Cost Accounting System

Question 1.
Explain integrated accounting system and state its advantages. fCA Inter Nov. 2019, May 2019, May 2015, May 2012, May 2010, 5 Marks]
Answer:
Integrated Accounting System:
Integrated Accounting System is a system of accounting, where the cost and financial accounts are kept in the same set of books. Integrated accounts provide or meet out fully the information requirement for Costing as well as for Financial Accounts. For Costing purposes, it provides information useful for ascertaining the cost of each product, job, and process, operation of any other identifiable activity and for carrying necessary analysis.

Integrated accounts provide relevant information which is necessary for preparing profit and loss account and the balance sheets as per the requirement of law and also helps in exercising effective control over the liabilities and assets of its business.

The main advantages of Integrated Accounting System are as follows:

• No need for Reconciliation: The question of reconciling costing profit and financial profit does not arise, as there is only one figure of profit.
• Less efforts: Due to use of one set of books, there is a significant saving in efforts made.
• Less Time consuming: No delay is caused in obtaining information as it is provided from books of original entry.
• Economical process: It is economical also as it is based on the concept of ‘Centralisation of Accounting function’.

Question 2.
Explain essential pre-requisites for Integrated Accounting System. [CA Inter Nov, 2020, May 2018, Nov. 2007, Nov. 2006, Nov. 2001, 5 marks]
Answer:
Essential pre-requisites for integrated Accounting System are following:
(a) The management’s decision about the extent of integration of the two sets of books.
(b) A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts.
(c) An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other adjustment necessary for preparation of interim accounts.
(d) Perfect coordination should exist between the staff responsible for the financial and cost accounts and an efficient processing of accounting document should be ensured.
(e) Under this system there is no need for a separate cost ledger. Of course, there will be a number of subsidiary ledgers; in addition to the useful Customers’ Ledger and the Purchase Ledger, there will be:
(a) Stores Ledger;
(b) Stock Ledger; and
(c) Job Ledger.

Question 3.
Discuss the reconciliation of Profit as per Cost Accounts and Financial Accounts. [CA Inter May 2007, May 2006, 6 Marks]
Answer:
When the cost and financial accounts are kept separately, it is imperative that these should be reconciled to make the cost accounts reliable. It is necessary for reconciliation of the two sets of accounts that sufficient details are available to locate the differences and the reasons for the same.

Causes of differences in Financial and Cost Accounts:
1. Items included in Financial Accounts only:

• Interest on loans or bank mortgages
• Expenses and discounts on issue of shares, debentures etc.
• Other capital losses i.e., loss by fire not covered by insurance etc.
• Losses on the sales of fixed assets and investments
• Goodwill written off
• Preliminary expenses written off
• Income tax, donations, subscriptions
• Expenses of the company’s share transfer office, if any.

2. Purely Financial Income:

• Interest received on bank deposits, loans and investments
• Dividends received
• Profits on the sale of fixed assets and investments
• Transfer fee received
• Rent receivables

3. Item included in Cost Accounts only (notional expenses):

• Charges in lieu of rent where premises are owned
• Interest on capital at notional figure though not incurred
• Salary for the proprietor at notional figure though not incurred
• Notional Depreciation on the assets fully depreciated for which book value is nil.

Question 4.
List the Financial expenses which are not included in cost. [CA Inter Nov. 2009, 2 Marks]
Answer:
Financial expenses which are not included in cost accounting are as follows:

• Interest on loans or bank mortgages
• Expenses and discounts on issue of shares, debentures etc.
• Other capital losses Le., loss by fire not covered by insurance etc.
• Losses on the sales of fixed assets and investments
• Goodwill written off
• Preliminary expenses written off .
• Income tax, donations, subscriptions
• Expenses of the company’s share transfer office, if any.

Question 5.
When is the reconciliation statement of Cost and Financial accounts not required? [CA Inter Nov. 2009, 2 Marks]
Answer:
When the Cost and Financial Accounts are integrated, there is no need to have a separate reconciliation statement between the two sets of accounts. Integration means that the same set of accounts fulfil the requirement of both Le., Cost and Financial Accounts.

Question 6.
“Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting system?” [CA Inter May 2013, 4 Marks]
Answer:

• In integrated accounting system, cost and financial accounts are kept in the same set of books. Such a system will have to afford full information required for Costing as well as for Financial Accounts.
• For Costing purposes, it must provide information useful for ascertaining the cost of each product, job, process and operation of any other identifiable activity and for carrying necessary analysis.
• It also provide relevant information which is necessary for preparing profit and loss account and the balance sheet as per the requirement of law and also helps in exercising effective control over the liabilities and assets of its business.

