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Advanced Cost Accounting I Cag 101 Yashwantrao Chavan Maharashtra Open University - Compress PDF
Advanced Cost Accounting I Cag 101 Yashwantrao Chavan Maharashtra Open University - Compress PDF
Production
Shri. Anand Yadav
Manager, Print Production Centre
Y.C.M. Open University, Nashik - 422 222.
This book of self - instructional material is based on the syllabus for the
subject Advanced Cost Accounting (M.Com : ACG 101). This book is written
after taking into consideration the revised syllabus prescribed for the M.Com
students of Yashwantrao Chavan Maharashtra Open University, Nashik from June,
2015. We hope that the book will help the students in understanding the theory as
well as the practical part related to the topics included in the syllabus for the
subject.
The authors welcome any valuable suggestions made by the students and
teachers.
The authors and editors are greatful to the authorities of YCMOU guidence
and co-operation provided by them.
Editor Authors
TOPIC 1 Introduction to Cost Accounting
1.0 Introduction
NOTES
1.1 Unit Objectives
1.2.1 Cost
1.2.2 Costing
1.10 Summary
1.0 Introduction
Business enterprises all over the world are functioning in a highly competitive
environment with high degree of risk. They are required to function more efficiently
and more effectively to offer their products at comparatively lower prices. This is
necessary for achieving the objective of maximisation of profit. Amount of profit
earned depends upon the price of the product and the cost incurred for
manufacturing and selling of the product. Financial Accounting was not able to
help the management in obtaining information and using it for decision-making,
efficient management and for controlling cost. Therefore, a new branch of
accounting, viz. cost accounting come into existence. In this unit, information is
provided about some basic terms used in costing and necessity for cost Accounting.
Advanced Cost Accounting - I 1
Cost Concepts
1.1 Unit Objectives
After studying the information given in this unit, you should be able to
understand :
(i) ICMA London defines the term ‘Cost’ as, “the amount of expenditure
(actual or notional) incurred on or attributable to a specified thing or activity”.
(vii) W.M. Harper defines ‘Cost’ as, “the value of economic resources used
as a result of producing or doing the thing costed”.
(viii) According to Oxford Dictionary, “Cost is the price paid for something”.
Again the general concept of Cost which is most widely used is the money
cost of production. Another concept of Cost is the real cost according to Marshall.
Again Opportunity Cost concept is there. Opportunity Cost means the sacrifice
made for not utilising the other alternatives.
From the above definitions we can conclude that Cost is the total of all
expenses incurred, whether paid or outstanding, in the manufacturing and sale of
product or those incurred in giving a service. Costs are calculated from the point
of view of management which expects costs to perform three functions i.e. cost
computation, cost control and cost analysis. Thus, concept of Costs depends upon
the purpose for which it is used, the conditions under which it is employed and the
people who intend to use this concept. From the management point of view the
Cost may be direct, indirect, prime, conversion, joint, product, period, controllable,
out of pocket, imputed, differential, marginal, standard etc. In short, Cost is a
sacrifice made to achieve something and measured in terms of money and has
always been used with some specific objective. It depends upon many factors
and it changes with the changes in factors.
1.2.2 Costing :
Costing is simply cost finding. It is the process, technique and procedure of
ascertaining the costs. It includes all the principles, rules and regulations of
calculating the costs. The concept ‘Costing’ is defined in different ways by various
authorities as follows :
ii) Wheldon defines Cost Accounting as, “the classifying, recording and
appropriate allocation of expenditure for the determination of the costs of products
or services, the relation of these costs to sales values and the ascertainment of
profitability”.
iii) Van Sickle defines, “Cost Accounting is the science of recording and
presenting business transactions pertaining to the production of goods and services,
whereby these records become a method of measurement and means of control.”
ii) For Cost Presentation different forms and statements are prepared for
efficient reporting.
For Cost control purpose, setting up of standard and comparing them with
actual to find out variation, analysing the variances and taking up corrective actions
etc.
ii) It is an art because it is the ability and skill of the cost accountant to apply
the principles of cost accountancy to solve the intricate and complex
problems of the management.
iii) It is the practice because cost accountant has to keep his knowledge up-
to-date to the latest developments. He has to present the data to the
management in a most up-to-date manner with latest techniques and methods
for taking various decisions.
In the modern business world, business concerns need some methods and
ways by which they can measure their performance. Financial Accounting cannot
serve this purpose at all. The indications given by Profit and Loss Account and
Balance Sheet are generally inadequate. It is just like thermometer which only
indicates the temperature of human body. Judgements can be made only on the
basis of such thermometer and a good doctor will have number of other checks
made in order to see what the patient is suffering from. The profit shown by
Profit and Loss Account should not be taken as a sign of success because there
may be a loss on certain items which might have been compensated by the profit
of certain other items. Information regarding wastages and losses is very difficult
to get from Financial Accounting and therefore it is only Cost Accounting which
makes such information available to the management . Hence, Cost Accounting
has emerged mainly because of certain limitations of Accounting which are shown
in figure 1.2
ta
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4
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NOTES in rp 5
a ll
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Fai r o per c e appraisa
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No p
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ste
p ro v id e propersy
Does no t
Fails to analyse losses
Does not 8
provide p
Fai ro per basis
Fai ls to provid of cost co
mparison
Po l s t o e adequ
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Do bili p r ovi a te infor m 9
Fa es n ty of de ade ation
for rep
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to m nip te d
as ake ula ata
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r ta eo i gem
in fc n anc
br on ial ent
ea t ro acc
ke l tec oun
ve hn ts 11
n i q
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in s 12
t
13
14
3) It is static in nature :
In Financial Accounting, expenses are not classified into direct and indirect,
fixed and variable and controllable and uncontrollable. These classifications
have utility of their own. NOTES
Financial Accounting does not fully analyse the loss due to idle time, idle
plant capacities, inefficient labour , sub-standard material, etc.
Very often Financial Accounts are manipulated at the whim and fancies of
the management so as to project better image in the minds of prospective
investors. Financial Accounts may be manipulated by making under or
overvaluation of machinery, excessive or inadequate provisions for
depreciation, creation of secret reserves etc.
Financial Accounting does not help in ascertaining the break-even point. Advanced Cost Accounting - I 9
Cost Concepts i.e. the sale or output where the revenue equals the cost. Hence, the point
of no profit-no loss cannot be found out under financial accounts.
Ascertainment
Cost
of
Standards
Measuring
Efficiency
for
Con st
ation
of
st
ate
trol
Co
of Co
r
Pr epa
Estim
De Objectives of Cost Accounting
te
Re Co for e
ta id
of rmi
da pr ov
Se nat
on
du st
Pr llin ion
c ti
To
ice g
To t
pr q uention
bas ovide e
Fr para unt
is f
Ope o pre Accother
ra r of n d o r ts
Pol ting a epo
icy R
i) Ascertainment of cost :
Cost data to a great extent helps the management in formulating the policies
of a business and in decision-making. Hence, availability of cost data is a
must for all levels of management. Some of the decisions which are based
on cost data are; make or buy decision, manufacturing by mechanization or
automation, whether to close or continue operations inspite of losses, selling
below cost decision, introduction of new products etc.
Every concern relies upon the reports on cost data to know the level of
efficiency regarding purchase , production, sales and operation results.
Financial accounts provide information only at the end of the year because
value of closing stock is available at the end of the year. But cost accounts
provide the value of closing stock at frequent intervals by adopting,
“continuous stock verification “ system. Using the value of closing stock it
is possible to prepare final accounts and to know the operating results of
the business.
i) Helps in Decision-Making :
The important decisions which are influenced by, to a greater extent, the
cost reports, are :
d) Whether the joint and/or by-products are to be sold at split-off point or after
further processing;
Cost is one of the most important factor to be considered while fixing prices.
It assists management in fixation of selling price both in normal conditions
and for the period of depression. With the help of costing only, it is possible
to prepare estimates, tenders and quotations.
14 Advanced Cost Accounting - I
iv) It reveals Operating Efficiency : Cost Concepts
v) It facilitates Planning :
NOTES
It helps in the introduction of a cost reduction program and finding out new
and improved ways to reduce costs.
This way, Cost Accounting serves the company, Further, it may be noted
here that Cost Accounting serves, directly or indirectly, all the parties in one way
Advanced Cost Accounting - I 15
Cost Concepts or the other. Cost Accounting is primarily designed to serve the management in its
decision-making task which in turn will benefit the company and others. Indirectly,
workers, creditors, investors, customers, society and government are benefitted
by a god costing system.
NOTES
1.7 Limitations of Cost Accounting
Besides the various advantages of Cost Accounting system, it suffers from
certain limitations which are as follows :
i) Expensive :
Highly paid cost accountants and the organisation of costing system involves
additional expenditure. However, before installing it, care must be taken to
enure that the benefits derived are more than the investment made on this
system of accounting.
All business enterprises cannot make use of a single method and technique
of costing. It all depends upon the nature of the business and type of
product manufactured by it. If a wrong technique and method is used, it
misleads the result of the business.
v) Lack of Uniformity :
ix) Contorl aspect It does not make use of It makes use of some
any control techniques. It important control NOTES
does not control material techniques such as
and labour cost. Standard costing,
Marginal costing,
Budgetary Control etc.It
exercises control over
material cost by ABC
Analysis, level setting,
EOQ etc. and over
labour cost by minimizing
idle time, overtime etc.
x) Types of statements Financial Accounting Cost Accounting
prepared prepares general purpose generates special
statements like Profit purpose statements and
and Loss A/c and reports like Reports of
Balance Sheet. Loss of Materials, Idle
Time Reports, variance
Report etc.
xi) Pricing It fails to guide the It provides adequate data
formulation of pricing for formulating pricing
policy. policy.
xii) Valuation of Stock Stock is valued at cost Stock is always valued at
price or market price, cost price.
whichever is less.
xiii) Evaluation of Effi- The information provided The cost data helps in
ciency by Financial Accounts is evaluating the efficiency
not sufficient to evaluate of the business.
the efficiency of the
business.
xiv) Break-up of costs Costs are not broken up The costs are analysed
according to thier nature according to thier nature
and fuctions. and functions for further
analysis and control.
If unit is too large, significant cost trends may pass unnoticed, due to
averaging of cost. If the unit is too small, it may necessitate detailed and expensive
clerical work.
Costing means measuring the costs in relation to a unit. Hence, the unit of
measurement must be clearly defined and selected. This should be done before
ascertainment of costs. For Example, in a cement factory, the cost per tonne of
cement is found out, in a cloth mill, the cost per meter is ascertained in case of
machine, the cost per machine hour is found out etc. Thus, here tonne, meter and
machine hour become the cost units. Hence, we can say that a cost unit is nothing
but a unit of measurement of cost.
In case of a service unit, it is difficult to find out and decide a suitable cost
20 Advanced Cost Accounting - I unit. For example, in case of transport undertaking, the costs may be either related
to the distance travelled in kilometer, or the weight carried i.e. tones. While Cost Concepts
selecting proper cost unit for the transport both factors i.e distance and weight
should be considered. Hence, tonne kilometer or passenger kilometer will be a
proper unit.
Each industry has a different cost units, some of which are given below:
i) Automobile Number
ii) Bricks Thousand
iii) Cotton/Jute Bale
iv) Chemicals Litre, Gallen, K.G., Tonne
v) Electricity KWH
vi) Furniture Number
vii) Gas Cubic meter
viii) Hostel or Hospital Room per day or per bed
ix) Mines Tonne
x) Steel Tonne
xi) Shoes Pair
xii) Transport Tonne km/Passenger km
xiii) Utensils KG/Tonne
xiv) Cement Tonne
xv) Cable Meter or km
xvi) Fertilizer Tonne
xvii) TV/Radio/VCR Set
xviii) Building sq.ft. or sq. mtr.
xix) Nuts and Bolts Gross
xx) Sugar and Flour Mills Quintal
xxi) Timber Cubic foot
xxii) Water Supply Thousand Litres/ Gallon
Production
Cost
Process Centres Service
cost cost
centre centre
Types
of cost
Centres
Impersonal Personal
cost cost
centre Operating centre
cost
centre
A Service Cost Centre is one which provides services to the other cost
centers. Only non-manufacturing costs are charged to service cost centre.
Examples of service cost centre are canteen, machinery maintenance, office
service etc.
1.10 Summary
In order to understand the subject of Cost Accounting it is necessary to first
know the meaning and definitions of some basic terms used in the subject of Cost
Accounting. These terms include cost, costing, cost accounting and cost
accountancy, Cost means the amount of expenditure (actual or notional) incurred
on or attributable to a specified, thing or activity. Costing means finding the cost.
The techniques and processes used for calculation or ascertainment of cost related
to a product, order, job, contract, process or a service means costing. Cost
Accounting is the process of accounting for costs. It is a branch of accounting
and it is used for ascertainment, presentation and control of costs. Cost accounting
is the application of costing and cost accounting principles, methods and techniques
to the science, art and practice of cost control and the ascertainment of profitability.
It is presentation of cost information to the management in such a way that it
Advanced Cost Accounting - I 23
Cost Concepts helps the managements in decision taking.
The need for Cost Accounting was realised due to the limitations of financial
accounting. Cost accounting possesses certain advantages and it also has certain
limitations. Ascertainment of cost, control of cost, determination of selling price,
to provide a basis for operating policy, help in cost reduction, create standards for
NOTES
measurement of efficiency and preparation of cost estimates are the main
objectives of cost accounting. According to the nature of industry, the type of
product and the volume of production every, enterprise has to decide the cost unit
which is nothing but the quantity for which cost is to be calculated. Cost unit may
be number, weight, square feet or square meter, etc. Cost Centres are the sub-
units of the entire organisation and the sub-units may be sections, departments, a
machine or group of machines, a person or group of persons for which cost is
collected separately so that cost ascertainment and cost control become possible.
ii) Costing : Costing means finding out the cost incurred for a product, service,
job, process, contract or an operation.
iii) Cost Accounting : Cost Accounting is the process of accounting for costs.
It includes classifying, recording and appropriate allocation of expenditure
for determing the cost of a product, process, service, etc and to relate the
costs to sales revenue and finding out the profitability.
vi) Cost Centre : Cost Centre is a location, person or item of equipment (or
group of these) for which costs may be ascertained and used for the purposes
of control.
1.12 Questions
I) Select the most appropriate answer for the multiple choice questions
given below :
(i) The profession of the cost Accounting has gained importance when the
Government of India framed cost Accounting Record Rules, -----
24 Advanced Cost Accounting - I (a) 1956, (b) 1959, (c) 1965, (d) 1968
(ii) The cost journals and cost ledgers are recorded and maintained on the Cost Concepts
basis of -------
(a) single entry principle, (b) Cost Accounting Record Rules, (c) Cost
accounting standards, (d) double entry principle
(v) A cost which will still be incurred although a plant is closed down temporarily,
is termed as----cost,
[Answers : (i) - (d), (ii) - (d), (iii) - (c), (iv) - (a), (v) - (b), (vi) - (c).
8) What is ‘Cost Unit’? State the unit of cost used at least in five manufacturing
companies.
(1) Cost Accounting has been developed out of the limitations of ---------
Accounting.
(a) management
NOTES
(b) personal
(c) financial
(d) assets
(a) direct
(b) indirect
(c) essential
(d) secondary
(3) A cost ----------- is a sub unit of organisation for which costs may be collected
separately for cost ascertainment and control.
(a) accounting
(b) centre
(c) department
(d) section
2.0 Introduction
2.8 Summary
2.10 Questions
2.0 Introduction
After studying the information about cost concepts in the unit 1, in this unit
you will be studying information about elements of cost. There are three elements
of cost - material cost, labour cost and expenses. Each element of cost is divided
into direct and indirect and how these direct and indirect elements of cost are
decided and how classification of costs according to the different methods is
done is also explained in this Unit. Clear and proper understanding of costs
classification is important since cost collection and presentation of cost-data is
possible only when costs classification is fully understood.
NOTES
2.2 Elements of Cost
The costituent elements which build up the cost of a unit are materials,
labour, energy and equipments. These elements are broadly divided into three
major groups of materials, labour, and expenses. These three elements of cost or
cost factors could then be further classified in to direct and indirect categories.
The term ‘materials’ refer to all commodities supplied to an undertaking. Labour
is an essential factor of production. It is a human resource and participates in the
process of production. labour cost is a significant element of cost of a product or
service. All costs other than material costs other than material costs and labour
costs are termed as expenses. Direct expenditure is one which is identifiable as
belonging exclusively to a particular process .product, unitary service. Indirect
expenditure is one which , while still being part of the production ,is not incurred
exclusively for a particular part of the job and must , therefore, be spread over the
whole.
On the basis of the nature or elements of costs, costs may be classified into
three broad categories as material cost, labour cost and other expenses. Material
cost denotes the cost of raw materials consumed in the process of manufacturing
and marketing a commodity. Labour cost represents the wages, salaries, etc.
payable to the employees of a corporate entity. Expenses refer to the costs other
than material and labour costs ( but including notional costs of the use of owned
assets) of other services. provided and used in manufacturing and marketing the
goods and services of the company. Elementwise classification is important for
the purpose of ascertaining the costs of different elements of total cost of a product
manufactured or services generated. Further, it also helps to ascertain the relative
share and importance of each of the elements of total cost of goods and services.
Total Cost
NOTES
Elements
Selling and
Production Administration
Distribution
Thus, elements of cost are the different items or components of cost which
are added to get the total cost of any product or service. According to ICMA,
London, Elements of Cost means, “the primary classification of costs according
to the factors upon which expenditure is incurred viz. material cost, labour cost
and expenses”.
2.2.4 Expenses
All costs other than material and labour are termed as other expenses.
According to ICMA, London, Expenses is defined as, “the cost of services provided
to an undertaking and the notional cost of the use of owned assets”. Expenses
are divided into the following :
Direct Expenses include all types of expenses other than direct materials
and direct labour which are incurred specifically for a particular product or process.
It is defined as “expenses which can be identified with and allocated to cost
centres and cost units”. Direct expenses are also known as chargeable expenses.
Direct expenses form a part of the Prime Cost, e.g. chargeable expenses, Hire of
special plant, Royalties, Cost of patents and patterns, Engineer’s Fees, Cost of
special drawings, Designs and layouts, Architect’s fees, Direct expenses payable,
Surveyor’s fees, Productive expenses outstanding, Consultant’s fees, Process
expenses due but not paid, Prime cost expenses etc.
Distribution overheads are the expenses incurred in moving the goods from
the company’s godowns to the customers premises. It means that distribution
overhead starts with all indirect material, indirect wages and indirect expenses
incurred upto the point of packing the product for making available for despatch
and ends with making the re-conditioned returned empty packages and tins available
for reuse. The actual definition of distribution expenses is “the cost of the sequence
of operations, which begins with making the packed product available for despatch
and ends with making the re-conditioned returned empty package, if any available
for reuse”. Examples of distribution overheads are : warehouse rent and insurance,
salary of warehouse keeper and other cost of transportation of goods, insurance
of goods in transit, cost of maintenance of vehicles, loading expenses, carriage
outward, special packing expenses, cost of repairing and re-conditioned of empty
packages etc.
i) Financial Incomes :
Capital Losses, Cash Discount, Trade Discount, Penalties and Fines, Share
Transfer Fees Paid, Interest on Bank Loan, Interest on Debentures,
Preliminary Expenses, Underwriting Commission, Discount on Issue of
Shares and Debentures, Loss on Investments, Capital Expenses, Interest
on Capitals, Salary or Commission paid to Partners. Income Tax, Wealth
Tax, Interest on Debentures, Reconstruction Expenses, Development
Expenses.
iv) Abnormals :
NOTES
Abnormal Wastage, Abnormal Idle Time, Loss by fire, Loss by Theft, Loss
of Stock, Insurance Premium, etc.
i) Prime Cost :
This is the total of Direct material, Direct labour and Direct Expenses.
v) Selling Price =
Division of Costs
NOTES
Works on Cost
Direct Material or
Direct Labour Factory Overheads
(+) Add or
(+) Direct Expenses (+) Manufacturing Expenses
Add
(+)
Add
(+)
The need for cost classification arises having to use cost data for a variety
of purposes. For different purposes different kinds of cost informations are required.
