MBA Management Accounting Dr.

Pralhad Prakash Joshi

Contents - Cost Accounting

Topic 1 – Basics of Cost Accounting ............................................................. 2

Topic 2 – Cost Sheet .................................................................................... 11

For Private Circulation only 1 | Page Cell

8087197719
MBA Management Accounting Dr. Pralhad Prakash Joshi
Topic 1 – Basics of Cost Accounting
I. MEANING OF COST
 The monetary value of all sacrifices made to achieve an objective. (i.e. to produce goods and
services).
 Cost refers to the expenditure incurred in producing a product or in rendering a service.
 It is expressed from the producer or manufacture’s viewpoint. (Not from consumer’s viewpoint).
II. DEFINITIONS
“Cost Accountancy” is defined as “ The application of costing and cost accounting principles,
methods and techniques to the science, art and practice of cost control, and the ascertainment of
profitability. It includes the presentation of information derived there from for the purpose of
managerial decision-making”.

‘Costing’ may be defined as. The techniques and processes of ascertaining costs. It may further be
said that “cost Accounting is the classifying, recording and appropriate allocation of expenditure for
the determination of the costs of the product or services”
Inception – It started as a branch of financial accounting but developed soon as a specialized field
distinct from financial accounting. The limitations of Financial Accounting gave birth to the Cost
Accounting Methods and Techniques.
III. OBJECTIVES OF COST ACCOUNTING
There are basically 4 objectives of Costing:
1. Cost Ascertainment: This involves collection of cost information, by recording them under
suitable heads of account and reporting such information on a periodical basis. It simply means
calculation of cost. Cost calculation also helps in ascertainment of profit.
2. Cost Estimation: In many business situations, we need to quote a price to the customer before
accepting his order . In such case you need to first estimate the cost and then add profit to provide
the price quotation to the customer.
3. Cost Control : Cost has an inherent tendency to go up, hence cost control becomes a very
important feature of Cost Accounting.
4. Assisting management in decision-making: Business decisions are taken after conducting Cost-
Benefit Analysis. Hence cost and benefits of each option are analysed and the Manager chooses
the least cost option. Thus cost accounting and reporting system assist managers in their decision
making process.
IV. ELEMENTS OF COST:
Basically there are three elements of costs –
1. Material Cost : It is cost of tangible items, which gets consumed in the process of manufacture.
2. Labour Cost : It is the cost of human efforts.
3. Expenses: It is the cost of intangible items which is neither material not labour.
These cost elements can be further divided into as:
Direct Material Indirect material
(+) Direct Labour (+) Indirect Labour
(+) Direct Expenses (+) Indirect Expenses
Prime Cost + Overheads = Total Cost

For Private Circulation only 2 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
In practice , however, the elements of costs are better known as –
1. Material Cost
2. Labour Cost and
3. Overheads Cost
V. DIFFERENT METHODS OF COSTING :
Job Costing – In this case each job is treated as distinct from other and the cost of each job is
calculated separately. E.g. Scooter servicing, fabrication workshop, furniture manufacturing ,etc.
Batch Costing – It is a variation of job costing. A batch is considered as a job and the cost of each
batch is calculated separately. e.g. Pharmaceutical Companies, toothpastes, spare parts etc.
Contract Costing – It is another variation of job costing, but the job is of a big size relating to civil
construction or mechanical erection etc. and involves a longer period to complete. Say more than a
year. e.g., Construction of Bridges, Dams, Housing Complexes, Road Building etc.
Process Costing / Operation Costing – This method is applied where different processed are
involved in a sequence to manufacture a particular product. Cost for each such process is required to
be calculated separately . e.g Sugar factories, paper industries, cement industry etc.
Unit/Single/Output Costing – This method is applied where a continuous production of identical
items is done. e.g. Newspaper Printing, Electricity generation, coal mining etc. This is the simplest
form of costing method.
Multiple Costing – A combination of above different methods of costing may be used as per the
need and suitability of the organization. It is called as “ Multiple Costing”. It is not a separate method
of costing but use of a combination of different methods of costing.

VI. DIFFERENT CLASSIFICATIONS OF COSTS –

Time based
 Historical Controllability based
Payment based  Controllable
 Explicit  Current
 Budgeted  Non- controllable
 Implicit

Normality based
Elements based  Normal
 Material  Abnormal
 Labour
 Expenses
cost Association based
 Period
 Product
Function based
 Production
 Administration
 Selling
Nature based Decision making based
 Distribution
 Variable  Relevant
 R&D
 Fixed  Irrelevant
 Conversion
 Pre- Production  Semi-variable

