till the goods received.

Total cost Carrying cost - cost of storage and

maintenance of raw material. it generally
- - - -
-
Relevant cost

includes storage cost, interest cost,

;
t insurance cost, obsolescence cost.
cos Ordering c
ing
Ca rry
i. EOQ ost
No. of orders = annual requirement
Order quantity Order quantity

EOQ = 2 x annual requirement x ordering cost Average inventory = order quantity

Carrying cost Z

HARDIK MISHRA
 5
Material Costing

Note: If question provide monthly demand of product or normal usage per week then find out annual
usage by using normal usage per week x 52

Time between 2 orders/ order frequency = 360 days / 52 weeks / 12 months

No. Of orders

If OC and CC is provided in the question and we need to find annual demand then apply

OC + CC = 2 x A x O x C

Topic 3: EOQ vs NON EOQ (without discount)

Irrelevant cost
Particulars EOQ NON EOQ
Purchase cost Annual requirement units x cost/unit Annual requirement units x cost/unit
Ordering cost Annual demand x OC/order Annual demand x OC/order
EOQ OQ
Carrying cost EOQ x CC/unit/p.a. OQ x CC/unit/p.a.
2 2
Total cost Total cost

Topic 4: EOQ vs NON EOQ (with discount)

Relevant cost
Particulars EOQ NON EOQ
Purchase cost Annual requirement units x cost/unit Annual requirement units x cost/unit
Ordering cost Annual demand x OC/order Annual demand x OC/order
EOQ OQ
Carrying cost EOQ x CC/unit/p.a. OQ x CC/unit/p.a.
2 2
Total cost Total cost
After discount

Note: If carrying cost given in percentage then apply that percent in cost per unit after discount for
calculation of carrying cost in case of NON EOQ but if CC given as flat rate then apply the same
in both the cases.

Topic 5: Slab discount (Price break) Select the minimum cost

Quantity Cost/unit Purchase cost Ordering cost Carrying cost Total cost

Take the quantity on the lower side of slab for each level and for 1st level take any round off Qty.
HARDIK MISHRA
 6
Material Costing

Topic 6: Various stock levels

Reorder level = Maximum consumption x Maximum lead time

Or
= Minimum level + (Normal consumption x Normal lead time)

Minimum level = Reorder level - (Normal consumption x Normal lead time)

Maximum level = Reorder level + Reorder Quantity - (Minimum consumption x Minimum lead time)

In very exceptional case = EOQ + Minimum level

Average level = Minimum level + 1/2 Re order Quantity

Or
= Maximum level + Minimum level
2

Danger level = Normal/Minimum consumption x Lead time for emergency purchase

If not given assume any days less than minimum days

Topic 7: Stores ledger

Receipt Issue Balance

Date Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount

Methods of valuation of stock

FIFO LIFO Weighted Average Simple Average

Return to supplier: Put in issue column at the rate of purchase

Return from production to stores: Put in receipt column
# If fifo method followed put the amount in Top of Que. specify Que. Doesn’t
balance column the date of specify the
# If lifo method followed put the amount in bottom of issue date of issue.
balance column
If freight is given: Add in purchase price Value at the Value at the
given rate latest issue rate
HARDIK MISHRA
 7
Material Costing

Topic 8: Shortage or surplus

Shortage

Abnormal Normal

Costing p&l Absorbed by good units

Depends upon FIFO or LIFO
Issue column Issue column
Qty. Rate Amount Qty. Rate Amount
xxx xxx xxx xxx - -
It inflates the cost of remaining units

Topic 9: Material turnover ratio

MTR = cost of raw material consumed Opening stock + purchases - Closing stock
Average stock of raw material Opening stock + Closing stock
2
High Low

Fast moving Slow moving

Material holding period = 360 days/ 52 weeks/ 12 months

Material turnover ratio

High Low

Slow moving Fast moving

HARDIK MISHRA
'tEEgBgMa-
Chapter 3 Labour Costing
8

Labour Costing
Topic 1: Calculation of Employees cost
Benefits paid or payable to the employees of an entity, whether permanent, or temporary for the
services rendered by them. Employee cost includes payments made in cash or kind.

S.no. Particulars Amount

a. Basic pay
b. Dearness Allowance
c. All Allowances
d. Bonus
e. Other benefits to employees
f. Gross wages (a+b+c+d+e)
i. Employer’s contribution towards PF & ESI
j. Labour cost (f+i)
k. Employee’s contribution towards PF & ESI
l. Net wages (f-k)

Labour hr. Rate = Labour cost = Rate/hr

Total effective labour hrs.

Total no. Of days Khud chutti mari

(-) Holidays
Actual days worked Hamne chutti dedi

Total hours = Actual days worked x Hours/day

(-) Normal idle time
Total effective hours

Topic 2: Idle Time

Normal idle time: treated as factory overheads
Abnormal idle time: transfer to costing P&L

Topic 3: Over time

Overtime Payment = Wages paid for overtime at normal rate + Premium (extra) payment for
overtime work
As per the Factories Act 1948 "Where a worker works in a factory for more than nine hours in any
day or for more than fourty eight hours in any week, he shall, in respect of overtime work, be
entitled to wages at the rate of twice his ordinary rate of wages”. .

HARDIK MISHRA
 9
Labour Costing

Reason of overtime Treatment

The customer demands Overtime premium charged to job directly

Overtime is done to meet any shortfall in production Normal wages = Direct labour cost
which is unexpected Overtime premium = Factory overheads

Overtime is done as a regular policy due to labour Charged to Direct labour cost on weighted
shortage average rate basis which is calculated from past
data

Overtime is done due to fault of any department Charge overtime to that particular department

Overtime is done due to any abnormal reason Charged to costing P&L

such as flood, earthquake, etc

Normal wage rate = 25/hr

Overtime rate = 25 + 25 x 40% = 35/hr
Overtime premium = 35 - 25 = 10/hr

Topic 4: Time rate and piece rate

Payment can be done

Time rate Piece rate

Time worked x rate/hr Units produced x rate/unit

Topic 5: How to calculate efficiency of labour

Efficiency

Time based Output based

= standard time x 100 = Actual quantity x 100
Actual time Standard quantity
Topic 6: Various Incentive Plan
Taylor Differential Piece Rate System
• Performance Below 100% = 80% of Normal Wages
• Performance Equal and Above 100% = 120% of Normal wages

Merrick Differential Piece Rate System

• Up to 83% of production = Normal piece rate
• 83% to 100% of production = 110% of ordinary piece rate
• Above 100% of production = 120% of ordinary piece rate

HARDIK MISHRA
 10
Labour Costing

Gantt Task Bonus Plan

• Production below standard = Guaranteed time rate
• Production at standard = Bonus of 20% [normally] of time rate
• Production above standard = High piece rate for the entire output

Emerson’s Efficiency Plan

• for a performance below 66.67% efficiency, only time rate wages is paid without any bonus
• for a performance between 66.67% and 100% efficiency, bonus 20%
• above 100% efficiency level, bonus of 20% of basic wages + 1% for each 1% increase in
efficiency is admissible

Bedaux System
Bedaux Points = Time*60
Premium = 75% of Bedaux points saved * Rate per hour
60

Barth Variable Sharing Plan

Wages = Rate per hour * √𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑇𝑖𝑚𝑒 × 𝐻𝑜𝑢𝑟𝑠 𝑊𝑜𝑟𝑘𝑒𝑑

Halsey premium plan

Wages = Time taken x Rate/hr + 50% of (standard time - time taken) x Rate/hr
- -

Basic pay Bonus

Rowan premium plan

Wages = Time taken x Rate/hr + Time taken x Time saved x Rate/hr
Standard time

===
Basic pay Bonus

Halsey weir plan

Wages = Time taken x Rate/hr + 33-1/3% of (standard time - time taken) x Rate/hr

Basic pay Bonus

Topic 7: Group Bonus scheme

Bonus is to be calculated on the basis of group performance and not by a individual worker
performance. Total actual output and total standard output of the group is considered for efficiency
calculation and accordingly % of bonus is calculated then applied to rate/hr to find out bonus rate
per hour.

