DEPARTMENT OF COMMERCE CS

ACADEMIC YEAR 2024-2025 (ODD )

COST ACCOUNTING STUDY MATERIAL
UNIT - I

Introduction
Cost Accounting provides significant information to the management to take various
managerial decisions. The business, at present is highly competitive. In order to withstand
competition the concerns have to supply goods at low prices. Low prices may affect the basic
concept of the profit maximization of business. To overcome this problem the only alternative
for a concern is to reduce the cost of production. Cost Accounting as a subject is designed to
provide many methods and techniques to reduce the cost of production through various stages of
production.

Definition of cost Accounting:

Cost Accounting is the process of accounting for cost which begins with the recording of
income, expenditure and ends with the preparation of periodical statements and reports for
ascertaining and controlling costs.

Meaning of cost:
Cost refers to the total expenses which are incurred to produce an article. Cost consists of
all the expenses incurred in producing a commodity.

Objectives of cost Accounting

 To ascertain the cost of products or service
 To control costs
 To Provide guidelines for management policy
 To determine selling price

Elements of Cost
 Direct and indirect material
 Direct and Indirect Labour
 Direct and Indirect expenses

Classifications of Costs
 On the basis of elements - Direct Material, labour, expenses and Overheads
 On the basis of functions - Production expenses, Office expenses, Selling
expenses and Distribution expenses
 On the basis of behavior - Variable expenses, fixed expenses and semi variable
expenses
 On the basis of Controllability - Controllable and Uncontrollable
 On the basis of time - Historical cost and Predetermined Cost

Direct Material
Direct material cost is which cost can be conveniently identified and allocated to Cost units
Example: Material specially purchased from a particulate job, order or process

Indirect Material
Indirect material cost cannot be conveniently allocated but can be apportioned of
Absorbed by units or cost centers

Example: Lubricating oil, fuel, cotton, waste etc,

Labour Cost:
Labour cost is the cost of remuneration (Wages, salaries bonus etc.,) paid or payable to
the employees of an undertaking.

Direct Labour
Direct labour is that labor which can be conveniently identified with and allocated to cost
units. It is the among of labour which directly engaged or productive jobs or process

Example: Wages paid to a machine operator.

Indirect labour cost

It is the cost of labour or directly engaged in the production operators and engaged to
assists or help the production operation

Example: Wages of store keepers, Inspectors etc.

Expenses
The cost other than the material cost and labour cost are called expenses.

Direct Expenses
Direct expenses are those expenses which can be directly identified with and allocated to
cost units

Example: Hire of a special plants and machinery required for a particular job.

Indirect Expenses
Indirect expenses are those expenses which are common to jobs or process and cannot be
directly identified with a particular job or process.

Factory Overheads
Factory overheads are those expenses which are incurred in connection with
manufacturing operation but which cannot be identified and allocated to cost units or job or
process.

Example: Power, factory rent salary of works manager.

Office Expenses
Office expenses are those expenses which are incurred in formulating policies, planning
and controlling the functions, directing and motivating the personnel of an organization for the
attainment of the objectives.

Example: Office salaries, administration expenses, rent, repairs, depreciation of office building.

Selling expenses
Selling expenses are those expenses which are incurred to promote sales and to retain
customers. That is the costs, which are incurred to create and stimulate demand for the products
are known as selling expenses.

Example: Advertisement expenses, Salesman salaries, commission Bad debts.

Distribution expenses
Distribution expenses are those expenses which are incurred to distribute the goods which
are manufactured by the concern.

Example: Delivery van expenses, Carriage outwards packing expenses etc.,

Fixed Cost
Fixed cost is the cost which is constant within the installed capacity, irrespective of
volume of outputs. Fixed cost is the cost which is unaffected by the volume of output.

Example: Rent of building, factory, managers salary, insurance, administration expenses.

Variable cost
Variable cost is the cost which will vary according to the volume of unit production.

Semi – Variable cost or semi-fixed cost

Semi fixed cost is one which is partly fixed and partly variable it is also known as semi
variable cost.

Example: Telephone expenses, Electricity expenses.

Controllable cost
Controllable cost is the cost which can be controlled by the action of the executive of a
concern. Controllable cost is the cost is the cost which may be directly regulated by the top level
management.

Example: Variable cost is an example for controllable cost.

Uncontrollable cost
 Uncontrollable cost is the cost which cannot be controlled by the action of the executive of a
concern.
Example: Fixed expenses like salary, rent etc.,

Normal cost
Normal cost is the cost which is normality incurred at a given level of output which is
normality attained.

Abnormal cost
Abnormal cost is the cost which is not normality incurred at a given level of output
which is normality attained.

Historical cost
Historical costs are those costs which are competed or ascertained after they have been
incurred. The cost which is calculated after the completion of the job or process is known as
historical cost.
Predetermined costs
Predetermined costs are those cost which are computed in advance of production. The cost which
is estimated before the production is attained predetermined costs are also known as standard
cost.

Marginal cost
Marginal cost is the variable cost which is includes direct material; direct labour, direct
expenses.

Difference between Cost Accounting and Financial Accounting

SL.NO Financial Accounting Cost
Accounting
1. All trading transactions are Expenses which are incurred to production and
recorded in financial records sell the products are recorded in cost records The
2. The main purpose is to main purpose is to find out the total cost and
prepare trading , profit and profit for each of the unit
loss account Balance sheet of
3. a concern Only some companies prepare its cost accounts
All companies must prepare
4. its final account Cost records are prepared at short intervals
Financial reports are prepared at
5. the end of every accounting It is used for decision making , planning and cost
year. It is used to shareholders, control purposes
creditors, bankers, Government
6. and agencies etc. Cost accounts are prepared as when goods are
Financial accounts are produced
prepared at the end of every
7. accounting year Stock is valued at cost price
Stock is valued at cost price or
market price whichever is lower
 8. Costs are not classified into fixed Costs are classified into fixed and variable
and variable
9. It does not reveal inefficiencies in It reveals inefficiencies in handling
material handling
10. It serves the needs of It serves the needs of the management
shareholders, bankers, creditors
and tax authorities

Difference between Management Accounting and Cost Accounting

SL.No Management Accounting Cost
Accounting
1. It provides information to the It is used to determined and record the cost of
management for efficient producing a product or a service
management of the business It
2. deals with projection of future It is based on past and present figures
activities
3. No principles and procedures Certain principles and procedures are are being
are being followed followed
4. Qualitative and Quantitative Quantitative data are recorded
data are recorded
5. The scope of the accounting is The scope of cost accounting is very narrow. That is
very wide cost ascertainment only.

Advantages of Cost Accounting

The advantages are grouped into four categories. They
are. To the Management
 In fixing price
 In fixing profit
 In fixing sales
 In selecting a sales mix
 In selecting an alternative production pattern
 In determining the future course of action
 In fixing remuneration to workers

To the employees
 fixing a sound wage policy
 In fixing a suitable bonus plan
 In distinguish between efficient and inefficient workers
 In fixing appropriate incentive scheme in employees

To the government
 In facilitating the assessment of excise duty
 In facilitating the assessment of income tax
 In facilitating the formulation of policies regarding industry
To the public
 With control over costs, the prices are fair
 With control over wastage, the quality is better
 Cause overall growth of industries and employment

Limitation of Cost Accounting

 Not applicable to small business concern
 Expenses involved in installing a costing system is disproportionate to the benefits
received from it
 It is only based on estimation

Methods of costing
Job costing
The costing adopted to concerns which produce goods according to the specific order of
the customer is called job costing.

Example: Printing, Machine tools, Repair shops.

Batch Costing
Batch costing is a method of costing adopted to concerns which produce group of
identical or similar product in large units.

Example: Medicines, Ready-made garments, Spare parts.

Contract costing
Contract costing is adopted by the concern which produce product of construction types.
It is just like job costing. But a period is longer the cost.

Process costing
Process costing is adopted by concern which produces production of mass scale with two
or more processes.

Operation costing
Operation costing is a method of costing adopted for the concern, producing products
with number of process or operations where costs are collected, accumulated and ascertained for
each operation separately.

Example: Engineering, toy making etc.

Single or output Costing

Single or output costing is methods of costing adopted by concern which produce one
product with identical and standard units through two or more processes.

Example: Mines Quarries, Brick works.

Operating costing
The method of costing adapted by concerns which render services is called operating
costing

Example: Railways, Airways, Road transport Hospital, Power source

etc., Techniques (or) type of costing

Historical Costing
The determination of cost after the costs have been incurred is called historical costing.

Standard Costing
The determination of cost before the costs are incurred for the production is called
standard costing.

Absorption costing
The absorption costing is also known as full cost. In absorption costing, different costs
incurred for manufacturing a product are charged to the product.

Marginal costing
Marginal costing is also called variable costing. It helps the management to take
decisions on the basis of variable costs and fixed cost.

Uniform costing
Uniform costing is an adoption of similar costing principle and practices.

Preparation of cost sheet

Cost sheet is a statement of cost incurred for the production during a period. There is no
time basis for the cost sheet. It may be for 15 days, I month, 2 months or 3 months etc., all the
costs incurred in the production of the product during a period should be systematically stated in
the cost sheet.

Cost sheet without stock and work –in-

Progress COST SHEET
Particulars Rs
Direct Material xx
Direct wages x
Direct expenses xx
Prime Cost x
Add: Factory Overhead xxx
xxx
Work Cost xxx
Add: Administration Overhead xxx
Cost of production
Xx
x
xx
x
 Add: Selling and Distribution Overhead xx
Cost of Sales x
Costing xx
Profit Sales x
xx
x
xx
x
xxx

Cost sheet with stock and work-in-progress

Particulars Rs
Opening stock of Material xx
Add: Purchases x
xx
Less: Closing stock of x
material Raw Material xx
consumed Direct wages x
Direct expenses xxx
xx
Prime Cost x
Add: Factory Overhead xx
Opening work-in-progress x
xx
Less: Closing work in Progress x
Work Cost xxx
Add: Administration Overhead
xxx
Cost of production
xxx
Add: Opening stock of finished
Xx
goods Less: Closing stock of finished x
xx
goods x
xx
Cost of goods sold x
Add: Selling and Distribution Overhead xx
Cost of Sales x
Costing Profit xxxx
Sales
 Problem
The following are costing information related to ABC Company Ltd for three months ending 31st
March 2011.

I Jan 2011 31st March 2011

Rs. Rs.
Raw material 5,500 4,000
Work-in- 14,00 15,000
Progress
Purchases of raw material 30,000
Direct wages 31,500
Rent, rates and works on cost 17,000
Carriage inwards 2,000
Factory Supervision cost 12,000
Administration cost 31,000
Sales 1,80,000

Selling cost @ Rs.0.80 per Unit sold. The stock of finished goods as on 1 st January 2011is 2000
units and on 31st march 2011 is 2,500 units. The company sold 39,000 units during the period.
Prepare a cost sheet and find out the costing profit, cost per unit and selling price per unit’
SOLUTION
Statement of Cost for 3 months ending 31st March 2011

Particulars Rs Rs.
Opening stock of raw material 5,500
Add: Purchases of raw material 39,500
Carriage inwards 2,000
47,000
Less: Closing stock of raw material 4,000

Material consumed 43,000

Direct wages 31,200
Prime Cost 74,200
Add Factory Overhead
Rent, rates and works on cost 17,500
Factory supervision cost 12,000
29,500
Add: Opening work-in-Progress 14,200
1,17,9
Less: Closing work-in-Progress 00
Work Cost 15,000
Add: Administration Overhead 1,02,9
Cost of Production (40,000 units) 00
31,000
Add: Opening stock of finished 1,33,9
goods(2000x3.25) 00

Less: Closing stock of finished goods 6,700

(2500x3.25)
Cost of goods sold Add: 1,40,600
Selling and Distribution Overheads
(39,500x0.80) 8,375
Cost of Sales 1,32,2
Costing Profit 25
Sales (39,500 units) 31,600
1,63,8
25
16,175
1,80,0
00

Workings Units
Sales 39,500
 Add: Closing Stock 2,500

2,000
Less: Opening stock 2,000

40,000
Cost of finished goods = Cost of Production

No. of units

1,33,900
= -------------- = Rs.3.25 per unit
40,000
1, 80,000
Selling price per unit =-----------------= Rs. 4.56 per unit
39,500

UNIT II
MATRIAL CONTROL
MATERIALS
The term Material refers to all commodities consumed in the Process of
manufacturing.
Purchase of materials:
I. Centralised Purchasing: All purchases should be made by the
purchasing department. They are under the control of purchase
manager.
II. Decentralised purchasing: Heads of various departments make their
own purchases.
The Purchase Procedure:
I. Purchase Requisition: It is a form used as a formal request to the
purchasing department for, the purchase of a material. It contains the
name of the department requiring materials, description of materials,
Quantity etc. This form is prepared by the storekeeper for regular stock of
materials.
Specimen – Purchase Requisition
Ramkumar Co. Ltd.,
Purchase Requisition
Regular / Special
Date: _____
Date Required: ______
No: _______
Dept: _______
Sl. No. Quanity Description Code
No
.
Purchase order
No.
Supplier
Required by _____ Approved by ______
Purchase officer ______
II. Selection of Supplier: On the basis of purchase requisition the purchasing
department should make arrangement for getting Quotation from various
suppliers. On receipt of the Quotations from the suppliers should be
compared and the supplier who offer best quality at the lowest price
should be selected.
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III. Purchase Order: The purchasing department should place orders with
those suppliers who will provide best quality of goods at the lowest price.
Purchase order is a written authorisation to the supplier to su the. specified
materials at a price and terms mentioned therein.
Purchase order – Specimen
Ramkumar Co. Ltd.,
Purchase order
No: _____
Supplier: ________
Order No : _____
Date : _____
Required No: ______
Please supply the following items of stores in accordance with the
instructions mentionded herein , the following
Quanity Description Code No. Rate Delivery date
Terms of Delivery
Terms of payament
Purchase officer ______
IV. Receipts of materials: In large concerns, all incoming materials an
received by receving department. This department check the quantity
against copy of the purchase order and suppliers advice note. Thereafter a
goods received note is prepared in triplicate.
V. Inspection of materials: In large concerns, seprate inspection and testing
department to test the quality of materials purchased. Samples may be
tested before the goods are finally approved.
VI. Returns to supplier: Where goods received are not of the type ordered
or are damaged or are not satisfactory these may be returned to-supplier
immediately.
VII. Approval of Invoices: The supplier's invoice should be checked before
the payment is made. It should.be checked with the purchase requisition,
order,.Goods Received Note, inspection report against quantity, price etc.,
should be charged correctly.
31
MATERIAL CONTROL
Material control is defined as safeguarding of company's property in the
form of materials by a proper system of recording and also to maintain them at
the maximum level.
OBJECTS OF MATERIALS CONTROL:
1. No overstocking: Investment in materials must be kept as low as
possible.
2. Minimum wastage: proper storage facilities must be provided for
different type of materials in order to avoid losses arises due to theft,
deterioration.
3. Economy in purchasing: Materials should be purchased at favourable
4. price.
5. No under stocking: Investment in materials under stocking will lead to
delay or stoppage in production. It may result in to loss of profit.
6. Information about materials: This system should give complete and up
to date accounting information about the availability of materials.
Stock levels: In order to avoid under stocking and overstocking a scientific
system of stock level is to be adopted in the business. The stock levels are
a) Maximum stock level,
b) Minimum stock level,
c) Re-order level,
d) Average stock level,
e) Danger level
I. Maximum stock level: It means the maximum quantity of an item of,
materials which ban be held in stock at any time.
Formula: Maximum stock level=Reorder level + Re-order Quantity -
[Minimum consumption x Minimum re-order period]
II. Minimum stock level: This represents the minimum quantity of materials
which must be maintained in hand at all times.
Formula: Re-order level - (Normal Consumption x Normal re-order period)
III. Re-order level: If is the level of materials at which a new order f material
is placed. This level is above minimum level but below maximum level.
32
Formula: Reorder level = (Maximum consumption x Maximum Re-order
period)
(i) Re-order Quantity: It is the quantity for which order is placed wh material;
reaches at re-order level.
IV. Average stock level:
Formula : Average stock level=Minimum stock level +1/2 of Re-order
Quantity
(or)
=Minimum stock level + Maximum stock level \ 2
V. Danger level: It is a level of which issue of material are stopped and issues
are made only under specific instructions. It is below the minimum level,
(emergency)
Formula: Danger level: Average Consumption x Maximum re-order period for
emergency purchase.
Problem:1 Two Components X and Y are used as follows
Normal Usage - 600 Units per week each.
Maximum usage - 900 Units per week each.
Minimum Usage - 300 Units per week each.
Reorder Quantity - X4800 units, Y 7200 units.
Reorder period: - X=4to6Weeks
Y = 2 to 4 weeks.
Calculate for each Component:
A) Reorder Level B) Minimum Level C) Maximum Level D) Average Stock
Level
Solution:
Reorder Level = Maximum Consumption x Maximum Reorder period.
Component X : 900 units x 6 weeks =5400 units.
Component Y : 900 units x 4 weeks = 3600 units.
Minimum Stock Level = Reorder Level - [Normal Consumption x Normal
Reorder Period]
X = 5400 units (600 units x 5 weeks) = 5400 - 3000 units=2400 units.
33
Y= 3600 units- (600 units x 3 weeks) = 3600-1800= 1800 units
Maximum Stock Level: Reorder level+Reorder Quantity - (Minimum
consumption x Minimum Reorder period]
X=5400 units + 4800 Units - [300 units x 4 weeks] 10200 units -1200 = 9000 units
Y = 3600 units + 7200 units - (300 units x 2 weeks) 10800 units - 600 units =10200 units.
Average Stock Level: Minimum Stock Level +1/2 Reorder quantity
X= 2400 units=l/2 x4800 units= 2400+ 2400 =4800 Units. (OR)
= Minimum level+Maximum Level / 2
= 2400 + 9000 / 2 = 11400 units / 2 = 5700 units.
y = 1800 units+1/2 of7200 units. = 1800 + 3600 = 5400 units
(OR)
1800+10200 / 2 = =12000 / 2 = 6000 units.
Problem : 2
Normal usage : 50 units per week .
Minimum Usage: 25 units per week
Maximum usage: 75 units per week
Reorder quantity: 300 units, Reorder period = 4 to 6 weeks.
Calculate: Minimum level and Maximum level
Solution:
Reorder level: Maximum consumption x Maximum Reorder period.
75 units x 6 weeks = 450 units
Minimum stock level: Reorder level - ( Normal consumption x Normal
Reorder period)
=450 units - (50 units x 5 weeks) 450 units-250 units = 200 units
Maximum Stock level:(Reorder levels + Reorder Quantity) – Maximum
consumption x Maximum Reorder period.
=(450units + 300 Units) - (25 units x 4 weeks)
=750 units -100 .units = 650 units.
34
Average Stock Level: Minimum stock Level +1/2 Reorder Quantity
=200 units+ 150(300/2)= 350 Units.
[Or]
Minimum level + Maximum Level / 2 = 200+650 / 2 = 425 units
Economic Ordering Quantity (E.O.Q): The quantity material to be ordered at
one time is known as economic ordering quantity. This quantity is fixed in such
a manner as to minimise the cost of ordering and carrying the stock.
Formula: E.O.Q =