For Private Circulation only 3 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
1. Historical costs : Costs relating to the past time period; cost which has already been incurred.
2. Current costs : Cost relating to the present period.
3. Budgeted Costs : Costs relating to the future period; Cost which is computed in advance, on the basis
of specification of all factors affecting it.
4. Controllable costs: Cost which can be influenced and controlled by managerial action. These are also
known as avoidable cost or discretionary cost etc.
5. Non-Controllable costs: These are costs that cannot be influenced and controlled by managerial
decisions. These are also known as unavoidable costs or non-discretionary costs etc.
6. Normal Cost: Costs which can be reasonably expected to be incurred under normal, routine and
regular operating conditions.
7. Abnormal Cost: Costs over and above normal cost; which is not incurred under normal operating
conditions. e.g. fines and penalties, goods lost due to fire, repairs cost due to major machine
breakdown etc.
8. Period Costs: These are costs which are not assigned to the products but are charged as expenses
against the revenue of the period in which they are incurred. These costs vary according to period of
time and not according to the number of units produced we manufacture and not the period. These are
also known as Fixed costs. e.g. factory rent, fixed salary of office staff, insurance charges etc.
9. Product Cost: These are costs which will change according to number of units produced. These costs
are associated with the product we manufacture and not the period. These are also known as variable
costs e.g. direct material , direct labour etc.
10. Relevant Costs: Costs which are relevant for decision making i.e avoidable cost or discretionary cost.
11. Irrelevant Costs : Costs which are irrelevant for decision making i.e. unavoidable cost or non-
discretionary cost.
12. Variable Costs: These are costs which tend to vary or change in relation to volume of production.
They increase in total as production increases and vice-versa e.g. cost of raw materials , direct wages
etc. However, variable costs per unit are generally constant for every unit of the additional output.
13. Fixed costs: These are costs which remain constant at various levels of production. They are not
affected by volume of production e.g. Factory Rent, Insurance etc. Fixed costs per unit vary inversely
with volume of production, i.e. if production increases, fixed cost per unit decreases and vice-versa.
Sometimes, these are also known as Capacity costs or Period costs.
14. Semi- variable costs: These are costs which are partly fixed and partly variable. These are fixed upto
a particular volume of production and become variable thereafter for the next level of production.
Some examples are Repairs and Maintenance cost, Electricity bills, Telephone bills ect.
15. Production Costs: It is the costs related to manufacturing activities. Thus it is equal to the total of
Direct Material, Direct Labour, Direct Expenses and Production Overheads.
16. Administration Cost: The cost of formulating the policy, directing the organization and controlling
the operations of the undertaking. Which is not directly related to production, selling distribution,
research or development activity or function. Some examples are office Rent, Accounts Department
Expenses, Audit and Legal Expenses, Directors Remuneration, Printing & Stationery, Telephone &
postage ect.
17. Selling Cost: It is the cost of generating demand. These are sometimes called marketing costs. some
examples are Advertisement, Salesmen remuneration, Show-room Expenses, Cost of samples etc.
18. Distribution Costs: It is the cost of satisfying the demand. Some examples are: secondary packing of
goods for the convenience of material handling and transportation, carriage outwards, maintenance of

For Private Circulation only 4 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
delivery vans. Expenditure incurred in transporting articles to central or local storage, expenditure
incurred in moving articles to and from prospective customers (as in Sale or Return) etc.
19. Research Cost: The cost of researching for new or improved products, new applications of materials
or improved methods.
20. Development Cost: The cost of the process which begins with the implementation of the decision to
produce a new or improved product, or to employ a new or improved method and ends with
commencement of formal production of that product or by that method.
21. Pre-production Cost: It is the cost incurred before starting actual commercial production. For
example, cost incurred in making a trial production run, cost of moulds & designs, cost of training the
workers etc.
22. Materials: Cost of tangible, physical input used in relation to output / production, e.g. cost of raw
material consumable stores, maintenance items etc.
23. Labour: Cost incurred in relation to human resources of the enterprise; e.g. wages to workers, salary
to Office staff, Trading Expenses etc.
24. Expenses: Cost of operating and running the enterprise, other than materials and labour; they are the
residual category of costs. e.g. Factory Rent, Office Maintenance, Depreciation, Electricity etc.
25. Direct Costs: Costs which are directly related to/ identified with / attributable to a cost object or a
Cost unit. E.g. Cost of basic raw material used in the finished product, wages paid to site labour in a
contract etc. In simple words, it is a specific cost.
26. Indirect Costs: Costs which are not directly identified with a cost object or a cost unit. Such costs are
apportioned over different cost centers using appropriate basis e.g. Factory Rent incurred over various
departments; Salary of supervisor engaged in overseeing various construction contracts etc. In other
words, it is a common cost.

Distinguish between explicit and implicit costs.

Particulars Explicit Costs Implicit Costs
Meaning Costs which involve cash payment Cost which do not involve cash payment
Otherwise Out of pocket cost, Actual cost Opportunity costs / National costs / Imputed
known as cost / Hidden cost
Measurement These are actually incurred and They are not actually incurred. They cannot be
hence can be easily and easily measured and involves a subjective
objectively measured. estimation.
Recording in These are recorded in the books of These are not recorded in the books of
books of account. accounts.
accounts
Purpose Accounting , Reporting, cost Used only in Decision Making.
control & Decision Making.
Examples Actual rent paid, Salaries of staff, Interest on own capital , rent of own premises,
Advertisement etc. salary of proprietor etc.

For Private Circulation only 5 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
VII. TECHNIQUES OF COSTING:
1. Marginal Costing: This technique is popularly used for managerial decision making . This
technique recognizes the division of cost as variable cost and fixed cost only.
2. Standard Costing: It is a technique whereby, standard costs and revenues are pre-determined
and later on compared with actual costs and revenues. Standard costing is extremely helpful for
cost control and is generally used along with budgetary control.
3. Budgets & Budgetary control: This technique involves preparation of budgets and use of
budgets in proper planning and over all managerial control of the organization.