Therefore, costs must be arranged and classified in such a manner that they can
be combined in different ways to serve different purposes. Generally, Cost
Classification is required for the attainment of the following purpose shown in
Figure 2.3
Current
Ascertainment
Application of
of Profits
Plans and
Periodically
Policies
(i)
(v)
Irrelevant
Relevancy
(10)
Relevant
Revenue
Investment
(9)
Pre-determined
Period
Capital
Association
Uncontrollable
(8)
Product
Historical
Time
(7)
Controllable
Abnormal
Fig. 2.4 : Classification of Costs
Normality
Cost classification
(6)
Normal
developments
Research and
Controllability
Semi-variable
(5)
Behaviour
distribution
Selling and
(4)
Variable
Indirect
Identifiability
(3)
Direct
Administration
Fixed
Functions
Expenses
(2)
Labour
Factory
Elements
Material
(1)
a) Materials :
The ICMA, London defines material cost as, “the cost of commodities,
other than fixed assets, introduced into products or consumed in the operation of NOTES
an organisation. Material cost may be either direct material cost or indirect material
cost.
Direct Material Cost is defined as “the cost of materials entering into and
becoming constituent element of a product or saleable service”. Thus, materials
which can be identified with the production of a product or which can be traced to
the finished product are known as direct materials. Examples of direct materials
are cotton in cotton textile, timber in furniture making industries, leather in shoe
making industries etc.
Indirect Material Cost has been defined as, “material cost other than
direct materials cost”. In other words, material cost which cannot be identified
with a product, job or process or traceable to the same, is known as indirect
material cost. Examples of indirect materials are consumable stores such as oil,
cotton waste, small tools, works stationery etc.
But in some cases, even direct materials which can be traced to the
product concerned may be treated as indirect materials because of time and
labour involved in ascertaining their cost for the purposes of a direct charges. For
example, thread, buttons, nails, gum, metal strips etc. which are used in production
are treated as indirect although they are direct in nature.
b) Labour :
Direct Labour Cost is defined as, “the cost of remuneration for employee’s
efforts and skills applied directly to a product or saleable service”.
Indirect Labour Cost is defined as, “labour cost other than direct labour
cost”. Thus, indirect labour is not directly engaged in the production operations,
but only to assist or help in production operations. Examples of indirect labour are
: salaries and wages paid to foreman, supervisors, chargeman, inspectors,
maintenance workers, clerical staff etc. working in production department, overtime
and night shift allowance paid and any other benefit paid.
c) Expenses :
2) Functions :
a) Factory Cost :
This is the cost which is incurred for the series of operations i.e. right from
the supply of materials, labour and expenses incurred till the completion of
production. Thus, materials, labour and expenses, both direct and indirect, constitute
production cost. Examples of manufacturing cost are : material, labour, factory
rent rates and taxes, depreciation on factory building and plant and machinery,
factory lighting and power , store keeping expenses, insurance of factory building
etc.
b) Administration Cost :
This is the cost running a concern i.e. for framing the policies, directing and
controlling all the activities of the organisation other than manufacturing and selling
distribution expenses. According to ICMA it defines as, “the sum of these costs
of general and management and of secretarial, accounting and administrative
services which cannot be directly related to production, marketing, research and
development function of the enterprise”. Examples of administration cost are :
Director’s fees and allowances, Salaries of office staff, Audit fees, Legal expenses,
Office rent and taxes, Office lighting , Expenses of secretarial and accounting
department, Postage and telegram, Printing and stationery etc.
Selling costs are those costs which are incurred for attracting the potential
customers and retaining the existing customers. Thus, demand is created in the
market through advertisement and publicity so that new orders can be secured.
Research cost is defined as, “the cost of seeking new or improved products,
applications of material or methods”. Development cost is defined as, “the cost of
process which begins with the implementation of the decision to produce or new
or improved methods and ends with the commencement of formal production of
that product or by that method. NOTES
3) Identifiability :
According to the identifiability with the cost units, jobs or processes the
costs are classified into direct and indirect. In costing, Direct and Indirect costs
have much significance.
a) Direct Cost :
All the costs which can be conveniently allocated to cost unit or cost centre
is known as direct cost. For example the cost of cotton in case of textile industries,
the cost of timber in furniture industries etc.
b) Indirect Cost :
Direct costs are those costs which are incurred for and may easily and
conveniently be identified with a particular cost unit or cost centre. Direct costs
include direct material cost, direct labour cost and other direct expenses. Indirect
costs, on the other hand, represent the costs which are of general nature and
which cannot easily and conveniently be identified with a particular cost unit or
cost centre.They include indirect material cost, indirect labour cost and other
indirect expenses. The indirect costs are therefore called Overhead expenses.
Advanced Cost Accounting - I 41
Elements of Cost These indirect or overhead expenses can further be divided into three sub-categories
as factory overhead expenses, administration overhead expenses, and selling and
distribution overhead expenses (on the basis of the functions). The Classification
of Costs on the basis of Traceability Elements and Functions is shown in figure
2.5.
NOTES
Direct material cost
Direct cost Elementwise
or classification Direct labour cost
Prime cost
Direct expenses
Classification On the
of basis of
costs traceability
Indirect Production
material
cost overhead
Indirect costs expenses
or Elementwise Indirect
Overhead classification labour Functional Administrative
Expenses cost classification overhead
expenses
Indirect
expenses Selling &
distribution
overhead
expenses
4) Behavior :
a) Fixed Cost :
ii) increase or decrease in per unit fixed cost when volume of production
changes.
iii) fixed costs can are apportioned to departments on some equitable basis.
iv) fixed cost can be controlled mostly by the top level management.
NOTES
Examples of fixed cost are, Rent, Rates, Taxes, Insurance of factory building,
Manager’s salary, Office staff salaries, Municipal taxes etc.
The following is the graph indicating the Behavior of fixed cost in figure 2.6.
Y
Cost ( ` )
0 Volume of Production X
(Units)
Fig. 2.6 : Behavior of Fixed Cost
b) Variable Costs :
The following is the graph indicating the Behavior of Variable Cost in Figure
2.7 Y
Cost ( ` )
st
e Co
bl
ria
l Va
ta
To
Variable Cost per unit
Thus, Variable Costs, in general , indicate the following characteristics. Advanced Cost Accounting - I 43
Elements of Cost i) They vary in direct proportion to volume of output or turnover.
Example of variable costs are : direct material cost , direct labour cost, direct
expenses, power, repairs, royalties, commission of salesman, normal spoilage etc.
Semi-variable Cost
Semi-variable Cost
Cost ( ` )
Cost ( ` )
A = Fixed Cost
B = Semi-variable cost
C= = Variable cost
0 Volume of Production (Units) X
Fig. 2.9 : Behaviour of Fixed, Variable and Semi-Variable Costs
44 Advanced Cost Accounting - I Examples of semi-variable costs are : Telephone charges, depreciation,
repairs and maintenance of plant and machinery, building, supervision, compensation Elements of Cost
for accidents, light and power etc.
5) Controllability :
On this basis costs are classified into two types viz. Controllable Costs and
Uncontrollable Costs.
NOTES
a) Controllable Costs :
b) Uncontrollable costs :
6) Normality :
Under this method, costs are classified according to whether these costs
are normally incurred at a given level of output in the condition in which that level
of activity is normally attained. On the basis costs are classified into Normal Cost
and Abnormal Cost.
a) Normal Cost :
b) Abnormal Cost :
7) Time :
On this basis costs are classified into Historical Cost and Predetermined
Cost.
a) Historical Cost :
It is defined as, “the costs which are ascertained after these have been
incurred”. Thus, such costs are available only when the production of a particular
Advanced Cost Accounting - I 45
Elements of Cost thing has already been done. Such costs are only of historical value and not useful
for cost control purposes. The characteristics of such costs are :
ii) these costs may be verified with the help of supported documents,
NOTES
iii) these are objectives in nature because they relate to the past events.
b) Pre-determined Cost :
8) Association :
On this basis costs are classified into Product Cost and Period Cost.
a) Product Costs :
It is described as the costs which are directly associated with the product.
Thus, unit product is sold, these costs provide no benefit. When the products are
sold, the total product costs are recovered as an expense. This expense is called
the cost goods sold. Examples of product costs are : Direct material, Direct labour
and Factory overheads.
b) Period Costs :
9) Basis of Investment :
On this basis costs are classified into Capital Cost and Revenue Cost.
a) Capital Costs :
b) Revenue Costs :
On the basis of whether the cost items are relevant or irrelevant to the
decisions under the consideration of the management, costs may broadly be
classified into two categories as relevant costs and irrelevant costs. Check Your Progress
2.8 Summary
There are three elements of cost - material, labour and expenses. Element
of material consists of all raw materials, components, semi-finished, and finished
parts which are used in manufacturing of products or for providing services required
by the customers. The second element of cost is labour cost and it is the amount
of wages, fees and remuneration paid to the employees working in the enterprise.
Labour is provided by the employees in the form of physical labour, intelligence,
and skills required to convert the materials into a finished product by heating,
mixing, cutting, moulding, and other processes used for production. The third
element of cost is expenses and it includes all expenditure incurred - actual or
notional - excluding material cost and labour cost.
Each element of cost is divided in two parts - direct and indirect. So there is
direct material cost and indirect material cost, direct labour cost and indirect labour
cost and direct expenses and indirect expenses. When material, labour and
expenses can be easily related to the product manufactured and they form a
major or substantial part of the total cost of a product, they are recorded as ‘direct’,
Advanced Cost Accounting - I 47
Elements of Cost while when they form an insignificant portion of the total cost of a product and
relationship between them and the finished product cannot be easily established,
they are regarded as the ‘indirect’ materials, labour and expenses.
ii) Prime Cost : Aggregate of Direct Material Cost, Direct Labour Cost and
Direct Expensess.
iii) Factory Cost / Works Cost : Prime Cost plus Manufacturing / Factory /
Works Overheads.
iv) Cost of Production / Office Cost / Gross Cost : Factory Cost plus
Office overheads / Administration overheads / General Overheads.
vi) Selling Price / Sales : Cost of Sales plus Profit / minus Loss.
2.10 Questions
(I) Select the most appropriate answer for the following multiple choice
questions
(a) Direct
(b) Indirect
(c) Prime
(d) Essential
(a) direct
(b) fixed
(c) variable
48 Advanced Cost Accounting - I (d) indirect
(iii) Carriage on purchases is a part of direct ----cost. Elements of Cost
(a) labour
(b) material
(c) overhead
NOTES
(d) normal
Group I Group II
1) What is ‘cost’? State the various elements of cost with suitable examples.
4) “Fixed costs are variable per units while variable costs are fixed per unit”.
Comment.
ii) ‘Cost Accounting’ - Jawahar Lal - Publisher : Total Mc Graw Hill Publishing
Co. Ltd., New Delhi.
3.0 Introduction
3.4 Illustrations
3.7 Summary
3.0 Introduction
Cost information becomes useful only when it is arranged and presented to
the management in a systematic manner which can be grasped by the management
easily and in a very short time. Then only persons doing the management can use
it for cost controlling and for taking decisions. Cost sheet is the first such statement
which is prepared to give step-by-step information about costs incurred by the
enterprise for a certain period. In this Unit information is provided related to
preparation of a cost sheet and based on its information, how a quotation is
prepared.
A cost sheet not only shows the total cost but also the various components
of total cost. Total cost is the total cost incurred on various elements for
manufacturing and selling a product or total cost incurred for production and sale
of a certain quantity of a product or for completion of a job, order or process. A
cost sheet serves the following purposes :
i) It discloses the cost per unit as well as the total cost of output.
iv) It helps management to find out the causes of variations and take steps to
eliminate or control the factors which are responsible for increasing total
cost. It becomes possible by making comparative study of the current costs
with the past results and standard costs.
v) It enables manufacturer to keep a close watch and control over the cost of
production.
A cost sheet, including sale and profit is also known as Production Account.
Like expanded form of cost sheet, the Production Account consists of two parts.
The first part shows the cost of production in total and break-up costs and the
second part known as the ‘Statement of Profit’ shows sales and profit.
e.g.
Viz. Direct Labour Cost, Prime Cost Labour, Direct Wages, Process
Labour, Operating Labour, Basic Labour, Productive Labour
e.g. Productive Wages, Wages paid to direct workers, Outstanding
Wages, etc.
viz. Direct Cost, Basic Cost, Operating Cost, First Cost, Productive
Cost, Flat Cost.
Viz. Cost of Sales, Cost Price, Cost of Turnover, Sales Cost, Turnover i) How Prime Cost is
Cost, Net Cost. Calculated while preparing
Cost Sheet ?
(P) Profit : ii) Mention the major cost
heads shown in Cost Sheet.
3.4 Illustrations
ILLUSTRATION 1
Working Notes :
(i) Trade Discount and Donations for Educational Fund are the items to be
58 Advanced Cost Accounting - I excluded from cost.
ILLUSTRATION 2 Cost Sheet & Quotations
(a) Prime Cost, (b) Works Cost, (c) Cost of Production, (d) Cost of Sales,
(e) Profit or Loss for the period, for six months ended 31-3-2012
NOTES
`
Cost of Materials Consumed 40,000
Oil and Waste 100
Operating Labour 9,000
Wages of Foreman 1,000
Direct Expenses 2,000
Store keepers Wages 500
Sales - Cash and Credit 1,00,000
Commission paid to the partner, Mr.Chandmal 350
Electric Power 200
Salary paid to the partner, Mr. Rajmal 650
Consumable Stores 1,000
Direct Wages Payable 1,000
Lighting :
(i) Factory Plant 500
(ii) Office Establishment 200
Carriage Outward 150
Rent :
(i) Administrative Office 1,000
(ii) Workshop 2,000
Warehouse Charges 200
Repairs and Renewals :
(i) Factory Plant 500
(ii) Machinery 1,000
(iii) Office Premises 200
(iv) Warehouse 100
Interest on Bank Overdraft 340
Advertising 400
Depreciation :
(i) Office Buildings 500
(ii) Machinery 200
Travelling Expenses 200
Office Manager’s Salary 2,250
Salesmen’s Commission and Salaries 500
Director’s Fees 500
Printing and Stationery 200
Telephone Charges 50
Postage 100
Bad Debts 450
Working Notes :
(1) Commission paid to the partner Mr. Chandmal, salary paid to the partner
Mr. Rajmal and Interest on Bank Overdraft are the items to be excluded
from cost.
ILLUSTRATION 3
Royalties 1,000
Materials used in Production -Direct 12,000
Carriage on Sales 1,250
Materials used in Primary Packing 9,000
Carriage on Purchases 5,000
Materials used in Secondary Packing 1,500
Bad Debts 3,250
Materials used in Factory Workshop 750
Coal and Coke 1,750
Materials used in Administrative Office 1,250
Administration on Cost 750
Labour required in Manufacturing-Direct 9,500
General Overheads 1,000
Purchases of Raw Materials 44,000
Labour required for Works Supervision 2,500
Motive Power 1,000
Productive Wages Payable 500
Chargeable Expenses 4,000
NOTES
Particulars Amount Amount
` `
Direct Materials : 70,000
(i) Materials used in Production- Direct 12,000
(ii) Materials used in Primary Packing 9,000
(iii) Purchases of Raw Materials 44,000
(iv) Carriage on Purchases (+) 5,000
Add : Direct Labour : (+) 10,000
(i) Labour required inManufacturing-Direct 9,500
(ii) Productive Wages Payable (+) 500
Add : Direct Expenses : (+) 5,000
(i) Royalties 1,000
(ii) Chargeable Expenses (+) 4,000
Prime Cost (1) 85,000 85,000
Add : Factory Overheads : 6,000
(i) Materials used in Factory Workshop 750
(ii) Coal and Coke 1,750
(iii) Labour required for Works Supervision 2,500
(iv) Motive Power (+) 1,000
(+)
Factory Cost (2) 91,000 91,000
Add : Office Overheads :
(i) Materials used in Administrative Office 1,250
(ii) Administration on Cost 750
(iii) General Overheads (+) 1,000
(+)
Cost of Production (3) 94,000
Add : Selling and Distribution Overheads 6,000
(i) Carriage on Sales 1,250
(ii) Materials used in Secondary Packing 1,500
(iii) Bad Debts (+) 3,250
(+)
Total Cost (4) 1,00,000 1,00,000
Add : Profit (5) 25,000 25,000
(20% on Selling Price) (+)
62 Advanced Cost Accounting - I Invoice Price 1,25,000 1,25,000
Working Notes : Cost Sheet & Quotations
Additional Information :
Allocate Management on Cost on the basis of Works Cost and Selling and
Distribution Overheads on the basis of Actual Sales.
You are required to prepare a Simple Cost Statement showing the following
in case of each of the product in the columnar form.
Working Notes :
(2) Allocation of Selling and Distribution Overheads (i.e. Selling and Distribution
Expenses) on the basis of Actual Sales (i.e. Value of Turnover).
Particulars Cots Tables Chairs Cupboards
Value of Turnover ` 1,50,000 1,20,000 2,00,000 1,30,000
Ratio 15 12 20 13
Allocation of Selling and
Distribution Expenses
ILLUSTRATION 6
(a) Cost of Materials Consumed, (b) Prime Cost, (c) Works Cost,
(d) Cost of Production (e) Total Cost, (f) Net Profit and (g) Market Price.
`
Purchases of Materials-Cash 4,000
Establishment Overheads : 20% of Factory Cost
Wages Payable 800
Purchases of Materials-Credit 12,000
Works Overheads : 80% of Direct Wages
Cost of Special Designs 850
Clearing charges on Purchases 1,200
Productive Wages 3,200
Selling on Cost : ` 4 per unit sold
Chargeable Expenses Payable 150
Defective Materials Retuned 400
Distribution Overheads : ` 1 per unit dispatched
Trade Discount 785
During the month of April, 2012 units sold and dispatched were 1,300 units
only. Also find out the market price per unit on the basis that profit mark-up is
uniformly made to yield a profit of 4% on Cost of Sales.
ILLUSTRATION 7
The following data have been extracted from the books of M/s Sunshine
Industries Ltd., Sholapur, for the calender year 2011-2012
`
Opening Stock of Process Materials 25,000
Wages - Direct 70,000
Rent and Taxes 5,500
(Factory -10/11, Office - 1/11)
Freight on purchases of Raw Materials 5,000
Indirect Materials 500
Sales Promotion 2,000
Purchases of Raw Materials 85,000
Interest on Debentures 5,200
Depreciation :
(i) Plant and Machinery 1,500
(ii) Office Equipments 1,000
Closing Stock of Process Materials 35,000
Wages - Indirect 10,000
Cost of Designs and Drawings 12,000
Salaries :
(i) Office Staff 2,500
(ii) Travelling Salesmen 2,000
Productive Expenses 3,000
Defective materials returned -Process Material 5,000
Other Works on Cost 5,700
Office Overheads 4,900
Manager’s Remuneration :
(i) Works 2,300
Advanced Cost Accounting - I 69
Cost Sheet & Quotations (ii) Office 6,100
Productive Wages due but not paid 5,000
Irrecoverable Debts 1,000
Sales 2,50,000
Prepare a Statement of Cost showing profits earned during the year 2011-2012.