HARDIK MISHRA
 11
Labour Costing

Topic 8: Labour turnover ratios

Replacement Method = Number of employees replaced during the period x 100

Average number of employees during the period

Separation method = Number of employees separated during the period x 100

Average number of employees during the period
No. of Accessions

Flux method = No. Of employees separated + No. of replacement + No. of new joining x 100
Average number of employees during the period

Note: use this formula when LTR given and que

OR
says to find separation, replacement, etc.

= 1/2 ( No. of separation + No. of accessions) x 100

Average number of employees during the period

Average number of employees during the period = No. of employees at beginning + No. of employees at the end
2

Closing workers = opening workers - separated + replaced + New joining

Equivalent labour turnover ratio = LTR for the period x 365 days/12 months/52 weeks/4 quarters
Number for period

Topic 9: Impact of labour turnover

Settlement Recruitment Selection Training Rectification Contribution

Cost Cost Cost Cost Cost lost

Given in question We need to Find out the sales for

calculate as the proportionate
per data labour hours lost
then apply P/V ratio
to find profit lost.

-
Profit foregone

HARDIK MISHRA
end Chapter 4
re Overheads
12

Overheads
Topic 1: Distribution of overheads

Distribution summary

Primary summary Secondary summary

Distribution of overheads amongst Redistribution of overheads of

production department and services departments over
service department for 1st time. production department.

Format of primary summary

Particulars Basis P1 P2 P3 S1 S2
Direct material Given - - - xxx xxx
Direct wages Given - - - xxx xxx
Indirect material Direct material xxx xxx xxx xxx xxx
Indirect labour Direct wages xxx xxx xxx xxx xxx
Depreciation Capital value of assets xxx xxx xxx xxx xxx
Rent Area xxx xxx xxx xxx xxx
Insurance Capital value of assets xxx xxx xxx xxx xxx
Lighting Lights points/Area xxx xxx xxx xxx xxx
Power H.P. Of machine x Hrs xxx xxx xxx xxx xxx
Maintenance Machine hours xxx xxx xxx xxx xxx
Super vision/staff welfare No. Of employees xxx xxx xxx xxx xxx
Sundries Labour hr/machine hr/ xxx xxx xxx xxx xxx
Direct wages
Total of primary summary xxx xxx xxx xxx xxx

Secondary summary

Direct method: Ek service department dusre ko service nahi dega

Format of secondary summary
Particulars Basis P1 P2 P3 S1 S2
Total of primary summary xxx xxx xxx xxx xxx
Distribution of overheads of S1 Ratio xxx xxx xxx (xxx) -
Distribution of overheads of S2 Ratio xxx xxx xxx - (xxx)
Total xxx xxx xxx - -

.
HARDIK MISHRA
 13
Overheads

Step ladder method: Ek bar koi service nil hua toh dubara cost nahi allocate hogi
Format of secondary summary
Particulars Basis P1 P2 S1 S2 S3
Total of primary summary xxx xxx xxx xxx xxx
Distribution of S1 xxx xxx (xxx) xxx xxx
Distribution of S2 xxx xxx - (xxx) xxx
Distribution of S3 xxx xxx - - (xxx)
Total

The service department which provides services to maximum number of departments are going to
be distributed first and so on.
Example
Particulars P1 P2 S1 S2 S3
S1 60 40 - - - Rank 3
S2 20 30 10 - 40 Rank 1
S3 40 30 30 - - Rank 2

Format of secondary summary (without following ranking)

Particulars Basis P1 P2 S1 S2 S3
Total of primary summary xxx xxx xxx xxx xxx
Distribution of S1 xxx xxx (xxx) - -
Distribution of S2 xxx xxx - (xxx) -
Distribution of S3 xxx xxx - - (xxx)
Total

Format of secondary summary (with ranking sequence)

Particulars Basis P1 P2 S1 S2 S3
Total of primary summary xxx xxx xxx xxx xxx
Distribution of S2 xxx xxx xxx (xxx) xxx
Distribution of S3 xxx xxx xxx - (xxx)
Distribution of S1 xxx xxx (xxx) - -
Total

Simultaneous Equations Method: 2 equations banao or solve them simultaneously

Total overheads of S1 = x
Total overheads of S2 = y

x = overheads of S1 + share of overheads received from S2

y = overheads of S2 + share of overheads received from S1

HARDIK MISHRA
 14
Overheads

Repeated distribution method: 3 rounds tak distribution karte jao (2 service dept.)

Particulars Basis P1 P2 S1 S2
Total of primary summary xxx xxx xxx xxx
Distribution of S1 xxx xxx (xxx) xxx
Distribution of S2 xxx xxx xxx (xxx)
Distribution of S1 xxx xxx (xxx) xxx
Distribution of S2 xxx xxx xxx (xxx)
Distribution of S1 xxx xxx (xxx) xxx
Distribution of S2 xxx xxx - (xxx)
Total

Topic 2: Over/under Absorption

Actual overheads vs Absorbed overheads

Actual > Absorbed Actual < Absorbed Actual = Absorbed

Under Absorption Over Absorption Full Absorption

Given in Question Actual base x Predetermined overhead recovery rate

(Do adjustments if any) Budgeted overheads
Budgeted hours

Treatment of Under/Over Absorption

Normal reasons Abnormal reasons

Find out supplementary rate and apply to cost of sales, FG, WIP Costing p&l A/c Dr.
Supplementary rate = Over/under absorption due to normal reasons To Factory O/h control A/c
Equivalent units produced

FG + Sales + Equivalent units of WIP

Journal:
Cost of sales A/c Dr.
FG control A/c Dr.
WIP control A/c Dr.
To Factory O/h Control A/c

HARDIK MISHRA
 15
Overheads

Topic 3: Machine hour rate

Statement showing calculation of machine hour rate
S.no. Particulars Calculations Amount
A. Standing charges
Salary to manager, foreman, Supervisor, etc
Lighting
Rent
Indirect wages
Depreciation (based on time)
Department overheads
Total standing charges (a)
Total machine hours (b)
Standing expenses per hour (a/b)

B. Machine charges
Fuel

Y
Power/electricity Calculate
Repairs and maintenance on per hr
Consumables basis
Depreciation (based on Run)
Machine charges per hour

Machine hour rate (A+B)

Effective machine hours = Total machine hours - maintenance time - set up (unproductive)
Assume unproductive in silent cases

Note: In new study material institute taken depreciation in machine charges only.