VIII. BASIC COST CONCEPTS:

1. Cost Centre: It is defined as a location, person or items(s) of equipment for which cost may be
ascertained and used for the purpose of cost of the organization.
a. Personal Cost Canter: Consisting of a person or a group of persons.
b. Impersonal Cost Center: Consisting of a location or an item(s) of equipment.

In case of manufacturing concerns cost centers are mainly of two types:

Production Cost Center Service cost Centre

It is a cost venter where raw material is It is a cost center, with serves as a ancillary unit
processed and converted into finished product. and renders services to a production cost center.
Here both direct and indirect costs are incurred. Here only indirect costs are incurred. There are
no direct costs as there is not measurable and
saleable output.
Machine shops, welding shops and assembly Power-house , gas production shop, storage of
shops are examples of production Cost Centre material, plant maintenance centers are examples
of service cost centers.

Responsibility Centre:
Meaning:
 It is activity centre of a business organization entrusted with a special task.
 It is a unit of function of a business organization headed by an executive responsible for its
performance.
Types of Responsibility Centres :
Particulars Cost Centres Revenue Centres Profit Centres Investment Centres
Meaning A centre for which A centre devoted A centre whose A centre responsible
a standard amount to raising revenue performance is for generating
of cost is pre- ( no responsibility measured in adequate return on
determined and for production). terms of income investment by
used for control. earned and cost effective utilization
incurred ) profit of assets.
earning).
Primary Cost reduction and Generation of sale Profit earning Earning return on
responsibility cost control revenue. investments.
Performance Standard cost Budgeted revenue Budgeted profits Budgeted ROI
evaluation Less: Actual cost Less: Actual Less: Actual Less: Actual ROI
revenue profit

Other Points Control of cost is Also responsible In this case on Value of Investment
subject to – for some expenses division may in this responsibility
For Private Circulation only 6 | Page Cell 8087197719
MBA Management Accounting Dr. Pralhad Prakash Joshi
1. Time related with have to sale its centre needs to be
2. Location marketing of output to another carefully defined and
3. Product products. division within return on investment
the organization to be defined as
at profit, target before tax or after
tax, before interest or
after interest etc.

2. Cost Unit : Cost unit is a unit of measurement in which cost may be ascertained. Examples –
Product / Service Cost Unit Product / Service Cost Unit
Soaps Number / Carton Brickworks Per 1000 brick
wire / Cable Meter / Kilometer Building Square foot
Dairy ( Milk) Liter / Bag Cement Tonne
Goods transport Tonne kilometer Power Kilowatt hour
Passenger transport Passenger kilometer Paper Rim
Wood / Gas Cubic Feet (CFT) Textiles Meters
Food grains KG./ Quintal / Tonne Road contractors Per mile / kilometer
Sugar Per Tonne Bicycle Number
Hospital Per patient day Pharmaceuticals 1000 tables
Automobile Per vehicle / number Steel Tonne

3. Replacement Cost: It is the current market cost of replacing an asset or material.

4. Sunk cost : The costs which have already been incurred in the past (i.e. historical costs) and will
not require current cash expenditure are called as sunk costs.
5. Conversion cost: It refers to direct wages, direct expenses and overhead costs for converting raw
materials to the finished stage or for converting a material from one stage of production to the
other.
6. Marginal Cost: Marginal cost is the total variable cost i.e. prime cost plus variable overheads, It
is assumed that variable cost varies directly with production whereas fixed cost remains fixed
irrespective of volume of production . Marginal cost is a relevant cost for decision making as this
cost will be incurred in future for additional units of production.
7. Direct Expenses: These are expenses which can be allocated directly to job, products, processes,
cost centers or cost units. According to CIMA, London, Direct Expenses are ‘Cost other than
material and wages which are incurred for a specific product or saleable services’. These are also
known as Chargeable Expenses.
Nature of Direct Expenses:
 These are expenses other than Direct Materials and Direct Labour.
 These are either allocated or charged completely to cost centers or cost units.
 These are included in the Prime cost of a product.
Examples:
a. Hire charge of special machinery or plant for a particular production order or job.
b. Payment of royalties.
c. Coat of special moulds, designs and patterns.
d. Experimental cost before undertaking the concerned job.
e. Travelling and conveyance expenses incurred in connection with a particular job.
f. Sub-contracting expenses or outside work costs, where jobs are sent out for special processing.

For Private Circulation only 7 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
IX. COMPARATIVE ANALYSIS BETWEEN VALUE ,PRICE AND COST
Particulars Value Price Cost
Meaning Relative worth of a It is the sale price charged Expenditure incurred
commodity to an by the seller of goods or in producing a product
individual at a particular services to the buyer. or in rendering a
point of time. service.
Ascertained from User’s viewpoint Seller’s viewpoint Producer’s viewpoint
Differentiation/ Different persons attach It is policy decision of the Ascertained on the
subjectivity different values to a management to fix the basis of uniform
product at different points sales price of the product principles. Hence it is
of time. or services. They may objectively
also change the price determined.
from time to time.
Inference Opinion Policy Fact

