CHAPTER – 01

INTRODUCTION TO COST ACCOUNTING

Introduction:
Cost accounting emerged due to industrial revolution. Due to
industrial revolution, the industries started large scale production with
variety of goods, different types of expenses, and the amount of
expenditure etc. were also increased and it became difficult to calculate
the cost. A new discipline was introduced for this purpose called cost
accounting which is a part of accounting.

Meaning of Cost:
The total amount of expenditures incurred on the production and sale of
goods and services is called Cost.

Meaning of Costing:
Costing is a method (or) technique (or) process of ascertainment of cost.

Meaning of Cost Accounting:

Cost accounting is the process of recording, classifying, summarizing,
analysing, interpreting and evaluating the various costs incurred in the
production and sale of goods and services (or) business process.

Definition of Cost Accounting:

According to ICMA (Institute of cost and management
accountants) of London defines that, “Cost accounting is the process of
accounting for costs from the point at which the expenditure is incurred
for the establishment of its ultimate relationship with cost centers and
cost units.

Objectives of Cost Accounting:

1) To ascertain the actual cost of goods and services manufactured.
2) To ascertain the profit or loss made on each product or each process.
3) To determine the selling price of the product.
4) To Control the cost of goods and services.
5) To reduce the cost of goods and services.
6) To control the wastage of raw materials, labours and other resources.
7) To provide the data for inventory valuation.
8) To provide the data for comparison of costs between different
products and periods.
9) To preparation and implementation of wage & incentive plans to the
workers.
10) To preparation and presentation of financial and other statements.
 Advantages and dis-advantages of Cost Accounting:
Cost accounting has many advantages to different people. The
nature and extent of these advantages depends upon the type,
requirement and efficiency of the costing system. They are: ………
I. Advantages of cost accounting to the management:

1) It helps in ascertainment of actual cost of goods and services.

2) It helps in ascertainment of profit or loss made on each product or
each process.
3) It helps in determining the selling price of a product or service.
4) It helps in cost control.
5) It helps in cost reduction.
6) It helps in control of wastage of raw materials, labours and other
resources.
7) It helps in inventory valuation.
8) It helps in comparison of cost data between different products and
periods.
9) It helps in preparation and implementation of wage plans to the
workers.
10) It helps in preparation and presentation of financial and other
statements.
11) It helps in formulation of new plans and policies.
12) It helps in prevention of errors and frauds.

II. Advantages of cost accounting to workers:

1) It helps in avoiding the wastage of raw materials, labours and
overheads.
2) It helps in cost reduction by finding new ways or techniques.
3) It helps in evaluating and improving the performance of employees.
4) It helps in increasing the earning capacity of the employees.
5) It helps in achieving the targets of employees.

Dis-advantages / Limitations of cost accounting:

1) It is more expensive.
2) It is not suitable to all the organisations.
3) It is not necessary in all the organisations.
4) It is useful only when the management takes right decision.
5) It has lack of uniform procedures and practices for ascertainment
of cost.
6) The cost submitted by cost accountant may not be true cost,
because sometimes costs may be estimated.
7) One cost is not suitable for all purposes and under all the
circumstances.
Differences between Cost Accounting and Financial Accounting:

Cost Accounting Financial Accounting

1 The main purpose of cost The main purpose of financial

accounting is to provide cost accounting is to provide financial
information to the management information to the management
(i.e Total cost). (i.e P&L, balance sheet).

2 Cost reports are prepared at Financial reports are prepared

short intervals. Such as daily, at the end of the accounting
weekly, monthly, quarterly, half year.
yearly and yearly.

3 Cost accounts are not prepared Financial accounts are

compulsory under any act. prepared compulsory
under company’s act of
1956

4 Cost accounts discloses the cost Financial accounts discloses

and profit information of each the profit or loss information of
product, department and process. the whole business.

5 Cost accounting cannot be Financial accounting can be

adopted without the help of adopted without the help of
financial accounting. cost accounting.

6 Cost accounting prepares Financial accounting prepares

special purpose statements like general purpose statements
report of loss of materials, idle like profit and loss account and
items report, variance reports. balance sheet.

7 Stocks are valued at cost price. Stocks are valued at cost price
or market price whichever is
less.

8 Both Monetary and non- Only monetary

monetary transactions are transactions are recorded
recorded.
Essentials of a Good Costing System:
Following are the important essentials of a good costing system:
1) Simplicity:
A good costing system must be easy to understand and simple to
operate. A costing system can be simplified by avoiding needless
elaboration and unnecessary details.

2) Suitability:
Each undertaking should device a special costing system. The
system adopted by a business concern should be practically
suitable.

3) Economy:
The installation and operation of the costing system should be
economical or as low as possible.

4) Comparability:
The costing system must provide the comparison facility of the cost
data between different periods and also between business
concerns.

5) Accuracy:
The costing system must provide accurate cost data relating to
various jobs, processes, departments, operations based on all
elements.
6) Promptness:
The costing system should record the cost details of each
department promptly.

7) Periodical results:
The costing system should prepare and submit the cost results in
certain intervals of time period.

8) Balancing of cost accounts with financial accounts:

The Costing system must balance the results of cost accounts with
financial accounts.

9) Uniformity:
Different forms and records used for collection and presentation of
cost data are standardized in size and Colour. Uniformity helps in
easy and comparison.

10) Systematic wage system”

There should be well-defined procedure for recording the time spent
by the workers, on different jobs for preparing the wage sheets.
Installation of cost accounting system:
Following are the steps involved in installation of costing system:

1) Ascertaining the necessity and profitability of a costing system.

2) Determine the objectives of the costing system.
3) Designing a special costing system.
4) Determining the technical details of the costing system.
5) Paying attention to the operational details of costing system.
6) Explaining about the accounting system to the managerial,
supervisory work and accounting staff.
7) Securing trained people for the operation of the costing system.
8) Introducing the system.
9) Organizing the cost office.
10) Proper supervision over the working of the system.

Meaning and Definition of Cost center:

Cost center is a place or location, person or group of persons or
department or sub department, machinery or group of machineries for
which costs are calculated and controlled.

According to ICMA of London defines that, “Cost center is a place or

location, a person or an item of equipment for which costs may be
ascertained and used for the purpose of the cost control”.

Types / classification of cost centers:

Cost centers may be classified as follows:
I. On the basis of function:
a) Production cost center: (machine shop, welding shop etc.,)
b) Service cost center: (Power house, store house, drawing
office, repairs and maintenance internal transport etc.,)
c) Mixed cost center: (Producing and service work)

II. On the basis of persons:

a) Personal cost center (Works manager, store keeper, sales
manager, salesman etc.,)
b) Impersonal cost center (Department, store yard etc.,)

III. On the basis of nature:

a) Operation cost center: (Persons and machines in welding)
b) Process cost center: (Specific process of persons and machines)
Meaning and Definition of Cost Unit:
Cost unit is a unit of product or service or any type in terms of which
costs are calculated and expressed.

According to ICMA London defines as, “A cost unit is a unit of

product, service or type in relation to which costs may be ascertained
and expressed”.
For Example:
Industry Cost unit
Steel per tonne
Cement per tonne
Sugar per quintal
Cable per meter or KM
Textile per meter
Paper per tonne
Chemical per kg, liter or tonne
Power Kilowatt hour (KWH)
Transport per km
Automobile per automobile

Differences between Cost center and Cost Unit

Cost Center Cost Unit

1. Costs are collected by the 1. Costs are measured and
cost centers. expressed in terms of cost
units.
2. In the production of a 2. A product will have only one
product different cost centers cost unit for measuring and
may be involved. expressing units.

3. Cost center helps in cost 3. Cost unit helps only for cost
ascertainment and cost ascertainment.
control.

4. The selection of cost centers 4. The selection of cost units

depends upon many factors depends mainly on the
such as size, layout of nature of the final output.
factory, nature of product
etc.,
 Methods of costing:

I. On the basis of principles of job costing:

a) Job Costing:
Job costing is a method of costing, which is used in the job order
industries to ascertain the cost of each job.
In this method each job being considers as a separate cost unit.
For example: printing press, general engineering work shops, repair
shops, interior decorators, painters etc.

b) Contract Costing:
Contract costing is a method of costing, which is used in contract
work to ascertain the cost of construction work performed as per a
customers’ specification. It is also called as terminal costing.
For example: construction of bridges, buildings, roads etc.,

c) Batch Costing:
Batch costing is the identification and assignment of those costs
incurred in completing the manufacture of a specified batch of
components.
For example: Tyres and tubes, toys, biscuits etc.

II. On the basis of principles of process costing:

a) Process Costing:
Process costing is a method of costing, which is used in large scale
industries or mass production industries where standardized
products manufactured, in which raw material passes through a
number of processes in a particular sequence to completion stage.
For example: Textiles, sugar mills, refineries etc.

b) Operation Costing:
Operation costing is a method of costing which is used to ascertain
the costs incurred for providing a service. This method of costing is
applied by those undertakings which provide services rather than
production of commodities.

c) Departmental Costing:
Departmental costing is a method of costing in which cost of the
product can be calculated from each department separately. It is
adopted where a concern or factory is divided into many departments.

d) Single (or) Unit Costing:

Unit costing is a method of costing, which is used when production
is uniform and consists of two or three varieties of the same product.
 e) Working (or) Service Costing:
Operating costing is used in undertakings which provide services as
distinct from those manufacturing tangible products. For example:
Hotels, Hospitals etc.
f) Multiple Costing:
It is an application of more than one method of cost ascertainment in
respect of the same product. For example: Air-conditioners,
Refrigerators, computers and laptops, mobile phones, aero planes
etc..,

Types / Classification of Costs:

The costs can be classified as follows:
1. On the basis of nature of costs:
a) Material costs
b) Labour costs
c) Expenses
2. On the basis of functions:
a) Production / manufacturing / factory cost.
b) Office and Administration cost
c) Selling and distribution cost.

3. On the basis of identifiability

a) Direct costs
b) Indirect costs

4. On the basis of variability:

a) Fixed cost
b) Variable cost
c) Semi-variable costs.

5. On the basis of controllability:

a) Controllable costs
b) Uncontrollable costs.

6. On the basis of management decisions:

a) Differential costs
b) Notional costs
c) Opportunity cost
d) Replacement cost
e) Sunk cost.
 Elements of cost:
Meaning:
Elements of cost means, the essential components (or) parts of the total
cost of a product or service.