SOLUTION
Working Notes :
(1) Interest on Debentures, Advance payment of Income-Tax etc. are the items
to be excluded from cost.
ILLUSTRATION 8
The accounts of Dorabjee Manufacturers, Deolali for the year ended 31-3-
2012 show the following.
`
Stock of Raw Materials as on 1-4-2011 67,200
Bad Debts written-off 9,100
Raw Materials Purchased 2,59,000
Motive Power 320
Traveller’s Commission 10,780
Depreciation on Office Equipments 420
Carriage Inwards 720
Interest on Bank Loan 380
Factory Taxes 11,900
Productive Wages 1,76,400
Directors Travelling Expenses 8,400
Coal and Coke 560
General Overheads 4,760
Advanced Cost Accounting - I 71
Gas and Water - Factory 1,680
Packing Charges 940
Sales of Finished Goods 6,00,000
Manager’s Salary 15,000
(Factory - 2/3, Office - 1/3)
Delivery Van Expenses 4,060
Depreciation on Factory Building 18,200
Publicity Charges 2,000
Repairs to Plant 6,340
Carriage Outward 7,120
Hire Charges of Special Machinery 9,010
Office Rent 2,800
Surveyor’s Fees 590
Legal Charges 620
Stock of Raw Materials as on 31-3-2012 87,920
Prepare a Cost-Statement giving the following details for the year ended
31-3-2012
SOLUTION
In the books of Dorabjee Manufacturers, Deolali
Cost-Statement for the year ended 31-3-2012
Working Notes :
ILLUSTRATION 9
Following details have been obtained from the cost records of Colgate Ltd.,
Kolkata for the year ended 31-3-2012
`
Stock of Operating Materials as on 1-4-2011 30,000
Wages paid to Direct Workers 55,000
Interim Dividend paid 12,000
Purchases of Raw Materials 87,000
Heating and Lighting 6,000
Counting House Salaries 20,000
Carriage and Cartage on Purchases of Raw
Materials 3,000
Commission on Sales 5,000
Wages Payable 5,000
Technical Director’s Fees 10,000
Stock of Operating Material as on 31-3-2012 40,000 Advanced Cost Accounting - I 73
Cost Sheet & Quotations Show-Room Expenses 7,000
Establishment on Cost 12,000
Share Transfer Fees 2,000
Expenses of Testing Labs. 4,000
Branch Office Expenses 8,000
After-Sales Service Expenses 8,000
NOTES
Selling Price 2,50,000
SOLUTION
In the books of Colgate Ltd. Kolkata
Cost-Sheet for the year ended 31-3-2012
Working Notes :
The Following is the Trading and Profit and Loss Account of Sarabhai
Chemicals Ltd. Surat, for the year ended 31-3-2012
Dr. Trading and Profit and Loss Account Cr.
NOTES for the year ended 31st March, 2012
Particulars ` Particulars `
You are required to prepare a Cost Statement for the year ended 31-3-2012
showing
(1) Cost of Materials Consumed, (2) Flat Cost, (3) Manufacturing Cost,
(4) Gross Cost, (5) Cost of Turnover, (6) Profits for the year.
` ` NOTES
Stock of Raw Materials on 1-4-2011 18,000
Add :Purchases of Raw Materials (+) 2,52,000
Add :Expenses on Purchases of Raw Materials :
(i) Carriage on Purchases (+) 25,000
(ii) Custom and Duty (+) 8,000
3,03,000
Less: Stock of Raw Materials on 31-3-2012 (-) 10,000
Less: Returns Outward (-) 2,000
Less: Sale of Scrap Materials (-) 1,000
Cost of Materials Consumed (1) 2,90,000 2,90,000
Add :Direct Labour : 1,10,000
(i) Productive Wages (+) 1,02,000
(ii) Wages Outstanding (+) 8,000
Add :Direct Expenses : 10,000
(i) Royalty 7,200
(ii) Chargeable Expenses due but not paid (+) 2,800
Flat Cost (2) 4,10,000 4,10,000
Add : Factory Overheads : 30,000
(i) Gas and Water 19,000
(ii) Heating and Lighting (+) 11,000
Manufacturing Cost (3) 4,40,000 4,40,000
Add : Office Overheads : 20,000
(i) Salaries 16,000
(ii) Property Tax on Office Premises 2,000
(iii) Depreciation on Office Furniture (+) 2,000
Gross Cost (4) 4,60,000 4,60,000
Add : Selling and Distribution Overheads : 15,000
(i) Carriage on Sales 5,000
(ii) Commission on Sales 7,600
(iii) Sales Depot Expenses (+) 2,400
Cost of Turnover (5) 4,75,000 4,75,000
Add : Profits for the year (6) (+) 25,000 25,000
Sales 5,00,000 5,00,000
ILLUSTRATION 11
The cost accounts of Eagle Ltd. Allahbad, for the year ended 31-3-2012
showed the following information.
Types of Stock As on 1-4-2011 As on 31-3-2012
` `
Raw Materials 65,000 50,000
Work-in-Progress 10,000 7,500
Finished Stock 15,000 5,000
`
Underwriting Commission 10,000
Purchases of Raw Materials 2,60,000
Selling Overheads 8,000
Drawing Office Salaries 12,000
Productive Labour 1,65,000
Audit Fees 7,000
Establishment on Cost 2,000
Steam, Gas and Water 1,500
Sales 5,50,000
Rent 15,000
(Factory -66 2/3 %, Office - 33 1/3%)
Architect’s Fees 10,000
Wages Outstanding 5,000
Octroi and Duty 5,000
Distribution on Cost 2,000
Prepare a Cost-Sheet showing
(a) Cost of Materials Consumed, (b) Basic Cost, (c) Works Cost,
(d) Cost of Production, (e) Cost of Turnover, (f) Profit.
78 Advanced Cost Accounting - I
SOLUTION Cost Sheet & Quotations
Working Notes :
`
NOTES
Opening Stock as on 1-4-2011
Advertising, Bad Debts and Selling on Cost amounted to 50 paise per ton
sold. 16,000 tons of commodities were produced during the year 2011-2012.
(1) Cost of Materials Consumed, (2) Prime Cost, (3) Works Cost, (4) Cost
of Production, (5) Cost of Goods Sold, (6) Cost of Sales, (7) Profits for the period,
(8) Profits per ton of commodity sold.
(3) Income Tax, Preliminary Expenses etc. are the items to be excluded from
Cost.
ILLUSTRATION 13
The following information has been obtained from the records of Quality
Manufacturing co. Ltd., Bharatpur, for the year ended 31-3-2012
Additional Information `
Purchases of Raw Materials 1,30,000
Wages Outstanding 3,000
Indirect Materials 12,000
Discount on issue of Debentures 8,000
Freight Inward 15,000
Property Tax on Factory Building 8,000
Director’s Travelling Expenses 8,000
Carriage on Sales 5,000
Defective Raw Materials Returned 5,000
Direct Chargeable Expenses 2,000
Workshop Rent 7,000
Expenses for participating in Industrial Exhibition 3,000
Value of Sales 3,00,000
82 Advanced Cost Accounting - I Office Cleaning Charges 2,000
Sales Promotion Charges 6,000 Cost Sheet & Quotations
Miscellaneous Overheads 7,000
Upkeep of Delivery Vans 1,000
Motive Power 5,000
Productive Wages 60,000
Postage and Telegrams 3,000
Prepare a Statement of Cost showing : NOTES
(1) Value of Raw Materials Consumed, (2) Direct Cost, (3) Manufacturing Cost,
(4) Cost of Production, (5) Cost of Goods Sold, (6) Cost of Turnover, (7) Profit.
Also calculate the percentage of Profit on Cost Price and on Selling Price
separately.
SOLUTION
In the books of Quality Manufacturers Ltd., Bharatpur
Statement of Cost for the year ended 31-3-2012
If ` . 2,40,000 CP = ` 60,000 P
100 = ?
100 X ` 60,000
=
` 2,40,000
= 25%
(2) Calculation of percentage of Profit on Sales.
If ` . 3,00,000 SP = ` 60,000 P
100 = ?
100 X ` 60,000
=
` 3,00,000
= 20%
(3) Discount on issue of Debentures is an item to be excluded from cost.
ILLUSTRATION 14
Jindal Cables and Conductors Ltd. Jalgaon, provides the following cost data
relating to the manufacture of a standard product during the month of May, 2012
`
Carriage and Cartage 200
Units Sold -900 units @ ` 40 per unit
Raw Materials Stock as on 31st May, 2012 2,850
Monthly Production- 1,000 units
Sale of Raw Materials scrap 150
Selling and Distribution on Cost : ` 3.60 per unit
Operating Wages Payable 600
Operation of Machine Hours - 1,600
Stock of Raw Materials as on 1st May, 2012 1,200
84 Advanced Cost Accounting - I Administration Overheads: 10% of Works Cost
Hire of Special Machinery 1,500 Cost Sheet & Quotations
You are required to prepare a Cost-Sheet showing Total Cost Unit and NOTES
Cost for the month ended 31st May, 2012. Also calculate Profit earned for the
month and Profit per unit sold.
SOLUTION
In the books of Jindal Cables and Conductors Ltd. Jalgaon
Cost-Sheet for the month ended 31st May, 2012
Units Produced - 1,000 units
Units Sold - 900 units
Particulars Total Cost Unit Cost
` `
Stock of Raw materials as on 1-5-2012 1,200
Add : Raw Materials Purchases 14,600
Add : Carriage and Cartage (+) 200
16,000
Less : Raw Materials-Stock as on 31-5-2012 (-) 2,850
Less : Sale of Raw Materials Scrap (-) 150
Cost of Materials Consumed (1) 13,000 13.00
Add : Direct Labour : 5,000 5.00
(i) Operating Wages Payable 600
(ii) Productive Wages (+) 4,400
Add : Direct Expenses : 2,000 2.00
(i) Hire of Special Machinery 1,500
(ii) Cost of Layout (+) 500
(+)
Prime Cost (2) 20,000 20.00
Add : Factory Overheads : (+) 4,000 4.00
Works Cost (3) 24,000 24.00
Add : Administration Overheads : (+) 2,400 2.40
Cost of Production (4) 26,400 26.40
Add: Stock of Finished Goods on 1-5-2012 (+) -
Less : Stock of Finished Goods on 31-5-2012 (-) 2,640 -
Cost of Goods sold (5) 23,760
Add : Selling and Distribution on Cost
(900 Units x ` 3.60) (+) 3,240 3.60
Total Cost (6) 27,000 30.00
Add : Profits for the month (7) (+) 9,000 10.00
Sales (900 Units x ` 40) 36,000 40.00
Advanced Cost Accounting - I 85
Cost Sheet & Quotations Working Notes :
(1) Special Trade Discount, Preliminary Expenses etc. are the items to be
excluded from cost.
In order to obtain the order, the manufacturing concern has to prepare the
quotation in a proper way and the price mentioned in it should be a competitive
price. While preparing a quotation, the concern has to take into consideration
many factors such as the nature of work involved, the volume of work to be
completed and the type, quality and quantity of materials which will have to be
used and also the type of labour, number of workers whose services will have to
be used and labour cost to be incurred according to the rates of wages applicable
to the workers. For calculation of amount of overheads, the concern relies upon
the information about overheads available from cost sheet prepared for the previous
period. The overheads to be incurred are calculated by considering thier relations
with certain item appearing in the cost sheet. Once the total cost or cost of
88 Advanced Cost Accounting - I production is estimated for the work to be performed, the concern adds to it the
profit amount desired by it and the price to be quoted is finalized. Cost Sheet & Quotations
For preparation of quotation for a specific job direct materials cost, direct
labour cost and direct expenses, if any, are first determined and total of these
amounts is taken as a prime cost of the job for which the quotation is being
prepared. To the prime cost amount of Factory Overheads is added. Factory
Overheads are estimated as a certain percentage of direct labour cost and this NOTES
percentage is decided on the basis of direct labour cost and factory overheads
from the cost sheet of the previous cost sheet. When the estimated amount of the
factory overheads is added to the prime cost, the estimated amount of ‘Factory
Cost’ of the proposed job becomes available. To the factory cost amount the Check Your Progress
estimated office and administration overheads is added. Estimation of the office
i) What is meant by
and administration overheads is generally done as a percentage of office and Quotation ? Why it is
prepared ?
administration overheads to the factory cost of the previous period cost sheet.
ii) Enumerate the process of
After adding the estimated amount of office and administration overheads to the preparation of quotation.
factory cost the amount of cost of production of the proposed job becomes known.
Amount of desired profit (which may be a certain percentage of the estimated
cost of production or a certain percentage of the quotation price of the job) is
added to the estimated cost of production and the total so obtained is shown as the
price to be quoted to the customer who has invited the quotations for the job.
`
Direct Materials Consumed 4,80,000
Direct Wages 6,00,000
Direct Expenses 20,000
Office & Administration Overheads 50,000
Factory Overheads 1,50,000
Selling Overheads 1,45,000
Sales 17,80,000
The company intends to submit a quotation for supplying a machinery in the
month of May, 2014. The Costing Department of the Company has estimated that
materials costing ` 35,000, direct wages of ` 50,000 and direct expenses amounting
to ` 5,000 will be needed for the machinery. Factory Overheads as a percentage
of direct wages and Office Overheads as a percentage of Factory cost is to be
charged using the costs as a basis as appearing in the cost sheet for the period
ending on 31st March, 2014. The company desires to earn a profit of 25% on the
cost of production from the Quotation.
SOLUTION
Modern Manufacturing Company
Cost Sheet
For 3 months ending 31st March, 2014
`
Direct Materials Consumed 4,80,000
Add: Direct Wages 6,00,000
Add: Direct Expenses 20,000
Prime Cost 11,00,000
Add: Factory Overheads 1,50,000
Factory Cost 12,50,000
Add: Office & Administration Overheads 50,000
Cost of Production 13,00,000
Add: Selling Overheads 1,45,000
Total Cost 14,45,000
Add: Profit for the period 3,35,000
Sales 17,80,000
`
Direct Materials Cost 35,000
Add: Direct Wages 50, 000
Add: Direct Expenses 5,000
Prime Cost 90,000
NOTES
Add: Factory Overheads 12,500
(at 25% on Direct Wages)
Factory Cost 1,02,500
Add: Office & Administration Overheads 4,100
(at 4% on Factory Cost)
Cost of Production 1,06,600
Add: Profit 26,650
(at 25% on Cost of Production)
Price to be quoted for the machinery 1,33,250
Working Notes :
i) Calculation of % of Factory Overheads to Direct Wages :
Direct Wages ` 6,00,000 = Factory O.H. ` 1,50,000
Direct Wages 100 = Factory O.H.
1,50,000 X 100
=
6,00,000
= 25%
In the Quotation Direct Wages are estimated as ` 50,000
Factory Overheads are :
50,000 x 25
= ` 12,500
100
ii) Calculation of % of Office & Adm. O.H. to Factory Cost :
Stock on 30-6-2013 :
SOLUTION
Cost sheet of -------------
For the period of six months ending 30-6-2013
` `
Stock of Materials on 1-1-2013 32,000
Add: Purchase of Materials 2,08,000
2,40,000
Less: Stock of Materials on 30-6-2013 30,000
Cost of Materials Consumed 2,10,000
Add: Direct Wages 1,50,000
Prime Cost 3,60,000
Add: Works Overheads 45,000
Works Cost 4,05,000
Add: Office Overheads 40,500
Cost of Production 4,45,500
Add: Stock of Finished Good on 1-1-2013 34,500
4,80,000
Less: Stock of Finished Goods on 30-6-2013 48,000
4,32,000
92 Advanced Cost Accounting - I
Add: Selling Overheads 55,000 Cost Sheet & Quotations
Total Cost 4,87,000
Add: Profit 95,000
Sales 5,82,000
Calculation of Percentages :
NOTES
i) % of works overheads to Direct Wages :
Working Note :
Tender Price is taken as 100. Profit is 20% on Tender Price. So, Tender Price
` 100 - Profit ` 20 = ` 80 which is Cost of Production.
ii) Prime Cost : Direct Material Cost + Direct Labour Cost + Direct
Expenses.
4. What do you mean by Cost Sheet ? What are the purposes of a Cost
Sheet ?
2. M/s Strong and Weak Co., Matunga manufacture plastic buckets and
furnishes you the following particulars. You are required to prepare a Cost
Sheet for the year ended 31-12-2014, showing therein the Prime Cost, Works
Cost, Cost of Production and Cost of Sales alongwith Cost per unit and
percentage of each element of cost to total cost.
(i) Prime Cost, (ii) Factory Cost, (iii) Total Cost of Production and (iv) Cost
of Sales for the period ended 30.6.2014.
`
Raw materials 50,000
Wages paid to workers 20,000
Direct expenses incurred for production 2,500
Consumable stores 500
Supervisor’s wages 2,000
Wages paid to floor helper 600
Electric power (Factory) 800
Electric power (Office) 500
Rent (Factory) 5,000
Rent (Office) 2,000
Repairs and Renewals on :
Plant and Machinery 5,000
Renovation of Office Building 1,000
Depreciation on Plant and Machinery 500
Depreciation on Office Building 200
Manager’s salary 3,000
Telephone charges 200
96 Advanced Cost Accounting - I
Printing and Stationery 400 Cost Sheet & Quotations
Postage and Telegrams 150
Director’s Fees 800
Advertisement 800
Travelling expenses 300
Salesmen’s salary and commission 1,000
Warehouse rent 900 NOTES
Delivery van expenses 1,000
4. M/s Favourite Industries Ltd. Faizabad produce auto parts. From the following
particulars prepare Cost Sheet for the period ended 31st December, 2014.
`
Opening Stock of raw materials 20,000
Raw materials purchased 70,000
Closing stock of raw materials 15,000
Direct Labour Cost (20% of Factory on Cost)
Factory on Cost 30,000
Administrative Overheads (10% of Works Cost)
Selling and Distribution Expenses 10,000
Details of the finished goods are as follows :
Opening stock of finished goods 2,000 units 25,000
Finished goods produced during the period 20,000 units
Closing stock of finished goods 4,000 units
You are required to find out the profit made during the year @ 10% on the
Selling Price.
Note : (i) There was no balance of opening or closing stock of work-in-progress.
(ii) Show the working of profit ascertained.
