6 Non-integrated, Integrated & Reconciliation of Cost and Financial Accounts

Transcription

1 5.43 Activity Based Costing 6 Non-integrated, Integrated & Reconciliation of Cost and Financial Accounts Question 1 Write short note on Cost Ledger Control Account (May, 1996, 4 marks) Answer Cost Ledger Control Account: This control account is also popularly know as General Ledger Adjustment Account is opened in Cost Ledger to complete double-entry. All items of income and expenditure taken from financial accounts and all transfers from cost accounts to financial books are recorded in this account. Since the purpose of this account is to complete double entry in the cost ledger, therefore all transactions in the cost ledger must be recorded through the Cost Ledger Control Account. The balance in this account will always be equal to the total of all the balances of the impersonal accounts. Question 2 After the annual stock taking you come to know of some significant discrepancies between book stock and physical stock. You gather the following information: Items Stock Card Stores Ledger Physical Check Cost/Unit Units Units Units A B C (a) What action should be taken to record the information shown above. (b) Suggest reasons for the shortage and discrepancies disclosed above and recommend a possible course of action by management to prevent future losses. (Your answer should be in points and you need not elaborate).

2 Activity Based Costing 5.44 Answer (a) For recording the information shown in the question under consideration, the following action may be taken: (i) Check the stock card and stores ledger. The correct physical quantity be recorded. (ii) Investigate reasons for stock losses or gains. (iii) After ascertaining the reasons for stock losses the following treatment may be followed: (a) Debit Factory overhead A/c Credit Stores Ledger Control a/c (if the shortage is normal) (b) Debit Costing P & L A/c Credit Stores Ledger Control A/c (if the shortage is abnormal) (c) Debit Work -in-progress A/c Credit Stores Ledger Control A/c (if the shortage is due to non-recording or short recording etc.) (iv) Rectification entry may be passed for clerical errors. (v) After ascertaining the reason for stock gains an appropriate action may be taken as follows: (a) Debit Stores Ledger A/c Credit Factory Overhead A/c (if the excess of stock is due to normal causes) (b) Debit Stores Ledger Control A/c Credit Costing P & L A/c (if the excess of stock is due to abnormal circumstances) (c) Debit Stores Ledger Co ntrol A/c Credit Work-in-progress A/c (if the excess stock is due to wrong recording etc.) (vi) n the given example, the losses are with reference to items A ( 6 x 4 units = 2,4 and C ( 1 x 6 = 6). As the reasons for those losses are not given therefore they may be decided to P/L A/c and Stores Ledger Control A/c be credited accordingly. (vii) The gains are in respect of stock item B ( 4 x 5 = 2). For treating gain of 2 Stores Ledger Control A/c be debited and Costing P/L A/c credited.

3 5.45 Activity Based Costing (b) Reason for the shortage and discrepancies: (i) Wastage of material due to spoilage, evaporation etc. which may be normal or abnormal. (ii) Components issued for production without entry on stock card and stores ledger. (iii) Stores sta ff misreading figures on the requisitions. (iv) Theft of stock from stores. (v) Clerical errors in stores ledger. Recommended Course of action to prevent future losses (i) Entry in the stores should be restricted to authorised persons only. (ii) All issues of stock should be against proper stock requisition slip. (ii) Stores should follow a system of internal check for all items of stock. (iii) Proper accounting be done for all stock movements. (iv) Recording of entries in stores ledger and stock card should be made ca refully. (v) Stock items which come first in the stores should be issued first to avoid loses due to deterioration or obsolescence. Question 3 What are the essential pre-requisites of integrated accounting system? (Nov, 1996, 21, 28, 4, 3 marks) Answer Essential pre -requisites of Integrated Accounting System: The essential pre -requisites of integrated accounting system include the following: 1. The management s decision about the extent of integration of the two sets of books. Some concerns find it useful to integrate upto the stage of primary cost or factory cost while other prefer full integration of the entire accounting records. 2. A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts. 3. An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other adjustment necessary for preparation of interim accounts.

4 Activity Based Costing 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. 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 Bought Ledger, there will be : (a) Stores Ledger; (b) Stock Ledger and (c) Job Ledger. Question 4 What are the advantages of integrated accounting? (Nov.,1997,May, 22, 4 marks)

5 5.47 Activity Based Costing Answer Advantages of Integrated Accounting: Integrated Accounting is the name given to a system of accounting whereby 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. In other words, information and data should be recorded in such a way so as to enable the firm to ascertain the cost (together with the necessary analysis) of each product, job, process, operation or any other identifiable activity. For instance, purchases are analysed by nature of material and its enduse. Purchases account is eliminated and direct postings are made to Stores Control Account, Work-in-Progress account, or Overhead Account. Payroll is straightway analysed into direct labour and overheads. It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains. In fact all information that management requires from a system of Costing for doing its work properly is made available. The integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared according to the requirements of law and the management maintains full control over the liabilities and assets of its business. The main advantages of Integrated Accounting are as follows: (i) Since there is one set of accounts, thus there is one figure of profit. Hence the question of reconciliation of costing profit and financial profit does not arise. (ii) There is no duplication of recording of entries and efforts to maintain separate set of books. (iii) Costing data are available from books of original entry and hence no delay is caused in obtaining information. (iv) The operation of the system is facilitated with the use of mechanized accounting. (v) Centralization of accounting function results in economy. Question 5 What do you understand by integrated accounting system? State its advantages and pre-requisites.

