Syllabus

MBCII - 5 – COST ACCOUNTING

Unit I: Introduction to Cost Accounting and Unit and Output
costing: Meaning of Cost, Costing and Cost Accounting, Features,
Scope and Functions of Cost Accounting, Advantages and Limitations
of Cost Accounting; Concept of Cost; Analysis and Classification of
Costs; Elements of Cost; role of accounting information in planning
and control. Unit Output Costing: Preparation of Cost Sheet
(Statement of Cost); Quotations and tender.
Unit II: Marginal Costing and Decision Making: Introduction,
Application of Marginal costing in terms of cost control, profit
planning, closing down a plant, dropping a product line, charging
general and specific fixed costs, fixation of selling price, make or buy
decisions, key or limiting factor, selection of suitable product mix,
desired level of profits, diversification of products, closing down or
suspending activities, level of activity planning- Break-even-analysis:
Application of BEP for various business problems.
Unit III: Standard Costing and Variance Analysis: Introduction,
Meaning and limitations of Standard Costing, Standard costing as a
management Tool, Historical costing, Estimated Costing and Standard
Costing, Standard Cost and Budgeted Cost, Determination of
Standard Cost for Direct Material, Direct Labour and Overhead Cost.
Variance Analysis: Cost Variance, Direct Material Variance, Direct
labour Variance, Overhead Variance, Sales Variance, Variance with
reference to Profit. Practical Problems on Variance
Unit IV: Contract and Operating Costing: Salient clauses and
accounting features of Contract costing, Retention money clause and
Escalation clause, Profit of incomplete Contract, WIP in balance sheet.
Features of operating costing: Transport costing (Standing charge,
Repair and Maintenance Charge and Running charges and log sheet),
Canteen, Hospital and hotels costing
 Unit I
In the modern days of cut throat competition, any business organization has
to pay attention towards their cost of production. Computation of cost on
scientific basis and thereafter cost control and cost reduction has become of
paramount importance. Hence it has become essential to study the basic
principles and concepts of cost accounting.
Cost:-
Cost can be defined as the expenditure (actual or notional) incurred on or
attributable to a given thing. It can also be described as the resources that
have been sacrificed or must be sacrificed to attain a particular objective. In
other words, cost is the amount of resources used for something which must
be measured in terms of money. For example – Cost of preparing one cup
of tea is the amount incurred on the elements like material, labor and other
expenses, similarly cost of offering any services like banking is the amount
of expenditure for offering that service. Thus cost of production or cost of
service can be calculated by ascertaining the resources used for the
production or services.
Costing:- Costing may be defined as ‘the technique and process of
ascertaining costs’.
‘Costing is classifying, recording, allocation and appropriation of expenses
for the determination of cost of products or services and for the presentation
of suitably arranged data for the purpose of control and guidance of
management. It includes the ascertainment of every order, job, contract,
process, service units as may be appropriate. It deals with the cost of
production, selling and distribution.
If we analyze the above definitions, it will be understood that costing is
basically the procedure of ascertaining the costs.
‘Costing’ is precisely the procedure which helps management to find out the
costs of products or services.
Cost Accounting:-
Cost Accounting primarily deals with collection, analysis of relevant of cost
data for interpretation and presentation for various problems of
management.
Cost Accounting is defined as, ‘the establishment of budgets, standard
costs and actual costs of operations, processes, activities or products and
the analysis of variances, profitability or the social use of funds’.
Cost Accountancy:-
Cost Accountancy is a broader term and is defined as, ‘the application of
costing and cost accounting principles, methods and techniques to the
science and art and practice of cost control and the ascertainment of
profitability as well as presentation of information for the purpose of
managerial decision making.’
SCOPE OF COST ACCOUNTING
The Scope of Cost Accounting is Very Wide and Includes:
(a) Cost Ascertainment: The main function of cost accounting is the
ascertainment of cost of product or services rendered. It includes collection,
analysis of expenses and measurement of production at different stages of
manufacture. The collection, analysis and measurement requires different
methods of costing for different types of production such as Historical costs,
Standard costs, Process cost, Operation cost etc.