Topic 4: Overhead recovery rate/Absorption rate

Absorption rate = overheads x 100

Basis
Direct material, Direct labour, Direct labour hours, Machine hours
Department rate = Separate rate for each department
Blanket rate = Single rate for whole department

HARDIK MISHRA
end
16
Chapter 5
re Budget & Budgetary control

Budget and Budgetary control

Topic 1: Functional budgets
Budgets

Sales budget Production budget Purchase budget Cash budget Miscellaneous

Sales volume Sales Consumption of RM Opening balance

x Selling price/Unit + closing stock of FG + closing stock of RM +Receipts
Sales Amount - opening stock of FG - opening stock of RM - Payments
Production Purchases Closing balance
x Cost/unit
Labour cost,
Purchase Amount
Overheads,
Customised question etc

Particulars Q1. Q2. Q3. Q4.

Sales xxx xxx xxx xxx
60% of current Qtr. xxx xxx xxx xxx
40% of next Qtr. xxx xxx xxx xxx
Production xxx xxx xxx xxx
Bal.
D fig

Total production
Total sales
- Production for 3 Qtrs.
+ closing stock for the year
Production for 4th Qtr.
- opening stock for the year
Total production

Topic 2: Cost Classification Cost

Fixed cost Variable cost Semi variable cost

Units Cost Cost/unit Units Cost Cost/unit Units Cost Cost/unit

5000 20000 4 5000 20000 4 5000 20000 4
10000 20000 2 10000 40000 4 10000. 36000 3.6
change in totality change on per unit basis Bifurcation on fixed and variable
then change as per nature
VC per unit = Change in cost
= 36000 - 20000 = 3.2
Change in units
10000 - 5000
36000 = Fixed cost - 10000 x 3.2 i.e FC = 4000 (Total cost = Fixed cost + Variable cost)
HARDIK MISHRA
 17
Budget & Budgetary control

Topic 3: Flexible Budget

Format of flexible budget
S.no Particulars Level 1 units Level 2 units Level 3 units
A. Sales
B. Cost
Fixed
Variable
Semi variable
Total
C. Profit & Loss (A-B)

Topic 4: Budget Ratios

Standard time = Standard time for actual production = 36x2 Particulars Hours/unit Units
Actual Time = Actual time for actual production = 36x3 Actual 36 3
Budgeted time = Budgeted time for Budgeted production = 40x2 Budgeted 40 2

Efficiency ratio = standard time x 100 Activity ratio = standard time x 100
Actual time Budgeted time

Capacity ratio = Actual time x 100 Calendar ratio = Actual working days x 100
Budgeted time Budgeted working days

HARDIK MISHRA
end Chapter 6
re
Contract Costing
18

Contract Costing
Topic 1: Format of Contract A/c
Contract A/c
Particulars Amount Particulars Amount
To materials: By material:
Opening stock xxx Returned to supplier xxx
Direct purchases xxx Returned to stores xxx
Issued from stores xxx Transferred to other contracts xxx
Transfer from other contract xxx Sold xxx
To wages In hand xxx
To plant By plant
Cost of special plant xxx Returned to stores xxx
Depreciation ** xxx Transferred to other contracts xxx
Opening plant xxx Sold xxx
To Direct expenses xxx In hand xxx
To cost of sub contractor xxx By p&l
To cost of extra work xxx xxx
Material lost, stolen, destroyed
To indirect expenses xxx Plant lost, stolen, destroyed xxx
To accrued expenses xxx By WIP (Incomplete Contract)
To p&l Value of work certified xxx
Profit on sale of material xxx Value of work uncertified xxx
Profit on sale of plant xxx By contractee A/c xxx
(completed contract)
To notional profit (b/f) xxx Contract price
By costing p&l (b/f) xxx
xxx xxx

Topic 2: Calculation of realised profits % of work completed = work certified x 100

Transfer to P&L Contract price

Upto 25% of > 25% to < 50% >= 50% to < 90% >= 90%
work done
1/3 x Notional profit x Cash received Based on
Word certified estimated profit

No profit transfer 2/3 x Notional profit x Cash received

Word certified

HARDIK MISHRA
 19
Contract Costing

Estimated profit = Contract price - Actual cost till date - Estimated further cost

Transfer to P&L

Estimated profit x Work certified Estimated profit x Total cost till date
Contract price Total estimated cost

Estimated profit x cash received Estimated profit x Total cost till date x cash received
Contract price Total estimated cost Work certified

Calculation of further estimated cost

S.no Particulars Actual cost till now Further estimated cost Total cost
1. Material
2. Labour
3. Overheads
4. Plant
5. Any other expenses
Total estimated cost
+ provisions for contingencies
Total estimated cost after provision for contingencies

Depreciation in contract A/c

Only show depreciation on Show all adjustments related to plant

Dr. Side of contract A/c Or except depreciation
i.e. opening balance, closing balance,
abnormal loss, sale, purchase, p&l on
sale

Balance sheet (extract)

Liabilities Amount Assets Amount
O/s expenses xxx Plant at site xxx
Advance from customer xxx Material at site xxx
P&L balance xxx Plant at store xxx
Material at store xxx
Prepaid expenses xxx
WIP:
Work certified xxx
(+) Work un certified xxx
(-) Advance received from xxx
customer

HARDIK MISHRA
 20
Contract Costing

Topic 3: Valuation of work uncertified

Contract price = 600000 Note: Work certified is valued at contract price

Work certified = 300000 Work uncertified is valued at cost price
Work completed is 2/3 of CP
Cost till now is 267300
Contract price = 6,00,000

Completed = 4,00,000 Not completed = 2,00,000

Work certified = 3,00,000 Work uncertified = 1,00,000

% of work uncertified on work completed = 100000 x 100 = 25%

400000

Work uncertified = cost till now x % of work certified to work completed

= 267300 x 25%
= 66825
Contractee A/c
Particulars Amount Particulars Amount
xxx By bank xxx
To balance c/d

To balance c/d xxx By balance b/d xxx

By bank xxx

To balance c/d xxx By balance b/d xxx

By bank xxx

To contract A/c xxx By balance b/d xxx

By bank xxx

Topic 4: Escalation clause

The clause inserted in a construction contract so that if the price of raw material & other expenses
increased beyond a certain limit then the contract price increased by contractor

Journal
Contractee A/c Dr.
To contract A/c
(Being contract price increased due to escalation clause)

HARDIK MISHRA
 21
Contract Costing

Example: It was agreed in the contract that in the event of price rise of material above 5%
escalation clause activated & contractee will pay 50% of the price rise above 5%
Material issued to the contract 100000 & material in hand at the end of the year 20000
Price of material is increased by 25%

Solution: Material consumed = 100000 - 20000 = 80000

Material price before price rise = 80000 x 100 = 64000
125
Price rise = 80000 - 64000 = 16000
5% increase = 16000 x 5% = 3200
Price rise above 5% = 16000 - 3200 = 12800
Amount to be borne by contractee = 12800 x 50% = 6400

F
HARDIK MISHRA
Re Chapter 7 Process costing
22

Process costing
Topic 1: Process Costing
When more than 1 process is required to manufacture a product then concept of process costing
arise. Here we have to prepare process accounts to know cost incurred process wise and the
value of stock transferred to next process or finished goods account.