X. IMPORTANCE AND ADVANTAGES OF COST ACCOUNTING

1. A cost system identifies unprofitable activities, losses or inefficiencies such as wastage of
manpower in the form of idle time, wastage o material in the form of spoilage, scrap or wastage
of resources in the form of inadequate utilization of plant & machinery, production or service
facilities etc.
2. Cost accounting locates the causes for decrease or increase in the profit or loss by identifying
unprofitable products or product lines.
3. Cost account furnish suitable data and information to the management for decision making such
as make or buy, continue or shut down, product mix, to sell below cost or not, accept or reject etc.
4. It helps management to fix the selling rice and to furnish quotations/ tenders.
5. Application of Standard Costing & Budgetary Control techniques help management to achieve
optimum level of efficiency and control cost.
6. Variance analysis locates the areas of inefficiencies which require managerial attention. Saving
time and energy through management by exception.
7. Determination of cost centers helps management to define and fix responsibilities upon
individuals.
8. Cost of closing stock of raw materials, work-in-progress and finished goods can be easily
obtained from cost records and used in the financial accounting to determine the quantum of
profit or loss of the business.

XI. INSTALLATION OF A COST SYSTEM:

There is no one readymade cost system, which is suitable for all types of businesses. Therefore, a cost
system has to be specially design for an undertaking to meet its specific needs. Before installing a
cost system proper care should be taken to study all aspects involved and the needs of the business.
Otherwise the system will be a misfit and full advantage may not be derived from it.

The following points should be considered installing a cost system:

i. The nature, method and stages of production, the number of varieties, quantity of each product
and such other technical aspects as necessary to design a costing system.
ii. The size, layout and organization of the factory or service unit.
iii. The existing methods and procedures of purchase, receipts, storage and issue of materials.
iv. Existing wage payment methods.
v. The needs and requirements of management with the view to control costs.
vi. Willingness and co- operation of the staff and workers, etc.

For Private Circulation only 8 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
Essentials of a Goods Costing System:
1. It must be cost effective and economical.
2. It should be simple to understand and easy to operate.
3. It should involve minimum clerical work and expenditure.
4. It should involve minimum clerical work and expenditure.
5. It should be flexible to take care of any change, expansion or modernization without much
difficulty and cost.
6. The new system should be introduced with the simple & minimum modifications to the existing
cost system, it any.

XII. DIFFERENCE BETWEEN COST ACCOUNTING & FINANCIAL ACOUNTING:

Sr. Particulars Cost Accounting Financial Accounting
No.
1 Definition It is the application of costing and cost It is the art of recoding ,classifying and
accounting principles, methods & summarizing in a significant manner
techniques to the science art and and in terms of money, transactions and
practice of cost control and the events which are in part atleast of a
ascertainment of profitability. It financial character and interpreting the
includes the presentation of information results thereof
derived there form for the purpose of
managerial decision making.
2. Details It provides financial analysis of the It gives financial picture and the state
Provided business affairs product wise, service of affairs of a business in totality.
wise, element wise, or activity wise.
3. Users of It renders information for the guidance It safeguards the interests of the
Information of management , proper planning, business, its properties and other
operation control and decision making. concerned like creditors, shareholders,
tax authorities.
4 Main The main object is to ascertain the The main object is to ascertain correct
correct cost of production / Services. profit/ loss position and to give a true
and fair view of the state of affair of
business.
5. Time It is future oriented activity. It is a post-mortem activity.
Period
6. Usefulness It forms the basis for managerial It forms the basis for fulfilling the legal
decision making like make or buy, requirements like Income-tax Act,
continue or shutdown ,product mix, etc. Companies Act, Excise & Customs
Act, etc.
7. Final The final output is in the form of a cost The final output is in the form of Profit
output sheet and Loss A/c and Balance sheet.
8. Objective Profit Maximization is the objective. Profit/loss Ascertainment is the
objective.
9. Stock Stocks are valued generally at cost. Stocks are valued at Cost or Net
Valuation Realisable value whichever is less.
10. Nature of It considers both historical costs and Generally historical costs are used for
costs pre-determined costs and extends to recording purposes, Only explicit i.e.
plans and policies to improve future actual cost is used in financial
performance. It also considers explicit reporting.
and implicit cost.

For Private Circulation only 9 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi

XIII. DISTINGWISH BETWEEN PERIOD COST AND PRODUCT COST

Particulars Product cost Period cost
Meaning Costs which becomes part of Costs which are not associated with production
production costs. but with time period.
Inclusion I These are included in inventory These are not included in inventory valuation.
inventory valuation. They are treated as They are written off as expense in the period in
valuation assets till the goods to which they which they are incurred.
are assigned are actually sold.
Example Cost of Raw Materials, Direct General Administration Cost, Salesmen Salary,
wages, Depreciation of Plant & Rent of building etc.
equipments etc.
Nature of These are variable in nature and These are fixed in nature and changes
costs changes according to number of according to period of time.
units produced.