It can be done in two ways, namely
(i) Post Costing, where the ascertainment of cost is done based on actual
information as recorded in financial books.
(ii) Continuous Costing, where the process of ascertainment is of a
continuous nature i.e. where cost information is available as and when a
particular activity is completed, so that the entire cost of a particular job is
available the moment it is completed.
(b) Control of Costs: In the era of competition, the goal of every business is
to sustain; in costs at the lowest point with efficient operating conditions. To
sustain, It is essential to examine each individual item of cost in the light of
the services or benefits obtained so that maximum utilisation of the money
expended or- it may be recovered. This requires planning and use of
standard for each item of cost for locating deviations, if any, and taking
remedial measures.
(c) Proper matching of cost with revenue: In cost accounting manager
prepares monthly or quarterly statements to reflect the cost and income
data identified with the sale of that period.
(d) Aids to Management Decision-making: Decision-making is a process of
choosing between two or more alternatives, based on the resultant outcome
of the various alternatives. A Cost Benefit Analysis also needs to be done. All
this can be achieved through a good cost accounting system.
NATURE OF COST ACCOUNTING
The nature of cost accounting can be brought out under the following
headings:
1. Cost accounting is a branch of knowledge: Though considered as a
branch of financial accounts, cost accounting is one of the important branch
of knowledge, i.e. , a discipline by itself. It is an organised body of knowledge
consisting of its own principles, concepts and conventions. These principles
and rules of course vary from industry to industry.
2. Cost accounting is a science : Cost accounting is a science as it is a
body of systematic knowledge relating to not only cost accounting but
relating to a wide variety of subjects such as law, office practice and
procedure, data processing, production and material control, etc. It is
necessary for a cost accountant to have intimate knowledge of all these field
of study in order to carry on his day-to-day activities. But it is to be
admitted that it is not a perfect science as in the case of natural science.
3. Cost accounting is an art : Cost accounting is an art in the sense it
requires the ability and skill on the part of cost accountant in applying the
principles, methods and techniques of cost accountancy to various
management problems. These problems include the ascertainment of cost,
control of costs, ascertainment of profitability, etc.
4. Cost accounting is a profession : In recent years cost accounting has
become one of the important professions which has become more
challenging. This view is evident from two facts. First, the setting up of
various professional bodies such as National Association of Accountants
(NAA) in USA. The Institute of Cost and Management Accountants in UK,
the Institute of Cost and Works Accountants in India and such other
professional bodies both in developed and developing countries have
increased the growing awareness of costing profession among the people.
Secondly, a large number of students have enrolled in these institutes to
obtain costing degrees and memberships for earning their livelihood.
Functions of Cost Accounting
The functions of cost accountant may be enumerated under the following:
Traditional Functions
The traditional functions comprise of the routine functions of cost
accountant. Such functions are as follows:
(a) To establish various cost centres in the organisation.
(b) To ascertain the cost of every product, job or process both in terms of
total and per unit of product.
(c) To design suitable system for defining responsibilities and controlling
cost.
(d) To provide necessary data to enable management in fixing the price.
(e) To prepare reports on wastages of material, loss of labour time, idle
capacity of machines so as to improve profitability of business.
(f) To implement cost control techniques such as budgetary control and
standard costing.
(g) To prepare cost schedules to assist management in making decisions and
in formulating policies.
(h) To design suitable forms for organising an effective system of reporting
which ensures provision of adequate cost data to all levels of management.
(i) To assist management in the valuation of closing stock of raw materials
and work-in-progress so that too much of capital is not locked up in
unnecessary inventories.
(j) To prepare periodical cost statements and profit and loss account.
Modern Functions
In recent times the functions of a cost accountant are not only confined to
ascertain and control cost but extend far beyond these functions. This is on
account of the additional responsibilities arising from the various branches
of accounting, works organisation, office management and administration,
methods of statistical analysis, system analysis These modern functions are
as follows:
(i) Supervising the functions of mechanised accounting.