Following are the elements of cost: ………………………

1) Material cost:
Material cost refers to the cost of commodities supplied to an
undertaking. Materials may be direct and indirect.
a) Direct material:
Direct material cost is that which can be conveniently identified
with and allocated to cost units. Direct materials generally
become a part of finished product. For example: clay in bricks,
leather in shoes, steel in machines, cotton in textile garments,
timber in furniture etc.
b) Indirect material:
Indirect materials are those materials which cannot be
conveniently identifies with individual cost units. These are
minor in importance. For example: pins, screws, nuts, bolts,
thread, lubricating oil, small tools, coal etc.

2) Labour Cost:
Labour cost means the remuneration like wages, salaries,
commission, bonus and all other incentives paid to different types of
employees in a business concern. Labour may be direct or indirect.
 a) Direct labour:
Direct labour cost consists of wages paid to workers directly
engaged in converting raw materials into finished goods. These
wages can be conveniently identified with a particular product,
job or process. For example: wages paid to machine operator,
shoe maker, carpenter, weaver etc.
b) Indirect labour:
It is of general in character and cannot be conveniently
identified with a particular cost unit.

In other words, indirect labour is not directly engaged in the

production operations but only assist or helping production
operations. For example: salary paid to supervisor, inspector,
cleaners, peon, watchman etc.

3) Expenses:
Expenses refers to all costs other than the material cost and labour
cost incurred by a business concern. The expenses may be direct or
indirect.
a) Direct expenses:
Direct expenses those expenses which can be conveniently
identified with and allocated to cost units. They are also known
as chargeable expenses. For example: Rent of special plant,
cost of patent rights, experimental costs, carriage on
purchases, depreciation for hired plant etc.
b) Indirect expenses:
Indirect expenses are those expenses other than the indirect
material and indirect labour costs are called as indirect
expenses. For example: rent and rates, depreciation lighting
and power, advertising, insurance, repairs, printing,
transportation and stationary etc.

Prime Cost:
The aggregate of all direct material, direct labour and direct expenses is
called prime cost.
Prime Cost = Direct material + Direct Labour + Direct expenses

Overhead:
The aggregate of all indirect material, indirect labour and indirect
expenses is called overhead

Overhead = Indirect material + Indirect labour + Indirect expenses

 Meaning of Cost sheet:
Cost sheet is a periodical statement of cost which is prepared to show the various
elements of costs incurred in the production and sale of goods and services.
Such as prime cost, factory cost, cost of production and total cost.

Definition of Cost sheet:

According to CIMA of UK defines that cost sheet is a document which provides
for the assembly of the detailed cost of a cost center or cost unit.

Objectives of Cost sheet:

a) It reveals the total cost and cost per unit of goods produced.
b) It discovers the break-up of total cost into different elements of cost.
c) It helps to comparative study of the cost of current period with that of the
corresponding previous period.
d) It acts as a guide to the management for fixing the selling price and
quotations of tenders.

Items not included in Cost Sheet:

1) Cash discount 2) Interest paid 3) Preliminary expenses
4) Goodwill written off. 5) Provision for taxation 6) Provision for bad debts
7) Transfer to reserve 8) Donations. 9) Income tax paid 10) Dividend paid
11) Profit or loss on sale fixed assets. 12) Damages payable at law.

Simple Format of cost sheet:

Particulars Amount CPU
Direct material
Direct labour
Direct expenses
Prime cost
Add: Factory overhead
Factory cost
Add: Office & administration overhead
Cost of production
Add: selling & distribution overhead
Total cost
Add: profit
Sales
Format of cost sheet
Particulars Amount CPU
Opening stock of raw materials
Add: Purchase of materials
Carriage inwards
Octroi and customs duty
Freight inwards
Less: Closing stock of materials
Cost of Materials Consumed
Add: Direct labour / Direct Wages
Add: Direct expenses
Prime Cost (A)
Add: Factory Overhead:
Fuel and power
Factory rent
Foremen’s wages
Factory lighting
Heating
Tools used
Consumable stores
Repairs to buildings
Indirect materials
Indirect wages
Leave wages
Insurance
Overtime wages
Supervision
Works stationary
Canteen and welfare expenses
Works salaries
Depreciation of plant and Machinery
Works expenses
Gas and water
Technical directors’ fees
Laboratory expenses
Works telephone expenses
Internal transport expenses
Add: Opening stock of work in progress
Less: Closing stock of work in progress
Less: Sale of scrap

Factory cost / works cost (B)

Add: Office & Administration Overhead:
Office salary
Bank charges
Legal expenses
Office rent, Office lighting
Director’s fees, Audit fees
Printing and stationary
Office expenses
Depreciation of office furniture
Subscription to trade journals
Establishment charges
Directors’ travelling charges
Postage and telegram
Cost of Production (c)
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Cost of goods sold
Add: Selling & Distribution Overhead:
Travelers commission
Advertising expenses
Show room expenses
Bad debts
Salesman salaries and expenses
Packing expenses
Carriage outwards
Collection charges
Cost of catalogues
Expenses of delivery vans
Travelling expenses
Cost of tenders
Warehouse expenses
Cost of mailing literature
Sales manager salaries
Insurance of showroom
Sales director’s fees
Sales office expenses
Rent for showroom
Depreciation of redelivery vans
Exp. of sales branch establishment
Total cost or Cost of sales (F)
Profit or loss
Sales
Problems on preparing Cost Sheet:
Problem No: 01
From the following information for the month of January, prepare a cost sheet
to show the following components:
a) Prime cost b) Factory cost c) cost of production d) Total cost.
Direct material Rs. 50,000

Direct labour Rs. 20,000

Direct expenses Rs. 10,000

Factory overhead Rs. 20,000

Office and administration overhead Rs. 15,000

Selling and distribution overhead Rs. 5,000

Profit Rs. 30,000.

Problem No: 02
From the following information for the month of June, prepare a cost sheet to
show the following components:
a) Prime cost b) Factory cost c) cost of production d) Total cost.
Direct material 57,000
Direct wages 28,500
Factory rent and rates 2,500
Office rent and rates 500
Plant repairs and maintenance 1,000
Plant depreciation 1,250
Factory heating and lighting 400
Factory manager’s salary 2,000
Office salaries 1,600
Director’s remuneration 1,500
Telephone and postage 200
Printing and stationary 100
Legal charges 150
Advertisement 1,500
Salesman’s salaries 2,500
Showroom rent 500
Sales 1,16,000
Problem no. 3
From the following information prepare a cost sheet: ……………
Raw materials consumed 70,000
Direct wages 2,000
Factory rent 2,400
Carriage inwards 2,000
Indirect materials 560
Power 4,600
Printing and stationary 620
Legal expenses 350
Repairs on plant and machinery 1,200
Factory manager’s salary 18,000
Depreciation of plant and machinery 1,240
Postage expenses 465
Bad debts 440
Carriage outwards 1,540
Advertising 500
Sales men’s salary 3,400
General Manager’s salary 36,000
Audit fees 350
Depreciation on furniture 160

Problem No: 04
From the following information prepare a cost sheet to show:
a) Prime cost b) Works cost c) Cost of production d) Cost of Sales e) Profit.
Raw materials purchased 35,250
Carriage on purchases 850
Direct wages 18,450
Factory overhead 2,750
Selling overhead 2,450
Office overhead 1,850
Sales 75,000
Sale of factory scrap 250
Opening stock of finished goods 9,750
Closing stock of finished goods 11,100
Problem no.5
Bangalore limited supplies you the following information and requires you to
prepare a cost sheet.
Stock of raw materials on 1st Sept., 2016 75,000
Stock of raw materials on 30th Sept., 2016 91,500
Direct wages 52,500
Indirect wages 2,750
Sales 2,00,000
Work in progress on 1st Sept., 2016 28,000
Work in progress on 30th Sept., 2016 35,000
Purchase of raw materials 66,000
Factory rent, rates and power 15,000
Depreciation of plant and machinery 3,500
Expenses on purchases 1,500
Carriage outward 2,500
Advertising 3,500
Office rent and taxes 2,500
Travelers wages and commission 6,500
Stock of finished goods on 1st Sept., 2016 54,000
Stock of finished goods on 30th Sept., 2016 31,000

Problem No: 6

The following information is relating to Posters Manufacturing co. ltd for the year
ending 31-12-2017.

Production Wages 2,50,000

Direct material used 3,18,200
Chargeable expenses 30,000
Sales 7,80,000
Drawing office salaries 10,000
Counting office salaries 18,800
Cash discount allowed 3,000
Carriage outwards 5,400
Bad debts written off 8,500
Rent, rates and taxes:
(i) Office 4,000
(ii) Works 15,400
Travelling expenses 3,600
Travelers’ salaries and commission 8,500
Depreciation on plant and machinery 6,500
Depreciation on office furniture 1,000
Director’s fees 12,000
 Gas & water (3/4 factory, 1/4 office) 2,800
Manager’s salary (3/4 factory, 1/4 office) 24,000
General expenses 4,000
Hire of crane 5,000
Donations to charitable trust 2,000

Prepare a statement showing:

(1) Prime Cost (2) Factory cost (3) Total cost and (4) Net profit.

Problem no.7
The following particulars have been extracted from the books of Colgate
Manufacturing Co. Mysore, for the year ending 31-03-2017.
Stock of materials as on 1 April, 2016 47,000
Stock of materials as on 31 march 2017 50,000
Materials purchased 2,08,000
Drawing office salaries 9,600
Counting house salaries 14,000
Carriage inwards 8,200
Carriage outwards 5,100
Cash discount allowed 3,400
Bad debts written off 4,700
Repairs of plant, machinery and tools 10,600
Rent, rates, taxes and insurance (factory) 3,000
Rent, rates, taxes and insurance (office) 1,000
Travelling expenses 3,100
Travelling salaries and commission 8,400
Production Wages 1,40,000
Depreciation on plant and tools 7,100
Depreciation written off on furniture 600
Director’s fees 6,000
Gas and water charges (factory) 1,500
Gas and water charges (office) 300
General charges 5,000
Manager’s salary 12,000

Out of 48 hours in a week, the time devoted by the manager to the factory and
office was on an average 40 hours and 8 hours respectively throughout the
accounting year.
You are required to prepare a Cost Sheet.
Problem no.8
Mr. Gopal furnishes the following data relating to the manufacture of a
standard product during the month of April 2016:
Raw materials consumed 15,000
Direct labour charges 9,000
Machine hours worked 900
Machine hour rate 5
Administrative overheads 20% on works cost
Selling overhead Rs. 0.50 per unit
Units produced 17,100
Units sold 16,000 at Rs. 4 per unit

You required to prepare a cost sheet from the above, showing:

(a) The cost per unit; (b) Cost per unit sold and profit for the period;

Problem No: 9
The costing data of MK Ltd., shows the following materials used Rs.
14,00,000, direct wages Rs. 10,80,000, factory overhead Rs. 3,24,000,
establishment and general expenses Rs. 2,25,000.