XIV. Cost Sheet:

Meaning: A cost sheet is a statement which shows the break-up and build-up of costs. It is a
document, which provides for the assembly of the detailed cost of a cost centre or a cost unit.
Uses: The following are the uses of the Cost Sheet.
a. Presentation of Cost information.
b. Determination of Selling Price.
c. Ascertainment of profitability.
d. Product-wise and Location-wise Cost Analysis.
e. Inter-firm and Intra-firm Cost Comparison.
f. Preparation of Cost Estimates for submitting tenders/ quotations.
g. Preparation of Budgets.
h. Disclosure of operational efficiency for Cost Control.
Items not included in cost sheet:
a. Expenses or Income of purely financial nature e.g. dividends and rent received, cash
discount allowed, Bad debts, goodwill written off, Interest paid , interest received etc.
b. Expenses or profits of capital nature like profit or loss on sale of investments, plant and
equipment, etc.
c. Items not representing actual costs but dependent on arbitray decisions and policies of the
management, e.g. an unreasonably high salary to the managing director, providing for
depreciation at a rate exceeding the economic rate i.e. abnormal items o cost and income
are ignored from cost sheet.
d. Appropriation of profits for dividends, Payment of income tax and transfers to reserves.
e. Abnormal expenditures and costs e.g. penalties , fines, interest and other imputed costs, on
the ground that they distort comparison.

For Private Circulation only 10 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
Topic 2 – Cost Sheet
Specimen of Cost Sheet – Detailed
Particulars ₹ ₹
Direct Material
Opening Stock of Raw Material 100 xxx
(+) Purchases of Raw Material less Returns 200 xxx
(-) Closing Stock of Raw Material 50 xxx
(+) Carriage inward/Expenses on purchases 30 xxx
Direct Material Consumed 280 xxx
(+) Direct Labour xxx
(+) Direct Expenses xxx
Prime Cost xxx
(+) Factory Overheads
Indirect Wages/Material xxx
Drawing office salary xxx
Depreciation on plant and machinery xxx
All Factory Expenses etc. xxx xxx
Gross Factory Cost xxx
(+) Opening Stock of WIP xxx
(-) Closing Stock of WIP xxx
(-) Sale of Waste / Scrap xxx
Net Factory Cost / Works Cost xxx
(+) Administration Overheads
All expenses related to Office xxx
Depreciation on furniture xxx
Printing, Stationery xxx
Postage, Telegram xxx
Counting House Salary xxx xxx
Cost of Production xxx
(+) Opening Stock of Finished Goods xxx
(-) Closing Stock of Finished Goods xxx
Cost of Goods Sold xxx
(+) Selling and Distribution Overhead
Showroom expenses, warehouse xxx
Rent, Packing charges etc. xxx xxx
Cost of Sales / Total Cost xxx
(+) Profit/Loss xxx
Sales Less Returns xxx

For Private Circulation only 11 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
1
From the following information prepare a cost sheet showing (1) Prime Cost (2) Factory Cost (3) Cost of
Production (4) Cost of Goods sold and (5) Net Profit
Particulars ₹ Effects in statement
Opening Stock Raw Material 25,000 Starting point
Purchases of Raw Material 85,000 Add in R M
Carriage Inward 5,000 Add in R M
Wages – Direct 75,000 Direct Labour
- Indirect 10,000 Factory overhead
Other Direct charges 15,000 Direct expenses
Rent and Rates – Factory 5,000 Factory Overhead
- Office 500 Admin overhead
Indirect consumption of material 500 Factory overhead
Depreciation – Plant etc. 1,500 Factory overhead
- Office Furniture 100 Admin overhead
Salary – Office 2,000 Admin overhead
- Salesmen 2,500 Selling and Dist overheads
Other factory expenses 5,700 Factory overhead
Other office expenses 900 Admin overhead
Managing Director’s 12,000 ₹ 4,000 to Factory
remuneration ₹ 2,000 to the office
₹ 6,000 to Selling department.
Other selling expenses 1,000 Selling and Dist overheads
Travelling expenses of salesmen 1,100 Selling and Dist overheads
Carriage and Freight outward 1,000 Selling and Dist overheads
Sales 2,50,000 Last point
Advance Income Tax paid 15,000 Excluded from Cost
Advertisement 2,000 Selling and Dist overheads
Closing Stock of Raw Material 40,000 Less from RM
M.D’s remuneration is to be allocated ₹ 4,000 to Factory ₹ 2,000 to the office and ₹ 6,000 to selling
departments.

Solution
Cost Sheet for the year ended…
Particulars ₹ ₹
Opening Stock Raw Material 25000
+ Purchase of Raw Material 85000
+ Expenses on Purchase / Carriage inward 5000
- Purchase Return -
- Closing Stock of Raw Material 40000
Direct Material Consumed 75000
+ Direct Labour (Wages) 75000
+ Direct Expenses 15000
Prime Cost 165000
+ Factory Overheads
Indirect Wages 10000
Factory Rent and rates 5000
Indirect consumption of material 500
Depreciation – Plant etc. 1500
Other factory expenses 5700
For Private Circulation only 12 | Page Cell 8087197719
MBA Management Accounting Dr. Pralhad Prakash Joshi
M.D’s remuneration 4000 26700
Gross Factory / Works Cost 191700
+ Opening Stock of WIP -
- Closing Stock of WIP -
Net Factory Cost 191700
+ Office and Administration Overheads
Office Rent 500
Depreciation on Office Furniture 100
Office salary 2000
Other office expenses 900
Managing Director’s remuneration 2000 5500
Cost of Production 197200
+ Opening Stock of Finished Goods -
- Closing stock of Finished Goods -
Cost of Goods Sold 197200
+ Selling and Distribution Overheads
Salesman salary 2500
M.D’s remuneration 6000
Other selling expenses 1000
Travelling expenses of salesmen 1100
Carriage and Freight outward 1000
Advertisement 2000 13600
Cost of Sales / Total Cost 210800
+ Profit 39200*
Sales 250000
Advance Income Tax paid is ignored as it is purely financial in nature.