Since, only one set of books are kept for both cost accounting and financial accounting purpose so there is no necessity of reconciliation of cost and financial accounts.

Question 7.
What are the motivational factors for adopting a reconciliation process? Explain. [CA Inter Nov. 2017, 4 Marks]
Answer:
When the cost and financial accounts are kept separately, it is imperative that these should be reconciled, otherwise the cost accounts would not be reliable.

The reconciliation of two set of accounts can be made, if both the sets contain sufficient detail as would enable the causes of differences to be located. It is therefore, important that in the financial accounts, the expenses should be analysed in the same way as in cost accounts.

Motivation for reconciliation is:

• To ensure reliability of cost data
• To ensure ascertainment of correct product cost
• To ensure correct decision making by the management based on Cost & Financial data.

Question 8.
Which are the types of management accounting systems used for controlling costs? [ICAI Module]
Answer:
For cost control purpose, following are the two main types of management accounting systems which are followed on the basis of timing of variance analysis:
(i) Single Plan: Under this system, the variances in costs from the set standards are reported at its happenings without waiting for books closing.

• Timely analysis is done so that much time is not lost in taking corrective action wherever needed.
• The single plan system envisages the posting of all items in the debit side of the work-in-process account at the standard cost leaving the credit side to represent.
• This system enables the ascertainment of variances as and when the transaction is posted to work-in-process account. This method of analysis is known as analysis at source.

(ii) Partial Plan: In the partial plan, variances are analysed at the end of period. Under this method the work-in-process account is charged at the actual cost of production for the period and is credited with the standard cost of the period’s production of finished product.

• The closing balance of work-in-process is also shown at standard cost.
• The balance after making the credit entries represents the variance from standard for the period. The analysis of the variances is done after the end of the period.

Practical Questions

Question 1.
Pass journal entries in the cost books, maintained on non-integrated system, for the following:
(i) Issue of materials: Direct ₹ 5,50,000; Indirect ₹ 1,50.000
(ii) Allocation of wages: Direct ₹ 2,00,000; Indirect ₹ 40,000
(iii) Under/Over absorbed overheads: Factory (over) ₹ 20,000; Administration (under) ₹ 10,000 [CA Inter Now 2000. 6 Marks]
Answer:

Question 2.
Journalise the following transactions in cost books under Non-Integraled system of Accounting.
(i) Credit Purchase of Material ₹ 27,000
(ii) Manufacturing overhead charged to Production ₹ 6,000
(iii) Selling and Distribution overheads recovered from Sales ₹ 4,000
(iv) Indirect wages incurred ₹ 8,000
(v) Material returned from production to stores ₹ 9,000 [CA Inter Nov. 2019, 5 Marks]
Answer:
Journal entries are as follows:

Question 3.
As of 31st March 2021, the following balances existed in a firm’s cost ledger, which is maintained separately on a double-entry basis:

	Debit ₹	Credit ₹
Stores Ledger Control A/c	3,00,000	–
Work-in-progress Control A/c	1,50,000	–
Finished Goods Control A/c	2,50,000	–
Manufacturing Overhead Control A/c		15,000
Cost Ledger Control A/c		6,85,000
	7,00,000	7,00,000

During the next quarter, the following items arose:

	₹
Finished Product (at cost)	2,25,000
Manufacturing overhead incurred	85,000
Raw material purchased	1,25,000
Factory wages	40,000
Indirect labour	20,000
Cost of sales
Materials issued to production
Sales returned (at cost)	9,000
Materials returned to suppliers	13,000
Manufacturing overhead charged to production	85,000

You are required to prepare the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-In-progress Control A/c. Finished Stock Ledger Control A/c, Manufacturing Overhead Control A/c, Wages Control A/c, Cost of Sales A/c and the Trial Balance at the end of the quarter. [CA Inter Nov. 2008, 15 Marks]
Answer:
Cost Ledger Control Account

Stores Ledger Control Account

Work-in-progress Control Account

Finished Stock Ledger Control Account

Manufacturing Overhead Control Account

Wages Control Account

Cost of Sales Account

Question 4.
The following balances were extracted from a Company’s ledger as on 30th June, 2021:

	Debit (₹)	Credit (₹)
Raw material control a/c	2,82,450
Work-in-progress control a/c	2,38,300
Finished stock control a/c	3,92,500
General ledger adjustment a/c		9,13,250
Total	9,13,250	9,13,250

The following transactions took place during the quarter ended 30th September, 2021:
(i) Factory overheads – allocated to work-in-progress ₹ 1,36,350
(ii) Goods furnished – at cost ₹ 13,76,200
(iii) Raw materials purchased ₹ 12,43,810
(iv) Direct wages – allocated to work-in-progress ₹ 2,56,800
(v) Cost of goods sold ₹ 14,56,500
(vi) Raw materials – issued to production ₹ 13,60,430
(vii) Raw materials – credited by suppliers ₹ 27,200
(viii) Raw materials losses – inventory audit ₹ 6,000
(ix) Work-in-progress rejected (with no scrap value) ₹ 12,300
(x) Customer’s returns (at cost) of finished goods ₹ 45,900
You are required to prepare:
(i) Raw material control a/c
(ii) Work-in-progress control a/c
(iii) Finished stock control a/c
(iv) General ledger adjustment a/c [CA Inter Nov. 2018, 10 Marks]
Answer:
(i) Raw Material Control A/c

(ii) Work-in-Progress Control A/c

(iii) Finished Goods Control A/c

(iv) General Ledger Adjustment A/c

Question 5.
The following information has been extracted from the cost records of a manufacturing company:

Draw the Stores Leger Control A/c, Work-in-Progress Control A/c, Overheads Control A/c and Costing Profit and Loss A/c. [CA Inter May 2017, Nov. 2014, Nov. 2011, 8 Marks]
Note: General Ledger Adjustment A/c may also be written as Cost Ledger Control A/c
Answer:
Stores Ledger Control A/c

Note: Deficiency is assumed to be normal.

Work-in-Progress Control A/c

Overheads Control A/c

Costing Profit & Loss A/c

Note: General Ledger Adjustment A/c may also be written as Cost Ledger Control A/c

Question 6.
Acme Manufacturing Co. Ltd. opens the costing records, with the balances as on 1st July as follows:

	(₹)	(₹)
Material Control A/c	1,24,000
Work-in-Process Control A/c	62,500
Finished Goods Control A/c	1,24,000
Production Overhead Control A/c	8,400
Administrative Overhead Control A/c		12,000
Selling & Distribution Overhead Control A/c	6,250
Cost Ledger Control A/c		3,13,150
	3,25,150	3,25,150

The following are the transactions for the quarter ended 30th September:

	(₹)
Materials purchased	4,80,100
Materials issued to jobs	4,77,400
Materials to works maintenance	41,200
Materials to administrative office	3,400
Materials to sales department	7,200
Wages direct	1,49,300
Wages indirect	65,000
Transportation for indirect materials	8,400
Production overheads incurred	2,42,250
Absorbed production overheads	3,59,100
Administrative overheads incurred	74,000
Administrative overheads allocated to production	52,900
Administrative overheads allocated to sales department	14,800
Selling & Distribution overheads incurred	64,200
Selling & Distribution overheads absorbed	82,000
Finished goods produced	9,58,400
Finished goods sold	9,77,300
Sales;	14,43,000

Make up the various accounts as you envisage in the Cost Ledger and prepare a Trial Balance as at 30th September. [ICAI Module]
Answer:
Cost Ledgers
Material Control A/c

Wages Control A/c

Production Overhead Control A/c

Administrative Overhead Control A/c

Work-in-Process Control A/c

Finished Goods Control A/c

Selling and Distribution Overhead Control A/c

Cost of Sales A/c

Cost Ledger Control A/c

Costing Profit & Loss A/c

Trial Balance as at 30th September

Question 7.
A company operates on historic job cost accounting system, which is not integrated with the financial accounts. At the beginning of a month, the opening balances in cost ledger were:

	(₹ in lakhs)
Stores Ledger Control Account	80
Work-in-Process Control Account	20
Finished Goods Control Account	430
Building Construction Account	10
Cost Ledger Control Account	540

During the month, the following transactions took place:

		(₹ in lakhs)
Materials	Purchased	40
	Issued to production	50
	Issued to factory maintenance	6
	Issued to building construction	4
Wages	Gross wages paid	150
	Indirect wages	40
	For building construction	10
Works Overheads	Actual amount incurred (excluding items shown above)	160
	Absorbed in building construction	20
	Under absorbed	8
Royalty paid (related to production)		5
Selling, distribution and administration overheads		25
Sales		450