5. The accounts of Via Manufacturing Co., Nashik for the year ended 31st
December, 2014 shows the following :
`
Drawing Office Salaries 6,500
Counting-House Salaries 12,600
Cash-Discount Allowed 2,900
Carriage and Cartage Outwards 4,300
Carriage and Cartage Inwards 7,150
Bad debts written off 6,500
Repairs of Plant, Machinery and Tools 4,450
Rent, Rates, Taxes and Insurance-Factory 8,500
Rent, Rates, Taxes and Insurance- Office 2,000
Sales 4,61,100
Stock of Materials - 31st December 2014 62,800
Stock of Materials - 31st December 2013 48,000
Materials Purchased 1,85,000
Travelling Expenses 2,100
Traveller’s Salaries and Commission 7,700
Productive Wages 1,26,000
Depreciation - Plant, Machinery and Tools 6,500
Advanced Cost Accounting - I 97
Cost Sheet & Quotations Depreciation-Furniture 300
Director’s Fees 6,000
Gas, and Water-Factory 1,200
Gas, and Water-Office 400
Manager’s Salary (3/4 Factory and 1/4 Office) 10,000
NOTES General Expenses 3,400
Income-Tax 1,000
Dividend 2,000
Prepare a statement giving the following information :
(i) Materials consumed; (ii) Prime cost; (iii) Factory on cost and the
percentage on wages; (iv) Factory cost; (v) Genral on cost and percentage
on Factory cost; (vi) Total Cost; (vii) Net profit.
Also find our the selling price per unit on the basis that profit mark up is
uniformly made to yield a profit of 20% of the selling price.There were no
work-in-progress either at the beginning or at the end of the period.
7. The following details have been obtained from the cost records of
Cement India Ltd., Chennai for one month.
Stock of raw materials on 1st April 2014 75,000
th
Stock of raw materials on 30 April 2014 91,500
Direct wages 52,500
Indirect wages 2,750
Sales 2,11,000
st
Work-in-progress 1 April, 2014 28,000
Work-in-progress 30th April, 2014 35,000
Purchases of raw material 66,000
Factory rent, rate, power 15,000
98 Advanced Cost Accounting - I Depreciation on Plant and Machinery 3,500
Expenses on Purchase 1,500 Cost Sheet & Quotations
Carriage outward 2,500
Advertising 3,500
Office rent and taxes 2,500
Travellers wages and commission 6,500
Stock of finished goods 1st April 2014 54,000
Stock of finished goods 30th April 2014 31,000 NOTES
th
prepare Cost-Sheet for the month ended 30 April 2014.
8. Following information has been obtained from the records of Quality
Manufacturing Co., Bandra.
1-1-2014 31-12-2014
` `
Stock of Raw Materials 40,000 50,000
Stock of Finished Goods 1,00,000 1,50,000
Stock of Work-in-progress 10,000 14,000
Other Particulars :
Indirect Labour 50,000
Lubricants 10,000
Insurance on plant 3,000
Purchase of raw materials 4,00,000
Sales Commission 60,000
Salaries of Salesmen 1,00,000
Administrative Expenses 1,00,000
Carriage Outward 20,000
Power 30,000
Direct Labour 3,00,000
Depreciation on Machinery 50,000
Factory Rent 60,000
Property Tax on Factory Buildings 11,000
Sales 12,00,000
9. The following information are received from the books of ABC Co. Ltd.,
Allahabad for the quarter ending 31-3-2014.
`
Stock of Materials 31-3-2009 75,000
Purchases of Material 7,95,000
Stock of Materials on 1-1-2009 1,05,000
Travelling Expenses 5,100
Advanced Cost Accounting - I 99
Cost Sheet & Quotations Carriage Inward 8,290
Carriage Outward 9,150
Labour Welfare Expenses 14,200
Depreciation on Plant 18,000
Factory Rent 11,200
NOTES Office Rent 29,100
Bad Debts 9,000
Productive wages 2,27,000
Traveller’s Salary and Commission 9,000
Expenses regarding purchase of materials 4,500
Director’s Fees 8,700
Fuel, Gas and Water 17,900
Manager’s Salary 18,000
\ (He devotes 2/3 of his time to factory)
Air conditioning charges of Office 9,000
Outstanding productive wages 33,000
Sales 14,29,500
Prepare Cost-Sheet giving :
(i) Prime Cost, (ii) Works Cost, (iii) Cost of Production, (iv) Total Cost
10. The following data have been extracted from the books of Sunshine Industries
Ltd., Surat for the year 2014.
`
Opening stock of raw materials 25,000
Purchases of raw materials 85,000
Closing stock of raw materials 40,000
Carriage Inward 5,000
Wages-Direct 75,000
Wages-Indirect 10,000
Other direct charges 15,000
Rent and Rates -
Factory 5,000
Office 500
Indirect consumption of material 500
Depreciation -
Plant and Machinery 1,500
Office Furniture 100
Salary -
Office 2,500
Salesmen 2,000
Other Factory Expenses 5,700
Other Office Expenses 900
Manager’s Remuneration 12,000
Bad debts written off 1,000
Advertisement expenses 2,000
Travelling expenses of Salesmen 1,100
Carriage and Freight outward 1,000
100 Advanced Cost Accounting - I
Sales2,50,000 Cost Sheet & Quotations
Advance income tax paid 15,000
Cash discount 5,000
The manager has the overall charge of the company and his remuneration
is to be allocated at ` 4,000 to factory, ` 2,000 to office and ` 6,000 to the
selling expenses.
NOTES
From the above particulars prepare a statement showing :
(i) Prime Cost, (ii) Factory Cost, (iii) Cost of Production, (iv) Cost of Sales,
and (v) Net Profit.
11. The accounts of Machine Manufacturing Co., Mahim disclose the following
information for the six weeks ending 31st December 2014.
`
Materials used 1,50,000
Productive Wages 1,20,000
Factory Overheads Expenses 24,000
Establishment and Genral Expenses. 17,640
The net selling price was ` 31.60 per unit and all units were sold.
As from 1st April, 2014, the selling price was reduced to ` 31 per unit
and it was estimated that production could be increased in 2014-2015 by
50% due to spare capacity. Rates of Material and Direct Wages will increase
by 10%.
Using the above data prepare Cost Sheet for the year 2013-14 and also
for the year 2014-15. Advanced Cost Accounting - I 101
Cost Sheet & Quotations III. Multiple choice questions :
(1) A document which provides for the assembly of the estimated details cost
in respect of cost centre or cost unit is known as -----
(3) Cost sheet discloses the ---- as well as the total cost of output.
(4) A cost sheet, including sale and profit is also known as ‘-----Account’
(a) Trading
(c) Production
(d) Realisation
Structure
4.0 Introduction
NOTES
4.1 Unit Objective
4.8 Summary
4.10 Questions
4.0 Introduction
In Unit 2, you have studied the elements of costs and have become familiar
with the three elements of costs, viz. materials, labour and expenses. In this Unit
you shall study some basic information about the first element of cost, viz. material.
Information about the meaning of material, types of material and purchasing of
material is provided in this Unit. Since material cost forms a major portion of total
cost of a product, it must be controlled effectively and every step right from
purchasing of material needs proper understanding and attention.
• Meaning of material;
• Types of material;
2) Supplies : These include items like pins, paper of wooden boxes, polish
papers, cotton waste, small tools, jigs, etc. Which are used by workers for
carrying on the production processes or for storage of the parts produced
till further operation are completed on them to convert them into finished
products.
produce each and every part used in the final product. It may purchase
some parts from outside and use them in the final product; e.g. tubes and
tires used in an automobile car may be purchased by an automobile company
from outside suppliers. In a similar way companies manufacturing T.V.
sets, refrigerators, washing machines, ratio/transistor sets purchase a few
items which are fitted in the appliances manufactured by them. NOTES
5) Consumable : These are items like coal, gas, diesel, petrol, etc. Which are
needed to keep the machine and other apperatus running for carrying on
the manufacturing processes, soaps, towels, cotton-waste etc. Which are
supplied to the workers are also consumable items.
----------------------
Purchase Manager / Officer
Terms & Conditions overleaf.
A purchase order when accepted by the suppliers creates a legal contract
between the concern placing the order and the supplier. Therefore it must be
prepared very carefully and the supplier should be asked to acknowledge
acceptance of the order by signing and returning the second copy of the purchase
order to the concern placing the order. Five or more copies of the purchase order
are prepared in different colors. The first and second copy is send to the supplier-
the second copy is returned by the supplier as acknowledgments and acceptance
108 Advanced Cost Accounting - I of the order. The third copy is sent to the stores department, fourth copy is sent to
the costing/accounting department and fifth copy is sent to the department from Meaning & Purchasing
which the purchase requisition was received. The second copy received back
from the supplier is retained by the purchase department and used for taking
follow-up action, if necessary.
(d) bill.
(3) Decentralised purchasing is more convenient for ----- items which are
specific to departmental.
(a) useful
(b) common
(c) uncommon
(d) day-to-day
(c) no control
II - Theory Quesitons :
(1) What do you understand from `Material’? State the meaning of ‘direct
materials’ and ‘indirect materials’ and give list of five items of direct and
indirect materials.
(2) What is meant by `material cost’? Explain types of materials giving example
110 Advanced Cost Accounting - I of each type of material.
(3) How and when materials are purchased in an industrial undertaking? Meaning & Purchasing
Structure
5.0 Introduction
NOTES
5.1 Unit objective
5.4 Summary
5.6 Questions
5.0 Introduction
In the previous unit, we have studied information about meaning, types and
purchase of materials. When as per the order given to the supplier he delivers the
materials it is to be received and its quantity and quality is required to be checked
and arrangement for proper storage of the various items of material is done by the
manufacturing concern. In this unit we shall study the work of receipt and storage
of materials and how it helps in controlling the material cost.
It also checks the condition of the materials and if there are damaged or
broken goods, they are kept separate and after consulting the purchase department
they may be returned to the supplier with a request for replacement of them or if
the damage is negligible the goods may be accepted. Any difference between the
quantity received, quantity ordered and quantity mentioned in the delivery note of
the supplier is immediately reported to the purchase department so that it can
take-up the matter with supplier.
As mentioned above, when the materials and other goods are delivered by
the suppliers they are received and checked in respect of the quantity and the
quality by the Goods Receiving Department/ Section. It is not sufficient to merely
take possession of the materials, check their quantity and quality but a record of it NOTES
must be duly maintained by the Goods Receiving Department. Information about
the supplier who has sent the materials, purchase order number, description of
materials received, quantity of materials and condition of the materials, inspection
report giving information about quality of materials received are some of the
important points covered by the information. Printed forms are used as the goods
received note and inspection report. Some concerns use a single form with provision
to record the quantity as well as the quality inspection report, whereas some
concerns use two separate forms one for recording quantity and other for inspection
report.
Generally three copies are prepared of the Goods Received Note. First
copy is sent to the Purchase Department to verify with the purchase order given
to the supplier and to take necessary steps for damaged sub-standard or shortage
of material supplied and for payment to be made to the supplier for the materials
accepted. Second copy is sent to the stores department or the which has requested
for purchase of the material along with the materials. Third copy is retained as the
office copy by the goods receiving department as a record.
------------------Co. Ltd.
Goods Received Note
Supplier------------------- No.--------
------------------- Date received-----
------------------- Purchase order no.----
Carriage/Vehicle No.--- Delivery Note No.-----
There are some materials whose quality/grade must be properly tested before
they are allowed to be used for manufacturing purpose. According to the nature
of the material the manner in which its quality should be tested and to what extent
testing should be done is decided. Quality may be tested on the basis of hardness,
strength, chemicals to examine reaction of the materials, etc. and persons verifying
the quality of materials should be qualified and experienced and they should be Advanced Cost Accounting - I 115
Receipt & Storage of qualified and experienced and they should be given the necessary facilities for
Materials
conducting the tests. If a separate report about inspection of quality of materials is
prepared its format may be as under : -
--------------------Co. Ltd.
NOTES Quality Inspection Report
Some concerns do not prepare and use a separate Quality Inspection Report
but include it in Good Received Note by making necessary space provision for it.
The draw-backs of the centralised storage are delay in placing orders and
obtaining the materials from the suppliers, delay in movement of materials from
the store to the production of other departments especially when they are located
at a long distance from each other, purchase of materials of inexact specifications
due to not understanding the exact requirements of a particular department and
greater risk due to storage of all materials at a central place.
Due to the above limitations some concerns follow the system of decentralised
storage in which the production and other departments are provided a separate
space in their own department for storage of materials which they need in their
day-to-day working. Centralised storage is followed by majority of the concerns
due to more advantages provided by it.
Codification of materials :
Code means a symbol assigned to any item by which that item is identified.
NOTES
In the store as there are hundreds of items which are stored, it becomes difficult
to identify them by their names. Names of materials may be lengthy and there
may be materials which have only slight variation of names. Such materials are
likely to create ambiguity in the minds of store people and may lead to wrong
material being issued. Names of materials are lengthy and difficult to remember.
Therefore instead of using names of materials they are identified by the symbols.
Use of symbol avoids confusion in identifying the material since one code represents
only once specific material. Symbols are short and easy to remember and save
the time and labour spent in writing the lengthy names of materials. Use of codes
helps in maintaining secrecy about the materials being used in manufacturing and
use of code is essential when mechanised accounting is followed in a concern.
Methods of Codification :
There are three methods which can be used for codification of materials.
These methods are :-
Mnemonic codes can be used as symbols for the items at first materials.
Mnemonic code is dependent upon the first sound when the name of the
material is pronounced; e.g For wood the symbol used is W, for steel the
symbol is S, for oil symbol is O.
The area where the materials are stored is divided in such a way that for
Advanced Cost Accounting - I 119
Receipt & Storage of storage of each item of materials there is a certain area provided as per the
Materials
requirements. Each such area used for storage of material is called a ‘bin’. So bin
can be any container, a box, a rack, a shelf, an area in a cupboard or any other
arrangement made for storage of a certain material. Depending upon the nature
of the material, size of the material, volume in which the material is to be stored
NOTES and the value and risk attached to the material where and how it should be stored
is carefully decided. Each bin is numbered and a record of bin numbers and
materials stored in them is kept on the desk of the storekeeper for easy reference.
For every bin a document called ‘bin card’ is prepared which provides
information about bin number, description of material stored in the bin, stores
ledger number or folio, minimum level of quantity to be maintained of the material
etc. A bin card has columns for recording receipt of material, issue of material and
balance of material. Reference number of Goods Received Note No. and Material
Requisition Note No is recorded for each transaction of receipt and issue of material
from the bin and quantity in balance is shown in the balance column of the Bin
Card after every receipt and issue transaction of the material from the bin. When
the physical verification of actual quantity in bin is done and it is compared with
the quantity shown in balance column of bin card, the date of such verification and
signature of the person doing such verification is recorded in the bin card along
with remarks.
------------Co. Ltd.
BIN CARD
Material is issued from the store on the basis of Material Requisition Note
received from the production department or other departments which need the
material. Regular type of materials required for day-to-day production are
requisitioned by the supervisor by preparing and signing the Material Requisition
Note but for special, scares and valuable materials along with the supervisor`s
signature the signature of the Assistant production Manager or production Manager
is required as approval for issue of such materials. The store clerk checks all the
details given in the Material Requisition Note and if satisfied, takes out the quantity
of material from the bin and gives it to the person who has brought the Material
Requisition Note to him.
Sometimes it happens that the quantity of materials supplied from the store
to a production department for a particular job is found in excess of the quantity
used for consumption. This may happen due to over estimation of quantity of
material for doing a job or due to reduction in the quantity of the finished product
for the job due to change in order. Thus the production department possesses
some quantity of material not used for the job. Such excess material is required to
be returned back to the store for safeguarding it and while returning the excess
material the department returning it has to prepare a document called ‘Material
Return Note’ in duplicate filling all the necessary information in it. The colour of
Material Return Note is different from the colour of Material Received Note so
that the store clerk can distinguish it from the Material Received Note. When the
store clerk receives the returned material, he signes both copies and keeps one
copy in the store and gives the other copy to the person who has brought the
material from the production department to be kept by it as evidence of return of
excess material.
The cost office is required to make the recording for the cost of material
returned to the store. On the basis of quantity of material returned and the rate of
the material, the value of the returned material is calculated and credited to the
returned material is calculated and credited to the cost of the job from which it has
been returned. Recording in the Bin Card and store ledger Account is also made
to increase the quantity and value of material in stock.
---------------Co. Ltd
Material Transfer Note
Materials Ordered with the supplier is received from him and Goods
Received Department makes the necessary arrangements for receiving the
materials, for checking the quantity and condition of the materials. Quality of the
materials received is checked by the Inspection Section. If quantity and quality is
as per the purchase order it is accepted and Goods Received Note is prepared NOTES
and along with the materials it is sent to the stores department. Stores should be
located at a proper place which is suitable to all departments which use the
materials. A concern may use centralised stores method or de-centralised stores
method. When centralised store method is followed a separate stores-department
is created. A store-keeper or a stores manager is head of the stores department
and under him some assistants and stores clerks work in this department doing the
work of receiving , storing, issuing and protecting the various materials as per
requirement. Bin Card for each separate material is prepared in which quantity of
material received, issued and balance of quantity in the bin is recorded date wise.
Material received in the store is checked with the quantity mentioned in the Goods
Received Note and issue of material is done only against an authorised Material
Requisition Note. Recording is also made in the Bin Card when Material Return
Note and Material Transfer Note is received from the concerned departments.
i) Bin : A Space stores allotted for storage of a specific item of material. Bin
may be shelf, a cupboard, a specific floor area, a rack, a box, etc.
ii) Bin Card : It is Document prepared for each bin and is kept attached to
each bin. Columns provided in Bin Card are used for recording date wise
the quantity received in bin and issued from the bin and quantity in balance
column is adjusted after each receipt and issue transaction.
(b) expenditure
(c) material
(d) indirect
(a) classification
(b) codification
(c) centralisation
(d) decentralisation
Group I Group II
v) -----
(2) What care should be taken by a store clerk while receiving materials in
store ?
124 Advanced Cost Accounting - I
Receipt & Storage of
(3) What do you understand by ‘classification’ and ‘codification’ of materials ?
Materials
State the methods used for codification of materials.
(4) Why a store is necessary ? Which documents are used for recording receipt
and storage of materials ?
(5) Explain the organisation of store. Where the store should be located ?
NOTES
(6) What is meant by ‘bin’ ? Give format of ‘Bin Card’ explaining how the
information is recorded in the columns of bin card.
(7) Give specimens of ‘Material Return Note’ and ‘Material Transfer Note’.
When these Notes are used and how recording is made in these two
notes ?
Structure
6.0 Introduction
6.7 Summary
6.0 Introduction
Material cost forms 30% to 70% of the total cost of a product and so
efforts are required to be made to control material cost right from purchase of
materials to consumption of materials. When materials are being stored precaution
are required to be taken in handling of material, for protection of materials from
climate and theft and also in storing materials in particular quantities. In this unit
information is provided to you about the manner in which control over materials is
exercised when they are in the store.
• Which stock level are fixed and how they are fixed;
• Why stock taking is necessary and which methods can be used for fixing
stock levels;
Advanced Cost Accounting - I 127
Control Over Materials • Discrepancies in quantity of material and reasons for such discrepancies;
In Stores
and
NOTES
6.2 Control over Materials in Stores
For any business concern and especially for a manufacturing concern
material is almost equivalent to cash. A large amount of money is invested in the
stock of materials kept in the store. Material is affected by many factors such as
climate, sunshine, dust, insects and theft and its quality as will as quantity is adversely
affected and the concern is required to suffer the loss caused by this. So it is
necessary that proper control on the materials should be kept to eliminate or
minimise the loss when the materials are in the stores department. By giving
attention to the following points proper control on materials can be kept :-
1. While receiving the materials from the Goods Receiving section at the
entrance of the stores it should be physically counted, measured or weighed
and the quantity should be verified with the quantity mentioned in the Materials
Received Note. Attention should also be given to the condition of the
materials received.
