IPCC, Paper 3, Costing, Chapter 5 B.N.Pattabhi, M.Com., FCA

Dedicated to my Noble, Ever Loving, Ever Inspiring Parents

Lalitamma & Nanjappa

1 • Understanding the systems of Accounting

2 • Differentiating between Integrated & Non-Integrated Systems of

Accounting

3 • Identify and understand the ledgers maintained by finance & costing

departments

4 • Understand & Appreciate the reasons for differences between

Financial & Cost Accounting

5 • Master art of preparing a Reconciliation Statement

6 • Master the journal entries passed in Integrated and Non-Integrated

system of accounting

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If an entity maintains one set of books of accounts for both cost & financial transactions such system of accounting is known as Integrated or Integral System of Accounting

If an entity maintains separate set of books of account for cost and financial transactions such system of accounting is known as Non-Integrated System of Accounting

Reconciliation is required in case of Non-Integrated System of Accounting

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It is a system under which separate ledgers are maintained by accountants for cost and financial transactions, is also referred to as cost ledger accounting system.

Under Non-Integrated system of accounting the cost accountants do not record/consider certain items which do not relate to the product produced or service rendered or are purely financial in nature.

One of the special features of Non-Integrated system of accounting is that it considers even notional expenses like rent of own premises and interest on capital

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1 • It contains fewer accounts as compared to financial

accounts.

2 • Purchases, Expenses, Fixed Assets, Debtors & Creditors

are excluded. All these are routed through a common account called cost ledger control account

3 • All accounts are called as control accounts, following are

the accounts maintained and the purpose for which it is maintained

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An Intro.

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This is the principal ledger of the costing department

in which all impersonal accounts are maintained

it is a self balancing ledger since it will have a control account for each subsidiary ledger

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This ledger records the movement of raw materials and consumables

Records both quantity and values

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It is also known as job ledger

it is contains accounts for unfinished jobs and processes.

All costs pertaining to a Job from the moment materials are issued to production till the job is completed are collected & posted to the respective job accounts in this ledger

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It contains account for all the goods produced during the period,

once the production is complete WIP Ledger is Credited and FG Ledger is Debited

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An intro.,

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It is a balancing account for all other control accounts & is maintained to complete the double entry.

All expenses are Credited and sales is Debited to this A/c.

The balance in this account represents the sum total of all other control accounts.

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All entries pertaining to raw materials & stores are routed through this account.

All purchases are Debited to this account and then transferred to respective control accounts based on the nature of the materials

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All expenses pertaining to a job or process like Direct materials, labour, expenses & Factory Overheads recovered is Debited to this A/c &

The value of finished goods completed & transferred is Credited to this A/c

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This A/c is Debited with the value of finished goods completed and transferred from WIP Control A/c and Administration overheads recovered.

This A/c is Credited with Cost of goods sold and consequently cost of sales account is Debited

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This account is Debited with the total wages paid.

Total wages paid are then transferred to respective control A/c like direct wages to WIP, Indirect labour to FOH, Admin & S&D OHs to respective control A/c

This A/c is closed by transferring the abnormal labour costs if any to costing P&L A/c

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This account is Debited with all those indirect costs incurred with in the factory and

Is Credited with OHs recovered into production.

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This A/c is Debited with S&D OHs incurred and Credited with the OHs recovered

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This A/c is Debited with cost of Finished goods sold and S&D OHs recovered.

The balance in this account is transferred to sales A/c or costing P&L A/c

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This A/c is Debited with the cost of sales, under absorbed OHs & abnormal losses and

is Credited with sales, over absorbed OHs & abnormal gains. The net profit or loss is transferred to cost ledger

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Overheads Adjustment A/c

This A/c is Debited with under recovery of OHs and

Credited with Over recovery of OHs.