6 Activity Based Costing 5.48 Answer Integrated (or Integral) Accounts is the name given to a system whereby cost and financial accounts are kept in the same set of books. Obviously, then there will be no separate sets of books for Costing and Financial purposes. Integrated Accounts will have to afford full information required for Costing as well as for Financial Accounts. In other words, information and data should be recorded in such a way as to enable the firm to ascertain the Cost (together with the necessary analysis) of each product, job, process, operation or any other identifiable activity. For instance, purchases are analysed by nature of material and its end-use. Purchase accounts are eliminated and direct postings are made to Stores Control Account, Work-in-Progress Account, or Overhead Account. Payroll is straightway analysed into direct laour and overheads. It also ensures the ascertainment of marginal cost, variances, abnormal losses a nd gains in fact, all information that management requires from a system of Costing for doing its work properly. The integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared acco rding to the requirements of law and the management maintains full control over the liabilities and assets of its business. The main advantages of Integrated Accounts are as follows: (1) Since there is one set of accounts, thus there is one figure of profit. Hence the question of reconciliation of costing profit and financial profit does not arise. (2) There is no duplication of recording of entries and efforts in the separate set of books. (3) Costing data are available from books of original entry and hence no delay is caused in obtaining information. (4) The operation of the system is facilitated with the use of mechanised accounting. (5) Centralisation of accounting function results in economy. The essential pre -requisites for integrated accounts include the following steps. 1. The management s decision about the extent of integration of two sets of books. Some concerns find it useful to integrate upto the stage of primary cost or factory cost while others prefer full integration of the entire accounting records. 2. A suitable coding system must be made available so as to serve to accounting purposes of financial and cost accounts.

7 5.49 Activity Based Costing 3. An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, and other adjustments necessary for preparation of interim accounts. 4. Perfect co -ordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of the accounting documents should be ensured. Question 6 Write notes on Integrated Accounting (May, 1999, 1998, 4 marks) Answer Integrated Accounting Integrated Accounting is the name given to a system of accounting whereby 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. In other words, information and data should be recorded in such a way so as to enable the firm to ascertain the cost (together with the necessary analysis) of each product, job, process, operation or any other identifiable activity. For instance, purchases analysed by nature of material and its end use. Purchases account is eliminated and direct postings are made to Stores Control Account, Work-in-Progress accounts, or Overhead Account. Payroll is straightway analysed into direct labour and overheads. It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains, In fact, all information that management requires from a system of costing for doing its work properly is made available. The integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared according to the requirements of law and the management maintains full control over the liabilities and assets of its business. The main advantages of Integrated Accounting are as follows: (i) Since there is one set of accounts, thus there is one figure of profit. Hence the question of reconciliation of costing profit and financial profit does not arise. (ii) There is no duplica tion of recording of entries and efforts in the separate set of books. (iii) Costing data are available from books of original entry and hence no delay is casued in obtaining information.

8 Activity Based Costing 5.5 (iv) The operation of the system is facilitated with the use of mechanised accounting. (v) Centralisation of accounting function results in economy. Question 7 Why is it necessary to reconcile the Profits between the Cost Accounts and Financial Accounts? Answer (May, 24, 5 marks) 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. It is important to know the causes which generally give rise to differences in the costs & financial accounts. These are: (i) Items included in financial accounts but not in cost accounts Appropriation of profits Income -tax Transfer to reserve Dividends paid Goodwill / preliminary expenses written off Pure financial items Interest, dividends Losses on sale of investments Expenses of Co s share transfer office Damages & penalties (ii) Items included in cost accounts but not in financial accounts Opportunity cost of capital Notional rent

9 5.51 Activity Based Costing (iii) Under / Over absorption of expenses in cost accounts (iv) Different bases of inventory valua tion Motivation for reconciliation are: 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 To report fruitful financial / cost data. Question 8 What are the reasons for disagreement of profits as per cost accounts and financial accounts? Discuss. Answer (May, 2, 4 marks) Reasons for disagreement of profits as per cost and financial accounts The various reasons for disagreement of profits shown by the two sets of books viz., cost and financial may be listed as below: 1. Items appearing only in financial accounts The following items of income and expenditure are normally included in financial accounts and not in cost accounts. Their inclusion in cost accounts might lead to unwise managerial decisions. These items are: (i) Income: (a) Profit on sale of assets (b) Interest received (c) Dividend received (d) Rent receivable (e) Share Transfer fees (ii) Expenditure (a) Loss on sale of assets (b) Uninsured destruction of assets

10 Activity Based Costing 5.52 (c) Loss due to scrapping of plan and machinery (d) Preliminary expenses written off (e) Goodwill written off (f) Underwriting commission and debenture discount written off (g) Interest on mortgage and loans (h) Fines and penalties (iii) Appropriation (a) Dividends (b) Reserves (c) Dividend e qualization fund, Sinking, fund etc. 2. Items appearing only in cost accounts There are some items which are included in cost accounts but not in financial account. These are: (a) Notional interest on capital; (b) Notional rent on premises owned. 3. Under or over-absorp tion of overhead In cost accounts overheads are charged to production at pre -determined rates where in financial accounts actual amount of overhead is charged, the difference gives rise under-or over-absorption; causing a difference in profits. 4. Different bases of stock valuation In financial books, stocks are valued at cost or market price, whichever is lower. In cost books, however, stock of materials may be valued on FIFO or LIFO basis and work -in-progress may be valued at prime cost or works cost. Diffe rences in store valuation may thus cause a difference between the two profits. 5. Depreciation The amount of depreciation charge may be different in the two sets of books either because of the different methods of calculating depreciation or the rates adopted. In company accounts, for instance, the straight line method may be adopted whereas in financial accounts It may be the diminishing balance method.

11 5.53 Activity Based Costing Question 9 Reconciliation of cost and financial accounts in the modern computer age is redundant. Comment. (May, 1998, 4 marks)

12 Activity Based Costing 5.54 Answer In the modern computer age the use of computer knowledge and accounting softwares has helped the field of Financial and Cost Accounting in a big way. In fact, computers work at a very high speed and can process voluminous data for generating desired output in no time. Output produced is precise and accurate. Computers can work for hours without any fatigue. They can bring out different Financial Accounting and Cost Accounting statements and reports accurately in a presentable form. Financial accounts and Cost accounts show their results accurately and precisely, when maintained on a computer system, but the profit shown by one set of books may not agree with that of the other set. The main reasons for the disagreement of the profit figures shown by the two set of books is the absence of certain items which appear in financial books only and are not recorded in cost accounting books. Similarly, there may be some items which appear in cost accounts but do not find a place in the financial books. Some examples which affects it are as below: (i) Loss/profit on sale of fixed assets. (ii) Expenses on stamp duty, discount and other expenses relating to the issue and transfer of shares and debentures. (iii) Fee received on issue and transfer of shares etc. (iv) Interest on bank loan, mortgage etc. (v) Interest received on bank deposits and other investments. (vi) Fines and penalties (vii) Dividend received on investments in shares. (viii) Rental income etc. (ix) Under or over recovered expenses. (x) Difference due to varying basis of valuation of stock or in the matter of charging depreciation. Under the situation of differential profit figure shown by financial and cost accounts, it is necessary to reconcile the results (profit/loss) shown. Such a reconciliation proves a rithmetical accuracy of data, explains reasons for the difference in two sets of books and affords reliability to them. Hence, the reconciliation of cost and financial accounts is essential and not redundant even in the modern age of computer.