Topic 2: Process A/c As a percentage of input or production

Units introduced Scrap sale
Process 1 A/c
X

Particulars Units Amount Particulars Units Amount

To material xxx xxx By normal loss xxx xxx
To labour - xxx By next process/FG xxx xxx
To overheads - xxx By Abnormal Loss xxx xxx
To abnormal gain xxx xxx

x vv
Valued at per unit cost = Total cost - Normal loss scrap sale
Total units - Normal loss units

Normal loss: It is absorbed by good units

Abnormal loss: It is transferred to costing p&l
Abnormal Gain: It is transferred to costing p&l Scrap sale K
Normal Loss A/c
/

Particulars Units Amount Particulars Units Amount

To process A/c xxx xxx By Bank A/c xxx xxx
By Abnormal Gain A/c xxx xxx

Opportunity cost 1

Abnormal Loss A/c

Particulars Units Amount Particulars Units Amount
To process A/c xxx xxx By Bank A/c xxx xxx
By Costing P&L (b/f) - xxx

Abnormal Gain A/c

Particulars Units Amount Particulars Units Amount
To Normal Loss A/c xxx xxx By Process A/c xxx xxx
To Costing P&L (b/f) - xxx

HARDIK MISHRA
 23
Process costing

Topic 3: Process Stock A/c

Process 1 A/c
Particulars Units Amount Particulars Units Amount
To material xxx xxx By normal loss xxx xxx
To labour - xxx By Process Stock A/c xxx xxx
To overheads - xxx By Abnormal Loss xxx xxx
To abnormal gain xxx xxx

Process Stock A/c

Particulars Units Amount Particulars Units Amount
To bal. b/d xxx xxx By next process/FG xxx xxx
To Process 1 A/c xxx xxx By bal. c/d xxx xxx

Weighted average method

✓ ×

Cost/unit = Total Amount of dr. Side of process stock A/c Balancing figure in case
Total units of dr. Side of process stock A/c when closing stock is
valued at current cost

Topic 4: Direct sale from process A/c

Sometimes Question provide data related to selling price of respective process
that means process are selling their output directly to the market. In that case 2
types of presentation can be possible
1. Process is an responsibility centre: sales shown in process A/c
2. Process is not an responsibility centre: sales shown in costing p&l A/c

Topic 5: Equivalent production units (when opening WIP is not given)

Scrap sale
Process A/c ^

Particulars Units Amount Particulars Units Amount

To material xxx xxx By normal loss xxx xxx
To labour - xxx By Process Stock A/c xxx xxx
To overheads - xxx By Abnormal Loss xxx xxx
To abnormal gain xxx xxx By closing WIP xxx xxx

✓ ✓✓

As per statement of valuation a-

HARDIK MISHRA
 24
Process costing

Statement of equivalent production units

Material Labour Overheads
Input Particulars Output DOC EPU units DOC EPU units DOC EPU units
xxx Introduced
Normal loss xxx - - - - - -
Units Completed xxx 100% xxx 100% xxx 100% xxx
Closing WIP xxx DOC xxx DOC xxx DOC xxx
Abnormal Loss xxx DOC xxx DOC xxx DOC xxx
Abnormal Gain (xxx) 100% (xxx) 100% (xxx) 100% (xxx)

EPU EPU EPU

✓

If DOC not given take 100%

Statement showing per unit cost

Particulars Cost EPU Cost/Unit
Material xxx - Normal loss scrap sale EPU Cost/EPU
Labour xxx EPU Cost/EPU
Overheads xxx EPU Cost/EPU

Statement of valuation A-
Items Elements EPU Cost/unit Total Value
Completed, Material EPU xxx EPU * Cost/unit
Abnormal loss/ Labour EPU xxx EPU * Cost/unit
gain, WIP Overheads EPU xxx EPU * Cost/unit
xxx
Amount to be taken to process A/c <

Topic 6: Equivalent production units (when opening WIP is given) - FIFO method
Scrap sale
Process A/c ^

Particulars Units Amount Particulars Units Amount

To opening WIP xxx xxx By normal loss xxx xxx
To material xxx xxx By Process Stock A/c xxx xxx
To labour - xxx By Abnormal Loss xxx xxx
To overheads - xxx By closing WIP xxx xxx
To abnormal gain xxx xxx

Opening WIP cost + Opening WIP & current V V

period production as per

a
statement of valuation As per statement of valuation T

HARDIK MISHRA
 25
Process costing

Statement of equivalent production units

Material Labour Overheads
Input Particulars Output DOC EPU units DOC EPU units DOC EPU units
xxx Opening WIP Introduced
+

Normal loss xxx - - - - - -

Units Completed - Op. xxx
100 -
DOC xxx 100 -
DOC xxx DOC xxx
100 -

Current period xxx 100% xxx 100% xxx 100% xxx

Closing WIP xxx DOC xxx DOC xxx DOC xxx
Abnormal Loss xxx DOC xxx DOC xxx DOC xxx
Abnormal Gain (xxx) 100% (xxx) 100% (xxx) 100% (xxx)
EPU EPU EPU
If DOC not given take 100%
✓
>
Transfer to next process
Statement showing per unit cost
Particulars Cost EPU Cost/Unit
Material xxx - Normal loss scrap sale EPU Cost/EPU
Labour xxx EPU Cost/EPU
Overheads xxx EPU Cost/EPU

Statement of valuation

:
Items Elements EPU Cost/unit Total Value
Completed, Material EPU xxx EPU * Cost/unit
Abnormal loss/ Labour EPU xxx EPU * Cost/unit
gain, WIP Overheads EPU xxx EPU * Cost/unit
xxx
Amount to be taken to process A/c

Topic 7: Equivalent production units (when opening WIP is given) - Weighted Average method

Scrap sale
Process A/c ^

Particulars Units Amount Particulars Units Amount

To opening WIP xxx xxx By normal loss xxx xxx
To material xxx xxx By Process Stock A/c xxx xxx
To labour - xxx By Abnormal Loss xxx xxx
To overheads - xxx By closing WIP xxx xxx
To abnormal gain xxx xxx

V Vv

As per statement of valuation e

HARDIK MISHRA
 26
Process costing

Statement of equivalent production units

Material Labour Overheads
Particulars Output DOC EPU units DOC EPU units DOC EPU units
xxx Opening WIP +
Introduced
Normal loss xxx - - - - - -
Units Completed. xxx 100% xxx 100% xxx 100% xxx
Closing WIP xxx DOC xxx DOC xxx DOC xxx
Abnormal Loss xxx DOC xxx DOC xxx DOC xxx
Abnormal Gain (xxx) 100% (xxx) 100% (xxx) 100% (xxx)

EPU EPU
✓
✓

Take Units transferred to next If DOC not given take 100%

process don’t bifurcate opening
& current period production
Statement showing per unit cost
Particulars Opening WIP Cost Current period cost EPU Cost/Unit
Material xxx xxx - Normal loss scrap sale EPU Cost/EPU
Labour xxx xxx EPU Cost/EPU
Overheads xxx xxx EPU Cost/EPU

:
Opening WIP cost +
Current period cost
Statement of valuation
Items Elements EPU Cost/unit Total Value
Completed, Material EPU xxx EPU * Cost/unit
Abnormal loss/ Labour EPU xxx EPU * Cost/unit
gain, WIP Overheads EPU xxx EPU * Cost/unit
xxx
Amount to be taken to process A/c

When Question does not provide DOC of Opening WIP & Provide bifurcation
of cost of opening WIP then by default apply weighted average method

Topic 8: Concept of Material 1 and Material 2

When Question Provides DOC of material of Opening WIP or Closing WIP

or Scrap Units less than 100% then concept of M1 and M2 Arise

Note: If Question provides Material DOC then it is by default M2

HARDIK MISHRA
 27
Process costing

Topic 9: Inter Process Profits Cost of Cost of

process company
Process A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To opening stock xxx xxx xxx By next process
To Direct material xxx xxx - or FG A/c xxx xxx xxx
To Direct Labour xxx xxx -
To prime cost xxx xxx xxx > Ratio
(-) Closing stock xxx xxx xxx
xxx xxx xxx Apply to separate
To factory overheads xxx xxx - cost & profit
To Factory Cost xxx xxx xxx
To profit xxx xxx
( Cost * profit % )

Given in question
Note: For last process A/c sales value is going to be provided by questions so profit
will be balancing figure.