At the end of the month, the stock of raw material and work-in-process was f 55 lakhs and ₹ 25 lakhs respectively. The loss arising in the raw material accounts is treated as factory overheads. The building under construction was completed during the month. Company’s gross profit margin is 20% on sales.
You are required to prepare the Cost Ledger Control A/ c, Stores Ledger Control A/c, Wages Control A/c, Works Overhead Control A/c, Work-in-Process Control A/c, Finished Goods Control A/c, Cost of Sales A/c, Costing P&L A/c, Building Construction A/c and Trial Balance at the end of the month. [CA Inter Nov. 2021, RTPJ
Answer:
Cost Ledger Control A/c

Stores Ledge Control A/c

Wages Control A/c

Works Overhead Control A/c

Work-in -Process Control A/c

Finished Goods Control A/c

Cost of Sales A/c

Costing P & L A/c

Building Construction A/c

Trial Balance

Question 8.
A Company operates separate cost accounting and financial accounting systems. The following is the list of opening balances as on 1.04.2021 in the Cost Ledger:

	Debit (₹)	Credit (₹)
Stores Ledger Control Account	53,375	……
WIP Control Account	1,04,595	……
Finished Goods Control Account	30,780	……
General Ledger Adjustment Account	…..	1,88,750

Transactions for the quarter ended 30.06.2021 are as under:

Materials purchased	26,700
Materials issued to production	40,000
Materials issued to factory for repairs	900
Factory wages paid (including indirect wages ₹ 23,000)	77,500
Production overheads incurred	95,200
Production overheads under- absorbed and written-off	3,200
Sales	2,56,000

The Company’s gross profit is 25% on Cost of Sales. At the end of the quarter, WIP stocks increased by ₹ 7,500.
Prepare the relevant Control Accounts, Costing Profit & Loss Account and General Ledger Adjustment Account to record the above transactions for the quarter ended 30.06.2021. [CA Inter Nov. 2001, 10 Marks]
Answer:
General Ledger Adjustment A/c

Stores Ledger Control A/c

WIP Control A/c

Finished Goods Control A/c

Note: Gross profit is 25% of Cost of Sales or 20% on sales.
Hence cost of sales = ₹ 2,56,000 – 20% of ₹ 2,56,000 = ₹ 2,04,800

Factory Overhead Control A/c

Cost of Sales A/c

Sales A/c

Wages Control A/c

Costing Profit & Loss A/c

Trial Balance (as on 30.06.2021)

	(₹)	(₹)
Stores ledger control A/c	39,175
WIP control A/c %	1,12,095
Finished goods control A/c	28,880
General ledger adjustment A/c		1,80,150
	1,80,150	1,80,150

Question 9.
The following information is available from a company’s records for March, 2021:
(a) Opening Balance of Creditors Account ₹ 25,000
(b) Closing Balance of Creditors Account ₹ 40,000
(c) Payment made to Creditors ₹ 5,80,000
(d) Opening Balance of Stores Ledger Control Account ₹ 40,000
(e) Closing Balance of Stores Ledger Control Account ₹ 65,000
(f) Wages paid (for 8,000 hours) 20% relate to indirect workers ₹ 4,00,000
(g) Various indirect expenses incurred ₹ 60,000
(h) Opening balance of W1P control account ₹ 50,000
(i) Inventory of WIP at the end of the month includes material worth on which 400 labour hours have been booked. ₹ 35,000
(j) Factory overhead is charged to production at budgeted rate based on direct labour hours.
(k) j Budgeted overhead cost is ₹ 20,80,000 for budgeted direct labour hours 1,04,000.
You are required to prepare Creditors A/c, Stores Ledger Control A/c, WIP Control A/c, Wages Control A/c and Factory Overhead Control A/c. [CA Inter May 2016, 8 Marks]
Answer:
Creditors A/c

Stores Ledger Control A/c

Work-in-Process Control A/c

*Direct Labour Hour Rate = ₹ 3,20,000/ 6,400 hours = ₹ 50
**Factory Overhead Rate = ₹ 20,80,000/ 1,04,000 = ₹ 20

Wages Control A/c

Factory Overhead Control A/c

Question 10.
Journalise the following transactions assuming cost and financial accounts are integrated: [CA Inter Nov. 2013, 5 Marks]

		₹
(i)	Materials issued:
	Direct:	3,25,000
	Indirect	1,15,000
(ii)	Allocation of wages (25% indirect)	6,50,000
(iii)	Under/Over absorbed overheads:
	Factory (Over)	2,50,000
	Administration (Under)	1,75,000
(iv)	Payment to Sundry Creditors	1,50,000
(v)	Collection from Sundry Debtors	2,00,000

Answer:
Journal Entries under Integrated system of accounting

Question 11.
BPR Limited keeps books on integrated accounting system. The following balances appear in the books as on April 1, 20?