(ii) Organisation of internal audit in the field of accounting.
(iii) To work in close co-ordination with various departmental managers so
as to implement cost reduction programmes and methods of improvement.
(iv) To undertake cost audit programmes as per the directives issued by the
government and the provision of the Companies Act of 2013.
PURPOSES OR OBJECTS OF COST ACCOUNTS
Costing serves number of purposes among which the following are
considered to be most important:
1. Ascertainment of cost: This was considered to be the primary objective
of cost accounting in the initial stages of its development. Cost
ascertainment involves the collection and classification of expenses at the
first instance. Those items of expenses which are capable of charging
directly to the products manufactured are allocated. Then the other
expenses which are not capable of direct allocation are apportioned on some
suitable basis. Thus the cost of production of goods manufactured is
ascertained. In this process, cost accounting involves maintenance of
different books to record various elements of cost. Cost of production is
ascertained by using any of the costing technique such as historical costing,
marginal costing, etc.
2. Cost control: At one time cost control was considered as secondary
objective of cost accounts. But in modern times it constitutes the primary
purpose because of its utmost importance in all business undertakings.
Cost control is exercised at different stages in a factory, viz., acquisition of
materials, recruiting and deployment of labour force, during the production
process and so on. As such we have material cost control, labour cost
control, production control, quality control and so on. However, control over
cost is exercised through the techniques of budgetary control and standard
costing. The control techniques enable the management in knowing the
operating efficiency of a business.
3. Determination of selling price: Every business organisation aims at
maximising profit. Total cost of production constitutes the basis on which
selling price is fixed by adding a margin of profit. Cost accounting furnishes
both the total cost of production as well as cost incurred at each and every
stage of production. No doubt other factors are taken into consideration
before fixing price such as market conditions, the area of distribution,
volume of sales, etc. But cost plays the dominating role in price fixation.
4. Frequent preparation of accounts and other reports: The management
of every business constantly rely upon the reports on cost data in order to
know the level of efficiency relating to purchase, production, sales and
operating results.
Financial accounting provides information only at the end of the year
because closing stock value is available only at the end of the year. But cost
accounts provide the value of closing stock at frequent intervals by adopting
a “continuous stock verification system”. Using the value of closing stock it
is possible to prepare final accounts and know the operating results of the
business.
5. To provide a basis for operating policy:
Cost data to a great extent helps in formulating the policies of a business
and in decision-making. As every alternative decisions involve investment of
capital outlay, costs play an important role in decision- making. Therefore
availability of cost data is a must for all levels of management. Some of the
decisions which are based on cost are (a) make or buy decision,(b)
manufacturing by mechanisation or automation, (c) whether to close or
continue operation in spite of losses.
Advantages of Cost Accounting: Good costing system serves the needs of a
large sections of people. The advantages of cost accounting are discussed
below:
Advantages Of Cost Accounting To Management
1. Fixation of responsibility: Whenever a cost centre is established, it
implies establishing a kind of relationship between superior and
subordinates. Thus, responsibilities are fixed on every individual who is
concerned with incurrence of cost.
2. Measures economic performance: By applying cost control techniques
such as budgetary control and standard costing it helps in knowing the
performance of business.
3. Fixation of price: By providing cost data it helps management to fix the
selling price in advance. Hence, quotations can be supplied to prospective
customers to secure orders.
4. Aids in decision-making: It helps management in making suitable
decisions such as make or buy, replace manual labour by machines, shut
down or continue operations based on cost reports.
5. Helps in the preparation of interim final accounts: By the process of
continuous stock taking it enables to know the value of closing stock of
materials at any time. This facilitates preparation of final accounts wherever
desired.
6. Helps in minimising wastages and losses: Cost accounting system
enables to locate the losses relating to materials, idle time and under
utilisation of plant and machinery.