Prepare a cost sheet showing factory cost, total cost and also calculate
percentage of factory overhead to direct wages and percentage of establishment
and general expenses to factory cost.

Problem No: 10
The accounts of a Machine manufacturing company disclose the following
information for the month ending 31 Dec., 2015.
Materials used 1,50,000
Direct wages 1,20,000
Factory overhead expenses 24,000
Office expenses 17,640

Prepare cost sheet of the machine and calculate the price which the
company should quote for the manufacture of a machine requiring materials
valued at Rs. 1,250 and expenditure on productive wages of Rs. 750, so that the
price may yield a profit of 20% on the selling price.
For the purpose of price quotation, charge factory overhead as a percentage of
direct wages and charge office overhead as a percentage of works cost.
Problem No: 11

The following details are available from a company’s books:

Stock of raw materials on 1-1-2016 10,800
Stock of finished goods on 1-1-2016 28,000
Purchases during the year 2,94,000
Productive Wages 1,98,800
Sale of finished goods 5,92,000
Stock of finished goods on 31-12-2016 30,000
Stock of raw materials on 31-12-2016 13,600
Works overhead 43,736
Office expenses 35,524
The company is about to send a tender for large plant. The costing
department estimate that the material required for its production would cost Rs.
20,000 and wages for making the plant would cost Rs. 12,000. Tender is to be
made keeping a net profit of 20% on selling Price. State what would be the
amount of the tender, if based on the percentages?

Problem No: 12
From the following information have been extracted for the year 2017
Cost of materials 6,00,000
Wages 5,00,000
Factory overhead 3,00,000
Administration overhead 3,36,000
Selling charges 2,24,000
Distribution charges 1,40,000
Profit 4,20,000
A work order has to be executed in 2018 and the estimated expenses are:
Materials 8,000, wages 5,000.
Assuming that in 2018, the rate of factory overheads has gone by 20%,
distribution charges have gone down by 10% and selling and administration
charges have gone each up by 15%, at what price should the product be sold so
as to earn the same rate of profit on the selling price as in 2017?
Factory overheads are based on wages and administration, selling and
distribution overheads on factory cost.

Problem no.13
KMF Co. Ltd., furnishes the following information for 10,000 units of a product
manufactured during the year 2017.
Materials 90,000
Direct wages 60,000
Power and consumable stores 12,000
Indirect wages 15,000
Factory lighting 5,500
 Cost of rectification of defective work 3,000
Clerical salaries 33,500
Selling expenses 5,500
Sale proceeds of scrap 2,000
Repairs, maintenance and depreciation of plant 11,500

The net selling price was Rs. 31.60 per unit sold and all units were sold.
As from 1-1-2018, the selling price was reduced to Rs. 31 per unit. It was
estimated that production could be increased in 2016 by 50% due to spare
capacity.
Rates for materials and direct wages will increase by 10%.
You are required to prepare:
(A) Cost sheet for the year 2017 showing various elements of cost sheet per unit,
and
(B) Estimated Cost and Profit for 2018.
Assume that 15,000 units will be produced and sold during the year and
factory overheads will be recovered as a percentage of direct wages and office
and selling expenses as a percentage of works cost.

Problem No: 14
Bharat Engineering Company manufactured and sold 1,000 sewing
machines in 2017. Following are the particulars obtained from the records of the
company:
Cost of materials 80,000
Wages paid 1,20,000
Manufacturing expenses 50,000
Salaries 60,000
Rent, rates and insurance 10,000
Selling expenses 30,000
General expenses 20,000
Sales 4,00,000

The company plans to manufacture 1,200 sewing machines in 2018. You

are required to submit a statement showing the price at which machines would
be sold so at to show a profit of 10% on the selling price. The following additional
information is supplied to you:
a) The price of materials will rise by 20 percent on the previous year’s level.
b) Wage rates will rise by 5%.
c) Manufacturing expenses will be rise in proportion to the combined cost
of materials and wages.
d) Selling expenses per unit will remain unchanged.
e) Other expenses will remain unaffected by the rise in output.
Problem No: 15
Hero cycles Ltd., manufactured and sold 2000 bicycles in 2017. Following are
the particulars obtained from the records of the company.
Cost of materials 1,60,000
Wages 2,40,000
Manufacturing expenses 1,00,000
General expenses 40,000
Salaries 1,20,000
Rent, rates and insurance 20,000
Selling expenses 60,000
Sales 8,00,000
The company plans to manufacture 1500 bicycles during 2018. You are required
to submit a statement showing the price at which each bicycle should be sold so
as to show a profit of 25% on sales.
The following additional information is provided to you: ….
a) The price of materials will rise by 25% on previous years level.
b) Wages rate will rise by 5%.
c) Manufacturing expenses will rise in proportion to the prime cost.
d) Selling expenses will decrease by 5%.
e) Other expenses will be unaffected by the rise in output.

Problem No: 16
From the following prepare a cost and profit statement of sunlight lamp
Co. for the year 2017.
Stock of materials on 1/4/2016 35,000
Stock of materials on 31/3/2017 4,900
Purchase of materials 52,500
Direct wages 95,000
Factory expenses 17,500
Establishment expenses 10,000
Completed stock in hand on 31/3/2017 35,000
Sales 1,89,000

The number of solar lamps manufactured during the year 2016-17 was 4,000.
The company wants to quote for a contract for the supply of 1,000 solar
lamps during the year 2017-18. The lamps to be quoted are of uniform quality
and make and similar to those manufactured in the year 2016-17. The cost of
materials has increases by 15% and wages by 10%.
Prepare a statement showing the price to be quoted to give the same
percentage of net profit on turnover as realized during the year 2016-17
assuming cost per unit overheads will be the same as in previous year.

……………………………………………………………………………………………………
…………………………………………………………………………………………………….
 CHAPTER – 2

MATERIAL COST
Meaning of Materials:

The term material refers to all commodities consumed in the process of

manufacturing.

Definition of Materials:

According to CIMA of UK defines Material cost as “the cost of commodities

supplied to an undertaking”.

Classification / Types of Materials:

1. Direct Materials:
Direct materials cost is that which can be conveniently identified with and
allocated to cost units. Direct materials generally become a part of finished
product. For example: cotton used in textile mill, leather in shoes, timber
used in furniture etc.,
2. Indirect material:
Indirect materials are those materials which cannot be conveniently
identified with individual cost units. For example: pins, screws, nuts,
bolts, thread etc.,
3. Supplies:
Supplies are the indirect materials used in production which do not
become part of the finished product. For example: soaps and towels used
by workmen, sand paper used in polishing etc..
4. Finished or component parts:
In assembly type production like refrigerator, radio, TV, car etc.,
component parts may be purchased or produced within the organisation.
For example: tyres and tubes in car manufacturing, picture tube in TV
manufacturing are component parts.
5. Stores:
The term stores is a very wide term and includes raw materials,
component parts, tools, maintenance material, consumable stores, work-
in-progress, finished goods and pattern etc.,
6. Inventory:
The term inventory covers stock of raw materials, workin-progress and
finished stock only.
7. Waste:
Waste has been defined as that portion of a basic raw material which is
lost in processing having no recovery value.
8. Scrap:
Scrap can be defined as the incidental residue from certain types of
manufacture usually of small amount and low value, recoverable without
further processing.
Inventory control (or) Material control:
No cost accounting system can become effective without proper and
efficient control of materials. This is so because quite often material is the largest
single element of cost and such an efficient system of material control leads to a
significant economy in the total cost of production.

Meaning and Definition of Material Control:

Material control can be defined as “Systematic controlling of purchasing,
storing and consumption of materials, so as to maintain regular supply of
material at the same time avoiding over stocking”.
OR
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 optimum level considering operating requirements and financial resources
of the business”.

Objectives of Material Control:

The main objectives of material control are listed below: ……
1) No understocking:
Understocking leads to materials running out of stock at some time or the
other. Shortage of material may arise at the time when they are urgently
needed and production then be delayed.

2) No overstocking:
Investment in materials must be kept as low as possible, considering the
production requirements and the financial resources of the business.
Overstocking of materials unnecessarily locks up capital and causes high
storage costs, thus adversely affecting the profits.

3) Minimum wastage:
Proper storage conditions must be provided to different types of materials.
Losses of materials may occur due to deterioration, obsolescence, theft,
evaporation etc.,

4) Economy in purchasing:
The purchasing of material is a highly specialized function. By purchasing
materials at the most favourable prices, the efficient purchaser is able to
make a valuable contribution to the success of a business.
5) Proper quality of materials:
While purchasing materials, due consideration should also be given to the
quality. It is no use purchasing materials of inferior quality or very
superior quality.
6) Material information reports to the management:
The material control system should be so designed so as to serve
the purpose of accurate and up-to-date reports to management about
purchase, consumption and stocks of material.
Essential requirements (or) Principles of Material Control:
The material control must ensure the following requirements:
a) There should be a proper co-ordination and cooperation between various
departments.
b) There should be central purchasing department under control.
c) There should be proper classification and codification of materials.
d) Material requirements should properly planned.
e) The perpetual inventory system should be operated.
f) Adequate records should be introduced to control materials.
g) The storage of all materials should be well planned.
h) The various stock levels should be maintained.
i) Purchase of materials should be controlled through budgets.
j) An efficient system of internal audit and internal check should be
operated.

Techniques of Material control:

Various techniques commonly used for inventory control: ….
a) ABC Analysis b) VED Analysis c) Level settings
d) Economic order quantity (EOQ) e) Proper purchase system
f) Proper storage of materials g) inventory turnover ratio
h) Perpetual inventory system i) Fixation of material cost
j) Preparation of material budgets.

Methods of Pricing Material Issues:

When materials are issued from stores to production department, a
difficulty arises regarding the price at which materials issued are to be charged.
This is because the same type of material may have been purchased in different
lots at different times at several different prices.

1) First-in-First-Out: (FIFO)
This method is based on the assumption that material which are
purchased first are issued first. It uses the price of the first batch of
materials purchased for all issues until all units from this batch have been
issued. After the first batch is fully issued, the price of next batch received
becomes the issue price.