2. Materials received should be immediately taken to the bins allotted for storage
of materials. It should not be allowed to lie near the entrance of the stores
department or in the passage.
3. While keeping the material in its proper bin it should be kept in such a way
that old stock in the bin is kept ahead and newly received material is kept in
the back. This enables issue of old material first and newly received material
later on. This is necessary when quality of material is adversely affected
due to passage of time.
For each material the stores department has to fix certain levels. They
include Maximum Level, Minimum Level, Re-Ordering Level and Danger Level.
It is also necessary to determine how much quantity should be ordered when for
a material fresh order is to be placed. Quantity to be ordered depends upon the
maximum and minimum consumption of the material, maximum and minimum
period required for receiving the material from the supplier after an order is placed
with him, the price per unit of material, changes expected in the price and availability
of material in the near future, the discount and other facilities offered by the
supplier for different size orders and the capital available with the concern for
investment in the stock of materials. Once the order quantity is fixed generally it
remains unchanged unless some major changes in the price of material or in the
availability of the material in the market are expected to take place. When a
material is available only in a certain season and it is consumed throughout the
year quantity to be ordered will naturally be a large quantity.
Cost of purchasing also called cost of ordering includes the cost of stationary,
cost of salary of the purchase clerk who prepares the order, postage cost of
sending the order to the supplier, proportionate cost of establishment expenses of
the purchase and goods receiving department, and cost of advertisement if tenders
are invited from suppliers by publishing an advertisement in the newspapers or
periodicals. Cost of purchasing is less if only a single order is given for purchasing
the annual requirement of the material and cost of purchasing increases when
number of orders given is more than one.
Economic order quantity is, therefore, such quantity per order which balances
the cost of ordering with the cost of carrying inventory. At economic order quantity
the total cost made up of cost of ordering and cost of carrying inventory is lowest.
EOQ =
2AB Where EOQ = Economic Order Quantity,
expressed as 0% p.a.
Economic order quantity can also be decided by using the Tabulation Method
according to which the number of orders for the annual consumption are started
from a single order and increased by one every time. Cost of buying and cost of
carrying average inventory are calculated separately and by adding these two
costs the total cost is calculated. When a single order is placed to obtain the
quantity of annual consumption, the buying cost is the minimum and since the
average inventory is more the cost of carrying the inventory is maximum. The
total cost is also maximum at this stage. With increase in the number of orders, the
buying cost increases while the carrying cost of the inventory decreases. Total
cost column shows that upto a certain stage it decreases and after that stage it
again starts increasing. The stage at which the total cost is lowest is the stage
which indicates the economic order quantity.
130 Advanced Cost Accounting - I
In order to understand calculation of EOQ by formula method and tabulation Control Over Materials
In Stores
method let us consider the following illustration :
ILLUSTRATION
Arun Co. Pvt. Ltd. manufactures a certain product and uses a particular
material in the manufacturing process. Annual consumption of this material is
20000 units. The cost price per unit is ` 2.50 and buying cost per order amounts
NOTES
to ` 100. The cost of carrying the inventory is 10 % per annum.
SOLUTION
i) Formula method :
EOQ =
2AB
Ci
Where A
B
= 20,000 unit
= ` 100 per order
C = ` 2.50 per unit
i = 10% p.a.
2.50 10 %
Therefore EOQ = 2 X 20000 X 100
X
=
4000000
.25
=
=
16000000
4000 units
At EOQ units the total cost is ` 1000 made up of ` 500 as buying cost
and ` 500 as the carrying cost. Figures in the total column show that ` 1000 is
the lowest cost and at this economic order quantity level the buying cost and the
NOTES
carrying cost are equal. When quantity per order is more than 4000 units or less
than 4000 units the total cost is more than ` 1000.
First stock level to be fixed is the re-order level because for fixing maximum
and minimum stock level information of re-order level is needed.
When stock of material in hand reaches the re-order level fixed for the
material an order is placed with the supplier. It is fixed at that level which enables
the stores department to supply the material to the production department even if
maximum consumption takes place and maximum period is taken by the supplier
to deliver the material for the order placed with him. Stoppage of production due
to non availability of material in stock is, thus, avoided by fixation of re-order
level.
Actual quantity of material in stores can be less than or equal to the maximum
level but cannot exceed the quantity fixed as the maximum level.
Minimum level, as the name suggests, is that actual quantity in stores which
will not be below the minimum stock level. If the actual quantity of the material
falls below the minimum level fixed, there is risk of stoppage of production and to
avoid it, the storekeeper should give priority to obtain the material from the supplier.
Average stock level indicates the average quantity carried for a material
and such level is calculated by the following formula :-
Maximum level + Minimum level
Average stock level =
2
It is also calculated by using the alternative formula as given below :-
ILLUSTRATION 1
Manohar & Co. uses a certain material in the manufacturing of its product.
It has asked you to fix maximum level, minimum level, re-order level and danger
level for this material and has provided following data related to the material :-
Minimum 2 Weeks
Normal 3 Weeks
Maximum 5 Weeks
ILLUSTRATION 2
From the following information calculate (a) Reordering Level, (b) Maximum
Level, (c) Minimum Level, (d) Average stock Level, (e) Danger Level.
ILLUSTRATION 3
Two components ‘A’ and ‘B’ are used in Swastic Industries, Pune as follows :
(a) Reorder Level, (b) Maximum Level, (c) Minimum Level, (d) Average stock
Level.
Advanced Cost Accounting - I 135
Control Over Materials SOLUTION
In Stores
(a) Reorder Level = MX . C x MX . RP
= Maximum usage per week x Maximum re-order
period in weeks
NOTES Component A’ = 225 units x 6 weeks = 1,350 units
Component B’ = 225 units x 4 weeks = 900 units
(b) Maximum Level = RL + RQ - (MN . C x MN . RP)
= Reorder Level + Reorder Quantity - (Minimum
Usage per week x Minimum reorder period in
weeks)
Component A’ = 1,350 units + 900 units - (75 units x 4 weeks)
= 2,250 units - 300 units = 1,950 units
Component B’ = 900 units + 1,500 units - (75 units x 2 weeks)
= 2,400 units - 150 units = 2,250 units.
(c) Minimum Level = RL - (A.C X A.RP)
= Reorder Level - (Normal usage per week x
Normal reorder period in weeks)
Component A’ = 1,350 units - (150 units x 5 weeks)
= 1,350 units - 750 units = 600 units
Component B’ = 900 units - (150 units x 3 weeks)
= 900 units - 450 units = 450 units
(d) Average Stock Level = MN.L+1/2 of Reorder Quantity
= Minimum Level + 1/2 of Reorder Quantity
Component A’ = 600 units +1/2 x 900
= 600 units + 450 units = 1,050 units
Component B’ = 450 units + 1/2 x 1,500 units
= 450 units + 750 units = 1,200 units
ILLUSTRATION 4
The following particulars are furnished by Casio Ltd., Cochin for 12 months
ended 31-03-2014.
Calculate : (1) Reorder Level, (2) Maximum Level, (4) Average Stock
Level using reorder quantity.
SOLUTION
Working Notes :
ILLUSTRATION 5
The following information is available in respect of a material.
Calculate : (i) Reorder Level, (ii) Maximum Level, (iii) Minimum level, (iv)
Average Stock Level.
SOLUTION
= 875 units.
ILLUSTRATION 6
Find out Reorder Level, Maximum Level, Minimum Level and Average
Stock Level from the following particulars :
Normal Consumption : 300 units per day
Maximum consumption : 420 units
Minimum consumption : 240 units per day
Reorder Quantity : 3,600 units.
Minimum period for receiving the goods - 10 days
Maximum period for receiving the goods - 15 days
Normal period for receiving the goods - 12 days.
SOLUTION
Particulars Consumption
(i) Maximum usage in a month 300 Nos.
(ii) Minimum usage in a month 200 Nos.
(iii) Average usage in a month 225 Nos.
Time lag for procurement of material :
(i) Maximum - 6 months
(ii) Minimum - 2 months
Reordering quantity - 750 Nos.
SOLUTION
The weekly production varies from 175 to 225 units averaging 200 units of
the said product. You are required to calculate, (i) Reorder Level, (ii) Maximum
Level, (iii) Minimum Level, (iv) Average Stock Level.
SOLUTION
1) Clerical errors made by the persons who have done recording in these
documents. Errors may have been committed while adding or substracting
the quantity received or issued respectively due to which quantity of material
in balance is recorded wrong.
4) Recording of the quantity received or issued may have been done in wrong
column in one of the documents due to which quantity shown in balance
column of that document becomes wrong.
By finding out the reason / reasons due to which the difference in the stock
of the two documents is caused and by rectifying these errors the stock shown in
the bin card and the stores ledger account is tallied.
According to the size of the concern, number of items kept in the store,
volume or quantity of each item of material, nature of the materials and the number
of transactions of receipt and issue of the materials one of the above mentioned
methods is selected and used for physical stock taking.
1. When periodic stock taking method is followed the working of plant and
Advanced Cost Accounting - I 143
Control Over Materials production department is required to be stopped during the period of stock
In Stores
taking because physical verification of stock and issue of materials to
production department is not possible at the same time. Stoppage of
production activity even for one day causes huge loss to the concern and in
a large size concern where stock taking may take a few days time and
NOTES during this period the loss caused is tremendous.
2. As the work of stock taking is done by workers and other employees the
result of physical stock taking may not be satisfactory and reliable.
6. Employees working in the stores department know that stock taking is done
only at the end of the financial year so they may become lethargic and may
not record the transactions of receipts and issues immediately after they
have taken place. The recording in bin cards and store ledger accounts
may be kept pending and may be completed a few days before the physical
stock taking begins.
1. Physical stock taking is done by staff specifically employed and trained for
that work and so the work is efficiently done and information about stock
available is reliable.
NOTES
2. Since physical verification of various item is done throughout the year any
discrepancy in recorded stock and the actual stock is brought to the notice
quickly and appropriate action can be taken immediately. Also attention of
the storekeeper is drawn to the slow moving or non-moving items of material
as well as the materials not being protected properly. Such items of materials
can be disposed off quickly and possible loss due to their deteroration can
be avoided or reduced.
3. When continuous stock taking method is used the working of plant and
production department is not required to be stopped for stock taking. Loss
of production due to stoppage of production work is thus avoided in this
method.
5. Information about the total quantity in stock for all the items can be quickly
found out by adding the quantities reported by the stock takers. Only the
quantity received and quantity issued since the last date of stock taking will
have to be added and substracted respectively to the last quantity reported
and this enables the management to know the quantity and value of materials
and other items on any day the information is needed by it.
2. Stock taking work and receipts and issues of materials take place
simultaneously and so the work of stock taking is disturbed and quantity of
material in stock cannot be exactly found out.
When physical stock taking of materials is done and the actual quantity of
the materials is found out it is compared with the quantity in balance in the bin
cards and the store ledger accounts of the particular material. If actual quantity of
material in store is not same as the quantity shown in the balance column of the
bin card and the store ledger account, the difference in the quantity is noted down
as a case of discrepancy. The cause of discrepancy is then found out and according
to the nature of it, the treatment to be given for the quantity and value of the
difference in material is decided. Discrepancy can be of two types-actual quantity
in store is less than the quantity appearing in the bin card and store ledger account.
The first type of discrepancy is known as shortage which implies loss and the
second type of the discrepancy is known as excess or overage and it is a surplus
or gain.
3. Insufficient protection provided to materials while they are stored ; e.g. iron
items not properly protected may become rusty, items affected by changes
in climate not kept in air conditioned rooms.
5. Calculation errors done by the store clerk while arriving at the quantity in
balance.
Treatment of discrepancies :
Discrepancies found in the actual quantity in store and the quantity appearing
in the bin card and store ledger account should be treated as per the cause due to
which the discrepancy has taken place. The treatment given may be as under :-
4. When the stock recorded as per bin card and store ledger account is more
than the actual stock as per physical stock taking, the following entry is
passed:
At the end of year, the balance standing to the Inventory Adjustment Account
is calculated and the Account is closed by transferring such balance to overhead
control Account or Profit and Loss Account as per the policy followed by the
management of the concern.
ILLUSTRATION 1
SOLUTION
EOQ =
2 AO
C
where, EOQ = Economic Order Quantity
A = Annual need in unit i.e. 1,600 units
O = Cost of placing an order i.e. ` 50
C = Inventory carrying cost including Rent, Insurance,
Tax per unit per year i.e. 10% of ` 30
= ` 3+` 1=` 4
= 2 1,600 units ` 50
X X
10% of ` 30 + ` 1
` 3+`
= 1,60,000 units
1
=
1,60,000
` 4
units
SOLUTION NOTES
EOQ =
2 AO
C
where, EOQ = Economic Order Quantity
A = Annual usage in terms of units i.e. 10,000 units
O = Cost of processing a purchase order i.e. ` 10
C = Stock holding cost i.e. 20% of ` 25 = ` 5
=
2 X 10,000
` 5
units X ` 10
=
2,00,000
` 5
units
=
40,000 units
= 200 units
Conclusion : The Company should buy 200 units in a single order at a time,
to minimise the inventory cost.
ILLUSTRATION 3
Given the annual consumption of material is 1,800 units, ordering cost are
` 2 per order, price per unit of material is 32 ps. and storage cost are 25% p.a. of
stock value, find the Economic Order Quantity.
SOLUTION
EOQ =
2CAO
where, EOQ = Economic Order Quantity
A = Annual consumption of material in units i.e. 1,800 units
O = Ordering cost per order i.e. ` 2
C = Storage cost per unit i.e. 25% of 32 ps. = ` 0.08
=
2 X 1,800 units X ` 2
25% of 32 ps.
=
7,200 units
` 0.08
Advanced Cost Accounting - I 149
7,200 units
Control Over Materials = X 100
In Stores
8
=
90,000 units
= 300 units
NOTES
ILLUSTRATION 4
SOLUTION
EOQ =
2CAO
where, EOQ = Economic Order Quantity
A = Annual requirements in units i.e. 1,600 units
O = Cost of placing and receiving one order i.e. ` 200
C = Inventory carrying cost i.e. 10% of ` 40 = ` 4
=
2 X 1,600 units X `
10% of ` 40
200
=
6,40,000
` 4
units
= 1,60,000 units
= 400 units
ILLUSTRATION 5
= 2 X 4,000 units X `
8% of ` 2
5
= 40,000
` 0.16
units
= 40,000 units X
100
16
=
2,50,000 units
= 500 units
ILLUSTRATION 6
SOLUTION
EOQ = 2 AO
C
where,
EOQ = Economic Order Quantity
A = Annual requirements in units i.e. 12,000 units
O = Order cost i.e. ` 200
C = Inventory carrying charges i.e. 20% of ` 6 = ` 1.20
= 2 X 12,000 units X `
20% of ` 6
200
= 48,00,000
` 1.20
units
=
40,00,000 units
= 2,000 units
Advanced Cost Accounting - I 151
Control Over Materials ILLUSTRATION 7
In Stores
You are required to calculate Economic Order Quantity from the following
information.
SOLUTION
EOQ =
2CAO
where, EOQ = Economic Order Quantity
A = Annual consumption in kg. i.e. 15,000 kg.
O = Cost of placing an order i.e. ` 48
C = Storage cost i.e. 8% of ` 2 = ` 0.16
=
2 X 15,000 kg. X ` 48
8% of ` 2
=
14,40,000
kg. = 14,40,000 kg. 100 X
` 0.16 16
=
90,00,000 kg.
= 3,000 kg.
ILLUSTRATION 8
SOLUTION
EOQ =
2 AO
C
where, EOQ = Economic Order Quantity
A = Annual usage in units i.e. 50,000 units
O = Order placing cost i.e. ` 45
C = Inventory carrying cost i.e. 15% of ` 1.20 = ` 0.18
=
2 X 50,000 units X
15% of ` 1.20
` 45
NOTES
6.7 Summary
Material is received at the entrance of the stores department and the person
receiving it should check the quantity of material with the quantity mentioned in
the Materials Received Note. Material is taken to the bin allotted for that material.
Material already in the bin is kept in the front side of the bin and new material
received in the back side of the bin so that old material is issued first and new
material remains in the bin. Personnel working in the stores department should be
given proper training for handling of the material and use of different weighing
machines correctly. For each material Maximum Level, Re-ordering Level,
Minimum Level and Danger Level are fixed by considering the use of material,
time required for obtaining material and quantity of material purchased at one
time. Economic Order Quantity is calculated for each material. To verify the
quantity and quality of material in bin stock taking arrangement is made. Periodic
stock taking and Perpetual or Continuous stock taking are the methods which can
be used for stock taking. Stock taking helps in locating discrepancy between
physical stock in the bin and quantity shown in the Balance column of the Bin
Card. Reasons for discrepanies are found out and suitable treatment is given for
the discrepancy.
1. Under ------------- level of stock materials are issued to important jobs only.
(a) minimum
(b) maximum
(c) ordering
(d) danger
(c) abnormity
3. Recorder point is lower than the ---------- levels to avoid excess stock.
(a) minimum
(b) maximum
(c) danger
(d) stock
(a) re-order
(b) danger
(c) maximum
(d) minimum
(1) Why Control over materials is needed when the materials are being stored
in the stores? Which factors should be given attention while exercising
such control ?
(2) Which stock- levels are fixed for materials ? What purpose is served by the
stock-levels fixed ?
(4) State the stock-levels which are fixed for the materials. Give formulas used
for calculating the various stock-levels.
(5) What do you understand by the term ‘stock-taking’ ? Which methods are
used for stock-taking ?
(8) What you understand by the term ‘discrepancy in stock’ ? What are causes
154 Advanced Cost Accounting - I of such discrepancies ?Explain treatment given to discrepancies in stocks.
III. - Exercises Control Over Materials
In Stores
1. From the following particulars calculate :
d) Re-ordering Level.
3. From the following particulars, calculate the minimum stock level, maximum
stock level and reorder level :
a) Re-order Level
c) Maximum Level
a) Re-order Level,
a) Re-order Level
b) Minimum Level
d) Average Level
7. You have been asked to calculate the following levels for Part No. ‘T’ from
the following information.
10. A unit of article A costs ` 50 and the annual consumption is 2,000 units.
The cost of placing an order is ` 40 and the interest is 10% per annum.
find the economic order quantity.
11. From the following figures, you are required to calculate Economic Order
Quantity and No. of orders to be placed per year.
12. If the annual usage of a component is 4,000 pieces, set up and order
processing cost ` 50, annual rate is 10% and cost of manufacturing a unit
is ` 100. Calculate the Economic Order Quantity.
13. Find out the economic order quantity from the following particulars:
15. Given : Annual usage of a material 600 units, ordering costs are ` 12 per
one order, price of material is ` 20 per unit, and cost of storage is 20% of
inventory value, find out EOQ.
16. Suppose the annual consumption is 675 units, 10% is the interest and cost
of storing an article ` 30 per unit, cost of placing an order is ` 18. Calculate
the Economic Order Quantity.
17. A factory requires 15,000 units of a certain material for the year. Cost of
carrying one unit of material is calculated to be ` 20 per annum, and it is
estimated that the expenses of placing an order and receiving would amount
to ` 375. Calculate Economic Order Quantity.