7. Facilitates comparison: It facilitates cost comparison in respect of jobs,
process, and departments and also between two periods. This reveals the
efficiency or otherwise of each job, process or department.
8. Assists in increasing profitability: Costing reports provide information
about profitable or unprofitable areas of operation. The management can
discontinue that product line or that department which are responsible for
incurring losses and only profitable line of activities alone are retained.
9. Reconciliation with financial accounts: A well maintained cost
accounting system facilitates reconciliation with financial accounts to check
the arithmetical accuracy of both the systems.
10. It guides future production policy: Cost data help management in
determining future production policy. Any expansion or contraction of
production for the future is based on past cost data.
Advantages to Employees
1. Cost accounting system enables employees to earn better wages through
overtime wages and incentive systems of wage payment.
2. By providing better facilities it ensures job security to employees.
3. Employees benefit by merit rating techniques which is conducted by
scientific process.
Advantages To Creditors
1. It increases the confidence of creditors in the capital employed in the
business.
2. The frequent preparation of reports and statements help in knowing
solvency position of the business.
Advantages To Government
1. It helps government in formulating policies regarding export, import,
taxation, price control measures, wage fixation, etc.
2. It helps in assessing excise duty, sales tax and income tax of the
business.
3. Costing information helps in preparing national plans.
Advantages To Society
1. Cost reduction and cost control programmes go to minimise cost of
production of goods and services. A portion of the reduced cost of
production is shared by customers by paying less price for goods and
services.
2. It offers employment opportunities in the cost accounting department in
the capacity of cost accountants and cost clerks.
Limitations of Cost Accounting
1. It is expensive: The system of cost accounting involves additional
expenditure to be incurred in installing and maintaining it. However, before
installing it, care must be taken to ensure that the benefits derived is more
than the investment made on this system of accounting.
2. The system is more complex: As the cost accounting system involve
number of steps in ascertaining cost such as collection and classification of
expenses, allocation and apportionment of expenses, it is considered to be
complicated system of accounts. Moreover the system makes use of several
documents and forms in preparing the reports. This will tend to delay in the
preparation of accounts.
3. Inapplicability of same costing method and technique: All business
enterprises cannot make use of a single method and technique of costing. It
all depends upon the nature of business and type of product manufactured
by it. If a wrong technique and method is used, it misleads the results of
business.
4. Not suitable for small-scale units: A cost accounting system is
applicable only to a large-sized business but not to small-sized one. Hence,
there is limitation to its application to all types of business.
5. Lack of accuracy: The accuracy of cost accounts get distorted owing to
the use of notional cost such as standard cost, estimated cost, etc.
6. It lacks social accounting: Cost accounting fails to take into account
the social obligation of the business. In other words, social accounting is
outside the purview of cost accounts.
Criticisms OR Objections Levelled Against Cost Accounts
Despite several benefits offered by cost accounts, critics have levelled the
following criticisms against it:
1. Cost accounting is merely a system of estimates and probabilities:
Though the main purpose of cost accounting is to ascertain the cost of
production with a reasonable degree of accuracy, yet absolute accuracy is
not possible owing to the two reasons. (a) Indirect expenditures are absorbed
on the basis of predetermined rates instead of actual rates, and (b) The
material cost and labour cost is inflated so as to cover the normal loss and
wastage of materials and normal idle time of workers.
2. Cost accounting is unnecessary in such business enterprises which
make large profit: It is argued that industries which earn large amount of
profit need not have a system of cost accounting. This statement is
absolutely wrong. Earning of more profit by industry does not necessarily
mean that its cost of production is lowest and there is no scope for further
reduction in the cost. Profit represents the difference between the selling
price and the cost of a product. Profit earned by a business may be high
because of increased price prevailing in the market. Two or more than two
products manufactured by business may earn profit for one line of product
and loss by other. The profit earned by one product may out weight the loss
suffered by other product thus resulting in overall profit. So it is wrong to
judge the efficiency of the business on the basis of overall profitability of the
business. If necessary steps are taken to reduce or eliminate losses suffered
by a second line product, the industry would earn more amount of profit. It
is in this context that a system of costing is felt.