𝐶𝑆
2𝐴𝐵
A = Annual usage
B = Buying cost per order
C = Cost of per unit of material
S = Rate of storage and carrying cost.
The E.O.Q is determined keeping in view the ordering cost and carrying costs.
Carrying Cost:- It is the cost of holding the 'materials in the store and icludes
I. Cost of storage, space
II. Cost of spoilage in stores
III. Cost of ins for storing materials
IV. Cost of maintaining the materials
V. Clerical cost
VI. Insurance Cost.
Ordering Cost: It is the cost of placing orders for the purchase of Materials and
includes cost of stationery, postage, cost of staff in Purchasing dept.
Problem 3:
X Co; purchases 1600units of certain component from Y Co; the average annual
usage is l600units. The order cost is Rs.100 and the carrying cost is Rs 8 per
unit. Calculate E.O.Q.
Solution
EOQ =
2×1600×100
8
= 40000 = 200 units
35
Problem: 4
Calculate E.O.Q from the following
Consumption 600 units.
Ordering Cost Rs 12 per order
Carrying Cost 20%
Price per unit Rs. 20
Solution: E.O.Q =

𝐶𝑆
2𝐴𝐵

A= 600 units B = Rs.12 C = 20 S= 20/100

=
2×600×12
20×20/100
=
2×600×12×100
20×20
E.O.Q. = 60 units
Problem:5
Two Components X and Y are used as follows:
Normal Usage -600 Units per week each.
Maximum usage -900 Units per week each.
Minimum Usage -300 Units per week each.
Reorder Quantity -X 4800 units,Y 7200 units.
Reorder period: -X= 4 to 6 Weeks
Y= 2 to 4 weeks.
Calculate for each Component a) Reorder Level b) Minimum Level c)
Maximum Level d) Average Stock Level
Solution:
Reorder Level = Maximum Consumption x Maximum Reorder period.
Component X = 900 units x 6 weeks =5400 units.
Component Y = 900 units x 4 weeks = 3600 units.
Minimum Stock Level = Reorder Level - (Normal Consumption x Normal
Reorder Period)
X - 5400 units (600 units x 5 weeks) = 5400 - 3000 units = 2400 units.
Y= 3600 units- (600 units x 3 weeks) = 3600 4800=1800 units
Maximum Stock Level = Reorder level + Reorder Quantity - [Minimum
consumption x Minimum Reorder period]
X - 5400 units + 4800 units - [300 units x 4 weeks]
10200 units - 1200 = 9000 units
36
Y = 3600 units + 7200 units - (300 units x 2 weeks)
10800 units. 600 units =10200 units.
Average Stock Level = Minimum Stock Level +1/2 Reorder quantity
X= 2400units=l/2 x4800 units = 2400 + 2400=4800 Units
(OR)
= Minimum level + Maximum Level / 2
= 2400 + 9000 =11400 units = 5700 units
y= 1800 units+ 1/2 of 7200 units = 1800+ 3600 = 5400 units [Or]
1800+10200 / 2 =12000 / 2 = 6000units.
BILL OF MATERIAL
Sometimes all the materials required for a particular job are listed on a single
document is known as a Bill of material. It is a master requisition listing all the
materials requested for a particular job.
Merits:
1. Clerical errors is reduced.
2. Costing Job is earlier. It is a material requisition to which is in printed
document.
Material Transfer Note: Any materials transferred from one job to another
should be recorded on a materials transfer note.
ABC Analysis (Always Better Control):
ABC analysis is also known as proportional parts value analysis. It is an
analytical method of stock control. This technique of stock control according to
value method. Under this technique of material control, materials are listed in
A, B and C categories in descending order based on value consumptions.
Item A - has low percentage but of high value.
Item B - has large percentage but of low value.
37
Item C - falls between item A and B and less importance
Thus ABC analysis measures and significance of each item of material
(ie) very close control is exercised over me Item A because it has high value and
adequate control is needed for Item B and little control is essential for Item C.
Example:
Category Percentage of Item Percentage of Cost
A 8% 75%
B 22% 18%
C 70% 7%
In the above example purchase stores and issue of materials are to be strictly
controlled in case of item A because it has high material cost. In case the ‗C‘
item little material control is exercised because it has very small protion of
costs.
These analysis will facilitate the management to exercise control on the basis
value of material.
Material Item Importance on the basis of value
A Most important
B Average
C Less important
Advantages: 1) A strict control is exercised on die item which represent a high
percentage of material value 2) investment in inventory is reduced to minimum
3) saving the time of management 4) storage cost ii reduced. 5) Introduction of
scientific inventory control.
VED Analysis: (Vital, Essential and Desirable analysis)
VED analysis means vital, essential and desirable analysis. It is used for
control! of spare parts. The spare parts are divided into 3 categories - Vital
Essential ami Desirable.
The spares: the stock Out of which even for a short time will stop production
for some time, where the cost of stock out is very high are known as 'vital
spares'.
38
The spares the absence of which cannot be tolerated for more than a few. hours
and the cost of production is very fugk and which are essential for the
production to continue are known as "Essential spares".
The Desirable spares are these spares which are needed but their absence for a
week will not stoppage of production.
Perpetual Inventory:
It is a continuous stock taking system. Under this system certain numbers of
items are counted daily or at frequent intervals.
Definition:
Perpectual inventory system as, "a system of records maintained by the
controlling department which reflects the physical movement of stocks and their
current balance - ICMA.
It is a method of recording stores balances after every receipts and issue to
facilitate regular checking to avoid closing down for stock taking. This system
consists of three.
Bin Card: A card is attached to each bin, drawer containing materials, It ts
called as Bin card., This card shows quantity of materials received, issued and
balance of stock.
Stores Ledger: This ledger contains an account for each item of materials in
stock It shows both quantity and value of materials received, issued and stock.
Continuous stock taking: It means physical verification of the stock records
with actual stock.
Advantages of the prepectuat inventory system:
1. Difference of unite are detected easily.
2. Bin cards and stores ledger give ready reference.
3. over stocking and under stocking can be avoided.
4. Deterioration and obsolescence can be avoided.
5. It is not necessary to stop production to carryout stock taking,
6. It is very easy to prepare final accounts without physical inventory being
taken.
39
7. Continuous stock taking will make the storekeeper and stores accountant
more vigilant in their work.
8. Planning of production can be done according to the availability of
material in stores.
Periodic Inventory system
Under periodic inventory system, the stocks are checked and verified
only at the end of the financial year. It is otherwise known as continuous stock
taking system certain number of items are counted at frequent intervals.
S.No. Periodic Inventory System Perpectual Inventory
System
1 Physical verification of
the stock records with
actual stocks.
The system of stock
records and continuous
stock taking
2 Conducted throughout the
year.
Conducted once in a year.
3 It is clieaper method Expensive method.
4 Routine work will not be
affected.
Routine work will be
affected.
5 Items are taken at random. All items are checked.
BINCARD
Bin is a place, rack or cupboard where materials have been kept. Each bin is
attached a card to show the stack position of the bin. This. is known as bin card.
It is also known as bin tag or stores card. These cards are maintained by the
store keeper. It shows quantities of each materials received, issued and balance
of stock. It shows Description code of number of material, bin number,
maximum, minimum. Bin serves the purpose of providing ready reference.
Specimen of Bincard
Bincard
Bin No : ____
Description: ______
Code No : ______
Minimum level _____
Re-order level ______
Date Receipts Issues Balance Stock verification
Qty Qty Qty Date Initials
40
Stores ledger: This ledger contains an ccount for each item of material in stock
which gives information about that material both quantity a Value. It is
maintained by cost accounting department This ledger show the Dalance in
hand at any time.
Specimen of Stores Ledger
Stores Ledger
Description: ______
Code No : ______
Bin No : ____
Unit : ______
Location : ______
Maximum : ____
Minimum level : _____
Re-order level : ______
Re-order Quantity: ______
Date Receipts Issues Balance
Qty Rate Amount Qty Rate Amount Qty Rate Amount
Difference between Bin card and Stores Ledger
S. No. Bin card Stores Ledger
1 It is kept inside the stores It is kept outside the stores.
2 It records Quantity only. It records both quantities and
Values.
3 It is mairrtoined by the store keeper. It is maintained by costing Dept.
4 Entries are made by the store keeper. Entries are made by the cost clerk.
5 It shows physical information.
It gives both physical as well as
value information.
6 postings are made before die
transactions.
Postings are made after the transactions.
7 Entries are made along with each
transactions.
Entries are made periodically.
Methods of pricing material Issues:
When pricing materials issued to production from stores there are six methods
are followed for pricing material issues,
1. First in First Out (RFC) Method
2. Last in First out (LIFO) Method
3. Simple average price Method
4. Weighted average price Method
41
5. Base stock method.
6. Highest m first out (HJFO)
I. First in First out Method: (FIFO):
Under this method materials which are purchased first are issued first
Materials are issued at the oldest cost price listed in stores ledger account It uses
the price of the first batch of materials purchased for all issues untill all units
from this batach have been issued After the first batch is fully issued, the price
of die next batch received becomes the issue price.
Advantages:
b. Materials are issued at actual cost.
c. closing stock valuation is at cost as well as at the latest market
price.
d. This method simple to operate and esay to understand.
e. When prices are falling, method gives better result.
f. This method is based on that materials which are received first are
issued first.
Disadvantages:
a. Materials are not priced at the current market price.
b. This method produces unfair results as between one job and
another.
Example:
Jan.5 Received 500 kg. @ Rs.5 per kg.
Jan. 10 Received 700 kg @ Rs.6 per kg.
15 Jan. Issued 800 kg
Solution:
Issue Price Rs.
[email protected] 2500
[email protected] 1800
800Kg 4300
Balance of Stock400 kg @Rs. 6 Rs. 2400.
42
II. LAST IN FIRST OUT METHOD (LIFO): This method is just oppsite
of FIFO. Under this method, materials received last are issued first Issues
are made from the latest purchase.
Advantages:
a. Materials cost represents cost price.
b. As materials are issued at actual cost, it does not result any unrealised
profit
c. It is suitable when prices are rising.
Disadvantages:
a. This method is not realistic
b. This method may lead to clerical errors.
c. This system is not accepted by income tai Department.
Example:
Jan.5 Received 500 Kg. @ Rs.5 Per Kg.
Jan.10 Jan. Received 700 Kg @ 6 per kg.
Jan 15 issued 800 Kg
Solution:
Rs.
700 kg @ Rs.6 4200
100 kg @ Rs.5 500
800 kgs 4700
Balance of Stock 400 kg @ Rs. 5 Rs. 2000
III. Simple Average Price Method: Simple average price is the average of
the prices of different lots of material to purchased.
Issue price = Total price / No. of Prices
Example:
Jan. l 100 units purchased of Rs.10 each
Jan 5 300 units purchased of Rs. 11 each
Jan 10 400 units purchased of Rs.15 each
Jan 15 Issue of 500 units.
Issue price = Rs. 10 + Rs.11 + Rs. 15/ 3 = Rs.36 = Rs. 12
Advantages:
1) It is easy to calculate and simple to understand.
2. It reduces clerical work.
43
Disadvantages:
1) Costs cannot be recovered fully. This system is not generally adopted.
Weighted Average Price Method: It is a price obtained by dividing tie total
cost of materials in the stock by total ooanity of materials in the stock and issues
are priced accordingly.
Issue Price = Total cost* / Number of Quantity
(*Total Cost = Quantity x Rate)
Example:
Number of Quantity
Jan 1 100 unite purchased of Rs.10
Jan 5 300 units purchased of Rs 11
Jan 10 400 unite purchased of Rs. 15
Jan 11 Issue 800 units
Issue price = 100 x 10 + 300 x 11 + 400x 15/ 100 + 300 + 400
= Rs.1000 + 3300+6000 / 800units
=Rs. 10,300 / 800 units =Rs. 12.88
1. FIFO, (First in First out Method)
Problem No: 1
The following transactions took place in request of Material during the
month of September 2015.
Date Particulars Quantity Rate per unit
Sept. - l Received 500 10
Sept. - 10 Received 300 12
Sept. - l5 Issued 700 ---
Sept. - 20 Received 400 14
Sept. - 25 Issued 300 ---
Sept. - 27 Received 500 11
Sept. - 30 Issued 200 ---
You are request to write up stores Ledger under FIFO, LIFO, Simple Average
Method and Weighted Average Cost Method.
Solution:
STORES LEDGER ACCOUNT (FIFO METHOD)
44
Date Particulars RECEIPTS ISSUES BALANCE
Qty Rate Amount Qty Rate Amount Qty Rate Amount
Sept. 1 Goods rec. note No. 500 10 5000 --- --- --- 500 10 5000
Sept. 10 Goods rec. note No. 300 12 3600 --- --- --- 500
300
10
12
5000
3600
Sept. 15 Requisition slip No. --- --- --- 500
200
10
12
5000
2400
100
12
1200
Sept. 20 Goods rec. note No. 400 14 5600 --- --- --- 100
400
12
14
1200
5600
Sept. 25 Requisition slip No. --- --- --- 100
200
12
14
1200
2800
200
14
2800
Sept. 27 Goods rec. note No. 500 11 5500 --- --- --- 200
500
14
11
2800
5500
Sept. 30 Requisition slip No. --- --- --- 200 14 2800 500 11 5500
Answer: closing stock 500 units Rs. 5500
II. LAST IN FIRST OUT METHOD (LIFO)
Date Particulars RECEIPTS ISSUES BALANCE
Qty Rate Amount Qty Rate Amount Qty Rate Amount
Sept. 1 Goods rec. note No. 500 10 5000 --- --- --- 500
300
10
12
5000
3600
Sept. 10 Goods rec. note No. 300 12 3600 --- --- --- 300 12 3600
Sept. 15 Requisition slip No. --- --- --- 300
400
12
10
3600
4000
100
10
1000
Sept. 20 Goods rec. note No. 400 14 5600 --- --- --- 100
400
10
14
1000
5600
Sept. 25 Requisition slip No. --- --- --- 300 14 4200 100
100
10
14
1000
1400
Sept. 27 Goods rec. note No. 500 11 5500 --- --- --- 100
100
500
10
14
11
1000
1400
5500
Sept. 30 Requisition slip No. --- --- --- 200 11 2200 100
100
300
10
14
11
1000
1400
3300
Answer : Closing stock 500 units of Rs. 5700
III. SIMPLE AVERAGE METHOD (STORES LEDGER ACCOUNT)
Date Particulars RECEIPTS ISSUES BALANCE
Qty Rate Amount Qty Rate Amount Qty Amount
Sept. 1 Goods rec. note No. 500 10 5000 --- --- --- 500 5000
Sept. 10 Goods rec. note No. 300 12 3600 --- --- --- 800 (5000+3600)=8600
Sept. 15 Requisition slip No. --- --- --- 700 11* 7700 100 (8600-7700)=900
Sept. 20 Goods rec. note No. 400 14 5600 --- --- --- 500 (900+5600)=6500
Sept. 25 Requisition slip No. --- --- --- 300 13* 3900 200 (6500-3900)=2600
Sept. 27 Goods rec. note No. 500 11 5500 --- --- --- 700 (2600+5500)=8100
Sept. 30 Requisition slip No. --- --- --- 200 12.50* 2500 500 (8100+2500)=5600
Answer: closing stock 500 units of Rs. 5600
Sept. 15 = 10+12 / 2 =22 / 2 = Rs. 11* Sept 25 = 12+14 / 2 = 26 / 2 = Rs. 13*
Sept. 30 = 14 + 11 / 2 = 25 / 2 = Rs. 12.50*
IV. WEIGHTED AVERAGE COST METHOD (STORES LEDGER
ACCOUNT)
Date Particulars RECEIPTS ISSUES BALANCE
Qty Rate Amount Qty Rate Amount Qty Amount
Sept. 1 Goods rec. note No. 500 10 5000 --- --- --- 500 5000
45
Sept. 10 Goods rec. note No. 300 12 3600 --- --- --- 800 8600
Sept. 15 Requisition slip No. --- --- --- 700 10.75* 7525 100 1075
Sept. 20 Goods rec. note No. 400 14 5600 --- --- --- 500 6500
Sept. 25 Requisition slip No. --- --- --- 300 13.35* 4005 200 2670
Sept. 27 Goods rec. note No. 500 11 5500 --- --- --- 700 8170
Sept. 30 Requisition slip No. --- --- --- 200 11.67* 2334 500 5600
Answer: closing stock500unitsbfRs.5836
Issue price = Total cost / Total Quantity Total Cost = (Total Quantity x Rate per unit)
Sept. 15 = 8600 / 800 = Rs. 10.75* Sept 25 = 6675 / 500 = Rs. 13.35*
Sept. 30 = 8170 / 700 = Rs. 11.67*
5) BASE STOCK METHOD: It is the minimum stock which is not to
production. The stock in excess of base stock is to be issued second L kaee fire,
careless handling loading and unloading any one of the method. e.g. FIFO, [or]
LIFO. It is alsp known as safely stock.
6) HIGEST IN FIRST OUT METHOD: In this method issued are always
valued at the highest price of the receipts. This rate continues until the material
at the high price is exhausted after which the next highest price is used.
7) REPLACEMENT OF PRICE METHOD: Under this method, material
are charged at the market price on the date of issue. Replacement price is
nothing but the price at which materials issued will be replaced i.e., market
price.
Advantages:
1. Materials are issued at the current market price.
2. This is method is simple to operate as no calculations are required.
Disadvantages:
1. Issues are not priced at actual cost, thus resulting in unrealised profit or
loss.
2. The valuation of stock is not at the current prices.
3. The replacement price may not be easily available.
8) Standard Price Method:
In this method a standard price is calculated and all materials issued are
valued at this price. Standard price is a notional price and is not actual cost
price.
46
Standard prices are fixed for each item of material and where prices of
materials fluctuate heavily, standard prices should not be fixed on a long-term
basis.
Under this method all receipts are posted in Stores Ledger Account at
actual cost and issues are priced at a pre-determined a standard rate for each
material.
Material Losses
1. Wastage: It is that portion of material which is lost during handling
storing or in course of production and has scrap value.
Causes of wastage: Wastage of materials arises due to evaporation,
leakage, fire careless handling and loading. It may be visible and
'invisible'.
Types of wastage: i) Normal wastage ii) Abnormal wastage.
i) Normal wastage: It is not avoidable wastages which arises due abnormal
conditions. (E.g.) Evaporation, leakage, loading and unloading.
Abnormal wastage: It is not avoidable wastage which arises due abnormal
conditions. (E.g.) Fire, accident, theft, careless handling. The value of such loss
will not be added to cost of production but is transferred to costing Profit &
Loss Account.
Scrap: it means fragments or incidental residue of material from certain types of
manufacture. It has small value without further processing.
Example: Turning, Punching, Sawing, Moulding etc.
Types of scrap: i) Legitimate Scrap, ii) Administrative Scrap iii) Defective
Scrap.
Defectives: Defectives are that portion of production which can be rectified at
some extra cost of re-operation. Defectives may arise due to sub- standard
materials careless inspection, bad-supervision.
Spoilage: spoilage occurs when goods are so damaged in the course of
manufacturing process. Spoilage is irreparable or unrectifiable.
47
Types of spoilage:
1. Normal Spoilage: The cost of normal spoilage is borne by goods units of
product.
2. Abnormal Spoilage: The cost of abnormal spoilage is transferred to
profit & loss account