13 5.55 Activity Based Costing Question 1 What are the reasons for disagreement of Profits as per Financial accounts and Cost accounts? Discuss? (Nov, 1999, 4 marks)

14 Activity Based Costing 5.56 Answer Reasons for disagreement of Profits as per Financial accounts and Cost accounts are as below. There are certain items which are included in Financial accounts but not in Cost Accounts. Likewise there are certain items which are in Cost Accounts but not in Financial accounts. Examples of financial charges which appear only in financial books are: (i) Loss on the sale of fixed assets and investments. (ii) Interest on bank loans, mortgage etc. (iii) Expenses relating to the issue and transfer of shares and debentures like stamps duty expenses; discount on shares and debentures etc. (iv) Penalties and fines. Examples of incomes which are recorded in the financial books only are: (i) Profit on the sale of investments and fixed assets. (ii) (iii) (iv) (v) Interest received on investments and bank deposits. Dividend received on investment in shares. Fees received on issue and transfer of shares etc. Rental income. There are abnormal or special items of expenditure and income which are not included in the cost of production. Their inclusion in cost of production, would result into incorrect cost ascertainment. Different bases of charging depreciation also accounts for the disagreement of profits as per financial and cost accounts. Different methods of valuation of closing stock adopted in cost and financial accounts will also account for the difference in profits under financial and cost accounts. Question 11 Why is it necessary to reconcile the Profit between Cost Accounts and Financial Accounts? (Nov, 22, 5 marks) Answer Need for reconciliation: When cost and financial accounts are maintained separately, the profit shown by one set of books may not agree with that of the

15 5.57 Activity Based Costing other set. In such a situation, it becomes necessary to reconcile the results (profit / loss) shown by two sets of books. Causes for difference between profit shown by cost and financial accounts (i) There are certain items which appear in financial books only and are not recorded in cost accounting books e.g. loss on sale of fixed assets; expenses on stamp duty; interest on bank loan etc. Similarly, there may be some items which appear in cost accounts only and do not find a place in the financial books e.g. notional rent; national interest etc. (ii) In cost accounts, overheads are generally absorbed on the basis of a pre - determined overhead rate, whereas in financial accounts actual expenditure on overheads is recorded, this will also cause a difference between the figure of profit shown under financial and cost account. (ii) Different methods of valuation of closing stock adopted in cost and financial accounts will also cause a difference in the results shown by the two sets of books. In financial accounts the method generally followed is cost or market price, whichever is less whereas in cost accounts different methods of pricing of material issues such as LIFO, FIFO, average etc are used. (iii) Use of different methods of depreciation is also responsible for the variation of profit shown by two sets of books. In financial accounts, depreciation may be charged according to written down value method whereas in cost accounts is may be charged on the basis of the life of the machine. (iv) Abnormal items not included in cost accounts also causes a difference in profit. If such items of expenses are included, cost ascertained will not be correct. Question 12 From the following data write up the various accounts as you envisage in the cost ledger and prepare a trial balance as on 31 st March (a) Balance as on 1 st April 1983: (in thousands) Material Control 1,24 Work-in-Progress 625 Finished Goods 1,24 Production Overhead 84

16 Activity Based Costing 5.58 Administrative Overhead 12 (cr.) Selling & Distribution Overhead 65 General Ledger control 3,134 (b) Transactions for the year ended 31 st March 1984 Material Purchases 4,81 Issued to : Jobs 4,774 Maintenance works 412 Administration offices 34 Selling Department 72 Direct Wages 1,493 Indirect Wages 65 Carriage Inward 84 Production Overheads: Incurred 2,423 Absorbed 3,591 Administration overheads: Incurred 74 Allocated to Production 529 Allocated to sales 148 Sales overheads: Incurred 642 Absorbed 82 Finished goods produced 9,584 Finished goods sold 9,773 Sales realisation 12,43 Answer

17 5.59 Activity Based Costing Cost Ledger General Ledger Adjustment Account Dr. Cr. To Costing Profit & Loss A/c By Balance b/d 3,134 (Sales) 12,43 By Material Control A/c 4,81 To Balance c/d 3,226 By Wage Control A/c 2,143 By Production Overhead Control A/c (carriage) 84 By Production Overhead Control A/c 2,423 By Administration Overhead Control A/c 74 By Selling & Dist. Control 642 A/c By Costing Profit & Loss 1,689 A/c 15,656 15,656 Material Control Account Dr. Cr. To Balance b/d 1,24 By WIP Control A/c 4,774 To General Ledger Adjustment A/c 4,81 By Production Overhead Control A/c 412 By Administration Ove rhead Control A/c 34 By Selling & Dist. Overhead Control A/c 72 By Balance c/d 749 6,41 6,41

18 Activity Based Costing 5.6 Wages Control Account Dr. Cr. To General Ledger Adjustment A/c 2,143 By WIP Control A/c 1,493 By Production Overhead 65 Control A/c 2,143 2,143 Production Overhead Control Account Dr. Cr. Rs To Balance b/d 84 By WIP control A/c 3,591 To Material Control A/c 412 By Balance c/d 62 To General Ledger Adjustment 84 A/c To Wages Control A/c 65 To General Ledger Adjustment 2,423 A/c 3,653 3,653 Work-in progress Control Account Dr. Cr. To Balance b/d 625 By Finished Goods 9,584 To Material Control A/c 4,774 Control A/c To Wages Control A/c 1,493 By Balance c/d 899 To Production Overhead Control A/c 3,591 1,483 1,483 Dr. Administrative Overhead Control Account Cr.