3. It is unnecessary: This criticism is levelled owing to lack of
understanding of the objectives and advantages of costing. In the present-
day competitive world, every manufacturer must know the cost of
production for each article so that he can fix selling price on a reliable and
reasonable basis. Further he can also compare his selling price thus fixed
with the price prevailing in the market. Cost ascertainment involves
application of certain principles and techniques. Having ascertained the
cost, control techniques are used to keep the costs under check and thereby
increase the profit. Thus it can be said that cost accounting is necessary in
most of the concerns.
4. It is expensive: This criticism is true as long as the benefits derived from
this system are not commensurate with the investment made on it. But by
carefully designing the system so as to suit the business, the criticism can
be nullified.
5. Competition governs price and hence there is no need for costing
system: Some critics contend that in these days of competition prices are
determined by the forces of demand and supply as against fixation of selling
price by adding a desired margin of profit on the cost price. This argument is
incorrect. Even in this situation cost accounts disclose the margin of profit
that is earned by comparing the market price and cost of production. It
impresses upon management the need to reduce cost by increasing the
volume of production or by elimination of losses and wastages if any. If the
cost price tend to be higher than the market price, it is desirable to abandon
such product line and pay attention to profitable line of products.
6. There is no need for costing where production efficiency is high: The
statement is misleading as without a yardstick to measure the efficiency it is
not possible to appraise the efficiency of a business. Cost accounting system
offers number of techniques such as standard costing, budgetary control,
inter-firm comparison and so on. The cost of production can also be
compared between two periods of time to know whether business is
currently running efficiently when compared to previous year. In case of
inefficient operation remedial measures can be taken to improve the
business.
7. Other objections: Some other objections that are raised against the
installation of cost accounting system are as follows:
(a) It is a mere matter of forms and rulings: Often it is argued that the
cost accounting system degenerates into a matter of mere forms and rulings.
This is not the defect of cost accounting system but the way in which the
system is maintained. No doubt different forms are necessary under costing
system but they must be simplified and altered to meet the changing
condition.
(b )Failure in many cases: The system of cost accounting is often
condemned as defective in as much as it has failed to produce the desired
result. The defect does not lie in the costing system but for some other
reasons such as indifferent attitude of the management, lack of adequate
facilities, non-cooperation’s or opposition from employees. These defects can
be overcome by reversing the above trend.
(c )For want of necessity: It is contended by some that costing is of recent
origin and that its application was not felt in the past. Though it was not
used earlier, still many industries prospered. So it is felt by some critics that
the installation of costing involves unnecessary expenditure. However, it is
to be remembered that today’s business functions in a competitive
conditions and every manufacturer must know the actual cost of production
in order to reduce the selling price.
Many industrial failures in the past may be attributed to the lack of
knowledge on the part of management relating to the actual cost of
production thereby selling product below cost.
Classification of Costs: - An important step in computation and analysis of
cost is the classification of costs into different types. Classification helps in
better control of the costs and also helps considerably in decision making.
Classification of costs can be made according to the following basis.
A. Classification according to elements: - Costs can be classified
according to the elements. There are three elements of costing, viz. material,
labor and expenses. Total cost of production/ services can be divided into
the three elements to find out the contribution of each element in the total
costs.
B. Classification according to nature: - As per this classification, costs
can be classified into Direct and Indirect. Direct costs are the costs which
are identifiable with the product unit or cost centre while indirect costs are
not identifiable with the product unit or cost centre and hence they are to be
allocated, apportioned and then absorb in the production units. All elements
of costs like material, labor and expenses can be classified into direct and
indirect. They are mentioned below.
i. Direct and Indirect Material :- Direct material is the material which is
identifiable with the product. For example, in a cup of tea, quantity of milk
consumed can be identified, quantity of glass in a glass bottle can be
identified and so these will be direct materials for these products. Indirect
material cannot be identified with the product, for example lubricants, fuel,
oil, cotton wastes etc cannot be identified with a given unit of product and
hence these are the examples of indirect materials.