UNIT III
LABOUR
LABOUR
Labour represents human contribution to production and is second
important element of cost
Definition:
Direct Labour is that ―which can be identified with and alloca to cost
centres or cost unit‖. I.C.M A., London.
―Direct Labour is all labour expended in altering the construction,
composition or condition of the product‖. - Wheldon
Indirect labour is of general character and cannot be conveniently
identified with a particular cost unit. It helps and facilitates production
indirectly. Examples are foreman, supervisor, cleaner, inspector; clerk, etc.
Types of Labour: 1) Direct Labour 2) Indirect Labour.
1) Direct Labour: Direct Labour is that, "Which can be identified with
and allocated to cost centres or cost units. Thus Direct labour is engaged in
converting rawmaterials into finished goods, (e.g) machine operator, shoemaker,
tailor.
2) Indirect labour: are those labour which cannot be conveniently
identified with a particular cost unit. (e.g) supervisor, foreman, peon, clerk, etc.
Distinguish between Direct and Indirect labour:
Direct labour is that labour which can be conveniently identified or
attributed wholly to a particular job, product or process. Thus direct labour
includes all labour expended in converting raw materials into finished goods.
Indirect labour is one which is of a general character and cannot be
conveniently identified with a particular job, product or process.
Examples of Indirect Labour
1. Labour employed in Service Departments like Power House, Internal
Transport Service, Gate and Security.
2. Labour employed on maintenance work.
3. Storekeeping workers and other such personnel.
Organisation of Labour Department
There are mainly five departments in an organisation dealing with labour:
1. Personnel Department
2. Time Recording Department.
3. Payroll Department
4. Engineering Department and
5. Cost Accounting Department
1. Personnel Department: it plays a very important role as it is primarily
concerned with the proper selection and training of workers and placing
them to jobs for which they are best suited. This department is a service
department and renders only advisory functions.
2. Time Recording Department: The recording of time put in by a worker
is required for two purposes, (i.e) for time keeping and time booking.
Time keeping is the recording of time for the purpose of attendance
and wage calculations.
Time booking is the recording of die time for purposes of cost
analysis and apportionment of labour costs over various jobs.
3. Payroll Department: The important functions of this department in
controlling and accounting for labour costs may be listed as follows:
a) To compute the wage and to prepare the payroll for each
department
b) To compute the payroll deductions.
c) To disburse salary and wage payments.
4. Engineering Departments: This department helps in maintaining control
over working conditions and production methods for each job,
department. It performs the following functions.
a) Preparation of plans and specifications for each job.
b) Safe and efficient working conditions.
c) Preparation of time and motion studies of labour.
d) Making job analysis and setting piece rates.
5. Cost Accounting Department: This department is responsible for the
accumulation and classification of all cost data of which labour, is one of
the elements. This department is responsible for analysing the payroll in
order to render, routine and special labour cost reports revealing the
amount of normal and abnormal idle time, direct and indirect labour,
overtime and variances from budgeted labour costs. These reports inform
management of the effectiveness of labour policies and permit necessary
action to be taken to retain proper control of labour costs.
Problem:1 Labour Cost per man per day of 8 hours
From the following particulars ascertain Labour cost per day of 8 hours
Basic Pay - Rs. 200 per month
Leave Pay-5%
Employer Contribution to provident fund 8% of (a) and (b)
Employer's contribution to E.S.I. -2.5% of (a) and (b)
Pro rate amenities Rs. 17.95 per head per month
Working hours in a month-200hours.
Solution:
Statement of Labour Cost per man per day of 8 hours
Particulars Per month Rs. Per day 8 hours
Basic pay 200
Leave pay 200x5 / 100 10
Employer‘s contribution to P.F. 8% of
(a) and (b) 210x 8 / 100
16.80
Employer's contribution to E.S.I. -
2.5% of of (a) and (b) 210 x 2 ½ / 100
5.25
Amenities 17.95
Total labour cost per man of 200 hours
of one month
250 10
Total labour cost per man of 8 hours = 250 x 8 / 200 = Rs. 10
Problem:
From the following particulars given below, Calculate Labour
cost per man per day of 8 hours:
Basic SalaryRs.5perday
Dearness Allowance 20 paise per every point over 100 cost of living index for
the workers. Current Cost of Living index is 800 points.
Leave Salary 5% of (1) and .(2)
Employer's contribution to P.F. 8% of (1) and (2)
Employer's contribution to State Insurance 5% of (1), (2) and (3)
Number of working days in a month 25 days.
Solution: Statement of Labour Cost per man per day of 8 hours :
Per day of
8 hours: (Rs.)
Basic salary 5.00
D.A. 20 paise per every point over 100 cost of having index for
a month of 25 days Per day=700 points x 20/100x1/25
(800 points-100 points=700 points)
5.60
Leave Salary 5% of (1) and (2) (5+5.60=10.60 x 5/100) 0.53
Employer's Contribution to P J?. 8% of (1) and (2)
(10.60x8/100)
0.85
Employer's Contribution to state * Insurance of 5% of (1), (2)
and (3) (5+5.60+ 0.53= 11.13x5/100)
0.56
Labour Cost per man per day of 8 hours 12.54
Time keeping
Time keeping Department is to keep a record of each worker entering and
leaving time in the factory.lt is considered important to record the time, of
workers entering arid leaving the factory. It is the recording of each worker's
time of coming in and going out of the factory for the prurpose of attendance
and wage calculations.
The objects of time-keeping :
1. To mark attendance of each worker to satisfy legal requirements.
2. To prepare wage sheets.
3. To maintain discipline in the factory.
4. To ascertain the labour cost chargeable to jobs.
5. To control labour cost.
6. To have a correct record of attendance for meeting statutory
requirements.
7. Overhead distribution, if it is based on wages or labour hours.
Methods of Time-keeping:
The methods of time-keeping can be broadly classified into two categories:
(a) Manual methods and (b) Mechanical methods.
a) Manual Methods: There are two manual methods. These are:
Attendance Register or Muster Roll: This is the oldest method of time
keeping. This register may be kept in time office ot with the foreman
in the department Attendence may be marked by the time-keeper or the
foreman. Under this method a register is maintained for worker‘s attendance.
This method is very simple and cheap to operate. But it can be used in very,
small factories. Records may not be accurate. Chances of disputes and mistakes
will arise.
Token or Disc Method: Under this system, every worker is allotted a disc or
token bearing his identification number. All such discs are hung on a board at
the entrance of the factory. As and when a worker enters, he removes his disc
from the board and puts it into the box or hangs it on another board which is
specially kept for this purpose.
After the expiry of the time, the first box is removed and replaced by
another for late comers. Alternatively, workers coming late may be required to
report at the time office so that the exact time of their arrival can be noted. After
the factory gates are closed, the, time clerk marks the attendance in register on
the basis of tokens in the boxes. The absentees are indicated by the missing
tokens in the box.
This system is improvement on the attendance register method. It is
difficult to check one worker inserting two discs into the box, one of himself
and the other of his friend. It involves a large amount of clerical work and there
is a possibility of mistakes.
Mechanical Methods: It is classified into three.
i. Time Clock Method: Under the mechanical methods, time clocks are used
to record the worker's attendance. In this system the attendance is recorded
on a clock card. When a worker enters the gate, he picks up his card from
the "out" rack, inserts it into the clock and the time is stamped at the
relevant space. He takes his card out and keeps it in the "In" rack. This
process is reversed when he goes out of the factory.
Thus every worker is allotted a card which bears the worker's
identification number. These cards are kept in racks lying outside the factory
gate. There are usually two racks denoting 'out' and 'in' racks. The cards left
in the 'Out' racks indicate absent workers.
Advantages:
1. It provides for correct recording of attendance.
2. Changes of false and fraudulent entries are reduced.
3. Work in connection with the preparation of wage sheets becomes is very
easy.
4. The clocks produce a definite record.
ii. Dial Tune Recorders:
This consists of a mechanism with a dial having a number of holes
about the circumference. When a worker enters the factory, he presses the
dial arm into a hole which denotes his particular number and die time is
recorded automatically on an attendance form placed inside.
This attendance sheet forms a part of the payroll and there is no-need
of copying out the record. But this method has the following defects
a) The time of worker's arrival and departure are widely separated on the
paper, making the calculation of worker's total time cumbersome.
b) The capacity of this machine is very much limited as the number of
holes is only about 150.
iii. Key Recorder System: This is a mechanism with a number of keys, each
key bearing the number of a worker. When a worker enters the factory, he
inserts his particular key in the key-hole and gives a turn, the ticket number
and the clock time are recorded on a sheet of paper.
Time Booking:
It is a process of recording the time spent by a worker on differ jobs carried
out by. In during his period of stay m the factory,
The objects of time booking:
1. To ascertain die cost of work done.
2. To ensure that time for which worker has been paid is properly
utilised.
3. To provide a basis for the appointment of over-heads, and
4. To ascertain the idle time so as to control it.
Time booking may be done manually or mechanically depending, upon
the size of the organisation. Large organisations, use time recording clocks for
recording time on each job.
Methods of Time Booking
There are five methods of Time booking. They are
1. Daily Time Sheet System: This is a daily record of the work done by a
worker, showing the jobs on which he worked and the time spent against
each. One sheet is allotted to each worker and a daily record is made therein.
This can be used in small organisations where the number of workers as
well as the number of jobs are very much limited.
2. Weekly Time Sheet: This is similar to Daily Time sheet. The difference is
that instead of recording the work done for a day only, record of time for all
jobs is done weekly. Here Weekly Time Sheets are kept. The weekly time
sheet gives a consolidation of the total hours worked during the week and
this total can be checked against the total shown in the clock cards. This
methods is useful-where there are a few jobs in a week.
3. Job cards: This card is prepared for each job. This card is allotted to each
worker whenever a worker takes up a particular job. Worker enters this card
the time of starting the job as well as tune of finishing the job.
4. Time and Job Card: This system provides a card which consists of two
sections, one to be filled up as a job and the other as a time card. This card
records the attendance time and the time spent on different jobs on the same
form. It consists of two sections - one for recording attendance and the other
for recording the work time. Thus, tins records both the attendance time and
work time of a worker on the same sheet.
5. Labour Cost Card: This is a type of circulating job card it meant to record
the time taken on the job by all the workers employed on it Instead of
allotting one card to each worker, the same card is passed round and the
time taken by each worker on that job is recorded on it Thus, this card gives
the total labour cost of a job.
6. Piece-Work Card: Where workers are paid on piece rate system, piecework
card is used. Such a card is maintained for each job separately.
7. Wages Abstract: This is a summary prepared weekly or monthly, showing
the amount of time spent by a worker on different jobs. This shows an
analysis of wages paid during a period of time on different jobs.
The Wages Abstract is a medium of allocation of labour cost to different
jobs. It provides a basis for writing job ledger.
Write short notes on: (a) Out workers, (b) Casual workers
a) Out workers: Out workers are those workers who work outside the
factory on behalf of the company.
b) Casual Workers: These are temporary workers who are appointed on
daily basis in order to meet increase in production or to replace the
absentee workers. These are known as casual workers. Such workers are
known as casual workers as they are not regular workers of the
organisation.
Overtime Wages
Work done beyond the normal working hours is known as overtime work.
According to the Indian Factories Act, no worker should be allowed to work for
more than 9 hours a day or 48 hours a week. Suppose a worker works for more
than 9 hours in a day or more than 48 hours in a week he has to be paid for his
overtime at double the normal rate of wages. Overtime work involves extra cost
as it has to paid at double of pauses of idle time
Treatment of Overtime Costs.
1. If overtime is required to make up any shortfall in production or for
meeting urgent orders, the overtime premium should be treated as
overhead cost of the department concerned.
2. When the customer agrees to bear the entire charge of overtime due to
urgency of work, it should be charged direct to the job or work order
concerned.
3. Where overtime is worked due to seasonal nature, it should be treated as
general overhead.
4. Overtime worked on account of abnormal conditions like floods, earth
quakes, etc., should be transferred to Costing Profit and Loss Account.
5. Overtime work is work done beyond normal working hours. The
Factories Act provides for payments of overtime wages at double the
norms rate wages.
Control of overtime:
1. All overtime work should be duly authorised by higher officials.
2. Overtime cost should be recorded separately and shown against the
department incurring it. It will help in proper planning in future.
3. If overtime is due to limited capacity of plant, new plant may be installed.
Idle time
Give reasons for idle time, How do you treat idle time in cost accounting.
Meaning of Idle time: Idle time is that time for which wages are paid but no
production is obtained. Idle time may be defined as that time for
which are paid but no production is obtained. This is the time which cannot be
attributed directly to any productive work. Idle time may represent loss of time
of labour, machines of equipments due to lack of material, breakdown of
machinery, failure of power supply, etc.
Causes of idle time:
a) Productive Causes.
b) Administrative causes
c) Economic causes
I. Productive causes: The productive causes may further be classified
as follows:
1. Idle time due to machine break down.
2. Power failures.
3. Workers waiting for raw materials and tools.
4. Workers waiting for work.
5. Workers waiting for instructions.
In all the above cases, idle time can be controlled by proper planning in
advance.
II. Administrative causes: Idle time is frequency caused by administrative
decisions. Sometimes administrative decisions are also responsible for idle
time. For example, in case of a surplus capacity of plant and machinery,
management may decide not to work fully and there may be some idle time.
Therefore, such idle time arises out of abnormal situations, and it cannot be
helped.
III. Economic causes: Idle time, may arise due to sever competition or seasonal
nature of industries. Idle time may arise due to seasonal nature of industries.
For example, in the case of woollen goods, ice-cream industry, production
cannot be evenly distributed throughout the whole year. It is not possible to
employ a number of workers in the busy season and to leave them during
slack season.
Normal Idle Time: It refers to that loss of time which is generally unavoidable
and is incidental to production.
For example:
Treatment of Idle Time Cost
Normal Idle Time Abnormal Idle time
a. Time taken from the factory gate to the department where worker is
engaged and the reverse journey at the end of the day.
b. Time which elapses between completion of one job and commencement
of the next.
c. Time spent in machine maintenance.
d. Tea breaks (if any), personal needs, etc.
Thus, normal idle time is of such a nature that it cannot be avoided and its cost
is an expense which the employer must bear.
Treatment of Normal Idle Time:
a) It is directly charged to factory overhead account.
b) Wage rate may be inflated so as to make allowance for normal loss of
labour time.
Abnormal Idle Time: This type of idle time arises due to inefficeient of
management bad luck or reasons beyond control.
Examples: Strikes and lockouts, major breakdown of machinery, fire, flood,
power failure delay in material supply, etc. Measurement of Labour Turnover
here are three different methods of measurement of labour turnover
Treatment of Abnormal Idle Time: Cost of abnormal idle time should be
collected separately and written off to costing profit & loss Account. It cannot
be regarded as a cost of production.
Control of Idle Time: For control purpose, idle time should be divided into
three categories:
i. Idle time controllable by foremen, e.g., waiting for instructions,
waiting for tools, faulty tool setting, interrupted flow of work, etc.
ii. Idle time beyond the control of foreman but controllable from the
standpoint of factory, e.g, shortage of raw material, power failure.
iii. Idle time essentially beyond control, e.g., unforeseen accidents,
shortage of work due to economic conditions, failure of power supply,
work stoppage due to strike, etc.
The different causes which lead to idle time should be properly analysed and
responsibility should be fixed on appropriate persons to control it.
Labour Turnover
What do you understand by Labour Turnover? How is it measured? What are
the causes? What are the remedial steps you would suggest to minimise its
occurrence?
Labour Turnover: It is rate of displacement of labour employed in an
organisation. It is a normal feature in every business organisation that some
workers leave their jobs and some new workers take their place. This mobility
or change in the labour force is known as labour turnover, labour turnover may
be defined as the number of workers left during the period in relation to the
average number of workers on the roll during the period. In the other words,
MEASUREMENT OF LABOUR TURNOVER
There are three different methods of measurement of labour turnover:
i. Separation Rate Method: This is the most commonly used method.
Under this method, measurement is made by dividing the total number of
separations during a period by the average number of workers on the roll
during the period.
Labour Turnover = No. of workers left during a period / Average No. of
workers in the period x 100
Average number of workers is calculated as under:
No. of workers in the beginning of period + Number at the end / 2
