Cost Accounting - Cost Book Keeping

 

Cost Accounting

COST BOOK KEEPING

 

Part A: Discussion of basic theories pertaining to Cost Book Keeping Systems: (i) Non-Integrated Accounting System and (ii) Integrated Accounting System, including defining these systems along with their respective features and advantages. Comparative journal entries for different transactions to be made in financial accounts, non-integrated accounts and integrated accounts have also been given in this part (i.e. Part A).

 

Part B: 2 Illustrations with Solutions.

Part A

1.0 Cost Accounting Systems

While installing effective costing system, the management must also decide the appropriate accounting system, i.e. Integrated or Non-Integrated. Where cost and financial accounting records are integrated, the system so evolved is known as Integrated or Integral Accounting System. In case cost and financial transactions are kept separately, the system is called Non-Integrated Accounting System.

 

If the organisation adopts Non-Integrated Accounting System, then reconciliation between financial and cost records need to be done. If the organisation adopts integrated accounting system, then there is no need for any reconciliation.

 

2.0 Non-Integrated Accounting System

2.1 Introduction to Non-Integrated Accounting System

A system of accounting under which separate ledgers are maintained for cost and financial accounts is called Non-Integrated Accounting System. This system is also referred as Cost Ledger Accounting System.

 

2.2 Features of Non-Integrated Accounting System

Features of Non-Integrated Accounting System are as follows:

(i)              Cost Accounting restricts itself to record only those transactions which relate to the product or service.

(ii)            Cost Ledger Control Account is maintained in the financial books and a General Ledger Adjustment Account is maintained in costing books.

(iii)         Certain expenses like interest, bad debts, etc. are not at all recorded in cost accounts.

(iv)         Items which are excluded in cost accounts are represented by an account known as Cost Ledger Account. The important ledgers to be maintained under non-integrated accounting system in the cost accounting department are the following:

(a) Cost Ledger: This is the principal ledger. It contains all impersonal accounts. It is made self-balancing by maintaining therein a control account for each of the other ledgers.

(b) Stores Ledger: This contains all the stores accounts. A separate account is opened for each item of stores.

(C) Work-in-Progress Ledger: This contains accounts of various jobs. Each job, unit, or process is given a job number and separate account is opened for each job.

(d) Finished Goods ledger: This contains accounts of all types of finished goods. A separate account is opened for each type of finished product.

 

Thus, cost ledger is the principal book of account. It contains all the impersonal accounts. In small concerns, only cost ledger is maintained. In large concerns subsidiary ledgers such as stores ledger, WIP ledger, finished goods ledger, etc. are also maintained. The cost ledger should be made self-balancing by the use of control accounts. For this purpose, a control account should be opened in the cost ledger for each of the subsidiary ledgers.

 

2.3 Control Accounts

In order to facilitate handling of numerous transactions, subsidiary ledgers are maintained along with the general ledger. Transactions kept in detail in one or more subsidiary ledger are posted in total at the end of the period to control accounts. Control accounts are the total accounts maintained in cost ledger. Each total account represents a subsidiary ledger in which individual accounts are maintained. Stores ledger control account for instance, represents the stores ledger in which individual stock cards are maintained. Individual debits and credits in stock cards are abstracted, totalled and taken into control account in cost ledger. At any time, the total balance in control account and aggregate of individual balances in subsidiary ledger accounts should agree. The following are the important control accounts in the cost ledger:

 

(A) General Ledger Adjustment Account (Cost Ledger Control Account):

All items of income or expenditure extracted from the financial accounts are posted into this account. The object of this account is to complete the double entry in the cost ledger. The balance on this account represents the total of all the balances of the impersonal accounts

 

(b) Stores Ledger Control Account (Material Control Account):

This account is debited for the purchase of material and credited for the issue of materials from stores. The balance in this account indicates the total balances of all the individual stores accounts. Abnormal losses or gains if any in this account are transferred to costing profit and loss account. Entries are made on the basis of goods received notes and stores requisitions

 

(C) Work-in-Progress Control Account:

This account is debited with the total cost of production which includes direct materials, direct labour, direct expenses, production overhead recovered and is credited with the amount of finished goods completed and transferred. The balance in this account represents total balances of jobs / WIP are shown by several job accounts.

 

(d) Finished goods control Account:

This account is debited with the value of goods transferred from WIP control account and administration costs recovered. This account is credited with the cost of sales account for the cost of goods sold. The balance in this account represents the value of finished goods in hand.