19 5.61 Activity Based Costing To Material Control A/c 34 By Balance b/d 12 To General Ledger 74 By Finished Goods 529 Adjustment A/c Control A/c To Balance c/d 23 By Cost of Sales A/c Finished Goods Control Account Dr. Cr. To Balance b/d 1,24 By Cost of Sales A/c 9,773 To Administrative 529 By Balance c/d 1,58 Overhead Control A/c To WIP Control A/c 9,584 11,353 11,353 Selling & Distribution Overhead Control Account Dr. Cr. To Balance b/d 65 By Cost of Sales A/c 82 To Material Control A/c 72 To Gene ral Ledger 642 Adjustment A/c To Balance c/d Cost of Sales Account Dr. Cr. To Finished Goods 9,773 By Costing Profit & Loss 1,741 A/c Control A/c To Selling & Dist. 82 Overhead Control A/c To Admn. Overhead 148 Control A/c

20 Activity Based Costing ,741 1,741 Costing Profit & Loss Account Dr. Cr. To Cost of Sales A/c 1,741 By General Ledger 12,43 To General Ledger 1,689 Adjustment A/c Adjustment A/c (Sales) 12,43 12,43 Trial Balance as on 31 st March, 1984 Material Control A/c 749 Work-in-progress Control A/c 899 Finished Goods Ledger Control A/c 1,58 Production Overhead Control A/c 62 Dr. Cr. Admn. Overhead Control A/c 23 Selling & Dist. Overhead control A/c 41 General Ledger Adjustment A/c 3,226 Note : 3,29 3,29 Administrative Overheads are generally charged to Finished Goods A/c. Hence the expression in the question Administrative overheads allocated to production has been interpreted as Administrative overheads allocated to finished production and accordingly charged to Finished Goods A/c. Question 13 The following balances are shown in the cost ledger of Vinak Ltd. As on 31 st Oct. 1981: Dr. () Work in Progress Account 7,56 Factory Overhead Suspense Account 36 Cr. ()

21 5.63 Activity Based Costing Finished Stock Account 5,274 Stores Ledger account 9,45 Admn. Overhead Suspense Account 18 General Ledger Adjustment Account 22,32

22 Activity Based Costing 5.64 Transactions for the year ended 3 th September 1982 were: Stores issued to production 45,37 Stores purchased 52,4 Material purchased for direct issue to production 1,135 Wages paid (Including indirect labour 2,52) 57,6 Finished goods sold 1,18,8 Administration expenses 5,4 Selling expenses 6, Factory overheads 15,6 Stores issued for capital work in progress 1,5 Finished goods transferred to warehouse 1,8, Stores issued for factory repairs 2, Factory overheads applied to production 16,83 Adm. Overheads charged to production 4,58 Factory overheads applicable to unfinished work 3,8 Selling overheads allocated to sales 5,5 Stores lost due to fire in stores (Not insured) 15 Administration expenses on unfinished work 85 Finished goods stock on ,274 You are required to record the entries in the cost ledger for the year ended 3 th September, 1982 and prepare a trial balance as on that date. Answer Cost Ledger General Ledger Adjustment Account Dr. Cr. To Cost of Sales A/c 1,18,8 By Balance b/d 22,32 To Balance c/d 54,585 By Stores ledger control A/c 52,4 By WIP control A/c 1,135

23 5.65 Activity Based Costing By Wages control A/c 57,6 By Factory Overhead control 15,6 A/c By Admn. Overhead control 5,4 A/c By Selling Overhead control 6, A/c By Costing Profit & Loss A/c 12,93 1,73,385 1,73,385 Stores Ledger Control Account To Balance b/d 9,45 By WIP Control A/c 45,37 To Gen. Ledger Adj. A/c 52,4 By Capital WIP A/c 1,5 By Factory Overhead 2, control A/c By Costing P/L A/c 15 By Balance c/d 12,83 61,85 61,85 Work-in Progress Control A/c To Balance b/d 7,56 By Finished Goods Control 1,8, A/c To Gen. Ledger Adj. A/c 1,135 To Stores Ledger Control 45,37 By Balance c/d 22,51 A/c To Wages Control A/c 55,8 To Factory Overhead 16,83 Control A/c To Admn. Overhead Control 4,58 A/c 1,3,51 1,3,51 Finished Goods Control Account

24 Activity Based Costing 5.66 To Balance b/d 5,274 By Cost of Sales A/c 99, To WIP Control A/c 1,8, By Balance c/d 14,274 1,13,274 1,13,274 Wages Control Account To Gen. Ledger Adj. A/c 57,6 By WIP Control A/c 55,8 By Factory Overhead Control 2,52 A/c 57,6 57,6

25 5.67 Activity Based Costing Factory Overhead Control Account To Factory overhead 36 By WIP Control A/c 16,83 suspense A/c To Gen. Ledger Adj. A/c 15,6 By Factory Overhead Suspense 3,8 A/c To Stores Ledger Control 2, By Costing Profit & Loss A/c 57 A/c To Wages Control A/c 2,52 2,48 2,48 Administrative Overhead Control Account To Admn. Overhead Suspense 18 By WIP Control A/c 4,58 A/c To Gen. Ledger Adj. A/c 5,4 By Admn. Overhead Susp. 85 A/c By Costing Profit & Loss A/c 15 5,58 5,58 To Finished Goods Control A/c To Selling Overhead Control A/c Cost Sales Account 99, By Costing Profit & Loss A/c 1,4,5 5,5 1,4,5 1,4,5 Factory Overhead Suspense Account To Balance b/d 36 By Factory Overhead Control 36 A/c To Factory Overhead Control 3,8 By Balance c/d 3,8 A/c 3,44 3,44

26 Activity Based Costing 5.68 Administration Overhead Suspense Account To Balance b/d 18 By Admn. Overhead Control 18 A/c To Administrative Overhead 85 By Balance c/d 85 Control A/c 1,3 1,3 Selling Overhead Control Account To Balance b/d 6, By Cost of Sales A/c 5,5 By Costing Profit & Loss A/c 5 6, 6, Capital Work in Progress Account To Stores Ledger Control A/c 1,5 By Balance c/d 1,5 1,5 1,5 Costing Profit & Loss Account To Cost of Sales A/c 1,4,5 By Gen. Ledger Adj. A/c 1,18,8 To Stores Ledger Control A/c 15 To Factory Overhead Control 57 A/c To Selling Overhead Control 5 A/c To Admn. Overhead Control 15 A/c To Gen. Ledger Adj. A/c (Profit) 12,93 1,18,8 1,18,8