The net balance in this account is transferred to costing profit and loss account

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In all Overhead control accounts, the balance if any i.e difference between OH incurred and OH Absorbed representing under or over absorption of overhead is either transferred to Costing P&L A/c or OH Adjustment A/c

Sometimes, overhead adjustment account is done away with and under/over absorbed overheads is directly transferred to costing profit & loss account from the respective OH Control A/c

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An intro.,

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Materials Returned

Cost Ledger Control A/c Dr To Stores Ledger Control A/c

Special Materials Purchased or a specific job

Work In Progress Control A/c Dr To Cost Ledger Control A/c

Materials Purchased

Stores Ledger Control A/c Dr To Cost Ledger Control A/c

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Materials Returned from Factory to Stores

Stores Ledger Control A/c Dr to Work In Progress Control A/c

Indirect Materials issued to production

Mfg/Prdn/Fac Overheads Control A/c Dr To Stores Ledger Control A/c

Direct Materials issued to production / Repairs

Work In Progress Control A/c Dr To Stores Ledger Control A/c

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Wages control A/c is Debited with total wages and then it is transferred to WIP control A/c & respective OH control A/cs in effect

the wages control account is opened and closed immediately

For Transferring wages

Work In Progress Control A/c Dr

Factory OH control Account Dr

Admin OH Control Account Dr

S&D OH Control Account Dr

To Wages Control Account

Wages Paid (Total of both Direct & Indirect wages)

Wages Control A/c Dr To Cost Ledger Control A/c

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Administration Overheads Recovered

Finished Goods Control A/c Dr To Administration OH Control A/c

Factory Overheads Recovered

Work In Progress Control A/c Dr To Factory Overheads Control A/c

Overheads Incurred Fac/ Admin/ S&D OH Control A/c Dr Fac/ Admin/ S&D OH Control A/c Dr

Fac/Admin/S&D OH Control A/c Dr To Cost Ledger Control A/c

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Over Recovered OHs Transferred to Costing P&L A/c

Fact/Admin/S&D OH Control A/c Dr To Costing P&L A/c

Under Recovered OHs Transferred to Costing P&L A/c

Costing P&L A/c Dr To Fact/Admin/S&D OH Control A/c

Selling & Distribution Overheads Recovered

Cost of Sales A/c Dr To S&D OH Control A/c

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To Transfer Loss

Cost Ledger Control A/c Dr To Costing Profit & Loss A/c

To Transfer Profit

Costing Profit & Loss A/c Dr To Cost Ledger Control A/c

Sales

Cost Ledger Control A/c Dr to Costing Profit & Loss A/c

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It is a system of accounting wherein only one set of books of account is maintained for both cost and financial accounting.

It combines the cost as well as financial entries and thereby caters to the needs of both internal and external users.

The number of entries passed are higher than the entries passed in financial or Cost Accounting taken separately.

The present day computerised accounting systems and enterprise level soft wares generally follow Integrated system of accounting

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No need for reconciliation of cost & financial profits

Less / reduced efforts

Less Time consuming Economical

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Management’s decision on the level of integration

A suitable coding system

A pre determined routine with regards to provisions, accruals, prepaid expenses etc

Higher degree of cooperation between cost & financial accountants

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In a sense, we can conclude that it is an extension of Financial accounting system to cover the Cost Accounting aspects as well

All other financial accounts like fixed assets, depreciation etc are also used.

In the integrated system of accounting, there is no common balancing ledger or A/c i.e cost ledger control or General Ledger Adjustment Account, instead the regular accounts like purchase, sales, bank, cash, debtors & creditors accounts are used.

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The need for reconciliation arises mainly due to

Differential treatment of expenses

Purely Financial Transactions(both expenses & Income)

Items/ notional expenses included in cost accounting only

Change in the basis of valuation

The question of reconciliation will arise only under Non-Integrated System of Accounting.

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Differential treatment of expenses Under Cost Accounting over heads are normally recovered or absorbed into production based on standing orders even before they are incurred,

Whereas in Financial Accounting, expenses are recorded after they are incurred, hence there is bound to be a difference between the two sets of books of account

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Purely Financial Transactions

Interest paid

Expenses on issue of shares or debentures

Capital Losses, if any

Loss on sale of fixed assets or investments

Goodwill written off

Preliminary Expenses written off

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Interest Received

Dividend Received

Profit on sale of fixed assets & investments

Transfer fees received

Rent

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Items or notional cost included in Cost A/c only

Notional Rent

Notional interest on capital

Notional Salary for proprietor or partner

Notional Depreciation on assets, which are

already fully depreciated

Change in valuation basis may also result in a

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In some cases or questions students may be required to ascertain the profit as per cost accounts and then they will have to reconcile the two profits.