Direct Wages / Prime Labour, Productive wages, Basic Wages

Direct Exp/ Chargeable Exp / Basic Exp/ Prime cost exp/ Any Special Expense

2
Particulars ₹ Effects in statement
Stock of raw material on 1st June 75,000 Op stock Material Consumed
1981
Stock of raw material on 30th June 91,500 - Cl stock Material Consumed
1981
Direct wages 52,500 Direct labour
Indirect wages 2,750 factory
Sales 2,11,000 last
Work – in – progress 1st June 1981 28,000 + Factory cost
Work – in – progress 30th June 1981 35,000 - Factory cost
Purchases of Raw Material 66,000 + material consumed
Factory rent, rate, power 15,000 Factory
Depreciation on Plant and Machinery 3,500 Factory
Expenses on Purchases 1,500 + material consumed
Carriage outward 2,500 Selling
Advertising 3,500 Selling
Office rent and taxes 2,500 Office
Traveler’s wages and commission 6,500 Selling
For Private Circulation only 13 | Page Cell 8087197719
MBA Management Accounting Dr. Pralhad Prakash Joshi
st
Stock of finished goods 1 June 1981 54,000 + cost of production
Stock of finished goods 30th June 31,000 - Cost of production
1981
Prepare cost sheet for the month of June.

3
Particulars ₹ Effects in statement
Depreciation on Plant and 3,200 Factory
Machinery
Depreciation on Office Furniture 150 office
Gas and Water – Factory 800 factory
- Office 300 office
Traveler’s Salaries and 2,400 selling
Commission
Advertisement and Samples 2,000 selling
Maintenance of Delivery Van 2,000 selling
Rent of Warehouse 1,800 selling
Printing and Stationery 1,200 office
Telephone charges – Factory 800 factory
- Office 1,200 office
Sales 2,72,500 last
Stock of raw material on 1.1.1995 24,000 Op start+
Stock of raw material on 31,400 - Material consumed
31.12.1995
Purchases of raw materials 92,000 + Material consumed
Drawing office salaries 3,200 Factory
Counting house salaries 6,000 Office
Carriage Inwards 2,300 + Material consumed
Carriage Outwards 2,100 Selling
Bad Debts written off 2,000 Selling
Rent and taxes – Factory 4,200 factory
- Office 1,500 office
Productive Wages 60,500 Direct labour

4
Particulars ₹ Effects in statement
Purchases of Material 49,500 + material consumed
Works wages: Direct 32,000 Direct labour
Indirect 4,000 factory
Office Salaries 9,890 office
Carriage Inward 300 + material consumed
Drawing Office Salaries 2,000 factory
Carriage Outwards 2,800 selling
Sales 1,60,000 Last
Stock of Materials on 1.1.1997 17,000 Start opening
Stock of Materials on 31.12.1997 19,000 - material consumed
Stock of Finished goods on 1.1.1997 4,500 + COP
Travelling Expenses 1,200 selling
Advertising 3,000 selling

For Private Circulation only 14 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
Income Tax 9,500 Not included in cost
Power 1,050 factory
Travelling Agent’s Commission 4,500 selling
Maintenance of Plant 3,660 factory
Rates Lighting Insurance (Nine Tenth for 1,000 Factory 1000*9/10 = 900 /// 1000*1/10 = 100
factory) office
Bad Debts 500 selling
Sundry Expenses: Works 1,400 factory
Office 2,600 office
Depreciation on Plant and Machinery 1,900 factory
On Building 800 Factory 800*9/10 = 720 /// 800*1/10 = 80
office
Stock of finished goods 31.12.1997 3,000 - COP
Counting House Salaries 1,000 office

5
From the following particulars, show the Prime Cost, Works Cost, Total Cost of good sold for the period
ended 31st December, 2000.
₹ Effects in ₹ Effects in
statement statement
Raw Materials 33,000 Material consumed Productive 30,000 Direct Labour
Start Wages
Unproductive 9,000 Factory Factory Rent, 7,200 Factory
Wages taxes
Factory Lighting 2,700 Factory Factory heating 1,500 Factory
Motive Power 4,400 Factory Haulage 3,000 Factory
Director’s Fees 1,000 Factory Factory 500 Factory
(Works) cleaning
Director’s Fees 2,000 Office Sundry Office 200 Office
(Office) Expenses
Estimating 800 Office Loose tools 600 Factory
Expenses written off
Office Stationery 900 Office Water supply 1,200 Factory
Rent and Taxes 500 Office Office 500 Office
(Office) Insurance
Factory Insurance 1,100 Factory Direct Expenses 3,000 Direct
Expenses
Legal Expenses 400 Office Dep. Of Office 1,000 Office
building
Rent of Warehouse 300 Selling Bad debts 100 Selling
Dep. Of Plant & 2,000 Factory Advertising 300 Selling
Mach.
Dep. Of Delivery 200 Selling Sales 1,500 Selling
Vans Department
Salaries
Upkeep of delivery 700 Selling Commission on 1,500 Selling
vans sales
Bank charges 500 Office Factory charges 750 Factory