Multiplying the labour turnover formula by 100; gives the rate in percentage.
The period for which labour turnover rate is calculated may be one month, six
months, one year period.
Replacement Rate Method: This method calculates labour turnover rate by
taking into consideration only the number of workers joined.
Formula:
Labour Turnover = No. of replacement in a period / Averge number of
workers in the period X 100
While calculating the number of replacements, new workers recruited because
of expansion should not be taken into account
Flux Rate Method: This method takes into consideration both the number of
workers left as well as number of new workers who have joined .
Formula:
Labour Turnover = No. of workers left + No.of workers replaced / Average
No. of workers x 100
This method is a combination of method 1 and method 2
CAUSES OF LABOUR TURNOVER
The causes of high labour turnover may be classified in two categories:
(i) Avoidable; and
(ii) Unavoidable
Avoidable Causes:
1. Redundancy due to seasonal fluctuations, contraction m the market lack
of proper planning.
2. Low wages and allowances
3. Unsatisfactory working conditions.
4. Disputes between rival trade unions.
5. Dissatisfaction with the job.
6. Lack of facilities like transport, medical, accommodation, etc.
7. Strained relationship with supervisors or fellow workers.
Unavoidable Causes:
1. Change of service for personal betterment, ,
2. Retirement due to old age and ill health,
3. Death,
4. Discharge on disciplinary grounds on continents long absence,
5. Marriage or pregnancy.
Effect of High Labour Turnover
Effects of Labour Turnover will increase cost of production. There are two
types of Cost. (i) Preventive cost (ii) Replacement cost
I. Preventive Costs: Preventive costs refer to all those expenses and
costs which are incurred by a firm to keep the labour force contented so
that excessive labour turnover may be prevented The major items of
preventive costs are:
1. Personal administration.
2. Cost of medical services.
3. Cost of welfare activities and schemes.
4. Pension and or provident fund schemes.
II. Replacement Costs: Replacement costs include all such losses, wastage
arising because of the inexperienced new labour farce replacing the
existing ones as well as die cost of recruitment and training of the new
workers. It includes the following elements:
a. Loss of output due to sometime taken in obtaining new labour,
b. Loss of output and quality due to inefficiency of new labour,
c. Employment department expenses,
d. Cost of training of new workers,
e. Cost of tool and machine breakages,
f. Cost of scrap and defective work, and
g. Cost of accidents.
Reduction of Labour Turnover: Labour turnover rate may be reduced
by taking preventive remedial measures and by removing avoidable
causes. The various steps are given below
1. A satisfactory wage system.
2. Improving working conditions.
3. Strengthening the welfare measures.
4. A satisfactory policy for transfers and promotions,
5. Labour participation in management.
6. Efficient and impartial personnel administration.
7. A sound personnel policy for recruitment induction and training of labour
8. A satisfactory level of amenities add welfare measures like canteen
facilities, medical services, recreation etc.
9. A satisfactory security scheme like family pension, provident fund,
accident compensation, etc.
10. A satisfactory policy for transfers and promotions.
11. Labour participation m management and joint consultation scheme.
Time & Motion Study
What do you understand by Time and Motion Study?
Time study aims at determining the proper speed of movements made by the
workers and motion study aims at eliminating unnecessary movements.
Time study: It may be defined as "the art of observing and recording the time
required to do each detailed element of an industrial operation" Its main object
is to determine the standard time required to carry out a job most efficiently.
Motion Study: This study deals with one aspect of methods study, i.e., to
eliminate unnecessary movements of men and material. "Motion study is the
science of eliminating wastefulness resulting from using unnecessary, illdirected
and inefficient motions". It is a detailed study and analysis of die
movements of an operation in performing an operation for the purpose of
eliminating unnecessary and useless motions:
Write notes on the following: (a) Job Evaluation and (b) Merit Rating
I. Job evaluation: Job evaluation may be defined as the rating of various
jobs according to the responsibility and skill required from them. The
basic object of job evaluation is to ascertain the relative worth of each job
through an objective evaluation so that relative remuneration can be fixed
for different jobs.
II. Merit Rating: Merit rating is a systematic evaluation of the personality
and performance of each employee by his supervisors or some other
labour qualified persons. It is a system by which the performance of an
employee is objectively evaluated and compared with that of others in his
work group.
Methods of Wage Payment
There are mainly three methods of labour remuneration:
a) Time Rate System
b) Piece Rate System
c) Incentive Schemes.
If a worker may be paid on the basis of time mat he spends on his job is known
as Time Rate. If he may be paid on the basis of quantity of work done by him is
known as piece rate.
Time Rate System: This is the oldest of the wage payment systems. In this
system time is made the basis of payment. Labour is paid for the time worked
irrespective of the volume of production during that time. The formula for
calculating wages under this system is:
Time Rate (T.R) = Hours worked x Rate per hour
Payment may be based upon the hour, the day or the week, or it may be at
the fixed salary rate.
Wages = Time spent x Rate per hour (T x R)
E.g.: Mr. X is paid at the rate of Rs. 10 per hour. During the month he spends
200 hours. Calculate Mr. X earnings.
Earnings=200 hours x Rs. 10 per hour = Rs. 2000 per month.
Types of Time Rates :
a) Times Rates at Ordinary Levels: In this system, time is made the basis of
payment irrespective of quantity of work done by a worker payment is made at
a rate on attendance by hour, week or a month.
Formula:
Time Rate = hours worked x Rate per hour
Time Rate at High Levels: Under this system, the worker is paid at a wages
which is substantially higher than the rate prevailing in that area or industry.
Graduated Time Rates: This system provides for variation in the wage
according to changes in the cost of living index. The rates are to be adjusted
periodically according to index.
Advantages:
1. The workers are assured of minimum wages which gives them a sense of
security.
2. The calculation of the amount of wages is simplified.
3. Workers avoid over-speeding arid thus cause less daniage to equipment.
4. Quality of work produced this method does not give weight to the
volume of work done.
5. Trade unions generally oppose tins mode of payment.
Drawback:
1. It does not distinguish between efficient and inefficient workers.
2. There is no incentive to work more.
3. From costing point of view, it creates difficulties in the calculation of
labour cost per unit as the output is quite fluctuating.
4. It needs extra provision for supervision so that workers do not waste their
same.
Piece Rate System: Under this system a worker is paid a fixed amount per unit
produced irrespective of the time taken. A rate per unit of output is fixed and
wages are calculated as follows:
Piece rate = No. of units produced x Rate per unit (N x R)
Earnings = No. of Units produced x Rate per unit (N x R)
Example: Mr. X is paid at the Rate of Rs. 4 per unit He produced 500 unit
during the month. Calculate his total earnings?
Earnings = 500 Units x Rs. 4 per unit=Rs. 2000 per month.
Advantages:
1. It distinguishes between efficient and inefficient workers.
2. It provides a strong incentive because remuneration is in direct ratio to
the worker‘s effort.
3. Costing is simplified because the exact cost of labour per unit is known in
advance.
4. Strict supervision is not necessary.
Drawbacks:
1. Workers try to produce maximum quantity to increase, their wages. In the
process quality of products is ignored.
2. Minimum amount of wages is not guaranteed.
3. High speed has injurious effect on the health of workers and also on
equipment and machinery.
4. Trade unions generally oppose this mode of payment.
5. It involves maintenance of larger records tor payroll.
TYPES OF PIECE RATES
i. Straight Piece Rates: This system makes quantity of work as the basis
wage payment. A fixed sum per unit of output is given to a worker
irrespective of the time taken by him.
The formula is:
Piece Rate = Units produced x Rate per unit (N x R)
ii. Piece Rates with guaranteed day rate: In this system, some minimum
wage is guaranteed to a worker and if his wage at piece rates, by chance,
con out to be less than the guaranteed minimum wage, he shall get the
minim wage and not the piece wage.
iii. Differential Piece Rates: Under this system, rates of wages vary at
different levels of output. As the output increases, the rate also increases.
The crease in rates may be proportionate to the increase in output or
proportion a more or less than that. The object of this system is to reward
the efficient workers and at the same time to encourage the less efficient
to attain standards. Taylor, Merrick, Gantt task and Bonus and Emerson
efficiency plan are used this system of payment.
iv. Bonus System and Incentive Schemes
The bonus system may take either of two forms - Individual Bonus
System or Group Bonus System.
Indirect Monetary Incentives:
Profit Sharing Scheme: Profit sharing schemes are those where there is an
agreement between the employer and his workers whereby the employer agrees
to pay to workers, in addition to their wages, a share of profit at an agreed rate.
Co-partnership: Workers ate given the opportunity to have a share in the capital
of business and to receive the profits accruing to their share
Non - memory benefits may be given in numerous ways like medical facilities,
educational facilities, subsidised canteen, better working conditions, housing
facilities and such other welfare measures.
Discuss the principles of a good incentive scheme. What are the advantages and
disadvantages of incentives schemes?
Incentive Wage Plan: Incentive may be defined as "the stimulation of effort
and effectiveness by offering monetary inducement or enhanced facilities" An
incentive may be monetary, i.e., cash benefit, or non-monetary.
Principles of a Good Incentive Scheme:
1. The scheme should be simple and easily understandable by workers
2. The scheme should be fair, to both employer and employee.
3. The cost of operating the scheme should be reasonably low,
4. The standard of performance should be scientifically set and should be
within the reasonable reach of an average worker.
5. No limit should be put on the earnings of workers.
6. The scheme should have the approval of workers and the union.
7. The scheme bonus provide a satisfactory system of supervision and
production control.
8. The scheme must be relatively permanent.
9. Indirect workers should also be included under this scheme.
10. Workers should be properly educated.
Incentive Schemes
Under Incentive schemes, time rate and piece rate systems are combined in such
a way that workers are induced to increase their productivity. Various Incentive
plans are
1. Halsey Plan:
This plan was first introduced by F.A. Halsey, a mechanical engineer in
America, in 1891. This is a simple combination of time and piece basis of
payment. Under this plan, bonus is paid on the basis of time saved. The amount
of bonus depends upon die time saved by the worker. Where,
Time saved = standard time - Actual Time taken
A standard time is set for each job. If a worker takes the standard time to
do it or even exceeds the standard time limit, he gets normal wages calculated at
die time rate. If he completes his job in less than the standard time, he gets a
bonus equal to 50% of the value of time saved. Therefore, die total earnings of a
worker under this system are wages for the actual time spent plus a bonus equal
to 50% of the. Value of time saved.
The formula: Bonus 50% of [Time saved x Time rate]
Total earnings - Time rate x Time taken +50% [Time saved x Time rate]
Example: Time rate = Re. 1.00; Time allowed = 7 hours
Time taken = 6 hours and Time saved = I hour.
Bonus = 50% [Time saved x Time rate]
= 50% [1 hour x Re. 1.00]
= 50% [Re. 1.00]- 50 paise
Total earnings - (6 hour \ Re. 1.00 + 50 paise - Rs. 6.50.
Advantages:
1. It is easy to understand and simple to operate.
2. This plan provides a strong incentive to improve efficiency.
3. The worker earns bonus on every job individually and the time saved by a
worker on one-job is not set off against the excess tune taken
on some other job.
4. It guarantees minimum wages according to time rate and thus provides a
sense of security to workers.
5. The benefit of time saved is equally distributed between workers and
employers.
6. It provides a strong incentive to increase production.
Disadvantages:
1. Incentive is not as strong as with piece rate system. Generally, the harder
the worker works, the lesser he gets per unit.
2. It does not give full protection to employer against wrong rate setting.
3. Workers do not welcome the sharing principle.
Problem : 1
Rate per hour =Rs.4
Time allowed for Job =40 hours
Time taken =32 hours
Solution:
Time saved =40hours-32hours = 8hours
Bonus = 50% of time saved = 8 hours =4 hours
Bonus = 50% Time saved x Rate per hour
= 4hoursxRs.4=Rs. 16
Time wages = Actual time taken x Rate per hour
= 32 hours x Rs.4 = Rs. l28
Total Earnings = Rs. 128+ Rs. 16 = Rs. 144.
Problem: 2
Calculate earnings of a worker, Under Halsey Premium Plan
Time allowed = 70 hours
Time taken = 60 hours
Rate per hour = Rs. 3
Time saved = Standard Time - Actual time
= 70 hours - 60 hours =10 hours
Bonus = 50% Time Saved x Rate per hour
= 10hours / 2 x Rs.3 =Rs. 15
Wages = Actual time x Rate per hour
= 60 hours x Rs. 3 = Rs. 180
Total Earnings = Actual wages + Bonus = 180 + 15 = Rs. 195
2. Halsey Weir Plan: This system was introduced by G.T. Weir and is a
modified form of the original Halsey plan. The only difference between
the two is that under the Halsey Weir plan the bonus is equal to 30% of
time saved.
E.g:
Standard time = 40 hours
Actual time = 34 hours
Rate per hour = Rs.10
Calculate Halsey weir plan?
Bonus = 30% of Time saved x Rate per hour
40 – 34 hours = 6 hours x 30 / 100 x Rs.l0 = Rs. 18
Wages = 34 hours x Rs.10 = Rs. 340
Total Earnings = Rs.340 + 18 = Rs.358
3. Rowan Plan : This plan was introduced by David Rowan and is similar to
Halsey Plan, except in the calculation of the amount of bonus. Bonus is that
proportion of the wages of the time taken which the time saved bears to the
standard time. Its formula is :
Bonus = Time saved / Standard time x time taken \ Rate per hour
Total earnings = (Time taken x Rate per hour x Bonus
Suppose Time Rate = Re. 1.00 per Hour; Standard time -8 hours;
Time taken = 6 hours; Time saved = 2 hours.
% of Time saved to Standard time =2/8 - 25%
Bonus = 25% of Rs. 6 = Rs. 1.50.
Total earnings = 6 hours x Re. 1.00 + Rs. 1.50 = Rs. 7.50.
Advantages:
1. It provides a guaranteed minimum wage as well as incentive for
efficiency.
2. It provides the employer an incentive to increase production facilities as
he receives a large share in savings achieved.
3. The Rowan plan provides a better bonus than the Halsey 50% scheme.
4. Up to 50% of the time saved, it provides a higher bonus than under
Halsey Plan. It offers protection to the employer when standard has not
been properly fixed,
5. As die bonus increases at a decreasing rate, at higher levels of efficiency,
the worker is not induced to rush through the work.
Disadvantages:
1. It is more complicated and costlier than the Halsey system.
2. It is not easily understood by workers and leads sometimes to disputes.
3. It does not provide adequate incentives beyond a certain level.
4. Where time saved is more than 50% of the standard, time, the total
earnings start decreasing.
Bonus = Time saved / Standard Time x Rate per hour x Actual time
Problem: 3
Calculate Earnings under Rowan scheme:
Standard Time = 100 hours
Time taken = 80 hours
Rate per hour = Rs.10
Bonus = time saved / standard time x Actual time x Rate per hour
= 20 hours / 100 hours x 80 hours x 10 = Rs.160
Time wage = Actual time x Rate per hour
= 80 hours x Rs. 10 = Rs.800
Total Earnings = Rs.800 +160=Rs. 960 .
Problem: 4
Calculate Halsey and Rowan Premium plan from the following data:
Time allowed = 96 hours
Time taken = 80 hours
Rate per hour = Rs. 2
Solution:
Halsey Plan:
Bonus = 50% Time saved = 96-80=16 / 2 = 8 hours
= 8 hours x Re.2 = Rs. 16
Total Earnings = Rs. 160 (80 x 2) +16 = Rs.176.
Rowan Plan:
Bonus = 16 / 96 x 80 x 2 = Rs. 26.66
Time wages = 80x2=160
Total Earnings = 160 + 26.66=Rs. 186.66
Problem: 5
A worker takes 12 hours to complete a. job on daily wages and 9 hours on
a scheme of payment by results. His day rate is Rs. 4 per hour. The material cost
of the product is Rs. 6 and the overheads are recovered at 150% of total direct
wages. Calculate Factory cost of the product under.
a) Piece Work Plan, b) Rowan Plan, c) Halsey Plan.
Solution:
a) Wages under piece work plan:
9 hours @ Rs.4 per hour = Rs. 36
b) Wages under Rowan plan:
Bonus = 3/12 x Rs.9 x 4 = Rs.9.00
Time wages = 9 hours x 4 = Rs. 36.00
Total Earning = Rs. 45 (Rs.36 + 9)
c) Wages under Halsey plan:
Bonus = 50% 3 hours x Rate per hour
= 1 1/2 hours x 4 = Rs.6
Time wages = 9 hours x 4 = Rs. 36.00
STATEMENT OF FACTORY COST
ELEMENTS OF COST PIECE WORK PLAN ROWAN PLAN HALSEY PLAN
Material 6.00 6.00 6.00
Wages 36.00 45.00 42.00
Prime cost 42.00 51.00 48.00
Factory overhead 150% wages 54.00 67.50 63.00
Factory cost 96.00 118.50 111.00
Taylor's Differential Piece Rate System: This system was introduced by
Taylor, who was the father of Scientific Management Under this plan no time
basis wages are guaranteed, but two piece rates are fixed, low piece rate and
high piece rate . The lower rate is for those who are not able to achieve the
standard output and higher rate is for those whose output is at or above the
standard. Under this system, the standard job is established after careful time
and motion study and two piece rates are set.
The features of the scheme:
1) Day wages are not guaranteed.
2) A standard time for job established.
3) Two piece work rates are fixed. If the worker does the work in less than
the standard time, he receives the higher piece rate, whereas if he takes
longer time he receives the lower piece rate.
Suppose Standard Production =100 units per day.
Piece Rates:
1) 10 paise per unit for 100 units or more.
2) 8 paise per unit for less than 100 units.
Therefore a worker producing 100 units will get Rs.10 and one producing
110 units will get Rs. 11. On the other hand, a worker producing 90 units will
get at the lower rate of 8 paise per unit, (90 x 0.08) i.e., Rs. 7.20.
Advantages:
1) This method is simple to understand and calculation of wages is not
difficult. It also provides a strong incentive to efficient workers.
2) It is advantageous from the point of view of the employer since it helps
much in increasing production by offering higher rates to more efficient
workers.
3) It attracts efficient workers.
4) Where the overhead's are high its incidence per unit cost is reduced
because of increased production.