In such cases it is advisable that the students should first prepare a cost sheet with the available information and then prepare a reconciliation statement

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Scheme of Journal Entries Non Integrated Accounts

The following balances are shown in the cost ledger of V Ltd as at 01.04.2002

work in progress 7056 FOH Suspense A/c 360 Finished Stock Account 5274 Stores ledger Control Account 9450 Administration OH Suspense A/c180 General Ledger Adjustment A/c 22320

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The transactions during the year were as follows a. Stores issued to production 45,370 b. Stores purchased 52,400 c. Materials purchased for direct issue to production 1,135 d. Wages paid (including indirect labour of Rs 2,520) 57,600 e. Finished goods sold 1,18,800 f. Administration expenses 5,400 g. Selling expenses 6,000 h. Factory overheads 15,600 i. Stores issued for capital work in progress 1,500 j. Finished goods transferred to warehouse 1,08,000 k. Stores issued for factory repairs 2,000 l. Factory overheads applied to production 16,830

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m. Administration overheads charged to production 4,580 n. Factory overheads applicable to unfinished work 3080 o. Selling overheads allocated to sales 5,500 p. Stores lost due to fire in stores (Not insured) 150 q. Administration expenses on unfinished work 850 r. Finished goods stock as at 31.03.2003 14,274 It is the policy of the management to park the overheads relatable to work in progress in respective suspense accounts. You are required to Pass the necessary Journal entries in the

cost ledger of the company

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a. Stores issued to production 45,370 WIP Control A/c Dr 45,370 To Stores ledger Control A/c 45,370

b. Stores purchased 52,400 Stores Ledger Control A/c Dr 52,400 To Cost Ledger Control A/c 52,400

c. Materials purchased for direct issue to production 1,135

WIP Control A/c Dr 1,135 To Cost Ledger Control A/c 1,135

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c. Wages paid (including indirect labour of Rs 2,520) 57,600

Wages Control A/c Dr 57,600 To Cost Ledger Control A/c 57,600 WIP Control A/c Dr 55,080 Factory O H Control A/c Dr 2,520 To Wages Control A/c 57,600

d. Finished goods sold 1,18,800 Cost Ledger Control A/c Dr 1,18,800 To Costing P&L A/c 1,18,800

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e. Administration expenses 5,400 Administration OH Control A/c Dr 5,400 To Cost Ledger Control A/c 5,400

f. Selling expenses 6,000 Selling & Distribution OH Control A/c Dr 6,000 To Cost Ledger Control A/c 6,000

g. Factory overheads 15,600 Factory OH Control A/c Dr 15,600 To Cost Ledger Control A/c 15,600

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h. Stores issued for capital WIP 1,500 Cost Ledger Control A/c Dr 1,500 To Stores Ledger Control A/c 1,500

i. Finished goods Xrd to warehouse 1,08,000 Finished Goods Control A/c Dr 1,08,000 To WIP Control A/c 1,08,000

j. Stores issued for factory repairs 2,000 Factory OH Control A/c Dr 2,000 To Stores Ledger Control A/c Dr 2,000

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k. Factory OH applied to production 16,830 WIP Control A/c Dr 16,830 To Factory OH Control A/c 16,830 l. Administration OH charged to production 4,580 Finished Goods Control A/c Dr 4,580 To Administration OH Control A/c 4,580 m. Factory OH applicable to unfinished work 3080 Factory OH Suspense A/c Dr 3,080 To Factory OH Control A/c 3,080

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n. Selling overheads allocated to sales 5,500 Cost of Sales A/c Dr 5,500 To Selling & Distribution OH Control A/c 5,500 o. Stores lost due to fire (Not insured) 150 Costing P&L A/c Dr 150 To Stores Ledger Control A/c 150 p. Administration exp on unfinished work 850 Administration OH Suspense A/c Dr 850 To Administration OH Control A/c 850

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Scheme of Journal Entries Integrated Accounts