Advantages of FIFO Method: ………..

a) This method is based on realistic assumption that material which
are received first are issue first.
b) Materials are issued at actual cost.
c) Closing stock valuation is at cost as well as at the latest market
prices.
d) This method is quite simple to operate and easy to understand.
 Disadvantages of FIFO Method: ……..
a) Materials are not charged at the current market prices.
b) This method sometimes produces unfair results as between one job
and another.
c) When transactions are large in number and the price fluctuates very
frequently, the method involves more calculations.

2) Last-in-First-Out: (LIFO)
This method is just reverse of FIFO. It is based on the assumption
that last purchase of materials are issued first and earlier receipts are
issued in the last.
Advantages of LIFO Method: ………..
a) The value of materials issued is closely related to current market
prices.
b) As materials are issued at actual cost, it does not result in any
unrealized profit or loss.
Disadvantages of FIFO Method: ……..
a) Although stock is valued at cost, the price is that of the earliest
materials purchased, so that stock value does not represent its
current value.
b) This method is not realistic as it does not confirm to the physical
flow of materials.

3) Simple Average method:

Under this method simple average price is calculated by adding all the
different prices and dividing by the number of such prices. It does not take
into account quantities of materials while computing average prices.

Advantages of Simple Average method: ………..

a) This method simple to understand. b) It is easy to operate.
Disadvantages of Simple Average method: ………..
a) Materials are not charged out at actual cost. Thus, unrealized profit
or loss will usually arise out of pricing.
b) This method is unscientific and usually produces unsatisfactory
results.

4) Weighted Average Method:

This method gives due weight to the qualities held at each price
when calculating the average price. The weighted average price is
calculating by dividing the total cost of the materials in stock from which
the material to be priced could have been drawn, by that total quantity of
materials in that stock.
 Formulas of stock levels:

1) Minimum stock level = Reorder level – (Normal consumption x Normal reorder

period)
2) Maximum stock level = Reorder level + Reorder quantity –(Minimum
consumption x Minimum reorder period)
3) Reorder level = Maximum consumption x Maximum reorder period.
4) Danger stock level = Normal consumption x Maximum reorder period for
emergency purchase.
5) Average stock level = Minimum stock level + Maximum stock level
2

Problems on stock levels

Problem No: 01
In a manufacturing company, a material is used as follows:

Re-order quantity = 3,600 units

Maximum consumption = 900 units per week
Minimum consumption = 300 units per week
Normal consumption = 600 units per week
Re-order period = 3 to 5 weeks
Calculate: (a) Re-order level; (b) Min stock level; (c) Max. Stock level.

Problem No: 02

Calculate: (a) Re-order level; (b) Min stock level; (c) Max. Stock level. And (d)
Average stock level from the following information:
Minimum consumption = 100 units per day
Maximum consumption = 150 units per day
Normal consumption = 120 units per day
Re-order period = 10 – 15 days
Re-order quantity = 1,500 units
Normal re-order period = 12 days

Problem No: 03

In a manufacturing company, a material is used as follows:

Re-order quantity = 48,000 units
Maximum consumption = 12,000 units per week
Minimum consumption = 4,000 units per week
Normal consumption = 8,000 units per week
Time required for delivery – minimum: 4 weeks, Max: 6 weeks
Calculate: (a) Re-order level; (b) Min stock level; (c) Max. Stock level.
(d) Danger level and (e) Average stock level.
 Problem no.04

The components M1 & M2 are used in manufacture of an article. The following

data relating to components.

Minimum Usage 25 units per week

Maximum Usage 75 units per week
Re-order period: M1 – 4 – 6 weeks
M2 – 2 – 4 weeks
Maximum level: M1 – 600 units
M2 – 750 units
Calculate for each Component:

(a) Re-order level; (b) Min. stock level;

(c)Re-order quantity (d) Average stock level.

Problem No: 05
From the following information relating to two components i.e. X and Y,
Compute Re-order level, minimum level, maximum level, and Average Stock
level.

Particulars Component X Component Y

Maximum consumption per week 75 units 75 units
Average consumption per week 50 units 50 units
Minimum consumption per week 25 units 25 units
Re-order period 4 to 6 weeks 2 to 4 weeks
Re-order quantity 400 units 600 units

Problem No: 06

From the following information calculate the 4 important levels of Stock.

Average delivery time - 20 days
Max. Delivery time - 30 days
Min. Delivery time - 15 days
Max. Delivery period for emergency purchases – 5 days
Average rate of consumption per day - 25 units
Max. Rate of consumption per day - 35 units
Min. rate of Consumption per day - 14 units
Standard ordering quantity - 600 units (Re-order quantity)
Problem No: 07
Medical Aids Co. manufactures a special product A. The following particulars
were collected for the year 2016:
Cost of placing an order Rs. 100
Annual carrying cost per unit Rs. 15
Normal Usage 50 units per week
Minimum Usage 25 units per week
Maximum Usage 75 units per week
Re-order period 4 to 6 weeks
Compute from the above: (1) Re-order quantity (2) Re-order level
(3) Minimum level (4) Maximum level (5) Average Stock Level.

…………………………………………………………………………………………………

Economic order quantity [ EOQ ]

It means quantity of materials to be ordered for purchase it, because which
gives maximum economy for the materials. It is also called as re-order quantity.

√2AB √2AB
Formula: 𝐸𝑂𝑄 = (or) 𝐸𝑂𝑄 =
CS S

Where, A= Annual consumption

B= Buying cost per order
C= Cost per unit of material
S= Storage & carrying cost in percentage of cost.
(or)
S= Storage & carrying cost per unit.

Problems on EOQ

Problem No: 01
Calculate the economic order quantity for material M. The following details are
furnished:

Annual Usage …… 90,000 units

Buying cost per order …… Rs. 10
Cost of carrying inventory 10% of cost
Cost per unit Rs. 50

Problem No: 02
Find out EOQ from the following information:
Annual consumption - 12,000 units
Cost of ordering - Rs. 15 per order
Cost of materials - Rs. 1.25 per unit
Carrying cost - 20% of average inventory
Problem No: 03
From the following information, calculate Economic Order Quantity and the
number of orders to be placed in one quarter of the year.
Quarterly consumption of materials 2,000 kg
Cost of placing an order Rs. 50
Cost per unit Rs. 40
Storage and carrying cost 8% of average inventory.

Problem no. 04:

Following information relating to a type of raw material is available:
Annual demand 2,400 units
Unit price Rs. 2.40
Ordering cost per Order Rs. 4.00
Storage cost 2% per annum
Interest rate 10% per annum
Calculate Economic Order Quantity.

Problem No: 05
XY Co. requires 1,500 units of a material per month, each costing Rs. 27.
Cost per Order is Rs. 150 and the inventory carrying charges work out to 20%
of the average inventory. Find out the Economic Order Quantity and the number
of orders per year.

Problem No: 06
A company uses 2500 units of a material per month. Cost of placing an
order is Rs. 150. The cost per unit is 20. The re-order period is 4 to 8 weeks. The
maximum consumption of raw materials is 100 units whereas the average
consumption is 275 units. The carrying cost of inventory is 20% per annum. You
are required to calculate:
(i) Re-order quantity (ii) Re-order level

Problem No: 07
From the following information calculate EOQ:
Monthly consumption 1,500 units
Ordering cost Rs. 50 per order
Inventory carrying cost per month per units Rs. 0.60

Problem No: 08
Annual usage 6,000 units, cost of material per unit Rs. 20, cost of placing and
receiving one order Rs. 60, annual carrying cost of one unit 10% of inventory
value. Find out EOQ.

……………………………………………………………………………………………………
 Methods of pricing material issues:
1. FIFO method
2. LIFO method
3. Simple average method
4. Weighted average method

Format for preparing Stores Ledger Accounts under different methods

Date Receipts Issues Balance
Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount

Problems on pricing material issues:

Problem no.1:
From the following information prepare stores ledger account under FIFO
method.
Jan- 1 Opening stock 200 pieces Rs. 2 each
5 purchases 100 pieces Rs. 2.20 each
10 purchases 150 pieces Rs. 2.40 each
20 purchases 120 pieces Rs. 2.50 each
22 issue 150 pieces
25 issue 100 pieces
27 issue 100 pieces
28 issue 200 pieces

Problem no.2:
From the following information prepare stores ledger account under FIFO
method.
April – 1 Balance 400 units Rs. 2.50
- 2 purchased 275 units Rs. 2.70
- 4 issued 200 units -
- 6 purchased 275 units Rs. 2.80
- 11 issued 200 units -
- 19 issued 275 units -
- 22 purchased 275 units Rs. 2.90
- 27 issued 200 units -
Problem No: 3
On March 2016 there are 1,500 units of material at Rs. 12 per unit in stock. The
following transactions were made during the month. Prepare stores ledger
accounts by FIFO method.
March 2 Issued 200 units
March 4 Purchased 1,000 units at Rs. 15 per unit.
March 8 Issued 1,200 units
March 12 Purchased 600 units at Rs. 20 per unit
March 15 Issued 650 units
March 20 Returned to stores from issued of March 2, 100 units
March 24 Purchased 300 units at Rs. 25 per unit
March 28 Issued 250 units
March 30 Issued 300 units

Problem No: 4
Prepare a stores ledger account from the following information in proper
format using FIFO method of pricing the material issues.
1st Nov. 2015 Opening Stock 400 units @ Rs. 8 per unit
5th ” Received 800 units @ Rs. 7.80 per unit
8 ”
th Issued to production dept. 480 units
10th ” Issued to production dept. 320 units
12th ” Received 1,000 units @ Rs. 7.70 per unit
15th ” Issued to production dept. 800 units
16th ” Received 500 units @ Rs. 7.50 per unit
19th ” Received 1,200 units @ Rs. 7 per unit
21st ” Issued to production dept. 700 units
24th ” Issued to production dept. 520 units
27th ” Issued to production dept. 680 units
28th ” Refund of Surplus from work order 50 units from `issues of 10th Nov.

On 30th Nov. 2015, the stock verification report revealed a loss of 20 units.

Problem no.5:
From the following information, prepare Stores Ledger Accounts under FIFO and
LIFO method:
June 07, 2015 purchased 500 units @ Rs. 12 per unit
June 13, 2015 purchased 700 units @ Rs. 10 per unit
June 22, 2015 Issued 1,000 units
June 25, 2015 Purchased 1,500 units @ Rs. 8 per unit

June 30, 2015 Issued 1,000 units.