Disadvantages:
1) It penalises very slow or inefficient workers.
2) It does not guarantee, the minimum day wages and this insecurity affects
the morale of workers.
3) Labour cost will differ between the two levels of performance because of
two different rates.
4) It makes differences between efficient and inefficient workers and thus
creative rivalry.
5) This system is unfair to beginners who cannot attain the standard output
immediately.
Problem: 6
Standard production -200 Units per day
Low piece rate - 8 paise per unit .
High piece rate -10 paise per unit
Mr. X who produced 240 units and Y produced 190 units. Calculate their
Earnings under Taylor's Differential piece rate system?
Solution:
Standard output = 200 units per day
X Produced - 240 units he will get high piece rate.
X earnings = 240 units x 10 paise = Rs. 24
Y produced = 190 units he will get low piece rate
Y earnings = 190 units x 6 paise=Rs. 15.20
Problem: 7
Calculate earnings of worker Mithilash and Sailesh under straight piece rate
system and Taylor's Differential piece rate system from the following
particulars.
Normal rate per hour =Rs. 18.00
Standard time per unit = 10 seconds
Differentials to be applied:
80% of piece rate below standard
120% of piece rate at or above standard
Worker Mithilesh produced 2700 units per day and worker Sailesh produced
3200 units per day,
Per day = 8 hours
Solution:
Standard production 10 seconds = 1 unit
Standard production one minute 60 seconds / 10 seconds = 6 units
standard production per hour (60 minutes)
= 6 units x 60 minutes =360 units
standard production per day of 8 hours
= 360 units x 8 hours =2880 units.
Normal rate per hour = Rs. 18.00
Normal piece rate = Rs. 18.00 / 360 units = 0.05 piece
Low piece rate = 5 paise x 80 / 100 x 0:04 paise
High piece rate = 5 paise x 120 / 100 x 0.06 paise
Earnings of worker Mithilesh:
a) Under straight piece rate system
Number of units produced x Rate per unit
= 2700 units x 0.05 paise =Rs. 135
b) Under Taylor's Differential piece rate system
= 2700 units x 0.04 paise =Rs. 108
Merrick's Differential Piece Rate System: It is a modified version of the
Taylor's scheme and is also known Multiple Piece Rate System. Workers
producing below die standard output are not penalised by the low piece rate.
This plan lays down three rates, one for the beginner, the second for die
developing workers and the third for die highly efficient workers.
a) Upto 83% of the standard output, the workers are paid at the ordinary
piece rate i.e., the lowest of the three rates.
b) Those, whose output exceeds $3% of the standard but does not reach
100%, axe paid at 110%of the ordinary piece rate.
c) Those whose output is 100% or above, get the highest rate which is 120%
of the ordinary piece rate.
Features of the scheme:
a) Up to 83% of the standard output, workers are paid at the on piece rate.
b) 83% to 100 % of the standard output, at 110% ordinary piece rate and
c) above 100% at 120% of the ordinary rate.
The earnings increase with increased efficiency, performance above the
standard will be rewarded by more than one higher differential piece rate. This
plan is effective for high-level production.
Problem: 8
Calculate the earnings of worker. Sundar, Sankar, Mani straight piece rate
system and Merrick multiple piece rate system the following particulars:
Normal rate per hour = Rs. 18
Output per day of hours is as follows:
Worker Sundar = 380 units.
Worker Sankar = 460 units.
Worker Mani = 540 units.
Solution:
Standard output per minute = 1 unit
Standard output per hour 1 x 60 minutes = 60 units.
Standard output per day of 8 hours = 60 units x 8 hours = 480 units
Normal rate per hour = Rs. 18.00
Normal Output per hour = 60 units.
Normal piece rate = 18.00 /60 units = 0.30 paise.
Calculation of Efficiency of workers:
% of Efficiency = Actual output / Standard Output x 100
Worker Sundar output per day 380 units.
Sundar's Efficiency = 380 units/ 480 units x 100 = 79%
Worker Sankar output per day 460 units
Sankar‘s efficiency = 460 units / 480units x 100 = 96%
Worker Mani output per day 540 units
Mani‘s Efficiency = 540 units / 480 units x 100 = 112.5 %
Earnings of Worker Sundar
Under Straight piece rate system:
380 units x 0.30 paise = Rs. 114
Under Merrick Multiple system:
380 units x 0.30=Rs. 114
Worker Sankar Earnings:
Under Straight piece rate:
460 units x 0.30 = Rs. 138
Under Merrick System:
460 x 0.33paise = Rs. 151.80
Worker Mani Earnings:
Under Straight piece rate:
540 units x 0,30 = Rs. 162.
Under Merrick System:
540 units x 0.36 paise =Rs. 194.40
Emerson's Efficiency Plan: This is an American scheme which combines
guaranteed fixed day wage with a differential piece rate. This system guarantees
time wages even to those whose output is below standard. Standard output is
fixed to represent 100% efficiency. A bonus is paid to a worker whose output
exceeds 66 2/3 % of the standard output. The bonus increases gradually at a
stated rate so that at 100% efficiency bonus would rise to 20%. Beyond this,
bonus would increase at l% of basic rate for every 1% increase in output.
Features of the scheme:
A certain standard output is fixed for a worker for each job. A worker who is
able to attain two - thirds of standard output is deemed a normal worker and
gets only guaranteed time rate. A worker who goes above the two-thirds
standard, is paid, in addition to his normal wage, a bonus the rate of which
increases as the extent of the excess of the output over two-thirds standard
increases.
Advantages:
1) The system is simple to understand and easy calculation. It provides
incentives for beginners also.
2) The disparity in wages among workers under the other systems is also
reduced here.
3) It provides security to the worker as day wage is guaranteed.
Disadvantages:
The incentive is quite small to attract very different and ambitious workers.
Problem: 9
Standard Output per day of 8 hours is 32 units. Actual output of a
workers for 8 hours is 40 unite Rate per hour is Rs.8. Calculate wages payable
for worker according to the Emerson's Efficiency plan.
Level of Efficiency = Actual Output / Standard Output x 100.
= 40 units / 32 units x 100 = 125% efficiency
20% Bonus = 25% Bonus
= Rs. 64.00 3-31
Bonus is payable 45% efficiency
(i.e) upto 100% Efficiency = 20% Bonus
Above 100% Efficiency = 25% Bonus
25% [125 - 100%]
Time wages for 8 hours of
Rs.8 per hour (8x8) = Rs. 64.00
45 / 100 x 64.00 = Rs. 28.80
Total Earnings payable to worker = Rs. 92.80
Gand's Task and Bonus Plan: This plan is a combination of time rate, piece
rate and bonus. It guarantees wages according to time basis. A high standard is
set and if this standard is achieved or exceeded, payment is made at a high piece
rate. This piece rate is so fixed so as to include a bonus of 20% over the time
rate of the worker. A worker who is not able to achieve the-standard or whose
efficiency is below 100%, gets wages at time rate and is not entitled to bonus.
The main feature as of this system are:
1. It is a combination of time rate, differential piece rate and bonus.
2. Day wages are guaranteed.
3. A standard task is set, on which a bonus may be earned if completed
within the standard time.
4. The bonus is a fixed percentage on the time taken.
5. A worker who attains the standard is paid a bonus, usually of 20% on his
time rate. Where he goes above the standard he gets at a higher piece rate
oh the worker's whole output.
Thus under this system, both time and piece rates are set and normal wages
are paid at the time rate or piece rate, Whichever is higher, in addition, a bonus
is also given if the work is completed within standard time.
Advantages:
1. It is simple to understand and easy to operate.
2. It provides an incentive to the efficient worker as well as security for less
efficient by guaranteeing the time rate.
3. It is useful where the overheads are very high.
4. It encourages better supervision and planning as under this scheme,
foreman also receives bonus.
Disadvantages: Guaranteed time rate Wage may act as a disinc for improved
production in case rate is fixed at a high level.
Bedaux Point Premium System:
This is premium bonus system in which standard tin determined by work study,
the time unit being the minute. A mi allowed time is termed as Bedaux point or
"B", sixty units make in hour's work, and the number of Bedaux points being
determined in respect of each job.
Example:
Allowed time for a job = 600 B's
No. of points earned = 720
Time rate = 1.80 per hour
Points earned = 720
Points allowed = 600
No. of points saved = 120
Time rate per minute is Re. 0.03 i.e., Rs. 1.80 / 60
Wages at time rate for 600 points = Rs. 18.00
Bonus = 75% of points saved at 3 paise per minute
= 120 x 75% x Re.0.03=Rs. 2.70
Total wages = 18.00 + 2.70=20.70.
Problem:10
Standard time required for a job is 30 hours.
Actual time taken for a job = 24 hours.
Rate per hour = Rs. 10 per hour.
Calculate worker earnings under Bedeaux point Premium plan:
Solution:
Standard time - 30 hours; one B = 1 minute
30 hours = 30 x 60 minutes = 1800 minutes
1800 B's = 1800 minutes
Actual time 24 hours
24 hours = 24 x 60 minutes = 1440 minutes
1440 B's =1440 minutes
Time saved = Standard minutes - Actual minutes
= 1800 - 1440 = 360 minutes
360 minutes = 6 hours
Bonus payable to worker 3/4 of tune saved
= 6 hours x ¾ = 4 ½ hours.
Calculation of Total Earnings:
Time wages 24 hours x Rs.10 = 240
Add: bonus 41/2 hours x Rs.10 = 45
Total Earnings = 285
Group Bonus Scheme
Bonus may be given individually to every worker or collectively to a
group of workers. When it is given collectively, it is known as group bonus
scheme. It is a scheme in which the bonus is calculated on the collective
production of a group of interdependent workers and distributed among the
individual members of the group on some agreed basis.
This system is employed in cases where the output of individual workers
cannot be measured and the ultimate production is dependent on the collective
efforts of a group of workers as a whole.
Group system of payment encourages co-operation and team work among
the workers. Supervision work is reduced.
Advantages:
1. It infuses co-operation and team-work among the workers.
2. Absenteeism is often reduced because an absent member weakens the
group and most workers do not like to let down their team
3. This system requires less clerical work.
4. Supervision work is reduced.
5. Indirect workers can also be included in the scheme.
Disadvantages:
1. This system is unfair to hard-working and efficient workers of the group
as an efficient worker is penalised for in efficiency of other members of
the group.
2. It is difficult to get workers acceptance of the scheme.
3. There may be some practical difficulties regarding fixing the amount of
incentive and how it is to be distributed to individual workers.
4. The amount paid as bonus to each member of the group is as small and
that may not prove to be an effective incentive.
ESSENTIALS OF A GOOD WAGE SYSTEM
Simplicity: The method should be simple and easy to understand by workers so
that workers so that workers can calculate their own wages.
Minimum wage: A good system should guarantee minimum wage to give
workers a sense of security.
Incentive: The scheme of payment should provide sufficient incentive to
workers to work more taking into account the quality of production.
Flexibility: The system should be flexible enough so that changes may be
introduced, if necessary.
Satisfaction: The system should be satisfactory from the point of view of both
worker and the employer.
Law labour turnover and absenteeism: A good system should reduce labour
turnover and absenteeism.
Economical: It should be economical in operation.
Approval of Trade Union: It should be acceptable to trade union.
Fringe benefits:
Fringe Benefits ( Individual Monetary benefits):
Dearness Allowance
Sick Pay
Provident Fund
Employee's State Insurance
Maternity Leave Pay
Night Shift Allowance
Holiday Pay
Gratuity; Pension
Annual Bonus
Fringe Benefits ( Group Non-Monetary):
Subsidised Conveyance
Subsidised Canteen Facilities.
Medical Care
Free Housing.
CONTROL OVER LABOUR COSTS
Labour control is primarily concerned with the proper employment and
efficient utilization of labour force. Labour cost control aims at the control of
the labour cost per unit-of production and not at the reduction of wage rates of
workmen.
1. Control over labour cost can be exercised in the fallowing manner:
2. Production Planning: Production should be so planned as to have the
maximum and rational utilization of labour. Production plarmmg consists
of the product and process engineering, programming, routing and
direction.
3. Recruitment of Efficient Workers: Proper selection and training of
workers and placing them to the jobs for which they are best suited helps
in achieving the optimum output and minimum labpur cost per unit.
4. Wage Policy: Wage plan including incentive scheme should be studied to
find out how far the remuneration paid on the basis of incentive plan
matches with increased production.
5. Setting up of Standards: With the help of work study time study and
motion study, standards are set for production operations.
6. Labour Budgets: Labour budgets are also used for control over labour
costs.
7. Labour Performance Reports: Management can also exercise control on
labour and labour cost with the help of periodical labour utilization and
labour efficiency reports.
Direct Expenses. (Chargeable Expenses)
A chargeable expense is an expense which is specifically incurred in connection
with the execution of a particular job or work order. If includes all direct
expenses other than those-of direct material and direct labour. It forms a part of
prime cost of the product.
Examples for chargeable expenses are:
1. Hire of special plant and machinery required for a. particular job product
or process.
2. Cost of patents and royalties.
3. Cost of special layout designs or drawings.
4. Experimental costs and expenditure in connection with models and pilot
schemes.
5. Fees paid to architects surveyors and other consultants in connection with
a job.
Chargeable expense is that which can be allocated directly to a cost unit. But
overhead expenses cannot be allocated to cost units. These have to be
apportioned or absorbed by cost centres or cost units.
OVERHEAD
Definition: Overhead is defined as ―the aggregate of indirect Material cost,
Indirect wages, and indirect expenses‖.
It is the total of all indirect expenditure.
Overhead = Indirect material + Indirect wages + Indirect expenses
ICMA defines overhead as total cost of indirect materials, wages and
expenses.
Overheads costs cannot be allocated but it can be apportioned
and absorbed on-an equitable basis.
It is also known as "On cost", "burden'', indirect expenses.
Cost Allocation and Apportionment
Cost Allocation: It means the allotment of whole items of cost to cost centre or
cost units.
Cost Apportionment: It involves allotment of proportion of items of cost to
cost centres or cost units.
CLASSIFY OVERHEAD
OVERHEAD CLASSIFICATION
OVERHEAD
FUNCTION WISE
1. Factory Overhead
2. Administration
Overhead
3. Selling Overhead
4. Distribution Overhead
ELEMENTS WISE
1. Indirect materials
2. Indirect Labour
3. Indirect Expenses
BEHAVIOUR WISE
1. Fixed
2. Variables
3. Semi- VAriable
Function Wise Classification: This classification is made on the basis of four
major function in a concern. i) Factory Overhead ii) Administration Overhead
iii) Selling Overhead iv) Distribution Overhead.
I. Factory Overhead: It is all indirect expenditure incurred in connection
with manufacturing operations. It consists of indirect material, indirect
labour and indirect expenses incurred in producing an article.
Examples: Power, Factory rent, Lighting & Heating Foreman Salary,
Depreciation on Plant & Machinery.
II. Administration Overhead: It includes all those costs which are incurred
in general and financial management of a concern.
Examples: Audit fees, legal charges, postage/ telegrams and telephone]
printing & stationery, Depreciation, of office building, Director's fee,
office rent, salary to office staff.
III. Selling Overhead: It refers to those indirect costs which are associated
with marketing and selling activities.
Examples: Advertisement costs, Bad debts, sales office expenses, sho
room expenses, salesman salaries.
IV. Distribution Overhead: It means the expenses incurred from the stage of
product is completed in the works till the product reaches its distribution.
Examples: Packing, godown rent, Depreciation, on delivery van, carriage
outwards.
Element Wise Classification: On this basis, overheads are classified under
three groups.
i) Indirect Material ii) Indirect labour iii) Indirect expenses
I. Indirect Material: are those material its cost cannot be allocated to
specific cost unit but which can be apportioned to or absorbed by and
does not form a part of finished goods.
Examples: Lubricants, cotton waste, consumable stores.
II. Indirect Labour: The wages of Indirect labour which cannot be
allocated but which can be apportioned to or absorbed by cost centre or
cost unit is known as indirect labour.
Examples: salary of supervisor, wages for maintenance workers
overtime, holiday pay, employee's contribution to provident fund.
III. Indirect Expenses: are those expenses which cannot be allocated but
which can be apportioned to or absorbed by cost centres or cost units.
Examples: Rent, rates, insurance, taxes, welfare expenses, lighting and
heating, Depreciation an plant Sc. machinery printing, stationery,
telephone, telegram etc.
Behaviour Wise Classification:
According to his behaviour, overheads are grouped into i) Fixed ii)
Variable iii) Semi variable.
I. Fixed Costs: These costs remain fixed in total and do not increase or
decrease when the volume of production increases or decreases. But the
fixed cost per unit increases when the volume of production decreases
and fixed cost per unit decreases when the volume of production
increases. It is also known as period cost.
Examples: Rent, insurance on building, salary to staff, Depreciation of
plant and machinery postage, stationery.
Example:
For 10000 output
Total Fixed overhead Rs. 1,00,000
Fixed cost per unit = 1,00,000 / 10,000 units = Rs.10 per unit
suppose output is increased to = 20,000 units
Total Fixed overhead = 1,00,000
Fixed cost perunit = 1,00,000 / 20000 units = Rs. 5 per unit
II. Variable Costs: These cost will change in proportion to the volume of
production (ie) when volume of production increases total variable cost
also increases and when volume of production decreases total variable
cost also decreases. But variable cost per unit remains fixed.
Examples: Direct Material Cost, Direct Wages, Power, Royalties, Royalities,
Fuel, Spoilage, Indirect Material, Indirect Labour, Idle Time etc.
Example:
Output 10000 units
Variable overhead = Rs.1,00,000
Per unit = Rs. 1,00,000 /10000 units = Rs.10
If the output increases to 20,000 units
Variable overhead = 1,00,000 / 10,000 units x 20,000 = Rs.200000
Variable overhead per unit = 2,00,000 / 20,000 units = Rs. 10
Variable Cost = Prime cost + All variable-overheads
III. Semi-variable Costs: These are certain items of cost which are part fixed
and partly variable. These are called semi variable costs.
Examples: Telephone, compensation to salesman, repairs and
maintenance, depreciation of plant & machinery.
ALLOCATION AND APPORTIONMENT
(PRIMARY DISTRIBUTION)
Allocation:
It means charging the full amount of overhead cost to a cost centre.
Definition: Allocation has been defined as, ―the allotment of whole item of cost
to cost centres or cost unite‖. It depends on the nature of cost.
Examples:
Allocation
Salary of a time keeper --- Time keeping Department
Salary of a foreman --- Production Department
Apportionment:
It is "allotment of proportions of items of cost to cost centres or cost
units".
Examples:
Overhead Basis
Rent of building Area occupied
Difference between cost Allocation and Apportionment :
S.No Allocation Apportionment
1 It deals with whole items. It deals with proportion of items of cost.
2
Some costs may be directly
allocated.
Costs can be apportioned on a suitable
basis.
Bases of Apportionment:
The following are main bases of overhead apportionment:
I. Direct Allocation: Overheads are directly allocated to various departments
on the basis of expenses for each department respectively.
E.g.: Indirect Material, Indirect Wages. Power & Light (when separate
metres ate installed)
II. Direct Labour: Under this basis the overhead expenses are distributed to
various dept, in the ratio of a total number of labour / hours worked in
each Debt.
E.g.: Salary of supervisor, Administrative expenses.
III. Direct Wages: According to this basis, expenses are distributed amongst
the departments in the ratio of direct wages.
E.g.: Contribution to provident fund workers compensation workers
insurance.
IV. Electric Light - Number, of light points
V. Electric Power - Kilowatt hours.
VI. Floor Area: This basis is adopted for the apportionment of certain
expenses like rent, rates on building lighting and heating.
VII. Capital Values: In this method the Capital value of certain assets like
machinery and building are used for the apportionment of certain
expenses. E.g.: Rent taxes of building, Depreciation of plant.
Cost Classification:
This is the process of grouping costs according to the common characteristics.
Cost may be classified accounting to various characteristics nature, functions,
variability etc.
Departmentalisation of Overhead Expenses:
In a factory there are two types of departments a) production department
b) service department.
Manufacturing processes carried out m the product. A service department
provides service for the benefit of other departments.
Departmentalisation of overhead expenses refers to the apportionment of
overhead between production and service departments and the reapportionment
of all service, department overheads to the production departments.
Primary distribution of overhead
Common expenses have to be apportioned or distributed between production
and service department on some equitable basis. The process of distribution is
usually known as primary distribution.
Problem: 1 Primary Distribution Overhead
Moorthy Company Ltd is divided into four Department A, B and C are
production Departments and D is service Department. The actual costs for a
period are as follows:
Rs. Rs.
Rent 5000 Supervision 3000
Repairs to plant 1400 Fire Insurance for stock 800
Depreciation on plant 2800 Power 2000
Employer‘s liability for insurance 2200 Light 300
Stores overhead 5000 Welfare expenses 4500
The following information available in respect of four departments.
Overhead Dept. A Dept.B Dept. C Dept.D
Area (Sq. Meters) 2000 1500 1000 500
No. of Employees 500 400 350 250
Direct wages 4000 2500 3000 1500
Value of plant 6000 4800 3600 2400
Value of stock 2000 3000 2000 1000
H.P. Plant 15 10 10 5
Direct material 1200 800 300 200
Apportion the costs to the various departments on the most equitable basis.
Solution:
Overhead Basis of
apportionment
Total
Amount
Production Department Service
Department
Dept. A Dept.B Dept. C Dept.D
Rent
Floor area
4:3:2:1
5000 2000 1500 1000 500
Repairs to plant
Plant value
5: 4 : 3: 2
1400 500 400 300 200
Depreciation
Plant value
5: 4 : 3: 2
2800 1000 800 600 400
Employer‘s liability for
Insurance
Direct wages
8:5:6:3
2200 800 500 600 300
Stores overhead
Direct material
12 : 8 : 3 : 2
5000 2400 1600 600 400
Supervision
No. of employees
10 : 8 : 7 : 5
3000 1000 800 700 500
Fire insurance stock
Direct material
12 : 8 : 3 : 2
800 200 300 200 100
Power
H.P. plant
3:2:2:1
2000 750 500 500 250
Light
Floor area
4:3:2:1
300 120 90 60 30
Welfare expenses
No. of employees
10 : 8 : 7 : 5
4500 1500 1200 1050 750
Total overhead 27000 10270 7690 5610 3430
Secondary Distribution of Overhead:
Service department costs are to be reapportioned to the production
departments or cost centres where production is going on. This Process of
apportionment of overhead expenses is known as second Distribution.
Methods of distribution of service department overhead to production
departments:
Methods of Re-apportionment. (Methods of Redistribution)
Appprticmment of service Department overheads
Apportionment to production as well as Service
departments (Step method)
Non - reciporcal basis Reciporal basis
Simultaneous
equation
Repeated
distrbution Trial and error method
Appcrtionment to production
Departments only (Direct Redistribution)
Apportion to Production and Service department:
Under this method cost of service department is apportioned to
production department and other service department on some suitable basis. It
may be reciprocal and non-reciprocal basis.
Problem: 2
Direct Reapportionment Non-Reciprocal Method:
Production Dept. Service Dept.
Primary distribution A B C D E
Overhead summary 8000 6000 5000 1000 800
Apportion expenses of service Dept. D in the ratio of 2:2 :1 and service Dept. E
in the ratio of 2:1:1.
Solution:
Production Department Service Department
ABCDE
Total overhead 8000 6000 5000 1000 800
Dept. D Rs. 1000 allocated 400 400 200 --- ---
Dept. E 2:1:1 Rs. 800 allocated 400 200 200 --- ---
Total 8800 6600 5400 Nil Nil
Apportionment and Non-reciprocal basis (step method)
The service department costs are arranged in the descending order of their
serviceability. The cost of most serviceable department-is first apportioned to
other service departments and production departments. The next best service
department cost is apportioned and' tins process, goes on till the cost of each
service department is apportioned, thus the cost of last service department is
apportioned. Thus the cost of service department is apportioned only to
production department.
Step method Problem : 3
A manufacturing company has two production Department namely A and B and
three Service Depts. Time keeping, stores and maintenance.
Production Department Service Department
AB
Time keeping
S1
Stores
S2
Maintenance
S3
Primary overhead summary 20000 30000 4000 3000 2000
Other information S1 S2 S3 A B
No. of Employees --- 10 5 40 25
No. of Stores requisition --- --- 4 16 15
Machine hours --- --- --- 3000 2300
Solution:
ABS1S2S3
Overhead summary 20000 30000 4000 3000 2000
S 1 (Time Keeping)
A:B:S2:S3 (40:25:10:5)
2000 1250 (-)4000 500 250
S 2 (Stores)
A:B:S1:S2 (16:15:4)
1600 1500 --- (-)3500 400
S 3 (Maintenance)
A:B (30:23)
1500 1150 --- --- (-) 400
25000 33900 Nil Nil Nil
Apportionment for reciprocal basis
Each service department has to receive and give their cost each other on
the basis of agreed ratio. There are three methods which may be used for the
reciprocal basis.
i. Simultaneous Equation Method
ii. Repeated distribution Method
iii. Trial and Error Method.
1. Simultaneous Equation Method:
In this method, the total overhead cost for each service department is
expressed in the form of algebraic equation with the help of percentage of
distribution of the service cost.
Draw backs: It needs a large number of calculations and is not suitable
where there are more than two service department.
2. Repeated Distribution Method:
Under this method overhead of service departments are redistributed
to the production department as well as service department on the basis of
agreed percentage. This process is repeated till the amount of service
departments are exhausted.
3. Trial and Error method:
Under this method the cost of one service department is
apportioned to another department. The department plus share received
from department first department is again apportioned to first department
and this process is repeated till the balancing figure becomes negligible.
Problem: 4
A company has three production departments and two service departments and
for a period the departmental distribution summary has the following totals:
Production Departments: Rs.
X - Rs-1000; Y - Rs.900 and Z - Rs.600 = 2500
Service Departments:
A – Rs. 200; B - Rs.l50 = 350
Total 2850
The expenses of service departments are charged out on a percentage basis as
follows :
XYZAB
Service Dept A 20% 40% 30% --- 10%
Service Dept B 30% 20% 30% 20% ---
Prepare a statement showing the apportionment of two service department
expenses to production departments under Repeated distributed Method.
Solution: Repeated Distributed Method:
XYZAB
As per overhead summary 1000 900 600 200 150
Service Dept. A Rs.200
X:Y:Z:B 2:4:3:1
40 80 60 (-) 200 20
Service Dept. B Rs.170
X:Y:Z:A 3:2:3:2
51 34 51 34 (-) 170
Service Dept. A Rs.34
X:Y:Z:B 2:4:3:1
7 14 10 (-) 34 3
Service Dept. B Rs.3 1 1 1 --- ---
X:Y:Z 3:2:3
1099 1029 722 --- ---
Simulation Equation Method:
Let X = Total overhead of Department A
Let Y = Total overhead of Department B
X = 200 + 20y / 100 (or) 200 + 0.2 y
Y = 150 + 10x / 100 (or) 150 + 0.1x
To eliminate decimals multiplying both equation by 10
10x – 2y = 2000 --------(1)
x + 10y = 1500 ---------(2)
Multiplying equation (1) by 5
50x – 10y = 10000
x + 10y = 1500
49x = 11500
X = 11500 / 49 = 234.9 or 235
Substitute this value in equation (1)
235X – 2y = 2000: 2Y = 2347 - 2000
2Y = 234 : Y = 347 / 2 = 173.5 Rs.174
Total X Y Z
As per distribution summary 2500 1000 900 600
Service Dept. A – 90% 235
(235 x 90/100) 2:4:3
211 47 94 70
Service Dept. B – 80% 174
(174 X 80 / 100)3:2:3
139 52 35 52
TOTAL 2850 1099 1029 722
Absorption of Overheads:
Overhead absorption is the process of charging to the product or
cost centre all the overheads allocated and apportioned to it.
Definition: Overhead absorption is the "allotment of overhead to cost
units". -I.C.W.A
Meaning: Distribution of overhead expenses allotted to a particular department
over the units produced in that department.
Methods of absorption:
1. Direct Material cost percentage rate
2. Direct labour percentage rate
3. Prime cost percentage rate
4. Direct labour hour rate.
5. Machine hour rate
6. Rate per unit of production.
1. Direct Material cost percentage rate: Under this method factory
overhead are absorbed on the basis of direct materials consumed in
producing the product.
overhead rate = Overhead expenses / Direct material cost x 100
E.g.: Factory overhead Rs. 20000
Direct material Rs. 80000
Overhead Rate = 20000 / 80000 x 100 = 25 %
Advantages: It is easy and simple to use.
Disadvantages:
1. It ignores time factor.
2. There is no logical relationship between manufacturing cost and cost of
raw materials used.
3. This method does not make distinction between skilled and unskilled
workers.
2. Direct labour percentage rate:
This is another simple and easy method. In this method percentage
of factory overheads to direct labour cost is calculated as follows:
Overhead rate = Factory overhead / Direct labour cost x 100
E.g.: Factory overhead = Rs.5000
Direct wages =Rs. 50,000
Overhead Rate = 5000 / 50000 x 100 = 10%
Advantages:
i. Labour rate do not change frequently. Hence this method gives
stable results.
ii. Simple and easy to use.
Disadvantage:
i. When workers are paid as piece basis. This, method will not give
satisfactory result.
ii. Where the labour is not the main factor of production absorption of
overhead is not equitable.
3. Percentage on Prime Cost Method:
This method takes both direct material and direct wages for the
absorption of overhead. Overhead rate in his method is calculated by
dividing the factory overhead by the prime cost.
E.g.: Factory overhead =Rs. 30000
Prime cost =Rs. 60000
Overhead rate = 30000/ 60000 x 100 = 50%
Advantages:
i. This method is simple and easy
ii. It does not require any special accounting records to be kept for its
operation.
Disadvantage:
i. This method combines the limitation of both direct material and direct
labour method.
ii. It does not give proper labour method.
4. Direct Labour Hour Rate: The direct labour hour rate is the overhead
cost of a direct worker working for one hour. This rate is determined by
dividing the overhead expenses by the total number of direct labour
hours.
= Factory overhead / direct labour hours (Direct wages) x 100
Factory overhead =Rs. 20000
Direct labour hours =Rs. 4000
=20000 / 4000 x 100 = 50%
Thus for a job requiring direct wages Rs. 100, overheads to be absorbed by
that job shall be 50% Rs.50.
Advantages:
i. It gives due consideration to time factor.
ii. It is most suitable where labour constitutes the major factor of
production.
iii. This rate is not affected by the method of wage payment.
iv. Labour rates one more stable than material prices.
Disadvantages: Additional records of labour must be maintained if this method
is to be used. It will lead to increase the clerical work.
5. Machine Hour Rate: This, method is applicable where work performed
mainly on machines.
Machine hour rate means the cost of running a machine for one
hour. Under tins method overheads are charged to production on the basis
of the number of hours a machines are used for a particular job. Thus
machine hour rate means the expenses incurred in running a machine for
one hour. Machine hour rate is obtained by dividing the amount of
factory overhead by the number of machine hours.
E.g.: Overhead for machine A - Rs.10,000
No. of machine hours - 5,000
Machine hour rate = 10,000 / 50000 = Rs.2 per hour.
Advantages:
1. It is a scientific and accurate method of allotting overhead expenses of
each job.
2. It gives a basis for the measurement of the monthly cost of idle machine.
3. It gives useful data for estimating the cost production and helps in the
fixation of selling price.
Disadvantage:
1. This method can be used only in those departments where work is done
by machines.
2. It is difficult to estimate total machine hours in advance.
Problem: 5 Work out the machine hour rate of a saw mill from the following
information of a wood working shop:
a) Purchase price of the saw mill Rs. 90000
b) Railway freight and installation charges Rs.,100
c) Life of the saw mill is 10 years and 2000 working hours per year.
d) Repair charges 50% of depreciation.
e) Consumption of electric power 10 units per hour @70 paise per unit.
Lubricating oil Rs.20 per day of 8 hours.
f) Consumable stores 100 per day of 8 hours
g) Wages of machine operator Rs. 40 per day of 8 hours
Solution: Computation of Machine Hour Rate
Depreciation:
Cost price saw mill 90000
Add Installation charges & Railway fright 10000
Total Cost Price Rs. 100000
Life of saw mill =10 years
Working hours one year =2000 hours
10 years working hours =20000 hours
Per hour
Depreciation per hour = Cost Price / Estimate life hours
(100000 / 20000hours )
5.00
Repair charges -50% Depreciation Rs. 5.00 / 2 = Rs. 2.50 2.50
Power (10 Units x 70 paste) = Rs.7.00 7.00
Lubricating oil expenses Rs. 20 / 8 hours=Rs. 2.50 2.50
consumable stores = Rs. 40 /8 hours - Rs. 5.00 5.00
Machine Hour Rate 22.00
Problem: 6
Calculate Machine Hour Rate from the following:
a) Cost of Machine Rs. 20,000
b) Estimated scrap value Rs. 1000
c) Repairs & Maintenance charges per month Rs. 225
d) Standing charges allocated to machine per month Rs.150
e) Effective working life of machine 1000 hours.
f) Running time per month 150 hours.
g) Powers used by machines; 10 units per hour 50 paise per unit.
Solution: Computation of Machine Hour Rate
Rate Per Hour
Standing charges:
Standing charges per month
Running time per moth 150 hours
Standing charges per hour = Rs.150/150 hours = 1.00 1.00
Variable expenses:
Depreciation = Cost Price – Scrap Value / Estimate Life of Machine
(Rs. 20000 – Rs. 10000 / 10000hours)
1.90
Repair & Maintenance charges Rs. 225 per month (225/ 150 hours) 1.50
Power (10 units x 0.50 paise) 5.00
Machine Hour Rate 9.40
Rate per unit of production:
It is the simplest of all the methods total overheads of a department are divided
by the number of units produced to give an overhead rate of per unit of output.
E.g.:
Production overhead = Rs. 20000
Number of units produced = 2000
Overhead rate = Rs. 20000/ 2000 =Rs.10 per unit
Overhead Rate
Overhead rate may be either (i) Actual rate ii) Predetermined rate.
Actual rate: This is the rate of overhead absorption which is calculated by
dividing actual overheads to be absorbed by actual quantity
Overheads = Actual overheads / Actual Quantity
Predetermined Overhead Rate: This is the rate of overhead absorption which
is calculated in advance of expenses incurred. This is calculated by dividing the
predetermined expenses by predetermined quantity.
= Predetermined Expenses / Predetermined Quantity
Under and over absorption of overhead
Absorption of overhead may be based on actual rate or Predetermined
rate, under Actual rate method of absorption costs are fully absorbed. But in
case of predetermined rates, overhead are not fully absorbed. (ie) overehaed are
not equal actual overhead incurred. It may be over or under absorption of
overheads.
Over Absorption: Over absorbed means that the amount of overheads absorbed
are more than actual overhead incurred.
E.g.:
Overheads Absorbed Rs. 50000
Less: Actual overheads Rs. 48000
Over absorption 2000
Under Absorption: It means the amount of overhead absorbed is Less than
actual overhead incurred.
E.g.:
Overhead Absorbed 50000
Less: Actual overhead 54000
Under absorption 4000
CAUSES OF OVER AND UNDER ABSORPTION:
a) Errors in estimating overhead expenses.
b) Unexpected changes in the method of production affecting the amount
of overheads.
c) Error in estimating the quantity of production.
d) Unforeseen changes in the production capacity.
e) Seasonal fluctuations in overhead in certain industries.
b) Accounting treatment of over and under absorption:
The under or over absorbed overhead may be adopted in the following three
ways:
Write off to costing profit and Loss account: When the amount of over or
under absorbed overheads is not large, the simple method is to write off to
costing profit & loss account.
Use of supplementary Rates: Where the amount of over or under absorption is
large this method is significant. A supplementary rate is calculated to adjust
amount of under or over absorbed overheads in the cost of work in progress,
finished stock and cost of sales.
This rate is calculated by dividing the amount of over [or] under
absorption by the actual base:
In case of under absorption, overhead is adjusted by a plus rate since the
amount is to be added, while over absorption is adjusted by minus rate since the
amount is to be deducted.
Carry over to the next year accounts: Under this method, the balance
in under and over absorbed overhead account at the end of the year
carried to next year.
Administration Overhead
Administration overhead is the indirect expenditure incurred formulating
policies, planning and controlling the functions, directing a motivating the
personnel of an organisation in the attainment of its objectives.
E.g.: Office salaries, postage, telephone, stationery, audit fee etc.
Accounting Treatment (Apportionment): There are three methods of
accounting of administration overheads.
1. Apportionment to Production and Selling Function:
Under this method office and administrative overheads are not
treated separately but are apportioned to production and selling function
on some suitable basis.
2. Addition as a separate item of cost: In this method administration
overhead is added as a separate element to the cost units and shown in the
cost sheet.
Adm. overhead Rate = Administration overhead / works cost x 100
3. Transfer to Costing Profit & Loss a/c: In tins method administration
overhead are closed by transfer to costing profit & loss a/c at the end of
year.
SELLING AND DISTRIBUTION OVERHEAD
i. Selling Overhead: It is the cost of seeking and to create and stimulating
demand and of securing orders.
E.g.: Advertisement cost, salesman salary, show room expenses, after sales
service cost
ii. Distribution Overhead: It is the cost incurred in placing the sold goods
in possession of customers. It includes all expenditure incurred from time
of product is complete until it reaches its destination.
E.g.: Packing costs, insurance of goods in transit, warehouse expenses.
Differences between Selling Overhead and Distribution Overhead:
S. No. Selling Overhead Distribution Overhead
1
It is incurred for promoting sales. It is incurred in moving goods
from the company's godown to
customer's place.
2
The object of selling overhead is to
solicit the! orders and to make efforts
to find and retain customers.
The object of distribution
expenses is the safe delivery of
the product to the customer.
Absorption of Selling and Distribution Overhead:
The following methods are usually adopted for the absorption of selling
and distribution, expenses.
a) A Rate per unit: under this method the total estimated selling and
distribution overhead is divided by the estimated number of units to be
sold. This gives rate per unit sold.
b) A percentage of selling price: on the basis of past records a percentage
of selling and distribution overheads to sales is determined.
c) A percentage on works cost: In this method a percentage of selling and
distribution overhead for works cost is ascertained. This percentage is
used to recover selling & Distribution overhead.
Control of Factory Overheads:
Control of factory overheads involves following steps:
i. Overheads should be classified according to variability: (fixed,
variable and semi-variable)
ii. Overhead cost should be budgeted by each classification and
department: The budgets are determined with reference to budgeted
level of activity of that department.
iii. Actual overheads should be collected and classified in the same frame
work as budget.
iv. Due to introduction of standard costing, the variance between actual
and standard costs are analysed and reported for corrective action.
Problem: 7
Calculate normal and overtime wages payable to a workman from the following
data:
Days Hours worked
Monday 8
Tuesday 11
Wednesday 9
Thursday 10
Friday 10
Saturday 4
Normal working hours: 8 hours per day; Normal rate: Rs.5 per hour. Overtime
rate upto 9 hours in a day at single rate and over 9 hours in a day at double rate
[or] upto 48 hours in a week at single rate and over 48 hours at double rate
whichever is more beneficial to the worker.
Solution: Calculation of Normal and overtime wages
Days Hours Worked Normal Hours Overtime Single
Rate
Overtime Double
Rate
Monday 8 8 --- ---
Tuesday 11 8 1 2
Wednesday 9 8 1 ---
Thursday 10 8 1 1
Friday 10 8 1 1
Saturday 4 4 --- ---
Total 52 44 4 4
Method: 1
Normal wages; 44 hours @Rs. 5 per hour = 220.00
Overtime: Single 4 hours @Rs. 5 per hour = 20.00
Double 4 hours @Rs. 10 per hour = 40.00
Total Rs. = 280.00
Method III
Normal wages @ Rs.5 per hour for 48 hours = 240.00
Overtime wages @ Rs.10 per hour for 4 hours = 40.00
Total Rs. = 280.00
The wages payable under both methods will be the same.