Actual realised profit = Profit of process - unrealised profit of closing stock +

unrealised profit of opening stock

HARDIK MISHRA
 int
ken
28
Chapter 8
Joint product By product

Joint product By product

Topic 1: Difference between joint product & by product

BASIS FOR
JOINT PRODUCT BY-PRODUCT
COMPARISON

Meaning When the production of two or more The term by-product means a
products of similar value, are made product which is incidentally
together with same input and produced, during the processing
process, is called joint product. operation of another product.

Economic Value Joint products have same economic Economic value of by-product is
value. lower than the main product.

Production Consciously Consequently

Input Raw material Waste or scrap of the main

product.

Further Required to turn the joint products Not required.

Processing into finished product.

Topic 2: Treatment of by product

Accounting treatment

If value is low If value is high

Treat it as joint
Treat it like normal Transfer to product
loss & reduce from costing p&l
cost

Topic 3: Treatment of Joint product Split off point

Raw materials Processing of raw material

Joint products
HARDIK MISHRA
 29

Joint product By product

Joint products

May be sold at split off point May be sold after further

as a intermediate goods processing as a finished goods

The main problem is how to do apportionment of joint cost?

Net realisable value

Survey point
Sale value after further processing Contribution margin method method
(-) Profit (if given)
(-) further processing cost Variable portion = in ratio of units JC apportioned
NRV Fixed portion = in ratio of contribution on the basis of
weights which
Contribution = sales - variable cost
In the ratio of NRV can be found
Reverse cost sheet method using: weight =
Sale value at separation point units of JC x
Sale value after further processing points allocated
(-) estimated profit Joint cost apportionment is to be
Cost of sales done in the ratio of sale value at
(-) selling and distribution expenses split off point
Cost of production
(-) administrative expenses
Factory cost Sale value after further processing
(-) further processing cost
Joint cost JC apportionment is to be done on
the basis of sale value after further
Find out share of joint cost for the products
processing
whose profit % is given by preparing reverse
cost sheet then allocate the remaining joint
cost to the product whose profit % is not given.
( kisi 1 product ka profit % nahi diya hoga usko Physical output method
bacha hua joint cost allocate kar dena)
Remaining joint cost = Total JC (given in que.) Apportion JC on the basis of
- Joint cost already allocated physical output of Joint
Products

Note: If question does not mention method of apportionment then analyse the data and decide the
method accordingly. If question does not provide even any hint then follow any method and put note
for that. It may be noted that institute’s preference is NRV and sale value at split off point.

HARDIK MISHRA
 30

Joint product By product

Topic 4: Computation of profits

Profit

Profit at split off point = Profit after further processing =

sale value at split off point - JC apportioned sale value after further processing - JC
apportioned - further processing cost

Topic 5: Decision regarding further processing

Incremental sales xxx Sale value after further processing - sale value at split off
(-) incremental cost xxx Further processing cost
Incremental profit xxx Positive = Accept

Negative = Reject

HARDIK MISHRA
·
31
Chapter
Chapter92 Standard Costing

Standard Costing
Standard costing is the practice of substituting an expected cost for an actual cost in the accounting
records. Subsequently, variances are recorded to show the difference between the expected and
actual costs.
Kitha Actually hua Difference in std. & Actual Kitha Hona chahiye tha

Actual cost > standard cost = Adverse

Actual cost < standard cost = Favorable
A B C

Topic 1: Material cost variance

Direct material cost variance

( Standard cost - Actual cost = SQ x SR - AQ x AR )

Direct material usage variance Direct material price variance

SR x (SQ - AQ) AQ x (SR - AR)

Direct material mix variance Direct material yield variance

SR x (RAQ - AQ) SR x (SQ - RAQ)

SQ = standard quantity for actual production AQ = Actual quantity SR = standard rate.

AR = Actual rate RAQ = Actual Quantity in standard rate.

M1 M2 M3 M4
Particulars SQ x SR RAQ x SR AQ x SR AQ x AR
Material 1
Material 2
Material 3
Total

Direct material cost variance = M 1 - M 4 Note: if question provide opening and

Direct material usage variance = M 1 - M 3 closing stock then use consumption to
Direct material price variance = M 3 - M 4 find variances except DMPV which is to
Direct material mix variance = M 2 - M 3 be calculated on purchases basis.
Direct material yield variance = M 1 - M 2
Direct material consumed = opening stock (value at std. rate if value not given in que.) + purchases -
closing stock ( value at Fifo basis )

HARDIK MISHRA
 32
Standard Costing

Example:
The standard mix to produce one unit of product is as follows:
Material A 60 units @ Rs. 15 per unit = Rs. 900
Material B 80 units @ Rs. 20 per unit = Rs. 1600
Material C 100 units @ Rs. 25 per unit = Rs. 2500
During the month of April, 10 units were actually produced as follows:
Material A 640 units @ Rs. 17.50 per unit
Material B 950 units @ Rs. 18.00 per unit
Material C 870 units @ Rs. 27.50 per unit
Calculate all material variances.

Solution:
Ratio 2460 In 6:8:10

M1 M2 M3 M4
Particulars SQ x SR RAQ x SR AQ x SR AQ x AR
Material A 600 x 15 615 x 15 640 x 15 640 x 17.5
Material B
Material C
-1 800 x 20
1000 x 25
820 x 20
1025 x 25
I 950 x 20
870 x 25
950 x 18
870 x 27.5
Total 50000 51250 50350 52225

Direct material cost variance = M 1 - M 4 = 50000 - 52225 = 2225 (A)

Direct material usage variance = M 1 - M 3 = 50000 - 50350 = 350 (A)
Direct material price variance = M 3 - M 4 = 50350 - 52225 = 1875 (A)
Direct material mix variance = M 2 - M 3 = 51250 - 50350 = 900 (F)
Direct material yield variance = M 1 - M 2 = 50000 - 51250 = 1250 (A)

Direct material cost variance

SQ x SR - AQ x AR = 50000 - 52225 = 2225 (A)

Direct material usage variance Direct material price variance

SR x (SQ - AQ) = 50000 - 50350 = 350 (A) AQ x (SR - AR) =
50350 - 52225 = 1875 (A)
Direct material mix variance Direct material yield variance
SR x (RAQ - AQ) SR x (SQ - RAQ)
= 51250 - 50350 = 900 (F) = 50000 - 51250 = 1250 (A)

HARDIK MISHRA
 33
Standard Costing

Topic 2: Labour cost variance

Direct labour cost variance

(Standard cost - Actual cost = SH x SR - AHP x AR)