 

(e) Wages Control Account:

This account is debited with the total wages paid. Direct wages are further transferred to Work-in-Progress account and indirect wages to Production overheads, administration overhead or selling and distribution overheads as the case may be. Wages paid for abnormal idle time are transferred to costing profit and loss account.

 

(f) Factory / Manufacturing / Production / Works Overhead Control Account:

This account is debited with indirect costs of production such as indirect material, indirect labour and indirect expenses. Overhead recovered is credited to this account. The difference between overheads incurred and recovered is transferred to costing profit and loss account.

 

(g) Administrative Overhead Control Account:

This account is debited with overhead incurred and credited with overhead recovered. The overhead recovered are debited to finished goods account. The difference between administrative overhead incurred and recovered is transferred to costing profit and loss account.

 

(H) Selling and Distribution Overhead Control Account:

This account is debited with selling and distribution overhead incurred and credited with recovered overhead. The difference between incurred and recovered overhead is transferred usually to cost of sales account.

 

(I) Cost of Sales Account:

This account is debited with the cost of finished goods transferred from finished goods account for sale as well as with the amount of selling and distribution overhead cost recovered. The balance of this account is ultimately transferred to sales account or costing profit and loss account.

 

(j) Costing Profit and Loss Account:

This account is debited with cost of goods sold, under absorbed overheads and abnormal losses. This account is credited with sales value, over-absorbed overhead and abnormal gains. The net profit or loss in this account is transferred to cost ledger control account.

 

3.0 Integrated Accounting System

3.1 Introduction to Integrated Accounting System

Integrated accounting system is the name given to a system of accounting whereby cost and financial accounts are kept in the same set of books. Obviously, then there will be no separate set of books for costing and financial records. Integral accounts provide or meet the information required by costing and financial accounts.

 

3.2 Features of Integrated Accounting System

(a)           Complete analysis of costs and sales are kept.

(b)           Complete details of all payments in cash are kept.

(c)            Complete details of all assets and liabilities are kept and this system does not use notional accounts to represent all impersonal accounts.

(d)           Under this system, general ledger adjustment is not at all maintained and detailed accounts of assets and liabilities are maintained.

 

3.3 Advantages of Integrated Accounting System

The main advantages of integrated accounts are as follows:

(a)           No need for Reconciliation. The question of reconciling costing profit and financial profit does not arise, as there is one figure of profit only.

(b)           Significant saving in the clerical efforts, as only one set of books is maintained.

(c)            Retrieving of information is easy & quick.

(d)           It is economical also as it is based in the concept of centralization of accounting function.

 

3.4 Essential pre-requisites for Integrated Accounting System

The essential pre-requisites for integrated accounts include the following steps:

(a)           The management’s decision about the extent of integration of the two sets of books. Some concerns find it useful to integrate up to the stage of primary cost or factory cost, while others prefer full integration of the entire accounting records.

(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 aspects of the accounts and an efficient processing of accounting documents should be ensured.

 

3.5 Journal entries to be made in financial accounts, non-integrated cost accounts and integrated cost accounts for different accounting transactions:

 

Transaction: 1

Credit purchase of material

JE in Financial Accounts:

Purchase A/c               Dr

To Creditors A/c

JE in Non-Integrated Cost Accounts:

Material Control A/c     Dr

To General Ledger Adjustment A/c

JE in Integrated Cost Accounts:

Material Control A/c     Dr

To Creditors A/c

 

Transaction: 2

Cash purchase of material

JE in Financial Accounts:

Purchase A/c             Dr

To Cash / Bank A/c

JE in Non-Integrated Cost Accounts:

Material Control A/c   Dr

To General Ledger Adjustment A/c

JE in Integrated Cost Accounts:

Material Control A/c   Dr

To Cash / Bank A/c

 

Transaction: 3

Purchase of materials for repairs

JE in Financial Accounts:

Purchase A/c                          Dr

To Cash / Bank / Creditors A/c

JE in Non-Integrated Cost Accounts:

Factory Overhead Control A/c    Dr

To General Ledger Adjustment A/c

JE in Integrated Cost Accounts:

Factory Overhead Control A/c    Dr

To Cash/Bank/Creditors A/c

 

Transaction: 4

Materials returned to suppliers

JE in Financial Accounts:

Creditors A/c                           Dr

To Return outwards A/c

JE in Non-Integrated Cost Accounts:

General Ledger Adjustment A/c  Dr

To Material Control A/c

JE in Integrated Cost Accounts:

Creditors A/c                           Dr

To Material Control A/c

 

Transaction: 5

Payment to creditors for supplies made

JE in Financial Accounts:

Creditors A/c        Dr

To Cash / bank A/c

JE in Non-Integrated Cost Accounts:

NO ENTRY

JE in Integrated Cost Accounts:

Creditors A/c       Dr

To Cash / bank A/c

 

Transaction: 6

Payment received from debtors

JE in Financial Accounts:

Cash / bank A/c        Dr

To Debtors A/c

JE in Non-Integrated Cost Accounts:

NO ENTRY

JE in Integrated Cost Accounts:

Cash / bank A/c       Dr

To Debtors A/c

 

Transaction: 7

Issue of direct material to production shop

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

WIP Control A/c       Dr

To Material Control A/c

JE in Integrated Cost Accounts:

WIP Control A/c       Dr

To Material Control A/c

 

Transaction: 8

Issue of indirect material to production shop

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

To Material Control A/c

JE in Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

To Material Control A/c

 

Transaction: 9

Return of direct material to store

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Material Control A/c       Dr

To WIP Control A/c

JE in Integrated Cost Accounts:

Material Control A/c       Dr

To WIP Control A/c

 

Transaction: 10

Return of indirect material to store

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Material Control A/c       Dr

To Factory Overhead Control A/c

JE in Integrated Cost Accounts:

Material Control A/c       Dr

To Factory Overhead Control A/c

 

Transaction: 11

Material transferred from one job to another

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Transferee Job A/c       Dr

To Transferor Job A/c

JE in Integrated Cost Accounts:

Transferee Job A/c       Dr

To Transferor Job A/c

 

Transaction: 12

Adjustment of normal deficiency in material stock

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

To Material Control A/c

JE in Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

To Material Control A/c

 

Transaction: 13

Adjustment of normal surplus in material stock

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Material Control A/c                Dr

To Factory Overhead Control A/c

JE in Integrated Cost Accounts:

Material Control A/c               Dr

To Factory Overhead Control A/c

 

Transaction: 14

Payment of wages & salaries

JE in Financial Accounts:

Wages and salaries A/c      Dr

To Cash / bank A/c

JE in Non-Integrated Cost Accounts:

Wages Control A/c           Dr

To General Ledger Adjustment A/c

JE in Integrated Cost Accounts:

Wages Control A/c           Dr

To Cash / bank A/c

 

Transaction: 15

Direct wages for production shop

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

WIP Control A/c       Dr

To Wages Control A/c

JE in Integrated Cost Accounts:

WIP Control A/c       Dr

To Wages Control A/c

 

Transaction: 16

Distribution of indirect wages

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c         Dr

To Wages Control A/c

JE in Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c         Dr

To Wages Control A/c

 

Transaction: 17

Payment of expenses

JE in Financial Accounts:

Expenses A/c                             Dr

To Cash / bank A/c

JE in Non-Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c         Dr

To General Ledger Adjustment A/c

JE in Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c         Dr

To Cash / bank A/c

 

Transaction: 18

Depreciation on asset

JE in Financial Accounts:

Depreciation A/c                         Dr

To Asset A/c

JE in Non-Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c         Dr

To General Ledger Adjustment A/c

JE in Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c         Dr

To Asset A/c

 

Transaction: 19

Absorption of Factory Overhead

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

WIP Control A/c       Dr

To Factory Overhead Control A/c

JE in Integrated Cost Accounts:

WIP Control A/c       Dr

To Factory Overhead Control A/c

 

Transaction: 20

Abnormal loss of materials from store

JE in Financial Accounts:

Profit and Loss A/c               Dr

To Trading A/c

JE in Non-Integrated Cost Accounts:

Costing Profit and Loss A/c    Dr

To Material Control A/c

JE in Integrated Cost Accounts:

Costing Profit and Loss A/c    Dr

To Material Control A/c

 

Transaction: 21

Spoiled / Defective work

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Costing Profit and Loss A/c     Dr

To WIP Control A/c

JE in Integrated Cost Accounts:

Costing Profit and Loss A/c     Dr

To WIP Control A/c

 

Transaction: 22

Cost of finished goods/jobs

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Finished Goods Control A/c       Dr