UNIT IV
PROCESS COSTING
Meaning
 Process Costing is a method of costing to find out the cost of production when the
product undergoes different stages or process of production.
 The characteristics of process costing, is that the finished product of one process is used
as the raw material of another process.
 Apart from this each process has its own expenses like, material cost, labour cost and
other expenses.
 This costing method helps to ascertain the cost of production and the cost per unit in
each stages of production.

Difference between process Costing and Job costing

Job Costing Process Costing
1 Costs are computed for each job Costs are computed for each process for a
separately period
2 Reduction is against specific order Production is not against specific order
3. Each job is separate and independent in Production is continuous and products are
nature homogeneous
4 Costs are found out when job is Costs are found out each end of the process
completed
5. Control is difficult as each product unit is Control is easier as the production is
different standardized

Procedure for preparing Process Account

1. The process costing is prepared in ‘T’ form containing debit side and credit side.
2. All expenses are debited in the process account. The opening stock in each process is
also debited.
3. The transfer of completed work I to next process and the closing stock in the process are
credited.
4. The expenses debited in the process account contain direct material cost direct labour
cost, direct expenses and factory overhead, the material is usually debited only in the
respective process account.
5. The factory overhead debited in the process account may be incurred commonly for all
the process. This will be apportioned on the basis of some predetermined overhead rates.
6. The work of each process is to supply in output as an input to the next process account.
7. Normal process loss will not be shown in the process account and it will automatically
be adjusted in the process cost.
8. If the output in the process is less than the input of material, after making adjustment of
the normal loss opening stock and closing stock then it is called abnormal loss.
9. If the output in a process is greater than the input of material after making the adjustment
of the normal loss, opening stock and closing stock, then it is called abnormal gain.
Problem
Prepare process cost accounts from the following data
Process Process Process Z
X Y
Direct Material (Rs.) 41,500 32,400 24,000,
Direct wages 20,700 27,400 24,100
Factory overhead 14,300 17,700 12,300
Number of units produced 25,000 30,000 32,000
st
Stock as on 1 August 2011 (Units) ---- 6,000 3,000
(from Proceeding process
Stock on 31st August 2011 (units) ---- 4,000 6,000

Assume that the increase of output in subsequent process is due to additional material
Solution
Process X Account
Particulars Rs Particulars Rs
To Direct 41,500 By Process Y A/c 85,500
Material To 29,700
Direct swages 14,300
To Factoory Overhead
85,500 85,500

Process Y Account
Particulars Rs Particulars Rs
To Opening stock of process 20,520 By Closing stock (of Process X)
X(6000x3.42) (4000 x 3.42) 13,680
To Process X A/c 85,500
To Direct Material 32,400 By Process Z A/c(Transfer @ 169,840
To Direct wages 27,400 Rs.5.66 per units 30,000 Units
To Factory Overhead 17,700
183,520 183,520

Process Z Account
Particulars Rs Particulars Rs
To Opening stock (of Process 16,980 By Closing Stock (of process 28,300
Y)
Y)(3000 x 5.66) (5000 x 5.66)
To Process Y A/c 169,840 (Transfer @ Rs.6.86 per unit ) 2,19,520
To Direct material 24,600
To Direct wages 24,100
To Factory overhead 12,300

2,47,820 2,47,820
Treatment of Process Losses and Gain
Process Losses: Process losses are two types. They are I) Normal Loss II) Abnormal loss
Normal Loss
Normal loss is a loss which arises due to unavoidable and uncontrollable situation. It
should not be prevented. It forms part of the manufacturing process. Normal loss may be in the
form of Scrap, Normal wastage and Normal spoilage

Abnormal loss
Abnormal loss is a loss which arises due to abnormal and unexpected situation. This loss
can be controlled and avoided. Abnormal loss may be due to abnormal wastage, abnormal
spoilage, negligence, accident, fire, theft etc.,

Cost of production (excluding the realization of

Normal loss) X Abnormal loss units
Value of abnormal loss = --------------------------------------------------------------------------------------
Number of units produced (including the Abnormal
Loss unit and including the normal loss units if any,
From the input units

Process gain or abnormal gain

Process gain is otherwise called abnormal gain. Abnormal gain arises when the actual
normal loss is less than the standard or expected normal loss. For example if the input of material
is 1000 units, the abnormal loss is 100 units and the output is 950 units, then the abnormal gain is
50 units
Cost of production (excluding the realization
of Normal units) X Number of Abnormal gain
units
Value of abnormal gain = ---------------------------------------------------------------------------------
Number of units produced
Problem
W. D & Co.Ltd produces a product with the help of three processes. The following are the
information available in the cost records of the company.
Process A Process B Process C
Material 5,500 1,200 3000
(Rs.) 4,500 5000 5,500
Wages(Rs) 10% 20% 15%
Normal loss as a percentage of input Nil 4 5
Value of scrap per Kgs (Rs) 650 600 450
Output (Kgm)
In the process A, 800kgm are introduced to Rs. 10 per Kgms. Factory overhead absorbed is 80
% on direct wages.
Prepare process account, abnormal loss account and abnormal gain account.
Solution
Process A Account
Particulars No of Rs. Particulars No.of Rs.
units units
To Units introduced 800 8,000 By Normal loss 80 --
To Material 5,500 By Abnormal 70 2,100
To wages 4,500 loss @Rs.20
To Factory overhead 3,600 By Process B A/c 650 19,500
(80% of wages) (Transfer) @ Rs.30
800 21,600 800 21,600

Process B Account
Particulars No of Rs. Particulars No.of Rs.
units units
To Process at A/c 650 19,500 By Normal loss 130 520
To Material 5,220 By Process C A/c 400 36,000
To wages 5,000 (Transfer) @ Rs. 60
To Factory Overhead 4,000
(80% of wages)
To Abnormal gain @ 80 4,800
Rs.60

730 36,520 730 36,520

Process C Account
Particulars No of Rs. Particulars No.of Rs.
units units
To Process C A/c 600 36,000 By Normal loss 90 450
To material 3,000 By Abnormal loss @ 60 5,700
To Wages 5,500 Rs.95
To Factory Overhead 4,400 By Finished Goods 450 42,750
(80% of wages) A/c @ Rs.95
600 48,900 600 48,900

Abnormal loss Acc

Particulars No of Rs. Particulars No.of Rs.
units units
To Process A A/c 70 2,100 By Sale of scrap in 70 --
To Process C A/c 60 5,700 process A a/c
By sale of scrap in 60 300
Process C A/c
By Closing P&L A/c -- 7,500
130 7,800 7,800
Abnormal Gain A/c
 Particulars No of Rs. Particulars No.of Rs.
units units
To Sale of scrap (due 80 220 By Process B A/c 80 4,800
to Normal loss@ Rs.4
To Closing P & L A/c 4,480
80 4,800 80 4,800

Workings:- 21,600

I) Cost per Unit in process A A/c = --------------- = Rs.30

600+70
(19,500+3220+500+400+520
II) Cost per unit in process B A/c = --------------------------------------
650 +130

= 31,720-520
--------------
520
= 31200
------------ =
520
= Rs. 60

Further Processing of By-Product

Companies may sometimes produce the by–product apart from the main product and the
last process. The by–product required for the processing before selling into customer. The value
of by-product is credited in the final process account by further process account. Further
processing accounting is debited with the cost processing the by-product. This accounts closed
by transferring to finished stock account.