27 5.69 Activity Based Costing Trial Balance Dr.() Cr.() Work-in-Progress A/c 22,51 Stores Ledger Control A/c 12,83 Finished Goods Control A/c 14,274 Factory Overhead Suspense A/c 3,8 Admn. Overhead Suspense A/c 85 Capital Work in Progress A/c 1,5 Gen. Ledger Adjustment A/c 54,585 54,585 54,585 Question 14 Pass journal entries in the cost books, maintained on non-integrated system, for the following: (i) Issue of materials: Direct 5,5,; Indirect 1,5, (ii) Allocation of wages: Direct 2,,; Indirect 4, (iii) Under/Over absorbed overheads: Factory (over) 2,; Administration (under) 1, (Nov, 2, 6 marks)

28 Activity Based Costing 5.7 Answer Journal Entries in Cost Books Maintained on non-integrated system (i) Work-in-Progress Ledger Control A/c Dr. 5,5, Factory Overhead Control A/c Dr. 1,5, To Stores Ledger Control A/c 7,, (Being issue of materials) (ii) Work -in Progress Ledger Control A/c Dr. 2,, Factory Overhead control A/c Dr. 4, To Wages Control A/c 2,4, (Being allocation of wages and salaries) (iii) Factory Overhead Control A/c Dr. 2, To Costing Profit & Loss A/c 2, (Being transfer of over absorption of overhead) Costing Profit & Loss A/c Dr. 1, To Administration Overhead Control 1, A/c (Being transfer of under absorption of overhead) Question 15 A company operates on historic job cost accounting system, which is not integrated with financial accounts. At the beginning of a month, the opening balances in cost ledger were. (in lakhs) Stores Ledger Control Account 8 Work-in-Progress Control Account 2 Finished Goods Control Account 43 Building Construction Account 1 Cost Ledger Control Account 54 During the month, the following transactions took place: Material Purchased 4

29 5.71 Activity Based Costing Issued to production 5 Issued to general maintenance 6 Issued to building construction 4 Wages Gross wages paid 15 Indirect wages 4 Works Overheads Rayalty paid Selling, distribution and administration overheads sales For building construction 1 Actual amount incurred (excluding items 16 shown above) Absorbed in building construction 2 Under absorbed 8 At the end of the month, the stock of raw material and work-in-progress was 55 lakhs 25 lakhs respectively. The loss arising in the raw material account is treated as factory overhead. The building under construction was completed during the month. Company s gross profit margin is 2% on sales. Prepare the relevant control accounts to record the above transactions in the cost ledger of company. (May, 1996, 16 marks) Answer Cost Ledger Control A/c ( In lakhs) Dr. Cr. To Costing P & L A/c 45 By Balance b/d 54 To Stores Ledger Control A/c 55 By Stores Ledger Control A/c 4 To WIP Control A/c 25 By Wages Control A/c 15 To Building Const. A/c 44 By Works Overhead Control A/c 16 To Finished Goods Control 43 By Royalty A/c 5 A/c By Selling Distribution and

30 Activity Based Costing 5.72 Administration Overheads 25 A/c By Costing Profit & Loss A/c Stores Ledger Control A/c Dr. Cr. To Balance b/d 8 By WIP Control A/c 5 To Cost Ledger Control A/c 4 By Works Overhead Control 6 A/c By Building Const. A/c 4 By Closing Balance 55 By Work Overhead Control 5 A/c (Loss) Work-in-Progress Control A/c Dr. Cr. To Balance b/d 2 By Finished Goods Control 333 A/c To Stores Ledger Control A/c 5 By Closing Balance 25 To Wage Control A/c 1 To Works Overhead Control 183 A/c To Royalty A/c Finished Goods Control A/c Dr. Cr. To Balance b/d 43 By Cost of Goods Sold A/c 36 (Refer Working Note)

31 5.73 Activity Based Costing To WIP Control A/c 333 By Balance Cost of Sales A/c Dr. Cr. To Cost of Goods Sold A/c 36 By Costing P & L A/c 385 To Selling, Distribution 25 and Administration Overheads A/c Costing P & L A/c Dr. Cr. To Cost of Sales A/c 385 By Cost Ledger Control A/c 45 To Works Overhead Co ntrol A/c 8 To Cost Ledger Control A/c 57 (Profit) Building Construction A/c Dr. Cr. To Balance b/d 1 By Cost Ledger Control A/c 44 To Stores Ledger Control A/c 4 To Wage Control A/c 1 To Works Overhead Control 2 A/c Works Overhead Control A/c Dr. Cr. To Stores Ledger Control A/c 6 By Building Construction A/c 2 To Wage Control A/c 4 By WIP Control A/c 183

32 Activity Based Costing 5.74 To Cost Ledger Control A/c 16 By Balance (Costing P & L A/c) 8 To Stores Ledger Control A/c 5 (Loss) Dr. To Cost Ledger Control A/c Wages Control A/c Cr. 15 By Works Overhead Control 4 A/c By Building Const. A/c 1 By WIP Control A/c Royalty A/c Dr. Cr. Rs To Cost Ledger Control A/c 5 By WIP Control A/c Cost of Goods Sold A/c Dr. Cr. To Finished Goods Control A/c 36 By Cost of Sales A/c

33 5.75 Activity Based Costing Selling, Distribution and Administration Overheads A/c Dr. Cr. To Cost Ledger Control A/c 25 By Cost of Sales A/c Trial Balance In (lakhs) Dr. Cr. To Stores Ledger Control A/c 55 To WIP Control A/c 25 To Finished Goods Control A/c 43 To Cost Ledger Adjustment A/c Working Note If S.P. is 1 then C.P. = 8 If S.P. is 45 then C.P. = 8 Rs. 45 = 36 lakhs. 1 Question 16 A Company operates separate cost accounting and financial accounting systems. The following is the list of Opening balances as on in the Cost Ledger. Debit Credit Stores Ledger Control Account 53, WIP Control Account 1,4, Finished Goods Control Account 3,78 -- General Ledger Adjustment Account 1,88,75 Transactions for the quarter ended are as under: Materials purchased 26,7 Materials issued to production 4,