6
For Private Circulation only 15 | Page Cell 8087197719
MBA Management Accounting Dr. Pralhad Prakash Joshi
Prepare Cost Sheet
Particulars ₹ Effects in statement
Opening stock of Raw Materials 22,500 Op start
Closing Stock of Raw Materials 17,500 -Material
Consumed
Indirect wages 2,350 Factory
Office Salaries 7,700 Office
Opening Stock of Work in 24,000 + Factory cost
Progress
Closing Stock of Work in Progress 21,000 -Factory cost
Purchases of Raw Material 37,950 + Material Consumed
Expenses on Purchases 550 + Material Consumed
Power Charges 2,900 Factory
Carriage Outward 3,100 Selling
Direct Wages 15,000 Direct Labour
Factory Rent and Taxes 5,350 Factory
Audit Fees 1,050 Office
Depreciation on Plant and 4,250 Factory
Machinery
Travelling Expenses 2,100 Selling
Discount to Customers 250 Not recorded in cost
Commission on Sales 500 selling
Stock of finished goods, opening 24,000 + COP
Stock of finished goods, closing 22,500 -COP
Sales 97,550 Last
Purchases return 450 Material Consumed
Sales return 150 -Sales
Haulage 1,500 Factory
Advance Income Tax 5,000 Not recorded in cost
Dividend 2,500 Not recorded in cost
Accrued Expenses
Direct wages 1,000 + Direct labour
Printing and Stationery 200 offfice

7
Particulars ₹Effects in statement
Material consumed 1,20,000Start point
Productive Wages 1,80,000Direct Labour
Chargeable expenses 10,000Direct Expenses
Indirect wages 20,000Factory
Factory supervision 5,300Factory
Power fuel 8,000Factory
Depreciation of Machine 12,000Factory
Miscellaneous Factory Expenses 2,000Factory
Office Salaries 36,000Office
Sundry Expenses 8,000Office
Rent and Rates is related to 16,000Factory = 16000*2/3 = 10667 Office 16000*1/3 =
building 5333
Bad debts 4,000 Selling

For Private Circulation only 16 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
Carriage Outwards 6,000 Selling
Travelling Expenses 10,000 Selling
Consumable Stores 900 Factory
Storekeeper’s Wages 300 Factory
Director’s Fees 500 Office
Factory occupied 2/3 area of building.

8
Calculate Prime Cost, Factory Cost, Cost of Production, Cost of Sales and profit from the following
particulars:

Particulars ₹ Particulars ₹
Direct Materials Start 1,00,000 Consumable stores 2,500 Factory
Direct Wages DL 30,000 Manager’s Salary 5,000 Office
Wages of Foreman Factory 2,500 Directors’ fees 1,250 Office
Electric power Factory 500 Office Stationery 500 Office
Lighting: Factory Factory 1,500 Telephone Charges 125 Office
Office Office 500 Postage and 250 Office
Telegrams
Storekeeper’s wages Factory 1,000 Salesmen’s salary 1,250 Selling
Oil and water Factory 500 Travelling expenses 500 Selling
Rent: Factory Factory 5,000 Advertising 1,250 Selling
Office Office 2,500 Warehouse charges 500 Selling
Repairs and Renewals: Sales 1,89,500 Last
Factory plant Factory 3,500 Carriage outward 375 Selling
Transfer to Reserves 1,000 Dividend 2,000
Discount on shares written 500
off
Depreciation: Factory Plant Factory 500

9
Find the Prime Cost, Works Cost, Cost of production, total Cost and profit from the following:- Direct
Materials ₹20000; Direct Labour ₹ 10000; Factory Expenses ₹ 7000; Administration Expenses ₹ 5000;
Selling Expenses ₹ 7000 and Sales ₹60,000.
10
In a factory 20,000 units of product P was manufactured in the month of July 1998. From the following
figures obtained from the costing records, prepare a cost sheet. Showing cost per unit.
Particulars ₹
Opening stock of raw material 5,000
Purchases 55,000
Closing stock of raw material 10,000
Direct wages 25,000
Factory overheads 40,000
Office and Administration 20,000
overheads

For Private Circulation only 17 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
11
Costing department of a company has furnished you the following information in respect of the product for a
period of three months ending on 30th September 2000.
Particulars ₹ Effects
Stock as on 1st July 2000
Raw Materials 32,500 start
Work in progress 5,000 + factory cost
Finished goods 7,500 + COP
Raw Materials purchased 1,30,000 + Material Consumed
Rent and taxes 6,000 3:2:1 3000:2000:1000
Salaries 12,500 office
General Expenses 7,500 Office
Gas and water (Factory) 1,500 Factory
Direct Expenses 18,900 DE
General Manager’s Salary 15,000 Office 12500 and Factory 2500
Works Manager’s Salary 8,000 Factory
Sales Manager’s Salary 12,000 Selling
Carriage Inward 8,600 + material consumed
Carriage Outward 6,800 selling
Drawing Office Salaries 3,000 Factory
Travelling Expenses 2,600 Factory 950 and selling 1650
Advertising 8,700 Selling
Maintenance of Plant 2,500 Factory
Wages (Direct) 25,000 DL
Wages (Indirect) 2,500 Factory
Plant and Machinery 1,50,000 Only dep 150000*10/100 * 3/12 F
Building (of factory) 1,00,000 Only dep 100000* 6/100 *3/12 f
Office Furniture 50,000 Only dep 50000*3/100 * 3/12 o
Stock as on 30th September
2000
Raw Materials 23,500 - material consumed
Work in Progress 4,000 - Factory cost
Finished Goods 5,700 - COP
Sales 320000 The following further information is available:
Depreciate plant and machinery @ 10% p.a.; factory building @ 6% p.a. and office furniture by 3%p.a.
1. The Works Manager was on leave for the month of September and hence General Manager was
devoting his half of the time of the factory for the month of September 2000.
2. A special type of machinery was taken on hire at the hire charges of ₹1000 per month. 1000*3 =
3000
3. Area occupied by the factory, office and sales department is in the ratio of 3:2:1.
4. Travelling expenses included ₹950 paid to the Works Manager for official visit to Bombay.
You are required to prepare a ‘Cost Sheet’ showing various details and profit earned or loss suffered for
the above period.