Direct labour efficiency variance Idle time variance Direct labour rate variance
SR x (SH - AHW) SR x (AHW - AHP) AHP x (SR - AR)

Direct labour Mix variance Direct labour yield variance

SR x (RAHW - AHW) SR x (SH - RAHW)

SH = standard hours for actual production AH = actual hours SR = standard rate AR = actual rate
RAHW = AHW in Standard ratio. AHW = Actual hours worked for. AHP = actual hours paid for
AHW = AHP - idle time

L1 L2 L3 L4 L5
Particulars SH x SR RAHW x SR AHW x SR AHP x SR AHP x AR
Skilled
Semi skilled
Unskilled
Total

Direct labour cost variance = L 1 - L 5

Direct labour efficiency variance = L 1 - L 3
Idle time variance = L 3 - L 4 ( always adverse )
Direct labour rate variance = L 4 - L 5
Direct labour Mix variance = L 2 - L 3
Direct labour yield variance = L 1 - L 2

Idle time: if the workers sit idle or not doing any work then it is termed as idle time.
Example: worker is paid for 50 hrs but he actually worked for 42 hrs then 8 hrs is idle time of worker

HARDIK MISHRA
 34
Standard Costing

Example:
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 Rs. 5, 3 & 2 per hour respectively. During April 2003, the production
department reported output of 5000 units of product X. The labour cost incurred was as detailed below:

Type of labour Hours paid for Rate per hour

Skilled 9,000 7.00
Semi-skilled 17,000 2.75
Unskilled 30,000 1.50

The total hours paid for included 1000 idle hours due to machine break down etc. out of which 500 hours
pertained to skilled men, 400 hours pertained to semi-skilled men and the balance to unskilled men.
Required: Calculate the labour cost variances.
AHP - Idle time
Solution: SH Ratio
55000 in 10:15:25 9000 - 500, 17000 - 400,
30000 - 100
L1 L2 L3 L4 L5
Particulars SH x SR RAHW x SR AHW x SR AHP x SR AHP x AR
Skilled 5000 x 2 x 5 11000 x 5 8500 x 5 9000 x 5 9000 x 7
Semi skilled
Unskilled
5000 x 3 x 3 16500 x 3
5000 x 5 x 2 27500 x 2
{ 16600 x 3
29900 x 2
17000 x 3 17000 x 2.75
30000 x 2 30000 x 1.5
Total 145000 159500 152100 156000 154750

Direct labour cost variance = L 1 - L 5 = 145000 - 154750 = 9750 (A)

Direct labour efficiency variance = L 1 - L 3 = 145000 - 152100 = 7100 (A)
Idle time variance = L 3 - L 4 ( always adverse ) = 152100 - 156000 = 3900 (A)
Direct labour rate variance = L 4 - L 5 = 156000 - 154750 = 1250 (F)
Direct labour Mix variance = L 2 - L 3 = 159500 - 152100 = 7400 (F)
Direct labour yield variance = L 1 - L 2 = 145000 - 159500 = 14500 (A)

Direct labour cost variance

SH x SR - AHP x AR = 145000 - 154750 = 9750 (A)

Direct labour efficiency variance Idle time variance Direct labour rate variance
SR x (SH - AHW) = 145000 - SR x (AHW - AHP) = 152100 - AHP x (SR - AR) =
152100 = 7100 (A) 156000 = 3900 (A) 156000 - 154750 =
1250 (F)
Direct labour Mix variance Direct labour yield variance
SR x (RAHW - AHW) = SR x (SH - RAHW) =
159500 - 152100 = 145000 - 159500 =
7400 (F) 14500 (A)
HARDIK MISHRA
end Chapter 10
re Marginal Costing
35

Marginal Costing
Topic 1: Meaning of marginal cost and marginal costing
Marginal cost is the change in the total cost for addition of one unit. It is to be noted that for an
economist marginal cost and variable cost would be different. But for an accountant both marginal
cost and variable cost are same and are interchangeably used. Therefore, for our study, we use
marginal cost and variable cost synonymously.

Marginal costing is “the ascertainment of marginal costs and of the effect on profit of changes in
volume or type of output by differentiating between fixed costs and variable costs.” Several other
terms in use like direct costing, contributory costing, variable costing, comparative costing,
differential costing and incremental costing are used more or less synonymously with marginal
costing.
Relevant cost vs Irrelevant cost

Variable cost = Relevant cost Fixed cost = Irrelevant cost

Units Total cost Cost/unit Units Total cost Cost/unit
Units Total cost Cost/unit Units Total cost Cost/unit

Topic 2: Income statement

Particulars Amount
Sales
(-) Variable cost
(Direct material, Direct labour, Variable overheads)
Contribution
(-) Fixed cost
Profit

Sales - Total cost = Profit

Sales - Variable cost - Fixed cost = Profit
Sales - variable cost = Profit + Fixed cost
-
Contribution
Contribution = sales - variable cost
Contribution = fixed cost + profit
Contribution = fixed cost - loss

HARDIK MISHRA
 36
Marginal Costing

Topic 3: Profit Volume ratio/ Contribution ratio/ Variable profit ratio

When single period data is given When two period data is given

PV ratio = Contribution x 100 PV ratio = Change in contribution x 100

Sales Change in sales
or

PV ratio = Change in profit x 100

Change in sales

Topic 4: Variable cost ratio

PV ratio + VC ratio = 100%
VC ratio = Variable cost x 100
Sales

Topic 5: Break even point

Break Even means the volume of production or sales where there is no profit or loss. In other words,
Break Even Point is the volume of production or sales where total costs are equal to revenue.
Sales - Total cost = profit
Sales - VC - FC = 0 BEP sales
Sales - VC = FC
Contribution = FC (at break even point) Units Amount
BEP Sales x PV ratio = Fixed Cost = Fixed cost = Fixed cost
BEP sales = Fixed cost Contribution/unit PV ratio
PV ratio
Cash BEP = cash fixed cost
Contribution/unit

Topic 6: Margin of safety

It is the sales point beyond the breakeven point. Margin of safety can be obtained by subtracting
break even sales from Total sales. It is useful to determine financial soundness of business
enterprise.
BEP
-
BEP sales + MOS sales = sales

Units Profit BEP % + MOS % = 100%

MOS
Contribution/unit
Sales
Amount Profit
PV ratio
HARDIK MISHRA
 37
Marginal Costing

Topic 7: Shut down point

Shut down point

= Avoidable fixed cost = Avoidable Fixed cost

contribution/unit PV ratio

Actual sales > Shut down point sales = Continue business operations
Actual sales < Shut down point sales = Don’t continue business

Topic 8: Sales for the target profit

Sales

Units Amount

= fixed cost + Desired profit = Fixed cost + Desired profit

Contribution/unit PV ratio

Note: If question provide after tax profit then find out profit before tax first.

Topic 9: Combined BEP

Combined BEP = Total fixed cost

Weighted contribution/unit

Product Contribution/unit Weights Product

X xxx xxx xxx
Y xxx xxx xxx
Total xxx xxx

Weighted contribution/unit = Total of products

Total of weights

Topic 10: Key factor i.e. short supply of any factor of production

A key factor is defined as the factor in the activities of an undertaking which, at a particular point of
time or over a period, will limit the volume of output. Other variant terms are limiting factor, Principal
Budget Factor & scarce factor. Limiting factors are governed by both internal & external factors. It
may be actual or potential. If a factor of production is in short supply, then the best-paying product
becomes that which yields the highest contribution per unit of limiting factor.