Joint Product
The processing of one raw material combination of raw material, make two or more
finished products of equal important. These products are called Joint Product. For Example, in
the oil referring, products like petrol, oil gasoline and lubricating oil produced by processing of
crude oil.
UNIT V
RECONCILIATION OF COST AND FINANCIAL ACCOUNTS
The cost accounting will deal with the ascertainment of cost of productabsorption of overheads into
product cost, ascertainment of division wise profitability etc. Different sets of accounts are maintained
under financial accounting and cost accounting. The accounting principles, methods and practices are
differentunder these two accounting systems. The maintenance of different sets ofaccounts with
different objects will cause to show different figures, of profit or
loss in cost accounts and financial accounts and it will necessitate to reconciliation the two accounts
periodically and a statement of reconciliation is prepared to show the reasons for difference profit or
loss shown by cost andfinancial accounts. The cost and financial accounts are maintained in different
forms or follow different methods, principles and approaches and it will naturally result in difference in
profit or loss ascertained in the cost and financial accounts
which necessitates the reconciliation of both the sets of accounts to identify the causes for deviation. In
the financial ledger, expenses are recorded in a subjective from. Whereas in cost ledger, expenses are
analysed and classified in an objective form. As these two sets of accounts are maintained in different
forms, it is quite natural that their results may also differ. Therefore, it becomes necessary that these
two accounts should be reconciled. Why is reconciliation of cost and financial accounts necessary ?
State the possible reasons for differences between profits shown by both the accounts. When cost
accounts and financial accounts are independently maintained, the profit or loss shown by one set of
accounts may not agree with profit or loss shown by the other. Therefore, it becomes necessary that
profit or loss shown by the two sets of accounts be reconciled.
The need for reconciliation arises due to the following reasons:
a) Reconciliation is necessary to find out the reasons for the difference and
to ensure that no income or expenditure item has been omitted and that
there is no under or over-recovery of overheads.
b) Cost ascertainment and cost control depend on die accuracy of cost analysis, distribution and
allocation. If the total expense which isclassified and distributed in cost accounts is not correct, cost
allocationand ascertainment would be rendered inaccurate and misleading. It is,therefore, essential that
costing figures in total should agree, with thefinancial records in order to ensure the accuracy of
costing data.
Reason's for necessity of reconciliation:
The reasons for difference in profit or loss in cost accounts and financialaccounts is analysed and
highlighted.The reliability of cost accounting data and financial accounting data isverified by
reconciling both tie accounts.Reconciliation of born the accounts is necessary to ensure that there is
noover or under recovery of overheads.
Reasons for disagreement:
The difference in profit or loss ascertained in cost acounts and financialaccounts is due to the following
reasons:
a. Certain items only shown in financial accounts that are not coming m
cost accounts like:
Profit or loss on sale of fixed assets.
Discount on issue or redemption of shares and debentures.
Preliminary expenses written off.
Receipt of interest and dividends on investments.
Payment of Income-tax
Goodwill written off
b. Certain items only shown in cost accounts that are not coming
financial accounts like:
National rent on premises owned
Notional rent on Capital
c. Disagreement due to under or over absorption of overhead item.
d. Difference due to use of different methods of stock valuation:
In financial accounts, the stock of raw materials are valued at cost or
market value whichever is lower. Whereas in cost accounts stock may be valued
under FIFO, LIFO, Simple Average Cost, Weighted Average Cost, Standard
Cost etc.
The finished goods are valued under absorption existing method in
financial accounts. But in preparation of cost accounts, the finished stock may
be valued under absorption costing, marginal costing, standard costing etc.
e. Difference due to use of different rates of depredation
In financial accounts the amount of depreciation is charged as per tne
rates given in the Companies Act, 1956. But in Cost Accounts, appropriate and
suitable method is used for calculation of die amount of depredation.
Model: Reconciliation Statement
Rs. Rs.
Profit as per cost accounts (or) Loss as per financial accounts

XXX
ADD: XX
1 Take Income in Financial books XX
2 Take Expenses in cost books XX
3 Excess of income in Financial books over cost accounts XX
4 Excess of expenditure in cost accounts over financial accounts XX
5 Over absorption of overhead in cost accounts XX
6 Under valuation of closing stock in cost accounts XX
7 Over valuation of opening stock in financial accounts XX XXX
XX
LESS: XX
1 Take Income in cost accounts XX
2 Take Expense in financial accounts XX
3 Excess of income in cost accounts over financial accounts XX
4 Excess of Expenditure in financial books books over cost accounts XX
5 Under absorption of overhead in cost accounts XX
6 Over valuation of closing stock in cost accounts XX
7 Under valuation of opening stock in cost accounts XX XXX
Profit as per financial accounts (or) Loss as per cost accounts XX XX

Problem: Ascertain the profit as%per P&L accounts by preparing a

Memorandum Reconciliation Account
a) Profit as per costing records Rs. 1,45,000
b) Factory overheads under recovered in cost books Rs. 3,500
c) Office overheads under recovered in Financial books Rs.1,500
d) Depreciation shows excess in costing books Rs.950
e) Interest on Investments Rs.495
f) Receipts of income from share transfer Rs.200
g) Provision made for Income tax Rs.48500
Solution:
RECONCILIATION STATEMENT
Profit as per cost accounts 1,45,000
Add:
Excess depreciation in cost books 950
Interest on investments in financial books 495
Share transfer fee in financial books 200 1,645
1,46,645
Less:
Factory overhead under recovered 3500
 Office overhead under recovered 1500
Income tax provided in financial books 48500 53500
Profit as per financial books 93145
Problem:
The Net profit of Sundar Co., Ltd., appeared at Rs.8200 as per financial
records for the year ending 31st March 2003. The cost books should showed a
Net profit of Rs.90,000 for the same period A scrutiny of the figures from both
the sets of accounts showed the following facts.
1. Factory overhead under recovered in costs 2,000
2. Adrniriistrative overhead over recovered in costs 1,000
3. Depreciation charged in financial books 4,500
4. Depreciation recovered in Costs 7,000
5. Interest on investments not included in costs . • 3,000
6. Goodwill written off in financial books 6,000
7. Preliminary expenses written off in financial books 5,000
8. Income tax provided in financial books v: 10,000
9. Loss due to obsolescence charged in financial books 3,500
10. Bank interest and transfer fee credited in financial books 9,000
11. Stores Adjustments credited in financial books 9,000
12. Value of opening stock:
a) Cost a/c 7000
b) Financial a/c 9000
13. Value of closing stock:
a) Cost a/c 12000
b) Financial a/c 8000
c) Interest charged in cost a/c 6000
d) Loss an sale of furniture 1000
Prepare a statement showing the reconciliation between the figure of net
profit as per cost A/cs and figure of net profit as shown in the financial books.
Solution:
RECONCILIATION STATEMENT
Rs. Rs.
Profit as per cost Accounts 90000
Add:
Administrative overhead charged in cost A/cs 1000
Excess of Depreciation charged in cost A/cs
cost A/c . 7000
Financial A/c 4500 3500
Income in financial books:
Interest on investment 3000
Bank interest & transfer fee 9000
Stores adjustments 4000
Expenses charged in cost A/c
Interest charged in cost A/c 6000 33500
125500
Less: Expenses and losses in Financial books but not shown in
cost books
Goodwill written off 6000
 Preliminary expenses written off 5000
Income tax provided 10000
Loss due to abolescence 3500
Loss on sale on furniture 1000
Factory overhead under recovered in cost 2000
Under valuation of opening stock in cost A/c
Financial A/c 9000
Cost A/c 7000 2000
Over valuation of closing stock in cost A/c:
Cost A/c 12000
Financial A/c 8000 4000 33500
82000

Problem:
The net profit shown by financial A/c‘s of a company amounted to Rs.2,85,500
while profit as per cost accounts for that period was Rs. 388600 on
reconciliation The following differences were noticed.
a) The following items were included in the Financial books:
a. Director fees (Dr) 6500
b. Bank interest (Cr) 300
c. Income tax (Dr) 83000
b) Bad and doubtful debts for Rs.5700 were written off in financial books.
c) Overhead in cost accounts absorbed were Rs.85000 with the actual were
Rs.83200.
d) A net loss of Rs.l0,000 on sale of old machinery was dealt with in the
Financial books.
Reconcile the profits between the cost and financial accounts.
Profit as per cost Accounts 388600
Add: Income credited in financial A/c‘s:
Bank interest 300
Overabsorption of overhead in cost accounts (85000-83200) 1800 2100
390700
Less: Expenses and loss in Financial books
Director fee 6500
Income tax 83000
Bad and doudful debts 5700
Loss on sale of machinery 10000
105200
Profit as per Financial Accounts 285500
Problem:
The Net profit of a Manufacturing Co., Ltd. appeared of Rs.64377 as per
financial Records for the year ended 31st March 2003. The cost books however
showed a net profit of Rs. 86,200 for the same period. Prepare a reconciliation
statement from the following information.
Works overhead under recovered in costs 1560
Administrative overhead over-recovered in costs 850
Depreciation charged in financial Accounts 5600
Depreciation recovered in costs 6250
Interest on investments not included in costs 4000
Loss due to obsolescence charged in financial A/c‘s 2850
Income tax provided in Financial A/cs 20150
Bank Interest credited in Financial A/cs 375
Stores Adjustments (credit) in Financial books 237
Loss due to depreciation in Stock values charged in Financial a/cs 3375
Solution:
Reconciliation Statement
Rs. Rs.
Profit as per cost Accounts 86200
Add:
Administrative overhead over-recovered in costs 850
Excess Depreciation in costs book (6250 - 5600) 650
Income credited in financial A/c’s:
Interest on investment 4000
Bank interest 375
Stores Adjustments 237 6112
92312
Less:
Work overhead under recovered in costs 1560
Expenses and loss in Financial books:
Loss due to obsolescence 2850
Income tax 20150
Loss due to depreciation in stock 3375 27935
Profit as per financial accounts 64377

OPERATING COSTING / SERVICE COSTING

Meaning:
Service Costing is a method of costing employed by the firms which are engaged in
rendering services in order to ascertain the cost per unit of service. According to CIMA,
London, “Operating costing is that form of operation costing which applies where
standardised services are rendered either by an undertaking or by a service centre
within an organisation.”
Figure 1: Forms of Service Costing
Characteristics:
Characteristics of such organisations/undertakings/firms are as follows
1. Service provided is standardised i.e., all customers receive similar kind of
services repetitively.
2. Services are produced on a continuous basis.
3. Investment in fixed assets is more than the working capital requirement.
4. Operating costs of providing services are categorised as fixed costs and
variable costs.
Cost Unit:
Selecting an appropriate cost unit is extremely important. The cost units may be:

1. Simple Cost Unit

2. Composite Cost Unit
Cost Unit Undertaking Cost Unit
TRANSPORT COSTING:
Transport costing is a type of service costing which is employed by the firms engaged
in providing transportation services, via rail, road or air. The objectives of transport
costing are:
• To determine the cost of carrying passengers or goods.
• To determine the price/freight/fare to be charged from users of such services
• To help the management in decision-making.

Illustrations:
1. Broadways Co. runs six buses between two towns which are 100 kms apart.
The seating capacity of each bus is 50 passengers. Actual passengers carried
are 70% of the seating capacity. All the 4 buses run for 25 days a month making
one round trip per day. Calculate the total passenger-kms.
Solution:
Total Passenger-kms
= No. of buses X Distance per round trip X No. of round trips per day X No. of
days X Capacity of the bus X Actual capacity utilised
= 4 X (100 kms X 2) X 1 X 25 days X 50 passengers X 70%
= 7,00,000 passenger-kms
2. A truck starts with a load of 10 tonnes of goods from station P. It unloads 4
tonnes at station Q and rest of the goods at station R. It reaches back directly
to station P after getting reloaded with 8 tonnes of goods at station R. The
distances between P to Q, Q to R and then R to P are 40 kms, 60 kms. and 80
kms. Respectively. Compute ‘absolute tonne-km.’ and ‘commercial tonne-km’.
(B. Com. Hons. Delhi; CA Inter)
Solution:
Absolute Tonne-kms
= (10 tonnes x 40 kms.) + (6 tonnes x 60 kms.) + (8 tonnes x 80 kms.)
= 400 + 360 + 640 = 1,400 tonne-kms.
Commercial Tonne-kms.
=Average load x Total km. travelled
= {10+6+8/3} tonnes x 180 kms. = 1,440 tonne-kms.

Contract Costing

Contract costing is a variant of job costing system applicable, particularly in case of the organization’s
doing construction work. It is also known as terminal costing. Each contract, short term, or long term,
is treated as a job.

Features of Contract Costing

The following are the features of contract costing.
1. A contract is undertaken according to the specific requirements of customers.
2. Generally, the duration of a contract is long period.
3. The contract is undertaken only at the site of the customer.
4. Contract work mainly consists of construction activities.
5. The specific order costing principles are applied in contract costing.
6. The size of a contract is usually large or bigger than jobs.
7. It requires a long time to complete a contract.
8. Each contract is an independent one, quite distinct from another.
9. A distinctive number is assigned to each contract to differentiate the contract from one another.
10. A separate account is maintained and prepared for each contract to find out the profit earned from
each contract separately.
11. If a contract is not completed at the end of the accounting period, only a portion of profit is
transferred to profit and loss account on the basis of stage of completion of a contract.
12. There is no problem of under absorption and over absorption of overheads.
13. Every conceivable expenditure is charged to the concerned contract.
14. If the materials, plants and other inputs are transferred from one contract to another, the transfer
may be affected by giving debit and credit to the respective contracts.
15. The proportion of indecent costs to total cost of a contract is very small.
16. A contractor may appoint a sub — contractor(s) for the execution of the work of the main contract.

Procedure of Contract Costing

In contract costing, most of the expenses are direct in nature as in the form of materials, labour,
expenses, plant, sub-contract charges and the like. Only a small portion of amount is charged as
overheads which are apportioned on suitable basis. Accounting treatment of costs of contract costing is
briefly explained below.

1. Materials

The value of materials used is debited in the concerned contract account. Materials may be specifically
purchased from the open market, issued from the stores, transfer from other contracts or supplied by
the contractee himself. If materials are returned to stores, the value of materials is credited in the
concerned contract account.

Sometimes, materials may be transferred from one contract to another. If so, the value of materials is
debited in the receiving contract account and credited in the transferring contract account. Whenever
the materials are purchased from the open market, the values of materials are debited in the concerned
contract account.

Similarly, if materials are issued from stores, the concerned contract account is debited and the stores
control account is credited. Sometimes, some materials may be stolen or destroyed by fire, the value of
materials is credited in the concerned contract as stores account and the same is transferred to profit
and loss Account.

2. Labour

Generally, the contract is carried on only at the site of the contractee i.e., customer not within
the company premises. Hence, labour is engaged at site to work on the contract. The amount paid to
workers is wages which is directly debited in the concerned contract account. The details of
information regarding wages are obtained from the records of time sheet and wages sheet. Equitable
base method is usually adopted to apportion the wages of supervisors working on two or more
contracts.

Likewise, the overheads are also apportioned on suitable basis. The accrued wages and outstanding
expenses are calculated at the end of the accounting period and debited in the concerned contract
account.

3. Direct Expenses

The direct expenses are debited in the concerned contract account as and when they are incurred.
Examples of direct expenses are hire charges paid for the plant procured from outside, sub-contractor’s
charges, architect’s fees, electricity, insurance and the like.

4. Plant and Machinery

The plant and machinery is treated in two ways. Under first method, the full value of plant and
machinery is debited in the concerned contract account if the plant and machinery is specifically
purchased for the contract. At the end of contract, the plant and machinery may be sold out in the
market if it is not required further. If so, the sale proceeds are credited in the concerned contract
account.

Sometimes, the plant and machinery may be required further, if so, the depreciated value or revalued
amount of plant and machinery is credited in the concerned contract account. The net effect is that the
contract account is debited with the amount of depreciation.

Under second method, the contract account is debited with the amount of depreciation of plant and
machinery. The plant and machinery may be purchased specifically from the open market or issued
from the stores. The amount of depreciation is calculated on the basis of daily use or hourly basis.
Sometimes, a plant is procured on hire basis, if so, only hourly charges are debited in the contract
account.

5. Overheads

Indirect costs cannot be directly charged to any contract account. These costs are apportioned to all the
contract accounts only on the suitable basis. These are called as overheads. The term overheads
includes payment made to engineers, supervisors, architects, managers, store keeper, central office,
administrative expenses like staff salaries, telephone expenses, postage, rent, stationery, advertisement
expenses etc.

Advantages
1.The contractor controls the costs involved in the contract for labor, material, other fixed expenses,
etc.
2.A contract account is prepared for each customer, identifying the cost incurred to date & work
completion.
3.Control is also maintained over the defects arising out of quality deficiency.
4.Expert advice is helpless in completing a contract & he also helps to identify defects before
completing the whole contract.
5.Retention money becomes a reason for inspiration to provide quality work.
6.A team spirit is built.

Disadvantages
1.The biggest disadvantage is that it is time-consuming.
2.Each customer may not agree with the escalation clause.
3.Lack of accounting may lead to improper calculation of profits.
4.Lack of control may make the contract lose-making for the contractor.
5.A continuous eye on market conditions is required.
6.Larger time gives rise to complications in the completion of work.