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a. Stores issued to production 45,370 WIP Control A/c Dr 45,370 To Stores ledger Control A/c 45,370 b. Stores purchased 52,400 Stores Ledger Control A/c Dr 52,400 To Sundry Creditors A/c 52,400 c. Materials purchased for direct issue to

production 1,135 WIP Control A/c Dr 1,135 To Sundry Creditors A/c 1,135

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c. Wages paid (including indirect labour of Rs 2,520) 57,600

Wages Control A/c Dr 57,600 To Bank / Cash A/c 57,600 WIP Control A/c Dr 55,080 Factory O H Control A/c Dr 2,520 To Wages Control A/c 57,600 d. Finished goods sold 1,18,800 Sundry Debtors A/c Dr 1,18,800 To Sales A/c 1,18,800

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e. Administration expenses 5,400 Administration OH Control A/c Dr 5,400 To Bank / Cash A/c 5,400 f. Selling expenses 6,000 Selling & Distribution OH Control A/c Dr 6,000 To Bank / Cash A/c 6,000 g. Factory overheads 15,600 Factory OH Control A/c Dr 15,600 To Bank / Cash A/c 15,600

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h. Stores issued for capital WIP 1,500 Capital WIP A/c Dr 1,500 To Stores Ledger Control A/c 1,500 i. Finished goods Xrd to warehouse 1,08,000 Finished Goods Control A/c Dr 1,08,000 To WIP Control A/c 1,08,000 j. Stores issued for factory repairs 2,000 Factory OH Control A/c Dr 2,000 To Stores Ledger Control A/c Dr 2,000

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k. Factory OH applied to production 6,830 WIP Control A/c Dr 16,830 To Factory OH Control A/c 16,830 l. Administration OH charged to production 4,580 Finished Goods Control A/c Dr 4,580 To Administration OH Control A/c 4,580 m. Factory OH applicable to unfinished work 3080 Factory OH Suspense A/c Dr 3,080 To Factory OH Control A/c 3,080

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n. Selling overheads allocated to sales 5,500 Cost of Sales A/c Dr 5,500 To Selling & Distribution OH Control A/c

5,500 o. Stores lost due to fire (Not insured) 150 Profit & Loss A/c Dr 150 To Stores Ledger Control A/c 150 p. Administration exp on unfinished work 850 Administration OH Suspense A/c Dr 850 To Administration OH Control A/c 850

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Reconciliation

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Following is the summary of the trading and Profit & Loss Account of M/s ABC for the year ended 31.12.2012

Particulars Amount In Rs Particulars Amount In Rs To Materials consumed 2740000 Sales120000 units 6000000 To wages 1510000 Finished stock 4000 Units 160000 Factory Expenses 830000 WIP Materials 64000 Administration expenses 382400 Factory Exps 20000 Wages 36000

Dividend received 18000 S & D Expenses 450000 Preliminary Exp W/o 40000 Goodwill W/o 20000 Net Profit 325600 6298000 6298000

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the company manufactures a standard unit in the cost accounts Factory expenses have been recovered from

production at 20% on prime cost Administration expenses at Rs 3 Per unit on

units produced S & D expenses at Rs 4 Per Unit on units Sold Your are required to prepare a statement of

cost & Profit in the cost books of the company and to reconcile the profit disclosed with that shown in the financial statements. 60

ABC Limited Cost Sheet for the year Ending 31/12/2012

Particulars Amount in Rs Raw Materials Consumed 2740000 Direct Wages 1510000 Prime Cost 4250000 Add Factory Over Heads 850000

5100000 Less Clsoing Stock of WIP 120000 Factory / Works Cost 4980000 Add Administration Expenses 372000 Cost of Production 5352000 Less Clsoing Stock of Finished Goods 172645 Cost of Goods Sold 5179355 Add Selling & Distribution Expenses 480000 Cost of Sales 5659355 Sales 6000000 Profit 340645

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ABC Limited Reconciliation Statement F Y E 31/12/2012

Profit as per Cost Accounts 340645 Add Dividend Received 18000 Add FOH Over Recovered 20000 Add S&D OH Over Recovered 30000 68000 408645 Less Admin OH Under Recovered 10400 Over Valuation of Closing Stock 12645 Less Preliminary Expenses W/o 40000 Less Good Will W/o 20000 83045 Profit as per Financial Accounts 325600

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