HARDIK MISHRA
 38
Marginal Costing

Moon Ltd. produces products ‘X’, ‘Y’ and ‘Z’ and has decided to analyse its production mix in
respect of these three products - ‘X’, ‘Y’ and ‘Z’.
You have the following information:
X Y Z
Direct Materials ₹ (per unit) 160 120 80
Variable Overheads ₹ (per unit) 8 20 12
Direct labour:
Departments Rate per hour Hour per unit Hour per unit Hour per unit
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11
From the current budget, further details are as below :
X Y Z
Annual Production at present (in units) 10000 12000 20000
Estimated Selling Price per unit (₹) 312 400 240
Sales departments estimate of possible
sales in the coming year (in units) 12000 16000 24000
There is a constraint on supply of labour in Department-A and its manpower cannot be increased
beyond its present level.
Required:
(i) IDENTIFY the best possible product mix of Moon Ltd.
(ii) CALCULATE the total contribution from the best possible product mix.

Particulars X Y Z
Selling price 312 400 240
Variable cost:
Direct material 160 120 80
Direct labour
Dept. A (Rate x hours) 24 40 20
Dept. B. (Rate x hours) 48 120 88
Variable overheads 8 20 12
Total variable cost 240 300 200
Contribution per unit. 72 100 40
Hours in department A. 6 10 5
Contribution per hour. 12 10 8
Rank. 1 2 3
Existing Hours = 10,000 × 6 hrs. + 12,000 × 10 hrs. + 20,000 × 5 hrs. = 2,80,000 hrs.
Best possible product mix (Allocation of Hours on the basis of ranking)
Produce ‘X’ = 12000 units
Hours Required = 72000 hrs (12000 units x 6 hrs)
Balance Hours Available = 208000 (280000 - 72000)
Produce Y the next best = 16000 units
HARDIK MISHRA
 39
Marginal Costing
Hours required = 160000 (16000 units x 10 hrs)
Balance hours available = 48000 (208000 - 160000)
Balance Hours Available Produce ‘Z’ (balance) = 9600 units (48000 hrs/5 hrs)

Product Units Contribution/unit Total contribution

X 12000 72 864000
Y 16000 100 1600000
Z 9600 40 384000
Topic 11: Marginal costing vs Absorption costing
Income statement under absorption costing
Particulars. Amount
Sales xxx
Production costs:
Direct material cost xxx
Direct labour cost xxx
Variable manufacturing overheads xxx
Fixed manufacturing overheads xxx
Cost of production xxx
(+) opening stock of finished goods (Value at cost of previous period production) xxx
(-) closing stock of finished goods (Value at cost of current period) xxx
Cost of goods sold xxx
(+/-) under or over absorption of fixed manufacturing overheads xxx
(+) administrative cost xxx
(+) selling and distribution cost xxx
Total cost xxx
Profit (sales - total cost) xxx
Income statement under marginal costing
Particulars Amount
Sales xxx
Variable manufacturing costs:
Direct material consumed xxx
Direct labour xxx
Variable manufacturing overheads xxx
Cost of goods produced xxx
(+) opening stock of finished goods (value at previous period) xxx
(-) closing stock of finished goods (value at current period) xxx
Cost of goods sold xxx
(+) variable administration, selling and distribution overheads xxx
Total variable cost xxx
Contribution (sales - total variable cost) xxx
(-) fixed costs (production, administration, selling and distribution) xxx
Net profit xxx

HARDIK MISHRA
 $
40
Marginal Costing

Absorption costing is used to calculate per unit cost of item manufactured while marginal
costing is costing used to take future decision in launching a new product in market.
Income calculated under both approaches is always difference. The reason behind this is
valuation of opening and closing stock.
In absorption costing, stocks are valued at all variable manufacturing costs and fixed
production overheads. Variable manufacturing costs = Direct material cost +Direct labour cost
+Direct expenses + Variable production OH
In marginal costing, stocks are valued at only variable manufacturing cost hence fixed
production overheads are not included in this.
This is the reason why valuation of stock under both approaches differs And if stock
valuation differs then profit figure also differs.

HARDIK MISHRA
end
Chapter 11
re Integral & Non Integral Accounting system
41

Integral & Non Integral

Accounting System
Topic 1: Meaning of Integral & Non Integral Accounting System

INTEGRATED NON-INTEGRATED
BASIS
ACCOUNTS ACCOUNTS

Meaning It is a combination of financial It is a system in which financial and

and cost accounts cost accounts are prepared
separately

Reconciliation Reconciliation is not required Reconciliation is required

Number of books One set of books is prepared Separate books for cost and financial
accounts are prepared

Duplication Duplication of work doesn't Duplication of work occurs, as one

take place transaction is recorded in two books
and reconciled at the end

Economical It is economical as it saves It is less economical as compared to

time and money while Integrated Accounts
maintaining books of accounts

Profit and Loss Figure Only one profit and loss figure Profit and loss are displayed in both
is shown because of a single books
set of books

Ledger Subsidiary ledgers are Cost ledgers are prepared

prepared

Interdependence Cost and Financial accounts It is an independent system of

are dependent on each other accounting

Note: from the next page, the journal entries of non-integral accounting system is given after
understanding non-integral accounting system. You just have to replace general ledger adjustment
account with personal or real account which We ignored at the time of passing journal entries in non-
integral accounting system.

HARDIK MISHRA
 42

Integral & Non Integral Accounting system

Material Journal Entries (Financial Accounting vs Cost Accounting)
1. Purchase of material
Purchase A/c Dr. Material control A/c Dr.
To Cash/Creditor A/c To General Ledger Control A/c
(Being material purchase) (Being material purchase)
Stores A/c Dr. Stores ledger control A/c Dr.
To Purchases A/c To material control A/c
(Being material t/s to stores) (Being material t/s to stores)

2. Return of Material
Creditor A/c Dr. General ledger A/c Dr.
To stores A/c To stores ledger control A/c
(Being material returned to supplier) (Being material returned to supplier)

3. Material issued to production department (direct)

Production department A/c Dr. WIP ledger control A/c Dr.
To Stores A/c To stores ledger control A/c
(Being material issued to production dept.) (Being material issued to production dept.)

4. Material issued to production department (indirect)

Production overheads A/c Dr. Product overheads control A/c Dr.
To stores A/c To stores ledger control A/c
(Being indirect material issued) (Being indirect material issued)

5. Material directly purchased by production department

Production department A/c Dr. WIP ledger control A/c Dr.
To cash/creditor To general ledger control A/c
(Being direct purchases made by purchase dept.) (Being direct purchases made by purchase dept.)