To WIP Control A/c

JE in Integrated Cost Accounts:

Finished Goods Control A/c       Dr

To WIP Control A/c

 

Transaction: 23

Cost of goods sold

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Cost of Sales A/c          Dr

To Finished Goods Control A/c

JE in Integrated Cost Accounts:

Cost of Sales A/c          Dr

To Finished Goods Control A/c

 

Transaction: 24

Sales

JE in Financial Accounts:

Cash / Debtors A/c                       Dr

To Sales A/c

JE in Non-Integrated Cost Accounts:

General Ledger Adjustment A/c      Dr

To Costing Profit and Loss A/c

JE in Integrated Cost Accounts:

Cash / Debtors A/c                       Dr

To Profit and Loss A/c

 

Transaction: 25

Absorption of Administration Overhead

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Finished Goods Control A/c       Dr

To Admn Overhead Control A/c

JE in Integrated Cost Accounts:

Finished Goods Control A/c       Dr

To Admn Overhead Control A/c

 

Transaction: 26

Absorption of Selling & Distribution OH

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Cost of Sales A/c          Dr

To S & D Overhead Control A/c

JE in Integrated Cost Accounts:

Cost of Sales A/c          Dr

To S & D Overhead Control A/c

 

Transaction: 27

Under-absorption of Overheads

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Costing Profit and Loss A/c           Dr

To Factory Overhead Control A/c

To Admn Overhead Control A/c

To S & D Overhead Control A/c

JE in Integrated Cost Accounts:

Profit and Loss A/c                       Dr

To Factory Overhead Control A/c

To Admn Overhead Control A/c

To S & D Overhead Control A/c

 

Transaction: 28

Over-absorption of Overheads

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c         Dr

To Costing Profit and Loss A/c

JE in Integrated Cost Accounts:

Factory Overhead Control A/c       Dr

Admn Overhead Control A/c         Dr

S & D Overhead Control A/c        Dr

To Profit and Loss A/c

 

Transaction: 29

Transfer of balance in cost of sales account

JE in Financial Accounts:

NO ENTRY

JE in Non-Integrated Cost Accounts:

Costing Profit and Loss A/c         Dr

To Cost of Sales A/c

JE in Integrated Cost Accounts:

Profit and Loss A/c                    Dr

To Cost of Sales A/c

 

Transaction: 30

Net profit

JE in Financial Accounts:

Profit and Loss A/c                   Dr

To Reserve and Surplus A/c

JE in Non-Integrated Cost Accounts:

Costing Profit and Loss A/c        Dr

To General Ledger Adjustment A/c

JE in Integrated Cost Accounts:

Profit and Loss A/c                   Dr

To Reserve and Surplus A/c

 

Transaction: 31

Net loss

JE in Financial Accounts:

Reserve and Surplus A/c             Dr

To Profit and Loss A/c

JE in Non-Integrated Cost Accounts:

General Ledger Adjustment A/c    Dr

To Costing Profit and Loss A/c

JE in Integrated Cost Accounts:

Reserve and Surplus A/c             Dr

To Profit and Loss A/c

Part B

Cost Accounting

Cost Book Keeping

Selected Problems on Integrated Cost Accounting

Illustration: 1

Journalise the following transactions assuming that cost and financial accounts are integrated:

 

	Particulars	Rs
1	Raw material purchased	40,000
2	Direct material issued to production	30,000
3	Wages paid (30% indirect)	24,000
4	Wages charged to production	16,800
5	Manufacturing expenses incurred	19,000
6	Manufacturing overhead charged to production	18,000
7	Selling and distribution expenses incurred	4,000
8	Finished products (at cost)	40,000
9	Sales	58,000
10	Closing Stock	Nil
11	Receipts from debtors	13,800
12	Payments to creditors	12,000

 

Click here for Solution: 1 in PDF 

Illustration: 2

Pass the journal entries for the following transactions under the integrated cost accounting system:

	Particulars	Rs
1	Issue of material – Direct	5,50,000
2	Issue of material – Indirect	1,50,000
3	Allocation of wages and salaries – Direct	2,00,000
4	Allocation of wages and salaries – Indirect	40,000
5	Factory overhead absorbed	1,50,000
6	Admn overhead absorbed	50,000
7	S and D overhead absorbed	30,000
8	Over-absorption of factory overhead	20,000
9	Under-absorption of administration overhead	10,000

 

Click here for Solution: 2 in PDF