Problem no.6:
From the following information, prepare stores ledger account under FIFO and
LIFO method.
Jan. 2016 1 Received 500 units at Rs. 20 per unit
“ ” 10 Received 300 units at Rs. 24 per unit
“ ” 15 Issued 700 units
“ ” 20 Received 400 units at Rs. 28 per unit
“ ” 25 Issued 300 units
“ ” 28 Received 500 units at Rs. 22 per unit
“ ” 31 Issued 200 units

Problem No: 7
Prepare stores ledger accounts under FIFO method. The stock of material on
1st Jan 2018 was 800 units at the rate of Rs. 2.00 per unit. Following
purchases and issues of these items were made
Date Receipts Rate per unit Issues units
Jan 6th - - 350
Jan 9 th 600 2.25 -
Jan 15 th 450 2.50 -
Jan 18 th - - 750
Jan 21 st - - 300
Jan 24th 750 2.60 -
Jan 26th - - 450
Jan 30 th - - 300

Problem No: 8
Following is the history of receipts and issues of raw material in chemicals Ltd.,
during the month of Feb - 2015.

February 1 Opening balance 500 tons @ Rs 200

” 3 Issued 70 tons
” 4 Issued 100 tons
” 8 Issued 80 tons
” 13 Received 200 tons @ Rs 190
” 14 Return from department 15 tons
” 16 Issued 180 tons
” 20 Received 240 tons @ Rs 190
” 24 Issued 300 tons
” 25 Received 320 tons @ Rs 190
” 26 Issued 115 tons
” 27 Returned from department 35 tons
” 28 Received 100 tons @ Rs 190
The stock verifier has found a shortage of 10 tons on the 22nd and left a note
accordingly.

Draw up a stores ledger accounts under FIFO method.

Problem No: 9
Following is the history of receipts and issues of raw material in Nathan Ltd.,
during April, 2015.
April 1 Opening balance 500 units at Rs. 25 per unit
” 3 Issued 70 units
” 4 Issued 100 units
” 8 Issued 80 units
” 13 Purchased 200 units at Rs. 24.50 per unit
” 14 Return of surplus 15 units at Rs. 24
” 16 Issued 180 units
” 20 Purchased 240 units at Rs. 24.40 per unit
” 24 Issued 304 units
” 25 Purchased 320 units at Rs. 24.30 per unit
” 26 Issued 112 units
” 27 Return of surplus 12 units at Rs. 24.50 per unit
” 28 Purchased 100 units at Rs. 25 per unit and paid
freight charges Rs. 200.

The stock verification reveals that on the 15th April, 2015 there was a shortage
of 5 units and on 27th April, 2015 another shortage of 8 units.

Problem No: 10

Following are the receipts and issues of material: ………

Date Receipt Cost Issue
1-1-2107 1,000 units 1,000 -
1-2-2017 1,000 units 800 -
28-2-2017 - - 1,200 units
1-3-2017 1,000 units 1,200 -
31-3-2017 - - 1,200 units
Prepare stores ledger accounts under Simple average method and weighted
average method.
Problem no.11:
From the following information, prepare Stores Ledger Account under
Simple Average Method and weighted average method.
Jan. 2015, 1 Received 500 units at Rs. 20 per unit
” 10 Received 300 units at Rs. 24 per unit
” 15 Issued 700 units
” 20 Received 400 units at Rs. 28 per unit
” 25 Issued 300 units
” 28 Received 500 units at Rs. 22 per unit
” 31 Issued 200 units

Problem No: 12
Following transactions relates to the Receipts and issue of material ‘X’.
Receipts:
30-06-2017 500 units @ Rs. 4.00 per unit
13-06-2017 900 units @ Rs. 4.30 per unit
23-06-2017 600 units @ Rs. 3.80 per unit
Issues:

05-06-2017 400 units

15-06-2017 400 units
25-06-2017 600 units

Prepare stores ledger accounts under simple average method and weighted
average method.
……………………………………………………………………………………………………
 CHAPTER – 03

LABOUR COST
Problems on calculation of wages:
Problem no.1
Calculate total earnings of the worker under Halsey plan.
Time allowed 48 hours
Time Taken 40 hours
Rate per hour Rs. 10

Problem No: 02
Calculate total earnings of the worker under Halsey plan.
Standard time 10 hours
Time Taken 6 hours
Hourly rate Rs. 2

Problem No: 03
Standard time allowed for a job is 20 hours at the rate of Rs. 2 + 60
paisa DA per hour worked. Actual time taken by a worker is 15
hours. Calculate total earnings under Halsey plan and Rowan plan.

Problem No: 04
Standard time fixed for a job in a manufacturing concern is 40 hours.
The time rate is 60 paisa per hour, the actual time taken by the
workers A, B, C in 20 hours, 15 hours and 30 hours respectively.
Calculate total remuneration of A,B,C on the basis of Halsey and
Rowan plan.

Problem No: 05
Sri Channabasappa finishes a work in 480 hours as against
600 hours allowed, his hourly rate is Rs. 5. He get a dearness
allowance of Rs. 16 per day of 8 hours worked in addition to his
wages. Calculate his total income under Halsey (50:50) and Rowan
plans.
Problem No: 06
A workmen’s wages for a guaranteed 44 hour week is Rs. 0.75
per hour. The estimated time to produce one article is 30 minutes
and under an incentive plan, the time allowed is increased by 20%.
During a week, a worker produced 100 articles. Calculate the Wages
under each of the following methods
(a) Time rate (b) Rowan System (c) Halsey System.

Problem No: 07
During the first week of April Mr. K Manufactured 300 articles.
He receives wages for a guaranteed 48 hours week at the rate of Rs.
4 per hour, the estimated time to produced one article is 10 minutes
and under incentive scheme the time allowed is increased by 20%.
Calculate his gross wages according to: ….
(a) Halsey plan (b) Rowans premium plan

Problem No: 08
Using Taylor’s plan, calculate the earnings of workers from the
following information. Normal rate per hour = Rs.12. Standard time
per piece = 20 minutes in a 9 hour day, A produces 26 units, B
produces 30 units.

Problem No: 9
On the basis of the following information Calculate the earnings of X
and Y on _____
(i) Straight piece basis
(ii) Taylor’s differential piece rate system.
Standard time 8 units per hour
Normal time rate Rs. 4 per hour

Details to be applied: ……….

(i) 80% piece rate below standard

(ii)120% of piece rate at above standard. In a 9 hours per day
X produces 54 units and Y produces 75 units.
Problem No: 10
From the following particulars Calculate the earnings of a
worker under ……….
(1) Straight piece rate
(2) Differential piece rate
(3) Halsey (50:50) plan and Rowan premium plan.
Weekly working hours 40
Piece rate per piece Rs. 6
Hourly rate of wages Rs. 15
Normal time taken per piece 20 minutes
Normal output per week 120 piece (Standard) Actual
working per week 150 pieces.

Differential piece rate:

a) 80% of output below normal output
b) 120% of piece for output above the normal output.

Problem No: 11
Standard output = 150 units per day 8 hours. Piece rate = Rs.
1 per unit, output of A 100 units, B 135 units, C 180 units. Calculate
the earnings of AB and C workers under Merrick’s Differential piece
rate System.

Problem No: 12
From the following particulars calculate wages of 3 workers under:
1) Taylor’s differential piece rate system
2) Merrick’s differential piece rete system
Standard production per hour 6 units
Normal rate per hour Rs. 120
In an 8 hours/day, production of three workers X=38 units, Y=45
units and Z=60 units.

……………………………………………………………………………………………………
 CHAPTER – 04
OVERHEAD COST
Problems on overheads distribution:
Problem No: 01
The following information is supplied from the costing records of a company:
Rent - 2,000
Maintenance - 1,200
Depreciation - 900
Lighting - 200
Insurance - 1,000
Employer’s contribution to provident fund 300
Energy - 1,800
Supervision - 3,000

The following information is given for the purpose of allocation

Particulars Dept. A Dept. B Dept. C Dept. D
Floor space [Sqft.] 150 110 90 50

No. of Workers 24 16 12 8

Total direct wages 8,000 6,000 4,000 2,000

Cost of Machinery 24,000 18,000 12,000 6,000

Stock of goods 15,000 9,000 6,000 --

Prepare a statement showing apportionment of cost to various dept.

Problem No: 02
ABC Company limited has 3 production departments A B C and two Service
departments D and E.
The following figures are extracted from the records of the company: …………
Direct wages 2,000
Rent and rates 9,000
Indirect wages 1,500
Dept. of Machinery 10,000
General lighting 600
Power 1,500
Sundries 10,000
Following are the further details are available…
Particulars Dept. A Dept. B Dept. C Dept. D Dept. E
Floor space [Sqft] 2,000 2500 3,000 2,000 500

Light points 10 15 20 10 5

Direct wages 3,000 2,000 3,000 1,500 500

HP of Machinery 60 30 50 10 --

Value of Machinery 60,000 80,000 1,00,000 5,000 5,000

Apportionment to the costs on various departments on most equitable basis.

Problem No: 03
The following data obtained from the records of Galaxy Company limited, for the
half year ended 30th September 2015. Prepare an overhead distribution
summary:
Particulars Production Department Service Department
Dept. A Dept. B Dept. C Dept. D Dept. E
Direct wages 7,000 6,000 5,000 1,000 1,000

Direct Materials 3,000 2,500 2,000 1,500 1,000

No. of Employees 200 150 150 50 50

Electricity [In Kwts.] 8,000 6,000 6,000 2,000 3,000

No. of light points 10 15 15 5 5

Asset value 50,000 30,000 20,000 10,000 10,000

Area acquired 800 600 600 200 200

The expenses for the 6 months was……………….

Stores Overhead 400 Motive power 1,500
Electricity 200 Labour welfare 3,000
Depreciation 6,000 Repairs & maintenance 1,200
General overhead 10,000 Rent and rates 600
Apportion the expenses of department D in the ratio of 4:3:3 and that of
department E in proportion to the direct wages to the department ABC
respectively.
Problem No: 04
The following particulars relate to the manufacturing company which has three
production departments A B and C and two service departments Dept. X and
Dept. Y
Particulars Production Department Service Department
Dept. A Dept. B Dept. C Dept. X Dept. Y
Total
departmental
overheads as per 6,300 7,400 2,800 4,500 2,000
primary
distribution

The company decided to charge the service department cost on the basis of the
following percentages: ….
Percentages Dept. A Dept. B Dept. C Dept. X Dept. Y
Overhead X 40% 30% 20% -- 10%
Overhead Y 30% 30% 20% 20% --

Find out the total overheads of the production departments by using ………..
a) Simultaneous equations method
b) Repeated distribution method

Problem No: 05
The following particulars relate to the manufacturing company which has three
production departments A B and C and two service departments Dept. P and
Dept. Q
Particulars Production Department Service Department
Dept. A Dept. B Dept. C Dept. P Dept. Q
Total
departmental
overheads as 6,50,000 6,00,000 5,00,000 1,20,000 1,00,000
per primary
distribution
The company decided to charge the service department cost on the basis of the
following percentages: ….
Percentages Dept. A Dept. B Dept. C Dept. P Dept. Q
Overhead X 30% 40% 15% -- 15%
Overhead Y 40% 30% 25% 5% --

Show how the expenses of two service departments are to be charged to

production departments under ………..
a) Simultaneous equations method
b) Repeated distribution method
Problem No: 06
Chandra’s company which has three production departments A B and C
and two service departments Dept. X and Dept. Y
Particulars Production Department Service Department
Dept. A Dept. B Dept. C Dept. X Dept. Y
Total
departmental
overheads as per 30,000 20,000 10,000 2,340 3,000
primary
distribution
The expenses of service department are charged on the basis of the
following percentages: ….