Structure
7.0 Introduction
NOTES
7.1 Unit Objectives
7.6 Summary
7.8 Questions
7.0 Introduction
Materials are purchased and kept in stores because they are needed by
production departments for processing and for completing operations necessary
for manufacturing finished products. Materials demanded by production and other
departments must be issued to them by stores department so that their work is not
held up. In this Unit information related to issue of materials and care to be taken
while performing this work is provided.
The rule of issuing any material from the stores only against valid material
requisition note should be strictly followed by the persons working in the stores NOTES
department and after issue of material recording of it in the bin card and recording
of the new balance in the balance column of the bin card should be completed
immediately by the concerned stores clerk. Similarly recording of the issue
transaction (quantity and value) in the appropriate columns of the stores ledger
account and recording of changed quantity and value of stock in the balance
column of the stores ledger account should be completed by the accounts/costing
department to avoid the possibility of omission of recording of the transaction in
the stores ledger account.
provided in the previous Unit. The specimen of Material Requisition Note and
Stores Ledger Account are given below :
----------------------& Co.
Reference No. under Issues is the Material Requisition Note No. After recording
the receipt of material the quantity in the balance column is increased and after
recording the issue of material the quantity in balance column is reduced by
deducting the quantity issued from the preceding quantity appearing in the balance
column.
NOTES
In the stock verification column the date on which the physical stock taking
is done and any difference (shortage or surplus) found in comparison to the stock
recorded in the balance column on that date is recorded with the initials of the
person who has done the physical stock taking. Information in ‘rate’ and ‘Amount’
columns is recorded by Costing Dept.
iii) Store clerk who does the work of materials issue should understand the
nature of material to be issued, code number of the material to be issued
and quantity in which material is to be issued. This enables him to issue the
exact material to be issued and issue of wrong material does not take place.
iv) While taking out the material from the bin, the store clerk should take the
material from the old lot, keeping recently received material in the bin. This
results in issue and use of the old material and helps in avoiding deterioration
in quality of old material.
v) The store clerk should check that the weighing machine or other instruments
used for measuring quantity of material are in proper condition and would
enable him in issuing the correct quantity as mentioned in the Material
Requisition Note.
vi) Proper and careful handling of material as per its nature is another point to
which the store clerk should pay attention. This helps in avoiding breakage
and loss of material when it is being removed from the bin and when it is
being carried to the stores entrance for issue.
vii) While handing over materials to the person who has brought the Materials Advanced Cost Accounting - I 163
Issue of Materials Requisition Note the store clerk should instruct him to check the quantity
and condition of the materials and to sign the Note for the materials received
by him. It acts as a proof of issue of materials.
viii) On the basis of M. R. Note, the store clerk should do the recording in the
Bin Card for quantity of material issued and record the quantity in the
NOTES
balance column of the Bin Card by deducting the quantity issued from the
previous quantity recorded in the balance column.
7.6 Summary
Issue of materials is done by store clerks working in the stores department
to production departments and other departments which need materials for
performing their activities. For obtaining materials a written request in the form of
Material Requisition Note is required to be prepared by the section or department
which needs the material. Details such as name/number of the section or department
which is requesting issue of materials, M.R. Note number, date, job/process/
operation for which materials are required, description and code of material required,
quantity, quality/specification, etc. are required to be filled in and signatures of
person who has prepared the M.R. Note, who has sanctioned it and if necessary
of the production or factory manager are required to be obtained before the copies
of the M.R. Note are presented at the entrance of the stores department. For
issue of materials a procedure is laid down in each concern and it is strictly followed
by the persons involved in the activity of issue of materials. Attention is given to
various factors connected with issue of materials. Materials Requisition Note,
Bin Card and stores Ledger Account are the documents in which information is
recorded regarding issue of materials. Issue of materials is as important as the
activities of purchase of materials and storage of materials.
7.8 Questions
I - Multiple Choice Questions.
(a) accounting of
(b) issue of
164 Advanced Cost Accounting - I (c) inspection of
(d) verification of Issue of Materials
(a) supervisor
(b) material manager
NOTES
(c) works manager
(d) storekeeper
3. In store ledger account information of rates and amount columns is recorded
by ----------
(a) duplicate
(c) triplicate
II - Theory Questiions
3) What care should be taken while issuing materials from store ? Why such
care is necessary ?
Structure
8.0 Introduction
NOTES
8.1 Unit objectives
8.5 Summary
8.0 Introduction
In Unit 7, we have studied information about issue of materials + stores to
various departments which use the materials. In order to calculate cost of the
materials used for jobs, operations, processes and other purposes it becomes
necessary to calculate the cost of materials used for them. Information about
work of pricing of materials issued, methods used for pricing the issue of materials
is provided in this Unit.
• Understand methods which can be used for pricing the issue of materials ;
and
• Know the effect on material cost when a particular method of pricing the
issue is used by an enterprise.
i) Standard Price
According to the method selected for pricing of issues the amount charged
for the issues and the amount of quantity in balance ( closing stock value ) will be
different. Out of the above mentioned methods only FIFO, LIFO, Simple Average,
Weighted Average and Base Stock Method are the methods on which the practical
168 Advanced Cost Accounting - I problems are given below. For other methods only theoretical information is given.
A. Cost Price Methods Pricing of Material Issued
Under this method it is assumed that material purchased first is issued first
and material purchased last remains in stock. If the stores ledger account shows
opening stock at a certain rate, the first issue will be priced at the opening stock
rate and only when the opening stock is fully exhausted, the subsequent issue will
NOTES
be priced at the rate at which the first purchases of the period is made.
Advantages
1) Under FIFO method the pricing of issue is done at the cost price and so
there is no unrealised profit or loss.
2) Issues are priced at the old purchase price and so this method follows the
rule of old materials to be issued first and latest purchases should be kept in
stock.
3) This method is suitable when the market shows falling price trend for the
material since high prices of the earlier purchases are charged to the
production and closing stock is valued at the current price which is low.
Disadvantages
1) FIFO method is not suitable when the material price shows a rising trend.
Material cost charged to the production is less and closing stock of material
is valued at current high price.
2) Material cost of two same jobs using the same quantity of material may be
different merely because material issued to them is from different lots
purchased at different prices. Proper comparison of the cost of two same
jobs does not become possible.
ILLUSTRATION
2013
Prepare Stores Ledger Account Pricing the issues using First In First
FIFO method
S R Company
No.
400 10 4000
Issue on July 4 of 500 units is priced at ` 8 per unit because this issue is
made out of the opening stock of 800 units, rate being ` 8 each. Issue of 400 units
made on July 12 is from the first last of 300 units @ ` 8 each and 100 units are
issued from the next lot @ ` 9 each. Total cost of material issued is, therefore,
` 3300. NOTES
Issue of 200 units on 15 July is made out of stock which is valued @ ` 9 per
unit. Issue of 800 units on July 28 is made from 300 units @ ` 9 and remaining
500 units are issued out of the lot of 700 units which was purchased @ ` 9.50 per
unit.
[In this illustration all columns of Stores Ledger Account are shown. In the
subsequent illustrations. Only columns related to quantity, rate and amount will be
shown to save the space.]
Advantages :
3) In the increasing price trend shown by the market this method is suitable
since issues are priced at the current prices which are high and high price
of material is immediately recovered by charging it to the production.
4) In the situation of rising prices the quantity in stock is valued at the old low
prices and so the closing stock value is shown less. This agrees with the
principle of valuation of closing stock to be done at cost or market price
whichever is less.
Disadvantages :
1) When there are large number of transactions of receipts and issues the
recording and calculations increase and the possibility of errors increases.
2) During the period of falling prices, the material cost of production will be Advanced Cost Accounting - I 171
Pricing of Material Issued shown less whereas that production has been done by using the material
purchased earlier at high prices.
3) Comparison of costs of two similar jobs using same material in same quantity
may give misleading results merely because material issued to them is from
two different lots purchased at different prices.
NOTES
ILLUSTRATION
SR Company
Stores Ledger Account
Date Receipts Issues Balance
2013
4 500 8 4000
400 10 4000
Closing stock of material at the end of July, 2013 is 600 units consisting of
300 units @ ` 8 and 300 units @ ` 9.50. The value of closing stock is ` 2400 +
` 2850 = ` 5250. Under the FIFO method of pricing the issues the value of
closing stock was ` 5900.
Under LIFO method closing stock consists of 300 units @ ` 8 each, which
are from the opening stock of 800 units.
20 9 180
Under LIFO method of pricing the recording for the above transaction will
be done on July 22 by valuing the returned material at ` 9 each because on July
12 the material was issued to the job from a single lot which was priced at ` 9
each. The recording for the transaction of return of material will, therefore, remain
same as shown for FIFO method above.
2013
NOTES
July 31 10 9.50 95 190 9.50 1805
400 10 4000
Under LIFO method of pricing the issues, the recording for shortage of 10
units will be done as under :-
2013
According to LIFO method, shortage of 10 units is charged from the last lot
in stock for which the rate is ` 9.50 each and the quantity in balance for the last
lot is reduced and so stock in balance on July 31 is shown as 300 units @ ` 8 and
290 units @ ` 9.50 each. The loss of ` 95 will be charged to costing profit &
Loss Account as abnormal loss.
In this method the pricing of issue is done at the highest purchase price
shown in balance column upto the date of issue. When the lot having the highest
price is fully exhausted by the issues, the next highest price is used for pricing the
subsequent issue. In this method production/ jobs are charged with the highest
price of purchase of material and recovery of the material purchased at highest
price is done first and valuation of material in stock is done at low prices. The
value of closing stock is shown less than its real value and thus by reducing the
profit amount for the period a secret reserve is created by the concern.
HIFO method of pricing the issues is not popular and a few concerns may
be using this method.
In this method a fixed quantity out of stock is always held at a fixed price
and this stock is known as the base stock and it is to be held as reserve stock for
a very long period of time. Base stock is not used for making any issues unless an
emergency situation arises. This method is not an independent method and for
pricing of issues it is to be coupled with FIFO or LIFO method. This method is
generally used by those industries which have to carry on the manufacturing process
174 Advanced Cost Accounting - I
for a very long period of time.
ILLUSTRATION Pricing of Material Issued
i) Simple Average :-
NOTES
In this method the pricing of issues is not done at the actual cost price but at
simple average of the prices at which materials are purchased prior to the issue
date. If the quantity of the previous purchases is exhausted, then the simple average
of prices of subsequent purchases is calculated and at that average price issue of
materials is priced. For calculation of simple average following formula is used :
Total of Prices
No of prices
If purchases have been made at ` 10. ` 12 and ` 11 per unit prior to issue
of material, the simple average of the prices will be
` 10 + ` 12 + ` 11 ` 33
= = ` 11 and
3 3
at ` 11 per unit the quantity issued will be charged. In simple average method only
purchase prices are added and the quantity purchased is not taken into consideration.
The justification given for using simple average method is the materials purchased
in different lots and at different prices gets mixed up when it is kept in the bin and
issue of material, therefore, may not be from a particular lot. So simple average of
prices should be used for pricing the issues.
The disadvantage of this method is that issue of material is not priced not at
the cost price but at a price which is totally different from cost price. Along with
this since quantity purchased at each price is not considered the price charged
may give an absurd result. From the following example this points should become
clear :
profit or loss is likely to take place when simple average method is used for pricing
the issues.
ILLUSTRATION
2013, March
SOLUTION
B Ltd.
Stores Ledger Account
(Simple Average Method)
Date Receipts Issues Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt
` ` ` ` ` `
2013
Mar,1 250 20 5000
3 400 19 7600 250 20 5000
400 19 7600
7 500 19.50 9750 150 2850
10 700 18 12600 850 15450
12 300 20 6000 1150 21450
23 200 19 3800 950 17650
27 450 19 8550 500 9100
At the weighted average price the pricing of material issued is done. The
new weighted average is required to be calculated after each purchase transaction
but on issue of material new weighted average is not to be calculated.
Advantages :
2) In this method weighted average changes only with the fresh purchases
and new weighted average is not calculated for the issue transaction. This
reduces the calculation work considerably.
3) As along with purchased price the quantity purchased at that price is also
considered the fluctuations in prices and in quantities purchased are ruled
out and the weighted average price gives a better result.
178 Advanced Cost Accounting - I
4) Valuation of stock is more realistic in this method because the extreme Pricing of Material Issued
Disadvantages :
NOTES
1) For accuracy purpose, the weighted average price is required to be calculated
upto 4 or 5 decimal points and calculation at such weighted average for
pricing the issues creates difficulty.
ILLUSTRATION
2012 Aug.
Assuming that the company follows Weighted Average Method for pricing
the issues, prepare Store Ledger Account.
In this method simple average of the purchase prices is calculated for all
the prices for all the prices for a fixed period which may be one month or 4
months or 6 months and the periodic simple average so calculated for pricing the
issues made in the subsequent period. If the period fixed is one month, the simple
average of all receipt prices is calculated and the periodic simple average so
calculated for pricing the issues made in the next month. If period fixed is six
months, the receipt prices in the six months period are used for calculating the
periodic simple average and it is used for pricing the issues made in the subsequent
period. In this method quantity of material purchased at different prices is totally
ignored and so the disadvantages of simple average method also become applicable
to the periodic simple average method. As periodic simple average calculated is
used for pricing the issues of next period the method does not charge the issues at
the current prices.
This method is similar to the periodic simple average method but in this
method, the periodic weighted average is calculated by considering the quantity
purchased at each price. In this method also the periodic weighted average
180 Advanced Cost Accounting - I
calculated for a fixed period is used for pricing the issues made in the subsequent Pricing of Material Issued
period.
The periodic simple average method and the periodic weighted average
method are used for pricing the issues in a very few concerns.
In this method pricing of issues is not done at the cost price or average
price. For a period a standard price or a pre-estimated price is fixed and the issues
are priced at this standard price of pre-estimated price. While fixing the standard
price various factors like current price, fluctuations in price expected in near future,
quantities normally purchased, discount available with a quantity purchased,
transport and other costs related to the material, etc. are considered and accordingly
a price is fixed as a standard price. All issues made during the period are priced at
the standard price. In the balance section quantity in balance after receipt of
material and issue of material is shown and its value is shown by adding the value
of receipt and by deducting the value of issued material to the previous stock
value. The value of closing stock is more or less as compared to the actual cost
and such variance is either favourable price variance or unfavorable price variance
and treated separately.
Advantages :
1) Since pricing of issues is done at the standard price the material cost of jobs
can be compared and difference in material cost of two similar jobs shows
efficiency or inefficiency in the use of material for them.
Disadvantages :
1) When there are wide fluctuations in the market price of material, it becomes
difficult to fix the standard price for pricing the issues.
2) Actual cost of material used for a job or production order is not shown in
the standard price method. So this method becomes suitable only when
standard costing is followed in the entire concern.
Inflated price method is not an independent method of pricing the issues but
it is to be used in conjunction with some other method such as FIFO, LIFO, etc.
When the nature of material is such that its quantity is reduced while it is being
stored in the stores department due to some natural reason like evaporation or
climatic changes this method of pricing the issues is found suitable. The loss in
Advanced Cost Accounting - I 181
Pricing of Material Issued quantity or weight is recovered by inflating the purchase price and the value of
purchased material is divided by the net quantity ( i.e. purchased quantity expected
loss in quantity) The inflated price so calculated for pricing the material issued
from that purchase lot. Since purchase price as well as the quantity purchase at
that price may change during the period, a new inflated price is required to be
NOTES calculated on purchase of every new lot. Supposing that there is 10 % loss in
weight for a material and 400 liters of material is purchased at a price of ` 90 per
litre, the inflated price for this lot can be calculated as under :-
Net Weight = Gross quantity purchased - 10% loss in quantity
= 400 - 40
= 360 liters
Value of purchased material = 400 x 90 = ` 36,000
Value of material purchased
Inflated price =
Net Weight
` 36,000
=
360 Liters
= ` 100 per litre
When 360 liters of material from this lot is issued the price will be charged
at ` 100 per litre and thus the full value of material purchased is recovered from
issue of the material and loss due to reduced quantity is fully recovered.
i) Material cost depends upon the quantity, quality and price of the materials
and on proper utilisation of the materials by workers engaged in the
manufacturing process. It is, therefore, necessary to establish and maintain
close co-ordination among the purchasing, stores and production departments.
When production department gives correct information about type of
materials, their quality and specifications, the quantity in which they are
needed and the date upto which they should be made available the stores
department con find out whether the required materials are available in
stores and can be supplied at the right time to the production departments.
If they are not available, the stores department, by preparing materials
requisition note can request the purchase department to place the order and
obtain the materials at reasonable prices within the specific time limit. Excess
material is to be properly preserved in the stores department so that loss of
materials can be minimised. The workers in the production department
should use the materials carefully and scrap, spoilage and wastage is kept
to the minimum. Thus proper co-ordination helps to a great extent in
182 Advanced Cost Accounting - I controlling materials control.
ii) Purchasing of materials should, as far as possible, be centralised and Pricing of Material Issued
purchasing of right material, in right quantity and at proper prices from right
suppliers should be ensured. Through this cost of materials is controlled to
the maximum extent.
iii) Proper procedures should be laid down for each activity connected with
the materials. Except in emergency situation the procedures should be strictly NOTES
followed.
vii) By making stock-taking arrangement the quantity as per records and the
actual quantity should be compared and proper re-conciliation between these
two quantities should be made. If possible, internal audit system should be
followed for verification of materials and for detecting and reporting any
loss, damage, theft and slow-moving, obsolete and adversely affected
materials.
viii) Fixation of stock levels and deciding the economic order quantity for each
item of material also helps in controlling materials cost.
8.5 Summary
Materials issued from the stores to a particular job, order, process or operation
are required to be priced and this work is done by accounts or costing department
of the enterprise. This is necessary in order to calculate total material cost of a
job, order, process or operation. There are various methods available for pricing
the materials issued such as ‘cost price methods’, ‘average price methods’ and
‘notional price methods’. These methods provide further certain methods out of
which a particular method is selected by the enterprise for pricing for materials.
For example, under cost price methods there are First In First Out (FIFO), Last In
First Out (LIFO), Highest In First Out (HIFO) and Base Stock Method. Each
method possesses certain advantages as well as certain disadvantages. According
to the type of material quantity in which materials are used, and variation in the
price of material over a period a particular method of pricing the issue of materials
is selected by an enterprise. In the Stores Ledger Account the value of material
Advanced Cost Accounting - I 183
Pricing of Material Issued issue is recorded and by adding the value of different materials issued for a job,
order, process or operation the total materials cost is calculated and charged to
the job, order, process or operation.
NOTES
ADDITIONAL ILLUSTRATIONS
ILLUSTRATION 1
185
Pricing of Material Issued Working Notes :
ILLUSTRATION 2
The following are the receipts and issues of material in Akbar-Ali Co. Ltd.
Ajmer, during the month of March 2012
31 Excess found in stock 430 units due to wrong weighing during the month.
The maximum level fixed is 4,000 units, the minimum 750 units and the
reorder level is 1,000 units.
Show the Stores Ledger Account under Last In First Out Method.
187
Pricing of Material Issued Working Notes :
(i) Excess found in stock on 31st March due to wrong weighing during the
month, is valued at ` 47 per unit as the latest purchase price.
ILLUSTRATION 3
NOTES
The stock on hand of material as on 01-01-2014 was 500 units @ ` 1 per
unit. The following purchases and issues were subsequently made. Prepare Stores
Ledger Account of Material in Ballarpur Ltd., Baroda for the three months ended
31-03-2014 under Last In First Out Method.