ii. Direct and Indirect Labor :- Direct labor can be identified with a given
unit of product, for example, when wages are paid according to the piece
rate, wages per unit can be identified. Similarly wages paid to workers who
are directly engaged in the production can also be identified and hence they
are direct wages. On the other hand, wages paid to workers like sweepers,
gardeners, maintenance workers etc are indirect wages as they cannot be
identified with the given unit of production.
iii. Direct and Indirect Expenses :- Direct expenses refers to expenses that
are specifically incurred and charged for specific or particular job, process,
service, cost center or cost unit. These expenses are also called as
chargeable expenses. Examples of these expenses are cost of drawing,
design and layout, royalties payable on use of patents, copyrights etc,
consultation fees paid to architects, surveyors etc. Indirect expenses on the
other hand cannot be traced to specific product, job, process, service or cost
center or cost unit. Several examples of indirect expenses can be given like
insurance, electricity, rent, salaries, advertising etc.
It should be noted that the total of direct expenses is known as ‘Prime Cost’
while the total of all indirect expenses is known as ‘Overheads’.
C. Classification according to behavior :- Costs can also be classified
according to their behavior.
This classification is explained below.
i. Fixed Costs :- Out of the total costs, some costs remain fixed irrespective
of changes in the production volume. These costs are called as fixed costs.
The feature of these costs is that the total costs remain same while per unit
fixed cost is always variable. Examples of these costs are salaries,
insurance, rent, etc.
ii. Variable Costs :- These costs are variable in nature, i.e. they change
according to the volume of production. Their variability is in the same
proportion to the production the increase is exactly in the same proportion
of the production. Another feature of the variable cost is that per unit
variable cost remains same while the total variable costs will vary. Examples
of variable costs are direct materials, direct labor etc.
iii. Semi-variable Costs :- Certain costs are partly fixed and partly variable.
In other words, they contain the features of both types of costs. These costs
are neither totally fixed nor totally variable. Maintenance costs, supervisory
costs etc are examples of semi-variable costs. These costs are also called as
‘stepped costs’.
D. Classification according to functions :- Costs can also be classified
according to the functions/activities. This classification can be done as
mentioned below.
i. Production Costs :- All costs incurred for production of goods are known
as production costs.
ii. Administrative Costs :- Costs incurred for administration are known as
administrative costs. Examples of these costs are office salaries, printing
and stationery, office telephone, office rent, office insurance etc.
iii. Selling and Distribution Costs :- All costs incurred for procuring an
order are called as selling costs while all costs incurred for execution of
order are distribution costs. Market research expenses, advertising, sales
staff salary, sales promotion expenses are some of the examples of selling
costs. Transportation expenses incurred on sales, warehouse rent etc are
examples of distribution costs.
iv. Research and Development Costs :- In the modern days, research and
development has become one of the important functions of a business
organization. Expenditure incurred for this function can be classified as
Research and Development Costs.
E. Classification according to time :- Costs can also be classified
according to time. This classification is explained below.
I. Historical Costs :- These are the costs which are incurred in the past, i.e.
in the past year, past month or even in the last week or yesterday. The
historical costs are ascertained after the period is over. In other words it
becomes a post-mortem analysis of what has happened in the past. Though
historical costs have limited importance, still they can be used for
estimating the trends of the future, i.e. they can be effectively used for
predicting the future costs.
II. Predetermined Cost :- These costs relating to the product are computed
in advance of production, on the basis of a specification of all the factors
affecting cost and cost data. Predetermined costs may be either standard or
estimated. Standard Cost is a predetermined calculation of how much cost
should be under specific working conditions. It is based on technical studies
regarding material, labor and expenses. The main purpose of standard cost
is to have some kind of benchmark for comparing the actual performance
with the standards. On the other hand, estimated costs are predetermined
costs based on past performance and adjusted to the anticipated changes. It
can be used in any business situation or decision making which does not
require accurate cost.