Percentages Dept. A Dept. B Dept. C Dept. X Dept. Y

Expenses of X 20% 40% 30% -- 10%

Expenses of Y 40% 20% 20% 20% --

Apportion the expenses of service departments’ expenses to various

departments on the basis of repeated distribution method.

Problem No: 07
Bharath’s company which has three production departments A B and C
and two service departments Dept. X and Dept. Y
Particulars Production Department Service Department
Dept. A Dept. B Dept. C Dept. X Dept. Y
Total
departmental
overheads as per 50,000 40,000 20,000 6,340 5,000
primary
distribution
The expenses of service department are charged on the basis of the
following percentages: ….

Percentages Dept. A Dept. B Dept. C Dept. X Dept. Y

Expenses of X 20% 40% 30% -- 10%

Expenses of Y 30% 20% 20% 30% --

Apportion the expenses of service departments’ expenses to various

departments on the basis of repeated distribution method.
Problem No: 08
A factory has three Production departments and two service departments.
The overhead departmental distribution summary shows the following:
Particulars Production Department Service Department
Dept. A Dept. B Dept. C Dept. P Dept. Q

Total Amount 3,00,000 3,50,000 2,00,000 80,000 60,000

The service departmental expenses of P and Q are to be allotted on a percentage
basis as follows:
Particulars Dept. A Dept. B Dept. C Dept. X Dept. Y
P 30% 20% 30% -- 20%
Q 40% 30% 20% 10% --
Prepare a secondary distribution overhead statement under:
a) Repeated distribution method and
b) Simultaneous equation method.

Problem No: 09
Shiva ltd., has three production departments and two service
departments. From the following details prepare the overhead distribution
summary using repeated distribution method for secondary distribution and
calculate overhead rate per hour.

Particulars Production Departments Service Depts.

A B C D E
Direct material 45,000 30,000 15,000 12,000 9,000
Direct wages 30,000 22,500 15,000 6,000 4,500
Value of Machinery 60,000 45,000 30,000 -- --
Floor Area (Sq.ft.) 30,000 20,000 15,000 10,000 5,000
HP of Machines 240 200 160 -- --
No. of lights 120 90 60 30 30
No. of Labour hours 5,000 5,000 5,000 -- --
Other details:
Indirect materials Rs. 22,200; Indirect Wages Rs. 15,000; depreciation on
Machinery Rs. 27,000; Depreciation on building Rs. 12,000; Rent, rates and
taxes Rs. 9000; Electric power Rs. 33,750; Lighting Rs. 2,400; General expenses
Rs. 7,800
The service rendered by each service department to other departments is as
under:
Departments Dept. A Dept. B Dept. C Dept. X Dept. Y
Department D 30% 40% 20% -- 10%
Department E 10% 20% 50% 20% --
Problem No: 10
Zenith Co. Ltd., has 2 production departments and 2 Service departments.
The following information relate to the year ending 31-3-2015.
Total Production Depts. Service Depts.
(Rs.) X Y P Q
Direct Wages 28,000 10,000 8,000 6,000 4,000
Indirect Wages 14,650 4.000 3,000 2,000 5650
Indirect Materials 5,000 1,800 700 1,000 1,500
Sundry supplies 1,750 400 1,000 150 200
Supervisor’s salary 4,000 2,000 2,000 -- --
General expenses 10,000 -- -- 6,000 4,000

O/Hs. to be apportioned:

Power 8,000
Rent 12,000
Heating & Lighting 6,000
Insurance (general) 1,000
Taxes 2,000
Depreciation 60,000

The further details were as follows:

X Y P Q
Floor space (sqft.) 2,000 800 400 1600
Radiator section 45 90 30 60
No. of employees 20 10 3 5
Investments (Rs.) 6,40,000 2,00,000 10,000 1,50,000
HP of machines 3500 500 ---- 1,000

Expenses of service dept. P is apportioned on the basis of no. of employees and

that of service department Q in the ratio of 5:2:3 to X, Y and P depts.

………………………………………………………………………………………………….
 Problems under Machine Hour Rate Method

Problem No: 01
From the following particulars compute the machine hour rate
Particulars Rs.
Cost of the machine 11,000
Scrap value 680
Repairs for the effective working life 1,500
Standing charges for 4 weekly period 1,600
Effective working life 10,000 hours.
Power used 6 units per hour @ Rs. 5 paise per unit.
Hours worked in 4 weekly period – 120 hours.

Problem No: 2
Work out the machine hour rate for the following machine for the month of
January 2018.
Cost of the machine Rs. 90,000
Other charges .e.g., freight & installation Rs. 10,000
Working life 10 years
Working hours 2,000 per year
Repair charges 50% of depreciation
Power – 10 units per hour @ 10 paise per unit
Lubricating oil @ Rs. 2 per day of 8 hours
Consumable stores @ Rs. 10 per day of 8 hours
Wages of operator @ Rs. 4 per day.

Problem No: 3
From the following information compute a machine hour rate in respect of
machine No. 10 for the month of January 2019.
Cost of the machine Rs. 32,000
Estimated scrap value Rs. 2,000
Effective working life 10,000 hours
Repairs and maintenance over the life period of machine Rs. 2,000
Standing charges allocated to this machine for January, Rs. 400 Power
consumed by the machine at Rs. 0.30 per unit Rs. 600 The machine
consumes 10 units of power per hour.

Problem No: 4
From the following information compute a machine hour rate in respect of
machine No. 10 for the month of January 2019.
Cost of the machine Rs. 34,000
Estimated scrap value Rs. 4,000
Effective working life 10,000 hours
Repairs and maintenance over the life period of machine Rs. 2,500
Standing charges allocated to this machine for January, Rs. 800 Power
consumed by the machine at Rs. 0.30 per unit Rs. 600 The machine
consumes 10 units of power per hour.
Problem no.5
The following particulars relate to processing machine treating a typical
material: ………
a) Cost of the machine – Rs. 10,000
b) Estimated life – 10 years
c) Scrap value – Rs. 1,000
d) Yearly working time (50 weeks of 44 hours each) – 2,200 hours
e) Machine maintenance 200 hours p.a.
f) Setting up time estimated at 5% of total productive time and is regarded
as productive time.
g) Electricity is 16 units per hour at 10 paise per unit.
h) Chemical required weekly Rs. 20
i) Maintenance cost per year – Rs. 1,200
j) Two attendants control the operations of machine together with 6 other
machines. Their combined weekly wages are Rs. 140.
k) Departmental overhead allocated to this machine per annum Rs. 2,000.
You’re required to calculate Machine Hour Rate.

Problem No: 6
From the following particulars compute Machine Hour Rate: ….
Particulars Rs.
Cost of the machine 1,14,800

Installation charges 5,400

Anticipated life of machine 10 years

Residual value at the end of 10 years 5,000

Rent and rates per annum 12,000

Insurance of the machine p.a. 3,000

Repairs and maintenance p.a. 8,640

Consumable stores p.a. 1,200

Total production services p.a. 1,080

Power cost is 5 units per working hour @ 40 paise per unit Setting up time
(Non-productive) 400 hours p.a.

There are 300 working days of eight hours each in a year.

Problem no.7
From the data given below, calculate the machine hour rate: ….
Particulars Per annum (Rs.)
Rent of the department (space occupied by machine 1/5th of the dept) 780
Lighting (number of men in the department 12, two men engage on this machine)
288
Insurance 36
Cotton waste, oil etc., 60

Salary of foreman (1/4th of the foreman’s time is occupied by this machine and
the remainder equally by the other two machines)6,000
The cost of the machine is Rs. 9,200 and it has an estimated scrap value of Rs.
200.

It is ascertained from past experience:

a) That the machine will work for 1,800 hours per annum.
b) That it will incur an expenditure of Rs. 1,125 in respect of repairs and
maintenance;
c) That it consumes 5 units of power per hour at the cost of Rs.
16 paise per unit, and
d) That the working life of the machine will be 18,000 hours.

Problem No: 8
Compute the Machine Hour Rate from the following data: ….
Particulars Rs.
Cost of the machine 1,00,000
Installation charges 10,000
Estimated scrap value after the expiry of its life (15 years) 5,000
Rent and rates for the shop per month 200
General lighting for the shop per month 300
Insurance premium for the machine per annum 960
Repairs and maintenance expenses per annum 1,000
Power consumption – 10 units per hour -
Rate of power per 100 units 20
Estimated working hours per annum 2,200 This includes
setting up time of 200 hours
Shop supervisor’s salary per month 600

The machine occupied ¼ th of the total area of the shop. The supervisor is
expected to devote 1/5 th his time for supervising the machine.
Problem no.9
The following annual charges are incurred in respect of a machine in a shop
where manual labour is almost nil and where work is done by means of five
machines of exactly similar type and specification.
a) Rent and rates (proportional to the floor space occupied) for the shop
Rs. 4,800
b) Depreciation on each machine 500
c) Repairs and maintenance for the five machines 1,000
d) Power consumed (as per meter) @ 5 paise per unit 3,000
e) Electric charges for lighting in the shop 540
f) Attendants:
There are two attendants for the five machines and they are each paid Rs.
60 per month.
g) Supervision:
For five machines in the shop there is one supervisor whose emoluments
are Rs. 250 per month.
h) Sundry supplies such as lubricants, jute and cotton waste etc., for the
shop 450
i) Hire-purchase instalment payable for the machine (including
Rs. 300 as interest) 1,200
j) The machine uses 10 units of power per hour Calculate the Machine Hour
Rate.