	Dr. (₹)	Cr. (₹)
Stores Control A/c	40,950	–
Work-in-progress A/c	38,675	–
Finished Goods A/ c	52,325	–
Bank A/c	–	22,750
Trade Payables A/c	–	18,200
Non-Current Assets A/c	1,47,875	–
Trade Receivables A/c	27,300	–
Share Capital A/c	–	1,82,000
Provision for Depreciation A/c	–	11,375
Provision for Doubtful Debts A/c	–	3,721
Factory Overheads Outstanding A/c	–	6,250
Pre-Paid Administration Overheads A/c	9,975	–
Profit & Loss A/c	–	72,800
	3,17,100	3,17,100

The transactions for the year ended March 31, 2021, were as given below:

	₹	₹
Direct Wages	1,97,925
Indirect Wages	11.375	2,09,300
Purchase of materials (on credit)		2,27,500
Materials issued to production		2,50,250
Material issued for repairs		4,550
Goods finished during the year (at cost)		4,89,125
Credit Sales		6,82,500
Cost of Goods sold		5,00,500
Production overheads absorbed		1,09,200
Production overheads paid during the year		91,000
Production overheads outstanding at the end of year		7,775
Administration overheads paid during the year		27,300
Selling overheads incurred		31,850
Payment to Trade Payables		2,29,775
Payment received from Trade Receivables		6,59,750
Depreciation of Machinery		14,789
Administration overheads outstanding at the end of year		2,225
Provision for doubtful debts at the end of the year		4,590

Required:
Write up accounts in the integrated ledger of BPR Limited and prepare a Trial balance. ]CA Inter Nov. 2003, 10 Marks]
Answer:
Stores Control A/c

Wages Control A/c

Work-in-Progress A/c

Production Overheads A/c

Finished Goods A/c

Administration Overheads A/c

Cost of Sales A/c

Sales A/c

Factory Overheads/Production Overheads Outstanding A/c

Finished Goods A/c

Administration Overheads A/c

Cost of Sales A/c

Sales A/c

Factory Overheads/Production Overheads Outstanding A/c

Prepaid Administration Overheads A/c

Provision for Depreciation A/c

Provision for Doubtful Debts A/c

Profit & Loss A/c

Trade Receivables A/c

Trade Payables A/c

Non-Current Assets A/c

Bank A/c

Trial Balance as on 31.03.2021

	Debit ₹	Credit ₹
Stores Control A/c	13,650
WIP A/c	1,06,925
Finished goods A/c	80,450
Bank A/c	47,775
Trade Payables A/c		15,925
Non-Current Assets A/c	1,47,875
Trade Receivables A/c	50,050
Share Capital A/c		1,82,000
Provision for Depreciation A/c		26,164
Reserve And Surplus (Profit & loss A/c )		2,08,046
Production o/h outstanding A/c		7,775
Administration o/h outstanding A/c		2,225
Provision for doubtful debts A/c		4,590
	4,46,725	4,46,725

Question 12.
A fire destroyed some accounting records of a company. You have been able to collect the following from the spoilt papers/records and as a result of consultation with accounting staff for the month of January:
(i) Incomplete Ledger Entries:
Materials Control A/c

Work-In-Process Control A/c

Payables (Creditors) A/c

Manufacturing Overheads Control A/c

Finished Goods Control A/c

(ii) Additional Information:
(1) The bank-book showed that ₹ 89,200 have been paid to creditors for raw-material.
(2) Ending inventory of work-in-process included materials of ₹ 5,000 on which 300 direct labour hours have been booked against wages and overheads.
(3) The job card showed that workers have worked for 7,000 hours. The wage rate is ₹ 10 per labour hour.
(4) Overhead recovery rate was ₹ 4 per direct labour hour.
You are required to complete the above accounts in the cost ledger of the company. [ICAI Module]
Answer:
Materials Control A/c

Manufacturing Overheads A/c

Work-in-Process Control A/c

Finished Goods Control A/c

Payables (Creditors) A/c