6. Material returned from production to stores

Stores A/c Dr. Stores ledger control A/c Dr.
To Production Dept. To WIP ledger control A/c
(Being material returned to stores) (Being material returned to stores)

7. Material issued for the purpose of repairs

Production Overhead A/c Dr. Production O/h control A/c Dr.
To stores A/c To stores ledger control A/c
(Material issued for repairs) (Material issued for repairs)

8. Transfer of production o/h to WIP

Production Department A/c Dr. WIP ledger control A/c Dr.
To Production O/h A/c To Production O/H control A/c
(Being overheard T/s to Production) (Being overheard T/s to Production)
HARDIK MISHRA
 43
Integral & Non Integral Accounting system
Wages Journal Entries (Financial Accounting vs Cost Accounting)
1. Wages paid (Direct)
Wages A/c Dr. Wages control A/c Dr.
To Cash/Bank A/c To General Ledger Control A/c
(Being wages paid) (Being wages paid)
WIP ledger control A/c Dr.
To wages control A/c
(Being wages charged to production)

2. Wages paid (Indirect) - Production

Wages A/c Dr. Wages control A/c Dr.
To Cash/Bank A/c To General Ledger Control A/c
(Being wages paid) (Being wages paid)

Production overhead control A/c Dr.

To wages control A/c
(Being indirect wages T/s to Production o/h)

WIP ledger control A/c Dr.

To Production O/h control A/c
(Being production o/h charged to production)

3. Wages paid (indirect) - Administrative

Wages A/c Dr. Wages control A/c Dr.
To Cash/Bank A/c To General Ledger Control A/c
(Being wages paid) (Being wages paid)

Administration overhead control A/c Dr.

To wages control A/c
(Being indirect wages T/s to Production o/h)

4. Wages paid (indirect) - selling and distribution

Wages A/c Dr. Wages control A/c Dr.
To Cash/Bank A/c To General Ledger Control A/c
(Being wages paid) (Being wages paid)

Selling overhead control A/c Dr.

To wages control A/c
(Being indirect wages T/s to Production o/h)

HARDIK MISHRA
 44

Integral & Non Integral Accounting system

Direct expenses journal entry

Direct expenses A/c Dr. WIP ledger control A/c Dr.
To Cash/Bank To General ledger control A/c
(Being direct expenses paid) (Being Direct expenses paid)

Production department A/c Dr.

To Direct expenses A/c
(Being direct expenses t/s to Production dept.)

Overheads journal entries

Production overheads control A/c Dr. Sales entry
To general ledger control A/c General ledger control A/c Dr.
(Being factory overheads paid) To costing p&l
(Being sales made)
WIP ledger control A/c Dr.
To Production overheads control A/c Profit/loss entry
(Being Production overheads charged to Production) Costing p&l A/c Dr.
To general ledger control A/c
Administrative overheads control A/c Dr. (Being profit t/s to capital A/c)
To general ledger control A/c
(Being Administrative expenses paid) General ledger control A/c Dr.
To Costing p&l
Selling & distribution overheads control A/c Dr. (Being loss t/s to capital A/c)
To general ledger control A/c
(Being selling expenses paid) Abnormal loss/Normal loss entry
Costing p&l A/c
Transfer entries To stores ledger control A/c
Finished goods control A/c Dr. (Being abnormal loss of material)
To WIP ledger control A/c
(Being factory expenses t/s FG A/c) Production overheads control A/c Dr.
To stores ledger control A/c
Finished goods control A/c Dr. (Being normal loss of material)
To Administrative O/h control A/c
(Being admin. Expenses t/s to FG A/c) Over recovery/Under recovery of overheads
Costing p&l A/c Dr.
Cost of sales A/c Dr. To Respective Overheads
To finished goods control A/c (Being under recovery of overheads now recovered)
(Being FG t/s to cost of sales A/c)
Respective overheads A/c Dr.
Cost of sales A/c Dr. To Costing P&L
To selling & Distribution O/h Control A/c (Being over recovery of overheads now reversed)
(Being selling expenses t/s to cost of sales)
HARDIK MISHRA
 45
Integral & Non Integral Accounting system

Topic 2: Reconciliation of cost Accounting & financial Accounting systems

Types of Questions

Question will provide all Question will provide Question will provide details
the items due to which trading and profit and loss, about costing and financial
difference is arise account and items due to accounts
which differences arise

Prepare Prepare cost sheet Prepare trading and profit

reconciliation and reconciliation and loss account with cost
statement statement sheet and reconciliation
statement

Reconciliation statement
Particulars Amount
Profit as per cost accounting
Add:
* Expenses included in cost accounts, but not in financial accounts
* Incomes included in financial accounts, but not in cost accounts
* Excess amount of income shown in financial accounts or compare
to entries made in cost account
* Excess of expenses shown in cost accounts as compare to entries
made in cost accounts
* Over absorption of overheads in cost accounts
* Overvaluation of closing stock in financial accounts
* Over valuation of opening stock in cost accounts
Less :
* Income included in cost accounts, but not in financial accounts
* Expenses included in financial accounts, but not in cost accounts
* Excess of income shown in cost accounts as compare to financial
accounts
* Excess of expenses shown in cost accounts as compare to financial
accounts
* Over absorption of overheads in cost accounts
* Overvaluation of closing stock in financial accounts
* Overvaluation of opening stock in cost accounts
Profit as per financial accounts

Note: Just do addition subtraction as per the the end point. Jiske pass jaa rahe ho vo jaisa kiya hai
vaise kardo.

HARDIK MISHRA
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46
Chapter 12 Service costing
re

Service Costing
Topic 1: Composite Units calculation
Composite units

Tonne kms Passenger kms No. of Room Days

= No of Tonnes x No of Kms = On of passengers x No of kms = No. of Rooms x No. of days

Seating capacity x % of occupancy

Absolute Ton kms
(Tonnes x Distance) No of kms/trip x No of trips x No of days x No of vehicles

Commercial Ton kms Total no of rooms x % of occupancy

Average of all Tons x Total distance travelled

Topic 2: Statement of cost

S.No Particulars Calculations Amount

A. Fixed Expenses
License fees and insurance
Salaries of drivers, cleaners, and conductors
Garage rent
Depreciation
Taxes
Administrative expenses
Insurance, etc
Total
B. Variable Expenses
Petrol & diesel
Lubricants
Grease
Tyres
Total
C. Repairs & Maintenance
Repairs & Maintenance
Total
D. Total cost (A+B+C)
Profit
Total collection

HARDIK MISHRA
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47
Chapter 13 Job & Batch Costing
re

Job and Batch Costing

Topic 1: Difference between Job and Batch Costing

BASIS FOR
JOB COSTING BATCH COSTING
COMPARISON

Meaning Job costing refers to a specific Batch costing, is a form of job

costing method, used when the costing, that is applied when the
production/work is carried out articles are produced in batches,
according to the requirements of i.e. a group of like units are
customers. produced.

Production As per customer specification Mass production

Product Product have an independent Products do not lose their

identity, as each job is distinct from individual identity, as they are
other jobs. manufactured in continuum.

Cost unit Executed Job Batch

Cost ascertainment On the completion of each job. Ascertained for the whole batch
and then per unit cost is
determined.

Topic 2: Economic Batch Quantity

Optimum Quantity that should be produced in one batch so that set up cost and carrying cost is
lowest.
EBQ = 2x Annual production x Set up cost/batch Absorption rates
Carrying cost per unit per annum If questions does not provide any
information then find out absorption
No of batches = Annual production rates as follows:
EBQ Factory overheads on Direct wages
Admin & selling overheads on works
Time between 2 batches = 360 days/52 weeks/12 months cost
No of batches

Set up cost = No of batches x Set up cost/batch

Carrying cost = EBQ x Carrying cost per unit per annum
2
Topic 3: Economic Batch Quantity vs Non EBQ
Show comparison between set up cost and carrying cost of both the batch size.

HARDIK MISHRA