Problem No: 10
The following information is made available from the costing records of a factory:
a) The original cost of the machine Rs.1,00,000
Estimated life 10 years
Residual value Rs. 5,000s
Factory operates for 48 hours per week – 52 weeks in a year Allow 15%
towards machine maintenance downtime. 5% may be allowed as setting
up time.
b) Electricity used by the machine is 10 units per hour at a cost of 50 paise
per unit.
c) Repairs and maintenance cost is Rs. 500 per month.
d) Two operators attend the machine during operation along with two other
machines. Their total wages, including fringe benefits amount to Rs. 5,000
per month.
e) Other overheads attributable to the machine are Rs. 10,431 p.a

Using the above data, calculate machine hour rate.

…………………………………………………………………………………………………….
 CHAPTER – 05
RECONCILIATION OF COST AND FINANCIAL ACCOUNTS

Meaning of Reconciliation:
Reconciliation is an accounting process used to compare two sets of records to
ensure the figures are in agreement and are accurate.

Meaning of Reconciliation statement:

Reconciliation statement is a statement which is prepared to reconcile the
differences in profits and losses between cost accounts and financial accounts.

Need for Reconciliation:

The need for reconciliation arise due to the following reasons:
a) It reveals the reasons for difference in profit or loss between cost and financial
accounts.
b) It helps to check the arithmetic accuracy of the costing data.

Reasons for Disagreement in Profit and Loss

Difference in profit and loss between cost and financial accounts may arise due
to the following reasons: ………
1) Items shown only in financial accounts:
There are number of items which appear in financial accounts and not in
cost accounts. These items are classified into three categories as under:
a) Purely financial charges / expenses:
1. Loss on sale of capital assets
2. Loss on sale of investments
3. Expenses of company’s transfer office
4. Interest on bank loans and mortgages etc.
5. Fines and penalties
6. Damages payable at law
7. Amount written off on goodwill discount on debentures,
preliminary expenses etc.
8. Loss due to theft, pilferage etc.

b) Purely financial incomes:

1. Profit on sale of capital assets
2. Profit on sale of investments
3. Dividend and interest received on investment.
4. Interest received on bank deposits.
5. Transfer fees received.
 c) Appropriations of profit:
1. Dividends paid
2. Transfer to reserve
3. Charitable donations
4. Income tax
5. Any other items which appear in P&L Appropriation A/c

2) Items shown only in cost accounts:

3) Under-absorption and Over-absorption of Overheads:
4) Different bases of stock valuation:
5) Different charges for depreciation:

Proforma of Reconciliation Statement

Particulars Rs. Rs.
Profit as per cost accounts ---
Add: 1. Over – absorption of overhead ---
2. financial incomes not recorded in cost books ---
3. Items charged only in cost accounts ---
4. Over-valuation of opening stocks in cost A/c ---
5. Under-valuation of closing stock in cost A/c --- ---

Less: 1. Under – absorption of overhead ---

2. Purely financial charges ---
3.Under-valuation of opening stock in cost A/c ---
4. Over-valuation of closing stock in cost A/c ----
Profit as per financial accounts

Proforma of memorandum Reconciliation Statement

Particulars Rs. Particulars Rs.
To (item to be deducted) --- By profit as per cost records ---
To (item to be deducted) --- By (item to be added) ---
To (item to be deducted) --- By (item to be added) ---
To (item to be deducted) --- By (item to be added) ---
To (item to be deducted) --- By (item to be added) ---
To (item to be deducted) --- By (item to be added) ---
To profit as per fin A/c
(Balancing figure)
 Problem No: 01
From the following information prepare a reconciliation statement and
determine financial profit.
Net profit as per costing books 66,760
Factory overhead under recovered in costing 5,700

Administration overhead recovered in excess 4,250

Depreciation charged in financial books 3,660

Depreciation recovered in costing 3,950

Interest received but not included in costing 450

Income tax provided in financial books 600

Bank interest credited in financial books 230

Stores adjustment (credited in financial books) 420

Depreciation of stock charged in financial accounts 860
Dividends appropriated in financial accounts 1,200
Loss due to theft and pilferage provided only in financial books 260

Problem No: 02
From the following information prepare a reconciliation statement and determine
financial profit.
Net profit as per costing books 1,72,400
Works overhead under recovered in costing 3,120

Administration overhead recovered in excess 1,700

Depreciation charged in financial books 11,000

Depreciation recovered in costing 12,300

Interest received but not included in costing 8,000

Income tax provided in financial books 40,300

Bank interest credited in financial books 750

Stores adjustment (credited in financial books) 475

Depreciation of stock charged in financial accounts 6,750
Problem No: 03
The net profit of a manufacturing company appeared at Rs. 74,500 as per
financial records for the year ended 31st march, 2018. The cost books, however,
showed a net profit of Rs. 88,460 for the same period. A careful scrutiny of the
figures from both the sets of accounts revealed the following facts: ………
a) Income tax provided in financial books 10,000
b) Bank interest credited in financial books 250
c) Works overhead under recovered in cost books 1,550
d) Depreciation charged in financial books 5,600
e) Depreciation recovered in costing books 6,000
f) Administration overhead over recovered 850
g) Loss due to obsolescence charged in financial A/c’s 2,800
h) Interest on investment not included in cost accounts 4,000
i) Stores adjustment (credited in financial books) 240
j) Loss due to depn., in stock values charged in fin. books 3,350

Problem No: 04
From the following details, you are required to prepare a reconciliation statement
and also ascertain profit as per financial books.
Particulars Cost Books Financial Books
Profit as per cost records 3,85,000 ?
Works overhead 68,500 72,000

Administration overhead 92,750 1,02,650

Selling overhead 45,600 38,500

Depreciation - 62,850

Stores adjustment (credited in P&L A/c) - 7,500

Value of opening stock 86,400 75,000

Value of closing stock 94,800 86,400

Reserve for bad debts - 16,050

Interest on bank deposit received - 16,750

Loss on sale of machinery - 15,000

Tax provision - 42,750

Interest on bank loan paid - 18,250
Problem No: 05
The manufacturing company disclosed a net loss of Rs. 3,47,000 as per
their cost records for the year ended 31st march, 2018. The financial accounts,
however disclosed a net loss of Rs. 5,10,000 for the same period. A careful
scrutiny of the figures from both the sets of accounts revealed the following facts:
………
a) Factory overheads under absorbed 40,000

b) Administration overheads over absorbed 60,000

c) Depreciation charged in financial accounts 3,25,000

d) Depreciation recovered in cost accounts 2,75,000

e) Interest on investment not included in cost accounts 96,000

f) Income tax provided 54,000
g) Interest on loan funds in financial accounts 2,45,000

h) Transfer fee (credited in financial accounts) 24,000

i) Stores adjustment (credited in financial books) 14,000

j) Dividend received 32,000

Problem No: 06
From the following figures prepare reconciliation statement: ….
a) Net loss as per financial records 2,08,045
b) Net loss as per costing records 1,72,400
c) Works overhead under recovered in costing 3,120
d) Administration overhead recovered in excess 1,700
e) Depreciation charged in financial records 11,200
f) Depreciation recovered in costing 12,500
g) Interest received but not included in costing 8,000
h) Obsolescence (loss) charged in financial records 5,700
i) Income tax provided in financial books 40,300
j) Bank interest credited in financial books 750
k) Stores adjustment (credited in financial books) 475
l) Value of opening stock in: Cost accounts 52,600
Financial accounts 54,000
 m) Value of closing stock in : Cost accounts 52,000
Financial accounts 49,600
n) Interest charged in cost accounts but not in financial accounts 6,000
o) Preliminary expenses written off in financial A/c’s 800
p) Provision for doubtful debts in financial accounts 150

Problem No: 07
A factory manufactures two types of television sets – Supreme and Majestic.
From the following particulars prepare, a statement showing cost and profit as
per television set sold. There is no opening or closing stock.
Particulars Supreme Majestic
Materials 81,900 3,26,040

Labour 46,800 2,09,760

Selling price per television set 3,000 3,000

Works expenses are charged at 80% on labour and office expenses at 15% on
works cost.

78 Supreme and 286 Majestic television sets were sold.

Find out profit as per financial accounts assuming that actual works expenses
amounted to Rs. 1,92,060 and office expenses totaled Rs.1,40,400.

Reconcile the profit shown by cost and financial records.

……………………………………………………………………………………………………

…………………………………………………………………………………………………….
 COST ACCOUNTING
2-Marks:

1) What is cost?
Cost means, the total amount of expenditures incurred on the
production and sale of goods and services is called cost.

2) Define Cost?
Cost may be defined as, “The total amount of expenditure incurred on the
production or sale of some goods or some services or on completion of the
some work”.

3) What is costing?
Costing is a process of ascertainment of cost incurred in the production
and sale of goods and services.

4) Define Costing?
According to ICMA of London defines “Costing is the process of
ascertainment of the cost of a product, service, job and the principles and
rules which govern the process of ascertainment of costs”.

5) What is cost accounting?

Cost accounting is the process of recording, classifying, summarizing,
analyzing and interpreting the various costs incurred in business
process.

6) Define Cost Accounting?

According to ICMA of London defines “Cost Accounting is the process of
accounting for costs from the point at which the expenditure is incurred
or committed to the establishment of its ultimate relationship with cost
centers and cost units”.

7) State any four objectives of Cost Accounting? 6m

 To ascertain the actual cost of goods and services manufactured.
 To ascertain the profit or loss made on each product or each process.
 To determine the selling price of the product.
 To Control the cost of goods and services.
 To reduce the cost of goods and services.
 To control the wastage of raw materials, labours and other resources.
8) State any four advantages of Cost Accounting? 6m
 It helps in ascertainment of actual cost of goods and services.
 It helps in ascertainment of profit or loss made on each product or each process.
 It helps in determining the selling price of a product or service.
 It helps in cost control.
 It helps in cost reduction.
 It helps in control of wastage of raw materials, labours and other resources.

9) State any two limitations of Cost Accounting? 6m

 It is more expensive.
 It is not suitable to all the organisations.
 It is not necessary in all the organisations.
 It is useful only when the management takes right decision.
 It has lack of uniform procedures and practices for ascertainment of cost.
 The cost submitted by cost accountant may not be true cost, because sometimes
costs may be estimated.

10) State any four Essentials of Good Costing System?

 Simplicity
 Suitability
 Comparability
 Uniformity
 Economical
 Accuracy
 Promptness….etc.

11) State the differences between Cost Accounting &

Financial Accounting?
Cost Accounting Financial Accounting
1 Cost accounts are not Financial accounts are prepared
compulsory prepared under any compulsory under the company’s act of
act 1956.
2 Cost accounting prepares for Financial accounting prepares for
special purpose statements general purpose statements like profit
like report of loss of materials, and loss account and balance sheet.
idle items report, variance
reports.
3 Both Monetary and non- Only monetary transactions are recorded.
monetary transactions are
recorded.
12) Define Cost Centre?
According to ICMA of London, defines that “Cost Centre is a place or
location, a person or an item of equipment for which costs may be
ascertained and used for the purpose of the cost control”.