34 Activity Based Costing 5.76 Materials issued for factory repairs 9 Factory wages paid (including indirect wages 23,) 77,5 Production overheads incurred 95,2 Production overheads under-absorbed and written-off 3,2 Sales 2,56, The Company s gross profit is 25% on Factory Cost. At the end of the quarter, WIP stocks increased by 7,5. Prepare the relevant Control Accounts, Costing Profit and Loss Account and General Ledger Adjustment Account to record the above transactions for the quarter ended (Nov, 21, 1 marks) Dr. Answer General Ledger Adj. A/c Particulars Particulars To Sales 2,56, By Balance b/d 1,88,75 To Balance c/d 1,8,15 By Stores ledger control A/c 26,7 Dr. Cr. By Wages control A/c 77,5 By Overheads control A/c 95,2 By Costing Profit & Loss A/c 48, 4,36,15 4,36,15 Stores ledger control A/c Particulars Particulars To Balance b/d 53,375 By WIP control A/c 4, To General ledger adj. A/c 26,7 By Factory overhead control A/c Cr. 9 By Balance c/d 39,175 8,75 8,75 Dr. WIP control A/c Cr.

35 5.77 Activity Based Costing Particulars Particulars To Balance b/d To Stores ledger control A/c To Wages control A/c 54,5 To Factory, O/H control A/c 1,4,595 By Finished goods control A/c 2,2,9 4, By Balance c/d 1,12,95 1,15,9 3,14,995 3,14,995

36 Activity Based Costing 5.78 Finished goods control A/c Dr. Cr. Particulars Particulars To Balance b/d 3,78 By Cost of sales A/c 2,4,8 (Refer to note) To WIP control A/c 2,2,9 By Balance c/d 28,88 2,33,68 2,33,68 Note: Gross profit is 25% of Factory cost or 2% on sales. Hence cost of sales = 2,56, 2% of 2,56, = 2,4,8 Factory overhead control A/c Dr. Cr. Particulars Particulars To Stores ledger control 9 By Costing & profit loss A/c 3,2 A/c To Wages control A/c 23, By WIP control A/c 1,15,9 To General ledger adj. A/c 95,2 1,19,1 1,19,1 Cost of sales A/c Dr. Cr. Particulars Particulars To Finished goods control A/c 2,4,8 By Costing Profit & Loss A/c 2,4,8 Sales A/c Dr. Cr. Particulars Particulars To Costing Profit & Loss A/c 2,56, By GLA A/c 2,56, Wages control A/c Dr. Cr. Particulars Particulars To General ledger adj. A/c 77,5 By Factory overhead control 23,

37 5.79 Activity Based Costing A/c By WIP control A/c 54,5 77,5 77,5

38 Activity Based Costing 5.8 Costing Profit & Loss A/c Dr. Cr. Particulars Particulars To Factory O H Control 3,2 By Sales A/c 2,56, A/c To Cost of sales A/c 2,4,8 To General ledger adj. A/c 48, (Profit) 2,56, 2,56, Trial Balance (as on ) Dr. Cr. Stores ledger control A/c 39,175 WIP control A/c 1,12,95 Finished goods control A/c 28,88 To General ledger adjustment 1,8,15 A/c 1,8,15 1,8,15 Question 17 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 in respect of January 1997: (i) Incomplete Ledger Entries: Raw-Materials A/c Beginning Inventory 32, Work-in-Progress A/c Beginning Inventory 9,2 Finished Stock 1,51, Creditors A/c Opening Balance 16,4

39 5.81 Activity Based Costing Closing Balance 16,2 Manufacturing Overheads A/c Amount Spent 29,6 Finished Goods A/c Opening Inventory 24, Closing Inventory 3, (ii) Additional Information: (1) The cash-book showed that 89,2 have been paid to creditors for rawmaterial. (2) Ending inventory of work-in-progress included material 5, on which 3 direct labour hours have been booked against wages and overheads. (3) The job card showed that workers have worked for 7, hours. The wage rate is 1 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. (May, 1997, 12 marks) Answer Creditors A/c Dr. Cr. To Cash & Bank (I) 89,2 By Balance b/d 16,4 To Balance c/d 19,2 By Purchases 92, (Balancing figure) 1,8,4 1,8,4 Work-in-progress A/c Dr. Cr. To Balance b/d 9,2 By Finished stock 1,51,

40 Activity Based Costing 5.82 To Raw-materials 53, By Balance c/d (Balancing figure) Material (2): 5, To Wages (3) 7, La bour (2): 3, 9,2 (7, hrs. x 1) (3 hrs. x 4 hrs) To Overheads (4) 28, Overheads (2) 1,2 (7, hrs. x 4) (3 hrs. x 4) 1,6,2 1,6,2

41 5.83 Activity Based Costing Raw-materials A/c Dr. Cr. To Balance b/d 32, By Work -in-progress 53, To Purchase 92, (As above) (As above) By Balance c/d 71, 1,24, 1,24, Finished Goods A/c Dr. Cr. To Balance b/d 24, By Cost of sales 1,45, (Balancing figure) To W.I.P. 1,51, By Balance c/d 3, (As above) 1,75, 1,75, Manufacturing Overheads A/c Dr. Cr. To Sundries 29,6 By W.I.P. 28, (7 x 4) By Under-absorbed Overheads A/c 1,6 29,6 29,6 Question 18 BPR Limited keeps books on integrated accounting system. The following balances appear in the books as on April 1,22. Dr. () Cr. () Stores Control A/c 4,95 Work-in-progress A/c 38,675 Finished Goods A/c 52,325 Bank A/c 22,75