Purchases :
6-1-2014 : 100 units @ ` 1.10
20-1-2014 : 700 units @ ` 1.20
27-1-2014 : 400 units @ ` 1.30
13-2-2014 : 1,000 units @ ` 1.40
20-2-2014 : 500 units @ ` 1.50
17-3-2014 : 400 units @ ` 1.60
Issues :
9-1-2014 : 500 units
22-1-2014 : 500 units
30-1-2014 : 500 units
15-2-2014 : 500 units
22-2-2014 : 500 units
11-3-2014 : 500 units
On 29-03-2014 the stock verifier reported that there was a breakage of 15
units.
189
NOTES
Pricing of Material Issued
A stock verifier noted that on 15th he had found a shortage of 5 units and on
th
28 a damage of 8 units.
193
Pricing of Material Issued ILLUSTRATION 5
On 1st March, 2013 the stock of a component in the stores was 500 units
@ ` 300 per hundred. During the three months the receipts and issues were as
follows:
NOTES Purchased :
March : 400 units @ ` 400 per hundred
April : 500 units @ ` 500 per hundred
May : 600 units @ ` 600 per hundred
Issued :
March : 300 units
April : 400 units
May : 500 units
When stock was taken on 31st May 2013, a discrepancy of 50 units was
revealed.
Prepare a Stores Ledger Card under First In First Out Method in the
books of Hamam Ltd., Himmatpur.
195
Pricing of Material Issued ILLUSTRATION 6
Prepare a Stores Ledger Account on the basis of First In First Out Method
of pricing the issue of stores using the following information about material G-7 of
Galaxy Co., Gauhatti for March, 2009.
NOTES Date Particulars Quantity Rate per unit
14th Shortage 10 -
197
NOTES
Pricing of Material Issued
The stock in hand of a Material Fox as on 1st January 2009 was 500 units @
` 10 per unit. From the following transactions of purchases and issues of Finolex
Co. Ltd., Faizabad, prepare a Stores Ledger Account under First In First Out
Method.
Purchases :
NOTES
201
Pricing of Material Issued ILLUSTRATION 8
Purchases :
th
5 100 Pieces @ ` 2.20 - Goods Received Note -7
th
10 150 Pieces @ ` 2.40 - Goods Received Note -12
Issues :
nd
2 150 Pieces - Material Requisition Note - 6
th
7 100 Pieces - Material Requisition Note - 10
th
12 100 Pieces - Material Requisition Note - 17
203
Pricing of Material Issued ILLUSTRATION 9
Prepare a Stores Ledger Account from the following receipts and issues of
Material Lee-45 of Liril Co. Ltd. for March, 2012 pricing it on Weighted Average
Rate Method.
NOTES Receipts :
Date Quantity P.O.No. Rate Per Unit
(Units) `
st
1 1,000 8 10
15th 1,500 12 9
30th 500 20 8
Issues :
Date Quantity M.R.N.
(Units) No.
3rd 500 6
9th 250 8
20th 1,250 13
31th 500 19
205
Pricing of Material Issued Working Notes :
207
Pricing of Material Issued Working Notes :
` 1,000
=
100 units
= ` 10
` 1,000 + ` 2,040
=
300 units
` 3,040
=
300 units
= ` 10.133
` 506.75 + ` 3,150
=
350 units
` 3,656.75
=
350 units
= ` 10.448
` 3656.75 + ` 2,160
=
550 units
` 5,816.75
=
550 units
= ` 10.576
` 2,686.40
=
250 units
NOTES
= ` 10.745
ILLUSTRATION 11
Record the above transitions in the Stores Ledger Account on the basis of
Weighted Average Rate Method.
2) Explain briefly the various factors which are considered before adopting a
particular method of pricing of issues from stores.
4) Discuss the effects of rising prices and falling prices on Last In First Out
method of pricing of materials issues.
II - Exercises
1. From the following, prepare Stores Ledger Account under : (i) FIFO and
(ii) LIFO methods for the month ended 31st January, 2012
Purchases :
Issues :
April 2010
At what prices will you issue the materials ? Use FIFO and LIFO methods
and show the comparative results.
3. A manufacturer used cost price as the basis for charging out the materials
to jobs. The receipt side of the stores ledger accounts shows the following
particulars :
Successive issues were made of 300, 1000 and 200 articles. At what price
per article should each of these issues be charged under FIFO method ?
(` )
completed job
5. The following are the receipts and issues of coal in a factory during March,
2011.
March 1 Opening stock 200 tons at ` 460 per ton
4 Issues 140 tons
6 Purchased 350 tons at ` 450 per ton
8 Condemned due to deterioration in quantity and transferred to
scrap 30 tons
9 Issues 80 tons
14 Issues 210 tons
17 Purchased 200 tons at ` 480 per ton
20 Issued 210 tons
25 Purchased 180 tons at ` 470 per ton
28 Issues 280 tons
31 Excess found in stock - 43 tons due to wrong weighing during the
month
The maximum level fixed is 400 tons, the minimum 75 tons and the re-order
level is 100 tons. Show the Stores Ledger Account under LIFO system.
3. Issued 70 quintals
8. Issued 80 quintals
A stock verifier of the factor noted that on 15th January he had found a
shortage of 5 quintals and on 28th January another shortage of 8 quintals. NOTES
7. The following particulars have been extracted in respect of “Material A’.
Prepare Stores Ledger Account pricing the material issue on the basis of
First In First Out (FIFO) method and Last In First Out (LIFO) method :
Receipts :
Issues :
15-3-2013 - - 250
20-3-2013 - - 200
9. During January 2009, The Jagat Engineering Co. Ltd. effected the purchase
of a certain item of stores as under :
During the same period the details of the issues of the item were under :
Issues :
Date Units
8-1-2009 50
20-1-2009 100
Besides on 1-1-2009 there was an Opening Balance of 160 units valued for
` 200.
Enter the above transactions in the Stores Ledger under the Weighted
Average price Method.
10. The following figure relate, to Material ‘X’. Prepare Stores Ledger Account
showing receipt and issue, pricing the issue on the basis of Weighted Average.
11. From the following information prepare Stores ledger account under Weighted
Average Price Method for the months of March 2014.
Purchases :
12. The following are details supplied by Modern Company Ltd., in respect of
its raw materials for the month of March 2012
Date 2012 Receipts (Issues)
March Units kg.
Units kg. Price per kg. `
1. 2,000 5.
7. 1,000 6.
10. 2,500
15. 2,000 7.
31. 2,200
Show the Stores Ledger Account under FIFO and LIFO system.
13. The stock in hand of a material as on 1-1-2014 was 500 units at ` 1 per
unit. The following purchases and issues were subsequently made. Prepare
the Stores Ledger Account under FIFO method.
Purchases Issued
1. Under -------- method simplicity and convenience are lost when there is too
much change in the price of materials.
(a) LIFO
(b) FIFO
Advanced Cost Accounting - I 217
Pricing of Material Issued (c) Weighted average price
2. The objective of matching current costs with current revenues is not achieved
under the ---------- method of pricing material issue.
NOTES
(a) LIFO
(b) FIFO
3. Value of closing stock under ------- method can be well accepted for the
purpose of preparation of balance sheet.
(b) LIFO
(c) FIFO
Group I Group II
(c) Base stock method iii) manufacturing process for long period
NOTES
Structure
9.0 Introduction
NOTES
9.1 Unit Objectives
9.6 Summary
9.0 Introduction
After studying information related to the first element of cost, viz. material
cost, we have to study information about the second element of cost, viz. labour
cost. In every manufacturing as well as service providing concern, labour is required
to be used for creating finished product from the materials or for providing service
to customers. Physical labour, skill and intelligence required for this work is provided
by human beings who are employed by the concerns. In this unit, information
about meaning and importance of labour and about types of labour is provided.
1. Direct Labourers
2. Indirect Labourers
4. Out Workers
222 Advanced Cost Accounting - I Direct labourers are those labourers who are engaged in the process of
Meaning & Types of Labour
manufacturing by doing the work of mixing of materials. heating the materials,
operating on machines for giving a certain shape to the processed material by
cutting, moulding and shaping and thus creating a finished product. All the workers
who are performing one or more of the above mentioned activities is regarded as
direct labour and the amount paid to them is termed as the direct labour cost. The
labour of these workers can be easily and conveniently related to the finished
NOTES
product or a component created by them.
Thus labour which can be identified with its output is regarded as direct
labour and the cost incurred for such labour is direct labour and the cost incurred
for such labour is recorded as direct labour cost. A machinist operating a machine,
a coal miner digging out the coal, a carpenter cutting and fitting the pieces of
wood for creating chairs, tables or other wooden furniture, a worker working on
a weaving machine for producing cloth, an electrician doing the work of fitting
wires and cables in a motor car are all examples of direct labour.
Types of labour can also be stated on the basis of amount of skill possessed
by them. Accordingly, there are highly skilled workers, skilled workers, semi-
skilled workers and unskilled workers. According to the nature of work and the
amount of skill required for the work appropriate type of workers are appointed in
the factory. Highly skilled workers get more remuneration and as the degree of
skill decreases, the remuneration rate also reduces.
1. Personnel Department,
2. Engineering Department,
3. Time-keeping Section.
1) Separation Method
This method takes into account only those workers who have left during a
particular period. The formula is :
2) Replacement Method
This method takes into account only those new workers who have joined in
226 Advanced Cost Accounting - I
place of those who have left. Its formula is : Meaning & Types of Labour
If new workers are engaged for expansion programme or any other such
purpose they are not considered for this computation. NOTES
3) Flux Method
This shows the total change in the composition of labour force due to
separations and additions of workers. The formula is :
Number of Number of
workers left + workers replaced
Labour Turnover Rate = x 100
Average Number of workers during the period
EXAMPLE
Number of replacements 08
SOLUTION
80 + 100
Average number of workers = = 90
2
9
= x 100 = 10 %
90
8
= x 100 = 8.8 %
90
Advanced Cost Accounting - I 227
Meaning & Types of Labour
Number of workers left +
Number of workers replaced
3) Flux Rate = x 100
Average Number of workers
9+8
NOTES = x 100 = 18.8 %
90
i) Avoidable causes
1) Avoidable Causes :
These include :
b) Dissatisfaction with
i) low remuneration, ii) job, iii) long hours of work, iv) bad working
conditions, v) locality or environment.
e) Lack of :
2) Unavoidable Causes :
a) Personnel betterment,
b) Retirement,
228 Advanced Cost Accounting - I
c) Sickness, Meaning & Types of Labour
d) Accidents,
e) Death,
f) Domestic responsibilities,
NOTES
g) Pregnancy or marriage,
i) National service,
3) Personnal Causes :
c) Personal betterment,
d) Marriage of girls.
Labour Turnover due to avoidable causes is not only a loss to the individual
but also a loss to the organisation, industry and the nation as a whole.
ii) Costs connected with new entrants such as accidents, breakage of tools,
spoilage of finished products etc.
The cost of labour turnover may be broadly classified into two broad
categories viz. Preventive costs, and Replacement costs.
i) Preventive Costs
These costs are those which are incurred to keep the work force satisfied
and to prevent or discourage them from leaving the organisation. These include :
e) Extra bonus and other perquisities (in excess of those given by other
similar concerns) to discourage their defecting to other undertakings.
These costs include all such losses and wastages arising because of the
inexperienced new labour force replacing the existing one as well as the cost of
recruitment and training of the new workers. These include :
causes given earlier. The following steps may be taken in this regard :
FORMULAE
1) Separation Method : NS
x 100
AW
2) Replacement Method : NR
x 100
AW
3) Flux Method : NS + NR
x 100
A W
Number of workers Number of workers
+
left in a period replaced in a period
Labour Turnover Rate = x 100
Average Number of workers on the payroll in the period
ILLUSTRATION 1
The extracts from the payroll of Air Cooler Co., Ltd., Ahmedabad is as follows :
Calculate the labour turnover rate during the month under different methods.
= 175 workers
1) Separation Method :
= 16 %
2) Replacement Method :
21
= x 100
175
= 12 %
3) Flux Method :
Number of workers Number of workers
+
left in a period replaced in a period
Labour Turnover Rate = x 100
Average number of workers on the payroll in the period
28 + 21
= x 100
175
= 28 %
From the following particulars supplied by the personnel department of Balaji Co.,
Badalpur calculate the labour turnover.
SOLUTION
= 2,000 employees
1) Separation Method :
= 6%
2) Replacement Method :
60
= x 100
2,000
= 3%
120 + 60
= x 100 NOTES
2,000
180
= x 100
2,000
= 9%
ILLUSTRATION 3
The personnel department of Duplex Co. Ltd., Dombiwali has supplied the
following information relating to its work force during the month of January 2012.
During the month 15 persons quit and 25 persons are discharged. 150
workers were engaged out of them 20 persons were appointed in the vacancy
caused. Calculate labour turnover rate during the period under different methods.
SOLUTION
= 1,000 workers
1) Separation Method :
NOTES 20
= x 100
1,000
= 2%
3) Flux Method :
Number of workers Number of workers
+
left in a period replaced in a period
Labour Turnover Rate = x 100
Average number of workers on the payroll in the period
40 + 20
= x 100
1,000
60
= x 100
1,000
= 6%
ILLUSTRATION 4
During the month 10 workers left, 40 workers were discharged and 150
workers were newly recruited of these 25 workers were recruited in the vacancies
of those leaving, while the rest were for an expansion scheme.
SOLUTION
1) Separation Method :
= 5%
5 x 365
Annual Labour Turnover Rate = = 60.83%
30
2) Replacement Method :
25
= x 100
1,000
= 2.5 %
2.5 x 365
Annual Labour Turnover Rate = = 30.42%
30
3) Flux Method :
Number of workers Number of workers
+
left in a period replaced in a period
Labour Turnover Rate = x 100
Average number of workers on the payroll in the period
50 + 25
= x 100
1,000
75
= x 100
1,000
= 7.5 %
7.5 x 365
Annual Labour Turnover Rate = = 91.25%
30
During February 2012, the following information was obtained from the
personnel department of Moderate Co., Malegaon. Labour force at the beginning
of the month, 1,767 and 2,233 at the end of the month. During the month 60
NOTES persons were discharged and 20 left the company, During the month 200 workers
were engaged out of which only 40 workers were appointed against the vacancy
caused by the number of workers separated and the remaining on account of
extension programme of the company. Calculate the labour turnover rate and
equivalent annual rate under :
i) Separation method
SOLUTION
= 2,000 workers
1) Seperation Method :
= 4%
366* x 4
Annual Labour Turnover Rate = = 50.48%
29
2) Replacement Method :
= 2%
3) Flux Method :
Number of workers Number of workers
+
left in a period replaced in a period
Labour Turnover Rate = x 100
Average Number of workers on the payroll in the period
80 + 40
= x 100
2,000
120
= x 100
2,000
= 6%
366* x 6
Annual Labour Turnover Rate = = 75.72%
29
9.6 Summary
Labour cost is the second element of cost. It is an important element of
cost since it forms a substantial portion of the total cost of a product. Labour is
provided by human beings who provide physical, intelligence power, skills which
are required for creating a final product from the materials. There are various
types of labour such as direct labour, indirect labour, casual labourers, out workers
and depending upon level of skill possessed by labourers skilled, semi-skilled labour
and unskilled labour. An organisation is established consisting of personnel
department, engineering department, time-keeping section, remuneration and payroll
departments and cost accounting department. Such organisation looks after various
activities related to labour. Labour turnover is a problem faced by all industries
and by all nations. Measurement of labour turnover is done by using separation
method, replacement method and flux method. It is important to find out causes of
labour turnover, cost of labour turnover and efforts are required to be made to
minimise labour turnover and its cost.
iii) Direct Labour Cost : Cost incurred for the direct labour.
v) Indirect Labour Cost : Cost incurred for the indirect labourers. It is also
known as factory overheads.
vi) Casual Workers / Labourers : Workers who are not permanent workers
of an enterprise. According to the need of a concern, they are temporarily
taken up for doing the work, from unemployed labourers assembling outside
the gate of the concern.
vii) Out Workers : Out workers do not work in the factory premises but
perform the work assigned to them of their homes or perform it at the
customers’ homes or offices if it is a service to be provided.
(c) payroll
(d) store
(2) Indirect labour costs are not ----------- with the production of specific goods
or services.
(a) identifiable
(b) negotiate
(c) recorded
(a) highest
(b) efficient
(c) casual
Group I Group II
II - Theory Questions
5. What are causes of labour turnover? What care should be taken to keep
labour turnover to minimum ?
6. Explain the cost of labour turnover. ‘Zero labour turnover should be the
target of a good industrial concern’. Do you agree with the statement ?
NOTES
Structure
10.0 Introduction
NOTES
10.1 Unit objectives
10.3 Summary
10.5 Questions
10.0 Introduction
In every manufacturing as well as service providing enterprise a number
of workers and other employees are appointed to perform certain work assigned
to them. They work in different sections and department for co-ordinating their
work and for smooth functioning of the enterprise there is a particular time at
which they are they should report for work and a certain time upto which they
should remain present. When the number of workers and employees is a large
number a separate arrangement for recording the ‘in’ time and ‘out’ time has to
be made which is known as ‘time-keeping’ arrangement. In this Unit we shall
study information related to this arrangement in detail.
After completing study of information given in this unit, you should be able
to understand :
Time keeping means recording in and out time of the workers. Working of a
factory is an organized activity and to carry on this activity efficiently and smoothly,
it is necessary that the workers appointed for doing different types of work should
be available in the factory. Every factory decides the time at which the work
should begin and the time upto which the work should be carried on. According to
the volume of work, the number of workers and the space of the factory the
management decides whether the factory should operate in one, two or three
shifts and fixes the working hours for each shift. While deciding the working
hours the management should follow the provisions given in the Factories Act.
Provision is also made for lunch-break and tea-break for the workers. Hours
fixed for each shift are known as ‘normal hours’ and if workers work over and
above the normal hours, the additional time worked by them is the ‘over-time’
work done by them and for over-time wages are paid at higher rate which may be
one and half times or at double of the normal rate of wages.
1. It is a statutory requirement.
5. Certain benefits like pension and gratuity, leave with pay, provident fund
are provided by considering the continuity of service of the employees.
Also decisions regarding promotion, disciplinary action to be taken against
the employee are taken by considering regularity and punctuality of the
employees which becomes available from the time-keeping records.
Methods used for time-keeping can be divided into two categories as under:
244 Advanced Cost Accounting - I
Time Keeping
A] Manual Methods, and
B] Mechanical Methods.
A) Manual Methods :
In these methods the work of recording attendance as well as recording in- NOTES
time and out-time is done either by the workers themselves or by the time-keeper/
time clerk appointed to do that work and no mechanical device is used for doing it.
Under manual methods there are two methods available as under:-
For a small size factory employing limited number of workers the registers
method is very suitable. Once the procedure is explained to the workers they can
easily follow it. It also does not require investment of large amount to operate it.
The recorded and completed registers can be bound together and preserved for
any time.
The method suffers from two defects. First defect is that the timings
recorded by the workers may not be accurate because the worker may write the
timings to show that he is very punctual.
The second defect of the method is that a workers may record the attendance
of on absent or late-coming worker who is his friend by imitating his initials and
detection of this is very difficult.
In this method metal tokens or round metal discs are prepared. Each worker
is given an identity number and it is either painted or engraved on a token or disc.