13) Define Cost Unit?

According to ICMA of London, defines that “cost unit is a unit of product
or service or type in relation to which costs may be ascertained and
expressed”.

14) State any two differences between Cost Centre & Cost Unit?
Cost Centre Cost Unit
1 Costs are collected by the Costs are measured and
Cost Centers. expressed in terms of cost units.
2 Cost Centre helps in cost Cost unit helps only for cost
ascertainment and cost ascertainment.
control.

15) What are the elements of cost?

a) Material
b) Labour
c) Expenses
16) Give the meaning of Prime cost?
Prime Cost means, the aggregate of all direct material, direct labour and
direct expenses.
Prime cost = Direct material + Direct labour + Direct expenses

17) Give the meaning of Overhead?

Overhead means, the aggregate of all indirect material, indirect labour
and indirect expenses is called as Overheads.

18) What is marginal cost?

Marginal cost is the additional cost incurred for the production of an
additional unit of product.

19) What is cost sheet?

Cost sheet is a statement which is prepared to show various elements
incurred in the production and sale of goods and services.
20) Define Cost Sheet?
According to ICMA of London defines, “A document which provides for
the assembly of the detailed cost of a cost center and cost unit”.

21) State any two Objectives preparing Cost Sheet?

 To reveal the total cost and cost per unit of goods produced.
 To show the break-up of total cost into different elements of cost

22) Mention any four items which are not included in Cost sheet?
 Cash discount
 Interest paid
 Provision for taxation
 Donations
 Income tax paid
 Dividend paid

23) What is meant by materials?

Materials refers to the all commodities consumed in the process of
manufacturing.
24) What are direct materials?
Indirect materials are those materials which are directly identified with
the cost unit and cost Centres.

25) What are indirect materials?

Indirect materials are those materials which are not directly identified
with the cost unit and cost Centres.

26) Define Material costing?

According to ICMA of London defines, “Material cost is the cost of
commodities supplied to an undertaking”.

27) Give the meaning of Codification of Materials?

Codification of Material refers to “giving a specific name or a symbol or
number or a combination of these to the materials for convenient handling
and easy identification of materials”.
28) What is material control?
Material control is a system of controlling the cost of materials by
preparing cost records in order to avoid understocking and overstocking
of materials.
29) Define material control?
Material control is defines as safeguarding of company’s property in the
form of materials by proper system of recording and also to maintain
them at the optimum level considering operating requirements and
financial resources of the business.

30) State any four techniques of inventory control?

 ABC analysis
 Level setting
 Economic order quantity
 VED Analysis
 Just in time.

31) What is ABC analysis?

ABC analysis is a technique used to control the cost of materials based
on their values. i.e A=high value, B= medium value & C= low value.

32) What is VED analysis?

VED analysis is a material control technique used to control the cost of
materials on the basis of their criticalities to the industry. i.e. V=Vital,
E=Essential & D=Desirable.

33) Give the meaning of Level setting or Stock levels?

A scientific approach is adopted to control the materials is called as stock
levels or level setting.

34) State any 4 levels of stock?

 Minimum stock level
 Maximum stock level
 Reorder level
 Danger stock level
 Average stock level.

35) What is danger level of material?

These materials are identifiable in finished products and cost can be
conveniently allocated to a cost unit / centre.
For example: Cotton in textile mill, leather in shoes etc.,
36) What is EOQ? [ Re-Order Quantity]
Reorder quantity refers to the quantity of materials to be ordered for
purchase it, because which gives maximum economy in purchasing.
Therefore it is also called as Economic order quantity.
37) What is purchase order?
Purchase order is an order made by the purchaser to the seller to supply
of goods and services and materials to the business.

38) What is purchase requisition? To whom it is submitted?

Purchase requisition is a requisition made by the store keeper to the
purchasing department to purchase of raw materials.
It is submitted to the purchasing department.
39) Define Store Keeping?
According to Alford and Beatty defines as “store keeping is that aspect
of material control concerned with the physical storage of goods”.

40) What is Bin Card?

A Bin Card is a container which is used to keep the materials separate
and Bin cards are maintained by the store keeper for item of material in
stores. The bin card shows the details of receipt & issue of materials and
balance in stock at any time.

41) Name any 4 techniques of inventory control?

 FIFO method
 LIFO method
 Simple Average method
 Weighted Average method.

42) What is FIFO method?

Under this method, materials which are purchased first are issued first
to the production department.

43) State any two advantages of FIFO method?

 Materials which are purchased first are issued first.
 Materials are issued at actual cost.
 It is simple and easy to understand.

44) What is LIFO method?

Under this method, materials which are purchased last are issued first
to the production department.

45) State any two advantages of LIFO method?

 Materials which are received last are issued first.
 Materials are issued at actual cost.
46) Define direct labour cost?
According to ICMA London defines, “Direct labour cost is that cost
which can be identified with & the allocated to cost Centre and cost units.

47) Give the meaning of Labour turnover?

Labour turnover refers to the replacement of workers during a given
period to the average number of workers in employment in the business
during the same period.

48) State any four Avoidable Causes of Labour turnover?

 Lack of safety measures
 Lack of wage rates
 Lack of job security
 Lack of incentives
49) State any two unavoidable causes of labour turnover?
 Death of a person
 Retirement of an employee
 In case of female employees marriage, pregnancy etc.,
 Conviction of workers in criminal cases

50) Give the meaning of job analysis?

Job Analysis is the process of determining the tasks which comprise the
job and skills, knowledge, abilities and responsibilities required by the
workers for its successful performance.

51) Give the meaning of Merit Rating?

It is a systematic evaluation of an employee performance on the job in
terms of the requirements of the job. It grades workers on their jobs on
the basis of objective and comparative review of their individual
performance.

52) What is Time keeping?

Time keeping is a system of recording the In-time and Out-time of the
workers in the industry.
EX: Attendance register, token system, Biometric system….etc.

53) What is Time booking?

Time booking is a system of recording the in-time and out-time and also
time spent by the each worker on different jobs.
54) What is Overtime?
Overtime is the extra time, in which the worker works over and above the
normal working hours. Overtime wages are generally higher than the
normal wages.
55) Give the meaning of Idle Time?
Idle time means, loss of labour time due to machine breakdowns, power
failure, industrial accidents…etc.

56) State any four reasons for arising of Idle Time?

 Machine break down
 Power failure
 Waiting for raw materials
 Waiting for instructions
 Coffee and tea breaks

57) What is meant by Time rate system?

It is the oldest system of wage payment in which wages are paid on the
basis of time spent by the worker but not for the number of units
produced.
Wages = number of hours worked x rate per hour.

58) What is Piece rate system?

It is the oldest system of wage payment in which wages are paid on the
basis of the number of units produced by the employee but not for the
time spent by them.
Wages = number of units produced x rate per piece.

59) State any two advantages of Time rate system?

 Wastages of materials can be reduced
 Quality can be assured and maintained
 Proper utilization of resources is possible
 Accidents can be reduced

60) State any two advantages of Piece rate system?

 Idle time of the employee can be reduced
 Full utilization of plant capacity
 The management can reach the estimated output
 The cost of production per unit is reduced.

61) What is wage sheet?

Wage sheet is a statement which is prepared to calculate the total
earnings of the workers under different methods.
62) How do we calculate wages under Halsey plan?
Total earnings = wages + bonus i.e.
Wages = time taken x rate per hour
Bonus =50% (time saved x rate per hour)

63) How do we calculate wages under Rowan plan?

Total earnings = wages + bonus i.e
Wages = Time taken x rate per hour
Time saved
Bonus = standard time X time taken X rate per hour

64) What is Taylor’s differential piece rate system?

Under this method, no minimum wages are guaranteed to the workers
but two piece rates are given. Such as low piece rates are paid to the
worker who works less than the standards fixed and high piece rates are
paid to the workers who works more than the standards fixed.

65) Give the meaning of Cost Allocation?

Cost Allocation means charging the full amount of overhead cost to a cost
center.

66) Give the meaning of Cost Apportionment?

It means charging an overhead to two or more departments or cost
centers, when the item of cost is common to various cost centers, it is
allocated to different cost centers, proportionately on some equitable
basis.
67) What is fixed cost?
Fixed costs are those costs which are fixed in nature either increase or
decrease in the production. Ex: building rent. Depreciation on
machinery…etc.
68) What is variable cost?
Variable costs are those costs which are variable in nature on the basis
of production. Ex: purchase of raw materials.

69) What is semi-fixed cost (or) semi variable cost?

Semi fixed costs are those costs which are partly fixed and partly
variable on the basis of their production.
Ex: Electricity charges, telephone expenses…etc.
70) What are Production departments? Give an example.
A Production department is a department who directly engaged in the
conversion raw materials into finished products.
Example: melting department, weaving department, grinding department,
crushing department etc.,
71) What are Service departments? Give an example.
A Service department is a department who provide the services to the
production department to conversion of raw materials into finished
products.
Ex: Stores department, Transportation department, Power, Canteen etc.,

72) Give the meaning of Machine Hour Rate?

Machine hour rate means the costs or expenses incurred in running a
machine for an hour. The machine hour rate is calculated by dividing
total amount of factory overheads incurred in running a machine during
a particular period by total number of working hours of that machine
during that period.

73) State any two advantages of machine hour rate?

 It makes distinction between skilled and unskilled labours.
 It helps to compare the relative efficiencies and cost of operations of
different machines.

74) Give the meaning of Reconciliation?

Reconciliation is an accounting process used to compare two sets of
records to ensure the figures are in agreement and are accurate.

75) Give the meaning of Reconciliation Statement?

Reconciliation statement is a document prepared to reconcile the
balances of cash book maintained by the concern and pass book
maintained by the bank at periodical intervals

76) Give the meaning of apportionment?

Apportionment refers to the allotment of proportions of items of cost to
the cost unit and cost Centres.

77) What is meant by purely financial expenses?

Purely financial expenses are those expenses which are recorded only in
the financial accounts and not in the cost accounts.
Ex: loss on sale of fixed assets, loss on sale of investment, fines and
penalties…etc.
78) State the purpose of preparing reconciliation statement?
 To check the arithmetical accuracy of cost accounts.
 To know the reasons for difference in profit and loss between cost
accounts and financial accounts.

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