42 Activity Based Costing 5.84 Creditors A/c 18,2 Fixed Assets A/c 1,47,875 Debtors A/c 27,3 Share Capital A/c 1,82, Provision for Depreciation A/c 11,375 Provision for Doubtful Debts A/c 3,725 Factory Overheads Outstanding A/c 6,25 Pre-Paid Administration Overheads A/c 9,975 Profit & Loss A/c 72,8 3,17,1 3,17,1 The transactions for the year ended March 31,23, were as given below: Direct Wages 1,97, Indirect Wages 11,375 2,9,3 Purchase of materials (on credit) 2,27,5 Materials issued to production 2,5,25 Material issued for repairs 4,55 Goods finished during the year (at cost) 4,89,125 Credit Sales 6,82,5 Cost of Goods sold 5,,5 Production overheads absorbed 1,9,2 Production overheads paid during the year 91, Production overheads outstanding at the end of year 7,775 Administration overheads paid during the year 27,3 Selling overheads incurred 31,85 Payment to Creditors 2,29,775 Payment received from Debtors 6,59,75 Depreciation of Machinery 14,789

43 5.85 Activity Based Costing Administration overheads outstanding at the end of year 2,225 Provision for doubtful debts at the end of the year 4,59 Required: Write up accounts in the integrated ledger of BPR Limited and prepare a Trial balance. (Nov, 23, 1 marks)

44 Activity Based Costing 5.86 Answer Stores Control A/c Dr. Cr. To Balance b/d 4,95 By WIP A/c 2,5,25 To Creditors A/c 2,27,5 By Production overheads 4,55 A/c By Balance c/d 13,65 2,68,45 2,68,45 Wages Control A/c Dr. Cr. To Bank 1,97,925 By Work -in-progress A/c 1,97,925 To Bank 11,375 By Production overheads 11,375 A/c 2,9,3 2,9,3 Work-in-Progress A/c Dr. Cr. To Balance b/d 38,675 By Finish goods A/c 4,89,125 To Wages control A/c 1,97,925 By Balance c/d 1,6,925 To Stores control A/c 2,5,25 To Production overheads 1,9,2 A/c 5,96,5 5,96,5 Production Overheads A/c Dr. Cr. To Wages control A/c 11,375 By WIP A/c 1,9,2 To Stores control A/c 4,55 By Profit & Loss A/c 14,39 To Bank 84,75 (Under-absorbed overheads (91, 6,25) Written off)

45 5.87 Activity Based Costing To Production overheads 7,775 outstanding To Provision for 14,789 depreciation 1,23,239 1,23,239

46 Activity Based Costing 5.88 Finished goods A/c Dr. Cr. To Balance b/d 52,325 By Cost of sales A/c 5,,5 To Work -in-progress A/c 4,89,125 By Balance c/d 8,45 To Admn. Overheads A/c 39,5 5,8,95 5,8,95 Administration overheads A/c Dr. Cr. To Pre -paid admn. Overheads 9,975 By Finished goods A/c 39,5 A/c To Bank 27,3 To Admn. Ovherheads 2,225 outstanding 39,5 39,5 Cost of Sales A/c Dr. Cr. To Finished goods A/c 5,,5 To Sales A/c 5,32,35 To Selling overheads 31,85 5,32,35 5,32,35 Sales A/c Dr. Cr. To Cost of sales A/c 5,32,35 By Debtors A/c 6,82,5 To Profit & Loss A/c 1,5,15 6,82,5 6,82,5 Factory overheads / Production Overheads Outstanding A/c Dr. Cr. To Bank 6,25 By Balance b/d 6,25 To Balance c/d 7,775 By Production overheads 7,775

47 5.89 Activity Based Costing 14,25 14,25 Prepaid Administration overheads A/c Dr. Cr. To Balance b/d 9,975 By Admn. Overheads A/c 9,975 9,975 9,975 Provision for depreciation A/c Dr. Cr. To Balance c/d 26,164 By Balance b/d 11,375 By Production overheads 14,789 A/c 26,164 26,164 Provision for doubtful debts A/c Dr. Cr. To Balance c/d 4,59 By Balance b/d 3,725 By Profit & Loss A/c 865 4,59 4,59 Profit & Loss A/c Dr. Cr. To Provision for doubtful 865 By Balance b/d 72,8 debts To Production overheads 14,39 By Sales A/c 1,5,15 To Balance c/d 2,8,46 2,22,95 2,22,95 Debtors A/c

48 Activity Based Costing 5.9 Dr. Cr. To Balance b/d 27,3 By Bank A/c 6,59,75 To Sales A/c 6,82,5 By Balance c/d 5,5 7,9,8 7,9,8 Creditors A/c Dr. Cr. To Bank 2,29,775 By Balance b/d 18,2 To Balance c/d 15,925 By Stores control/ac 2,27,5 2,45,7 2,45,7 Dr. Fixed Assets A/c Cr. 1,47,875 By balance c/d 1,47,875 Bank A/c Dr. Cr. To Debtors 6,59,75 By Balance b/d 22,75 By Direct wages 1,97,925 By Indirect wages 11,375 By Production overheads 91, ( 84,75 + 6,25) By Admn. Overheads A/c 27,3 By Selling overheads A/c 31,85 By Creditors A/c 2,29,775 By Balance c/d 47,775 6,59,75 6,59,75 Trial Balance As on March 31, 23 Dr. Stores control A/c 13,65 Cr.