The token or disc has a hole in it so that it can be hung from a hook or nail. A
board is prepared having sufficient nails or hooks attached to it. The tokens or
discs are hung in serial order and it is kept just inside the factory gate. A similar
Advanced Cost Accounting - I 245
Time Keeping broad is kept near the time-keepers cabin. When a worker arrives for joining his
duty, he goes to the board, removes the token or disc bearing his number from the
board and hangs it on the board kept near the cabin of the time-keeper. When the
time allowed for reporting to the work is over, the time-keeper removes the second
board and keeps a box having a slot at its top in the place of the board. A workers
NOTES reporting late has to put his token or disc in the box or he may be required to hand
over the token or disc personally to the time-keeper who notes down the time of
reporting in the register. The tokens still hanging from the first board indicate the
workers who are absent on that day and the time-keeper does the absence
recording in the register. The tokens hanging from the second board show the
workers who have reported for the work within the time allowed and their presence
is recorded by the time-keeper. Similarly the tokens put in the box by late-comers
are removed from the box and the late-timing is recorder in the register against
the names of the workers bearing those token numbers. The same procedure is
repeated when workers go-out from the factory. Only tokens of workers who
are present for work are hung on the second board and when the worker goes
out he takes his token and hangs it on the board kept near the gate. After the
regular working hours are over, the tokens still hanging from the second board
indicate the workers who are working over-time.
Token or disc method can be used for any number of workers by preparing
required number of tokens and by using separate boards bearing a fixed number
for each board.
This method suffers from the defect that a worker may remove his own token
and also token bearing his friend’s number and hang them on the other board thus
recording his own as well as his absent or late-coming friend’s presentee. Strict
supervision at the board will become necessary to see that each worker takes
only one token from the board.
B) Mechanical Methods :
In this method each worker is given a card bearing name of the worker, his
number, name of the department in which he works. There are columns provided
for recording ‘in’, ‘out’, ‘in’, ‘out’ timings for each day. A card covers the period
of one week after which a fresh card is prepared for the worker. These cards are
serially arranged on a tray and the tray is kept on a table inside the factory gate. NOTES
When a worker enters into the gate, he picks up his card from the ‘out tray’,
inserts it inside the clock at proper place so that the clock records his in-time for
the day. The worker takes out his card, checks the time recorded and places the
card in another tray known as ‘in-tray’. Same procedure is repeated by the worker
when he wants to record his ‘out-time’ only difference being that he takes the
card from ‘in-tray’ and after the clock has recorded the out time he places it in the
‘out-tray’. The clock has an additional feature of recording late-timings and over-
times in red ink so that these entries of timings are immediately noticed by the
time-keeper. It is necessary to keep the recordings under the observation of the
time-keeper so that every worker will take only his card for doing the time recording
and possibility of recordings of time for a ‘dummy’ or ‘ghost’ worker is eliminated.
A specimen of a time-card or clock card is shown below.
------------ Co Ltd.
Time card
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
--------
In this method a dial recorder is used for recording in and out time of the
workers. The recorder has a dial and on the dial there are about 160 holes. Each
hole bears a number and each worker is given his identity or token number, these
numbers corresponding to the numbers given to holes on the dial. The dial recorder
NOTES
also has a dial arm at the center of the dial. The dial recorder also has a dial arm
at the centre of the dial. When a worker enters the gate of the factory he goes to
the dial recorder, moves the dial arm to the hole bearing his identity number and
presses the dial arm into that hole. When this is done, on the roll of the paper kept
inside the dial recorder the number of the worker and the time the dial arm was
pressed by the worker are automatically printed. Same procedure is followed by
the worker to record his out-time. At the end of the month the paper roll is taken
out from the dial recorder and a new paper roll is fitted in the clock recorder. The
paper roll on which the number and the in-coming and out-going time of the workers
are printed can be used for calculating the hours-normal and overtime-of each
worker and for preparation of payrolls.
Advantages :
3) Since the timings are, automatically printed, they are accurate and workers
complaints about wrong time recorded by the time-keeper do not take place.
4) Information about hours worked by the workers makes the work of payroll
department easy.
Disadvantages :
Check Your Progress
1) For using this method a lot of investment is needed and so small-size units
i) What is meant by ‘Time
Keeping’ ? Why it is do not use it.
regarded as important ?
ii) Which methods are used 2) Printing of timing is done on paperroll kept inside the dial recorder. So
for time-Keeping ? workers cannot see the recording to verify the correctness of the time
iii) Explain briefly following recorded.
methods of time keeping:
a) Muster / Attendance 3) If proper supervision at the dial recorded is not provided, a worker can
Register Method
easily record timing for his worker-friend who is absent or is reporting late
b) Token or
for the work.
c) Time-Recording Clock
Method
iii) Key Recording Method
d) Dial Recording Method
e) Key Recording Method It is a method similar to the dial recording method. A key recorder has
many holes on the dial of the recorder. There are many keys and each key has a
number which is same as the identity number given to a worker. When a worker
reports for work he picks up the key bearing his identity number and inserts it in
248 Advanced Cost Accounting - I the proper hole on the dial and gives it a turn. This result in recording the number
and the time at which the key was given a turn by the worker. This information is Time Keeping
printed on the paper roll kept inside the recorder. The worker takes out the key
and puts it in the tray kept near the recorder. Then the worker goes to the department
in which he has been appointed. When the worker leaves the factory at lunch-
break and or in the evening the out-time is recorded by following the same
procedure. On the basic of his in-time and out-time total time for which he was
present in the factory premises can be calculated. Division of the total time in NOTES
normal hours and over-time hours is shown and using the normal rate and over-
time rate applicable to the worker the pay roll department calculates his normal
wages, over-time wages and total wages payable to the worker. Deductions to be
made are shown separately and the net amount of wages to be paid to the worker
are shown.
This method has advantages and disadvantages which are similar to dial
recorder method.
10.3 Summary
Time keeping is an arrangement made by the enterprise to record ‘in time’
and ‘out time’ for each worker and employee. In time means the time at which a
worker enters through the gate of the enterprise and out time means the time he
goes out of the gate. In other words, the total time for which a worker was
present in the premises of the enterprise becomes available through the time
keeping record. Similarly whether a worker was present or absent on all working
days of the enterprise can also be found out by using the time keeping record. If
the enterprise operates in two or three shifts, the time keeping for workers of
each shift is required to be made. Time keeping is a statutory requirement of the
management of an enterprise.
i) Time Keeping : Reducing of ‘in’ and ‘out’ time of each worker present in
the factory.
(a) performance
(b) attendance
(c) efficiency
(a) Time-keeping
(b) Time-booking
(c) Payroll
(d) Production
Group I Group II
II - Theory Questions
Structure
11.0 Introduction
NOTES
11.1 Unit Objectives
11.3 Summary
11.5 Questions
11.0 Introduction
In the previous Unit we have studied time keeping and methods used for
time keeping. Time keeping gives in time and out time or arrival time and departure
time of every worker. However, this information is not sufficient for calculations
for labour cost. A worker is paid remuneration of the basis of time spent by him in
doing the work assigned to him. A worker may do only one job or he may do
different jobs on one day. For calculating the labour cost of a job the actual time
spent by a worker on that job is taken into consideration. Arrangement made for
recording ‘on-time’ (starting time) and ‘off-time’ (stop time) is called time booking
arrangement. By considering actual working time of all workers who have
performed work of that job and the wage rate applicable to each such worker,
the labour cost of the job or process or operation can be calculated.
• Know the various methods available for doing time booking; and
Time- Booking is a systematic arrangement to find out how much time the
workers have used for performance of a job, activity, process or production work.
When a worker reports for work in a section or department, the supervise or
foreman of the section/department informs him which work is to be done by the
worker. It may be a particular job, process or a certain stage in the manufacturing
activity. When the worker actually starts the work, time when the worker has
started the work is recorded by him or by the foreman under whom he is working.
This time is called as ‘on-time’ or ‘starting-time’. When the worker stops the
work he was doing, that time is also recorded and is known as ‘off-time’ or ‘finish-
time’. From the on-time upto the off-time the time is calculated and recorded as
the working time or productive time. If the productive time falls within the normal
working hours it is recoreded as normal hours and if the worker has worked even
after the normal working hours were over such additional time is recorded as the
over-time.
4. For calculation and control of idle time the time booked for workers is
compared with the hours for which the workers were present in the factory
premises. Through time booking the labour hours actually put in for doing
the work can be determined.
254 Advanced Cost Accounting - I
Time Booking
5. In those concerns where incentive or bonus payment is made on the basis
of time saved by the workers out of time allowed for doing a certain work,
accurate information about actual time taken by the workers is needed.
Time booking fulfills this need.
In this method a daily time sheet is prepared for each worker, when the
worker reports for the work, the foreman gives him a daily time sheet. The
information asked for in the sheet is to be filled-in by the worker himself and
when he stops the work in the evening, he is required to hand over the completed
sheet duly signed by him to the foreman. The foreman checks the recording in the
sheet and if they correct he sings the sheet and sends it to the cost department.
The cost clerk completes the recording in respect of normal hours, over-time
hours and the rates applicable and shows the total labour cost for the worker for
the day. He is also required to sign the sheet taking responsibility for the calculations
shown in it. Total number of daily time sheets will be equal to the actual number of
workers who were present for doing the work on that day. These sheets are
preserved and used for the further cost analysis.
————————————— Company
ii) Over-time Worker Foreman Cost clerk Advanced Cost Accounting - I 255
Time Booking In the daily time sheet information is recorded by the worker on the same
day the work is performed by him and it is also verified by the foreman immediately
and so the information is more accurate.
The drawback of this method is the lot of paper work involved since for
NOTES every worker one daily time sheet has to be prepared and so this method is not
suitable where the number of workers employed is very large.
This method is similar to the method of daily time sheet except the time
booking is done for the days of the week. Worker is given a weekly time sheet at
the commencement of the work on the first day of the week. He records the
details such as job or production order number, the starting and finishing time of
the work, details of the work performed by him and normal and overtime hours
spent by him on the job each day. At the end of the week he signs the sheet and
gives it to the foreman who checks the entries and if found correct, certifies it so
by singing the sheet and sends it to the cost department for calculations of normal
and overtime wages and any incentive bonus if applicable to the worker.
—————————— Company
Department :----------------------------------
Day Job/ Order Work done On Off HoursWorked Rate Amount
No. Normal Over Rs. Normal Over
-time time
Mon
Tues
Wed
Thurs
Fri
Sat
Total
Weekly time sheet reduces the paper work considerably. When workers
are engaged on a job for a long time, weekly time sheet method proves suitable.
However, as the sheet remains with worker for a week it may get spoiled, stained
256 Advanced Cost Accounting - I or torn. Also the time booked may not be accurate as the worker may record the
details not every day but for 3-4 days at one time relying on his memory for filling Time Booking
on (starting) and off (finishing) times. This inaccuracy will cause the calculations
of labour cost to become wrong.
This is another method used for time booking. Under it job card or job
NOTES
ticket can be prepared in the following ways :
d) Piece-work card.
Brief information about each of the above four methods are given below:
For each job a separate job card is prepared to record the time worked on
the job by each worker and the labour cost of each stage of the job and total
labour cost of a job. Job No., Job description, the sequence in which the stages of
the job are to be completed are recorded in the job-card by the production
engineering department. The job card is given to the worker or the group of
workers who have to perform the first stage of the job. The worker/workers
record their names, the starting time and the finishing time of that stage and total
hours worked on the first stage of the job and hand over the work together with
the job-card to the foreman and the foreman give the the work to the worker/
workers who have to do the next stage of the job work. In this way the job card
moves with the job and when the recording of the last stage of job work is done,
the total time taken for completion of the job is calculated. The cost department
calculates the direct labour cost of the job by considering the time spent by each
worker and the normal, overtime rate and any incentive bonus amount payable to
the workers.
Job card for each job provides information about the various stages through
which it has been completed, the departments and which workers from these
departments have performed these stages, the time taken by them to complete all
the stages, how many normal hours and overtime hours were required to do the
job and the labour cost incurred for the job. All this information becomes available
on a single job card or job ticket and it provides guidance while planning a similar
type of job.
Day Tokan Name of Dept. Work done Time Hours Rate Amount
Date No. of Worker On Off Normal Over ` `
Worker time
Total
In this method for each worker a separate job card is prepared for a specific
period, say a week or a fortnight. The job card is given to the worker at the
commencement of the period and the job number and the work he is required to
do in respect of the job is told to him. When the worker starts his work, he
records the time as ‘on time’ and when he finishes his work he records the time as
‘off-time’. After showing the recording to the foreman who had assigned the
work to him, the worker receives instructions about another job either in the same
department or a different departments. He begins the work on the new job and
again does the recording for it in the job card with him. At the end of the specific
period he signs it and gives it to the foreman or drops it in the box provided for it.
Thus the time booked by the worker on one or more jobs during the specific
period are recorded on the job card of the worker and the remuneration payable
to him for the period can be calculated by the cost clerk.
Comparing the time booked with attendance time of the worker, becomes
258 Advanced Cost Accounting - I easy in this method.
Time Booking
c) Combined Time and Job Card :
This method is useful for a small concern which employees a few workers
and on whom proper supervision can be kept to see that they report for the work
punctually and do the jobs assigned to them. Since recording of in and out time
(time-keeping) and on and off time (time-booking) of a worker is recorded on the
same card, it becomes easy to reconcile time of attendance and working time and
find out the idle time.
Tues
Wed.
Thurs.
Fri.
Sat.
Day Job Description Time Production Rejections Accepted Initials Passed by Rate Amount
No. of Work Taken (Units) (Units) (Units) Worker (Inspector) ` `
Mon.
Tue.
Wed.
Thurs.
Fri.
Sat.
Total
11.3 Summary
Time booking means recording ‘on-time’ and ‘off-time’ of workers
performing a job, process, activity or operation assigned to them. On-time is also
known as ‘starting-time’ and ‘off-time’ is also known as ‘stop or finishing time’.
Time booking enables the management to find out how much of attendance
time is spent by a worker for doing the work assigned to him. For calculating
wages when wages are paid on time-rate basis, for judging efficiency of worker
260 Advanced Cost Accounting - I
by comparing the actual time taken by him for doing the work with the time
Time Booking
allowed by management for doing the work and for calculating amount of incentive
payable to a worker for the time saved by him information becomes available
from time-booking records. Total labour cost of a job, process, activity and operation
can be calculated by finding out actual time spent by workers who have done the
work and the amount of wages payable to them for such work. Preparation of
‘daily time sheet’, ‘weekly time sheet’. ‘Job card/job ticket’ for each worker or
each job’, ‘combined time and job card’ and ‘piece-work card’ are the methods of NOTES
time- booking and depending upon nature of work and number of workers employed
a suitable method of time booking is selected and used for time booking.
ii) Daily Time Sheet : It is a sheet to given to each worker when he reports
for work every day. Details are filled in the columns by the worker and the
sheet is given to supervisor / foreman when the day’s work is over. The
supervisor checks the details recorded by the worker and signs the sheet
and sends it to wages section for further analysis.
iii) Weekly Time Sheet : It is similar to the Daily Time Sheet with the
difference that it is used for a week by a worker.
iv) Job Card for Each Job : It is a card used for time-booking of all the
workers who have worked on the job.
v) Job card for each worker : It is a card provided to each worker in which
he records his time booked for all the jobs which he has worked during a
specific period of time.
11.5 Questions
I - Multiple Choice Questions
3) When the workers are paid remuneration not on the basis of time worked
but on the basis of quality produced is known as ------- remuneration.
NOTES
(a) time rate
(d) piece-rate
(a) Daily time sheet method is not suitable where number of workers
employed is very large.
(c) A piece-work card is prepared when the workers are paid remuneration
not on the basis of the worked by them.
II - Theory Questions
2. Give the specimen of ‘Daily Time Sheet’. ‘Weekly Time Sheet’ and ‘Job
Card For Each Job’. Also mention how recording is done in these documents.
Structure
12.6 Summary
12.8 Questions
12.0 Introduction
In Unit 10 and 11, information is provided about time keeping and time
booking respectively. Attendance time is the time calculated from ‘in time’ to ‘out
time’ of a worker whereas actual work-time is calculated by considering ‘on-
time’ and ‘off-time’ of a worker spent by him on one or more jobs performed by
him on the same day. Time kept by a worker (attendance time) is always more
than time booked (actual working time) by him on any day. It is important to
reconcile the time kept with time booked for every worker employed by the
enterprise and minimise the difference in order to control the labour cost.
Information about the reconciliation is provided in this unit.
Idle time is of two types : normal idle time and abnormal idle time. Normal
idle time is caused by reasons which are of unavoidable nature, e.g. time taken by
a worker for walking from the entrance to the section or department where he
performs the work assigned to him. Similarly waiting to receive instructions from
the foreman or supervisor also results in idle time which cannot be avoided and so
it is treated as normal idle time.
According to the causes due to which the idle time arises they can be
grouped under three groups as shown below :
a) Production Causes,
NOTES
b) Administration Causes, and
c) Economic Causes.
a) Production Causes :
3. Idle time caused due to gap required between completion of one job and
starting of the next job.
b) Administration Causes :
c) Economic Causes :
These are the causes due to the economic situations. They include :-
1) Time taken by a worker to reach his department or place of work form the
gate of the factory.
12.6 Summary
NOTES
There is a difference between time kept (attendance time) and time booked
(time used for performance of work) for a worker. It is necessary to find out how
much is the difference between these two and why the difference has taken
place. This activity is known as reconciliation of time kept and time booked. This
difference is known as ‘idle-time’. As a worker gets remuneration for the idle
time also, it is important for the management to minimise the idle time and thereby
control the labour cost. Complete elimination of idle time is not possible because
there are certain causes which are bound to create idle time, e.g. a worker needs
some time to reach his section or department where he works and also needs time
to prepare for the job by changing his clothes, receiving instructions from his
foreman about the job assigned to him, setting-up of the machine and receiving
materials with which the job is to be done. Similarly some time is lost between
completion of a job and starting of another job. Idle time caused by such normal
causes is called ‘normal idle time’. When idle time is caused by reasons which are
controllable, such idle time is called as ‘abnormal idle time’, causes of idle time
can be grouped under production causes, administration causes and economic
causes. By preparing a separate idle time card, total idle time, cost of the idle time
and causes of idle time, the cost of normal idle time and of abnormal idle time is
calculated. Normal idle time cost is treated as production/factory overheads and
if such cost can be traced to particular production departments, it is added to the
production overheads of that production department. Cost of abnormal idle time is
treated as abnormal loss and it is charged as abnormal loss to Costing Profit and
Loss Account of the enterprise.
i) Idle Time : It is the time difference between ‘time kept’ and ‘time booked’
by a worker. Idle time is the time not used for production work.
ii) Normal Idle Time : It is the idle time caused by reasons which cannot be
avoided.
iii) Abnormal Idle Time : It is idle time which takes place due to abnormal
reasons and available causes.
(b) unavailable
(c) suitable
(d) considerable
(a) available
(b) unavailable
(c) suitable
(d) considerable
(a) abnormal
(b) normal
(c) available
(d) unavailable
Group I Group II
completing production
2) Give causes of ‘normal idle time’ ? How is cost of normal idle time treated
?
3) What are causes of ‘abnormal idle time’ ? How is cost of abnormal idle time NOTES
treated ?
4) What are causes of ‘abnormal idle time’ ? How is cost of abnormal idle time
treated ?