For Private Circulation only 18 | Page Cell 8087197719

 MBA Management Accounting Dr. Pralhad Prakash Joshi
12
The following extracts of costing information related to commodity “X” for the year ending 31.3.2020.
Particulars ₹
Purchase of Raw Material 48,000
Direct wages 40,000
Stock on 1.4.2019: of raw material 8,000
Of finished goods 1600 quintals 6,400
Stock on 31.3.2020 of raw material 8,800
Of finished goods 3200 quintals
Works on Cost 16,800
st
Work in progress 1 April 2019 1,920
st
31 March 2020 6,400
Office and Administrative Overheads 3,200
Sales (Finished Product) 1,20,000
1. Advertising, and selling cost is 0.40 per quintal.
2. During the year 25,600 quintals of commodity were produced.
Calculate cost of production and extend the cost sheet to include profit also so that it may also be called
production statement.

13
Marfi Radio Co. showed the following records for the year 2018-2019.
Particulars ₹
Office on Cost
Direct Expenses 6,000
Factory Overheads 1,000
Direct Material used 4,000
Direct wages 11,000
Sales 8,000
40,000
From the above mentioned information prepare a Simple Cost-Sheet showing:
(a) Prime Cost (b) Factory Cost (c) Total Cost and (d) Profits for the year 2018-2019.
The company wants to quote for a specific, job for the year 2019-2020 which will require direct materials of
₹ 2,500, direct wages of ₹2,000 and direct expenses of ₹ 500.
What should be the quotation price if a profit of 25% on selling price is desired?

14
In respect of Golden Co. Ltd. the following cost figures have obtained for the year 2018-2019.
Particulars ₹
Direct wages 2,00,000
Administration on cost 60,000
Selling and Distribution expenses 33,000
Cost of Materials 2,50,000
Factory Overheads 1,00,000
Chargeable expenses 50,000
Profit 69,300

For Private Circulation only 19 | Page Cell 8087197719

MBA Management Accounting Dr. Pralhad Prakash Joshi
A work order has been executed in 2019-2020 and the following expenses have been incurred.
₹
Materials 5,500
Wages 2,500
Direct Expenses 500

Assuming that in 2019-2020:

(1) The factory overheads have increased by 20%,
(2) Administration on-cost have gone up by 25% and
(3) Selling and distribution expenses have gone down by 20%.
At what estimated price should be product be sold as to earn 20% profit on selling price?
15
The following particulars have been extracted from the account of a Motor Manufacturing Company for the
year ended 31st March, 2020.
Opening Stock Raw Materials 1,00,000
Purchase of Materials 24,00,000
Carriage on Raw Materials 1,20,000
Wages of Manual and Machine Labour for manufacturing 14,00,000
Motor Car
Works Overhead Expenses 3,92,000
Establishment & General Charges 2,98,340
Closing Stock of Raw Materials 1,50,000
Find out works cost and total cost of motor cars, the percentage of works overhead cost to wages and the
percentage of establishment and general charges to works cost.
Work out what price the company should quote for a motor car, which it is estimated, will require an
expenditure of ₹44,000 in raw materials and ₹32,000 in wages so that it would yield profit at 25% on total
cost.
16
The under mentioned figures have been extracted from the books of the metal Co. Ltd., whose accounting year
closes on 31st December, 2020.

Stock of Raw Materials on 1st Jan. 2020 35,000

st
Stock of Raw Materials on 31 Dec. 2020 4,900
Purchase of Materials 52,000
Factory Wages 95,000
Factory Expenses 17,500
Establishment expenses 10,000
st
Completed stock in hand on 1 Jan. 2020 Nil
Completed stock in hand on 31st Dec. 2020 35,000
Sales 1,89,000
The company manufactured 4,000 electric stoves during 2020. The company was required to quote for the
supply of 1,000 electric stoves during 2021. The stoves to be quoted for are of uniform quality and make, and
similar to those manufactured during the period ended 31st December, 2020. However, as from 1st January,
2021, cost of material has increased by 15% and cost of Factory Labour by 10%.
Prepare a statement showing the price to be quoted to give same percentage of net profit on sales as
was realized during the year, 2020.

For Private Circulation only 20 | Page Cell 8087197719

 MBA Management Accounting Dr. Pralhad Prakash Joshi

For Private Circulation only 21 | Page Cell 8087197719

n-gl.com