49 5.91 Activity Based Costing Work in Progress A/c 1,6,925 Finished goods A/c 8,45 Bank A/c 47,775 Creditors A/c 15,925 Fixed Assets A/c 1,47,875 Debtors A/c 5,5 Share capital A/c 1,82, Provision for depreciation A/c 26,164 Profit & Loss A/c 2,8,46 Production overheads outstanding A/c 7,775 Outstanding administrative overheads A/c 2,225 Provision for doubtful debt 4,59 4,46,725 4,46,725 Question 19 In the absence of the Chief Accountant, you have been asked to prepare a months cost accounts for a company which operates a batch costing system fully integrated with the financial accounts. The following relevant information is provided to you. Balances at the beginning of the month: Stores Ledger control account 25, Work in progress control account 2, Finished goods control account 35, Prepaid Production overheads brought forward from previous month 3, Transactions during the month: Materials purchased 75, Material issued To Production 3, To Factory Maintenance 4, 34, Materials transferred between batches Total wages paid: To Direct workers 25, To Indirect workers 5, 3,

50 Activity Based Costing 5.92 Direct wages charged to batches 2, Recorded non-productive time of direct workers 5, Selling and distribution overheads incurred 6, Other Production Overheads Incurred 12, Sales 1,, Cost of Finished Goods Sold 8, Cost of Goods completed and transferred into finished goods during 65, the month Physical value of work in progress at the end of the month 4, The production overhead absorption rate is 15% of direct wages charged to work in progress Required: Prepare the following accounts for the month: (a) Stores Ledger Control Account. (b) Work in Progress Control Account. (c) Finished Goods Control Account. (d) Production Overhead Control Account. (e) Profit and Loss Account. Answer (a) Stores Ledger Control Account To Balance b/d 25, By Work in progress To Creditors (or bank) 75, Control A/c 3, By Production Overhead Control A/c 4, By Balance c/d 66, 1,, 1,, (b) Work-in Progress Control Account To Balance b/d 2, By Finished Goods 65, To Store Ledger Control A/c 3, Control A/c To Wages Control A/c 2, By Balance c/d 4,

51 5.93 Activity Based Costing To Production Overhead (Physical value) Control A/c 3, (15% of direct wages) To Profit & Loss A/c 5, (Stock Gains) 1,5, 1,5, (c) Finished Goods Control Account To Balance b/d 35, By Cost of Goods A/c 8, To Work in progress Control A/c 65, or By Profit & Loss A/c By Balance c/d 2, 1,, 1,, (d) Production Overhead Control Account To Balance b/d (Prepaid 3, By Work -in-progress amount) To Stores Ledger Control A/c 4, Control A/c 3, To Wages Control A/c (15% of direct wages) Direct Workers 5, Indirect Workers 5, 1, To Bank 12, To Profit & Loss A/c 1, (Over absorption, balancing figure) 3, 3, * Alternatively the over absorbed overhead may be carried forward. (e) Profit & Loss Account To Finished goods By Sales A/c 1,, Control A/c By Production Overhead

52 Activity Based Costing 5.94 or Control A/c 1, Cost of goods sold A/c 8, By Work -in-progress To Selling & Distribution 6, Control A/c (Stock 5, gain) Overheads A/c To Balance c/d 2, 1,6, 1,6, Notes (1) Materials transferred between batches will not affect the Control Accounts. (2) Non-production time of direct workers is a production overhead and therefore will not be charged to work in progress control A/c. (3) Production overheads absorbed in Work in Progress Control A/c will then equal 3, (15% of 2,). (4) In the Work in Progress Control A/c the excess physical value of stock is taken resulting in stock gain. Stock gain is transferred to Profit & Loss A/c. Question 2 On 31 st March, 1989 the following balances were extracted from the books of the Supreme Manufacturing Company. Dr. Cr. Stores Ledger Control A/c 35, Work in Progress Control A/c 38, Finished Goods Control A/c 25, Cost Ledger Control A/c 98, 98, 98, The following transactions took place in April 1989 Raw Materials Purchased 95, Returned to suppliers 3, Issued to production 98, Returned to stores 3,

53 5.95 Activity Based Costing Productive wages 4, Indirect labour 25, Factory overhead expenses incurred 5, Selling and Administrative expenses 4, Cost of finished goods transferred to warehouse 2,13, Cost of Goods sold 2,1, Sales 3,, Factory overheads are applied to production at 15% of direct wages, any under/over absorbed overhead being carried forward for adjustment in the subsequent months. All administrative and selling expenses are treated as period costs and charged off to the Profit and Loss Account of the month in which they are incurred. Show the following Accounts: (a) Cost Ledger Control A/c (b) Stores Ledger Control A/c (c) Work in Progress Control A/c (d) Finished goods stock control A/c (e) Factory overhead control A/c (f) Costing Profit and Loss A/c (g) Trial Balance as at 3 th April, 1989 (a) Dr. Answer Cost Ledger Control A/c To Costing Profit & 3,, By Balance b/d 98, Loss A/c (Sales) By Stores Ledger Control A/c 95, To Stores Ledger 3, By Wage Control A/c 65, Control A/c (Productive wages + Indirect wages) To Balance c/d 95, By Factory Overhead Control A/c 5, By Selling & Admn. Overhead Expenses 4, By Costing, Profit & Loss A/c 5, Cr.

54 Activity Based Costing ,98, 3,98, (b) Dr. Stores Ledger Control A/c To Balance b/d 35, By Cost Ledger Control A/c 3, To Cost Ledger Control A/c To Work in Progress Control A/c (c) Dr. To Balance b/d To Stores Ledger Control A/c 95, By Work in Progress Control A/c Cr. 98, 3, By Balance c/d 32, 1,33, 1,33, Work-in-Progress Control A/c 38, By Stores Ledger Control A/c Cr. 3, 98, By Finished Goods A/c 2,13, To Wages Control A/c 4, By Balance c/d 2, To Factory Overhead Control A/c (d) Dr. 6, 2,36, 2,36, Finished Goods Control A/c To Balance b/d 25, By Cost of goods sold A/c 2,1, To Work in Progress Co ntrol A/c Cr. 2,13, By Balance c/d 28,

55 5.97 Activity Based Costing 2,38, 2,38, (e) Dr. To Wage Control A/c Factory Overhead Control A/c 25, By Work in progress Control A/c Cr. 6, (Interest Labour) By Balance c/d 15, To Cost Ledger Control A/c 5, 75, 75, (f) Costing Profit and Loss A/c Dr. Cr. To Cost of goods sold A/c 2,1, By Cost Ledger Control A/c 3,, To Selling and Admn. 4, (Sales) Overhead A/c To Cost Ledger Control A/c 5, (Costing profit) 3,, 3,, (g) Trial Balance (as at 3 th April, 1989) Dr. Cr. To Stores Ledger Control A/c 32, To Work -in-progress Control A/c 2, To Finished Goods Control A/c 28, To Factory Overhead Control A/c 15, To Cost Ledger Control A/c 95, 95, 95, Working Notes : (1) Wage Control A/c