F. Classification of costs for Management decision making :- One of the
important function of cost accounting is to present information to the
Management for the purpose of decision making. For decision making
certain types of costs are relevant. Classification of costs based on the
criteria of decision making can be done in the following manner
I. Marginal Cost: - Marginal cost is the change in the aggregate costs due to
change in the volume of output by one unit. For example, suppose a
manufacturing company produces 10,000 units and the aggregate costs are
Rs. 25,000, if 10,001 units are produced the aggregate costs may be Rs.
25,020 which means that the marginal cost is Rs. 20.Marginal cost is also
termed as variable cost and hence per unit marginal cost is always same,
i.e. per unit marginal cost is always fixed. Marginal cost can be effectively
used for decision making in various areas.
II. Differential Costs :- Differential costs are also known as incremental
cost. This cost is the difference in total cost that will arise from the selection
of one alternative to the other. In other words, it is an added cost of a
change in the level of activity. This type of analysis is useful for taking
various decisions like change in the level of activity, adding or dropping a
product, change in product mix, make or buy decisions, accepting an export
offer and so on.
III. Opportunity Costs :- It is the value of benefit sacrificed in favor of an
alternative course of action. It is the maximum amount that could be
obtained at any given point of time if a resource was sold or put to the most
valuable alternative use that would be practicable. Opportunity cost of
goods or services is measured in terms of revenue which could have been
earned by employing that goods or services in some other alternative uses.
IV. Relevant Cost :- The relevant cost is a cost which is relevant in various
decisions of management. Decision making involves consideration of several
alternative courses of action. In this process, whatever costs are relevant are
to be taken into consideration. In other words, costs which are going to be
affected matter the most and these costs are called as relevant costs.
Relevant cost is a future cost which is different for different alternatives. It
can also be defined as any cost which is affected by the decision on hand.
Thus in decision making relevant costs plays a vital role.
V. Replacement Cost :- This cost is the cost at which existing items of
material or fixed assets can be replaced. Thus this is the cost of replacing
existing assets at present or at a future date.
VI. Abnormal Costs: - It is an unusual or a typical cost whose occurrence is
usually not regular and is unexpected. This cost arises due to some
abnormal situation of production. Abnormal cost arises due to idle time,
may be due to some unexpected heavy breakdown of machinery. They are
not taken into consideration while computing cost of production or for
decision making.
VII. Controllable Costs :- In cost accounting, cost control and cost
reduction are extremely important. In fact, in the competitive environment,
cost control and reduction are the key words. Hence it is essential to identify
the controllable and uncontrollable costs. Controllable costs are those which
can be controlled or influenced by a conscious management action. For
example, costs like telephone, printing stationery etc can be controlled while
costs like salaries etc cannot be controlled at least in the short run.
Generally, direct costs are controllable while uncontrollable costs are
beyond the control of an individual in a given period of time.
VIII. Shutdown Cost :- These costs are the costs which are incurred if the
operations are shut down and they will disappear if the operations are
continued. Examples of these costs are costs of sheltering the plant and
machinery and construction of sheds for storing exposed property.
Computation of shutdown costs is extremely important for taking a decision
of continuing or shutting down operations.
IX. Capacity Cost :- These costs are normally fixed costs. The cost incurred
by a company for providing production, administration and selling and
distribution capabilities in order to perform various functions. Capacity
costs include the costs of plant, machinery and building for production,
warehouses and vehicles for distribution and key personnel for
administration. These costs are in the nature of long-term costs and are
incurred as a result of planning decisions.
X. Urgent Costs :- These costs are those which must be incurred in order to
continue operations of the fi rm. For example, cost of material and labor
must be incurred if production is to take place.
Costing Methods and Techniques :-
It is necessary to understand the difference between the costing methods
and techniques. Costing methods are those which help a firm to compute
the cost of production or services offered by it. On the other hand, costing
techniques are those which help a firm to present the data in a particular
manner so as to facilitate the decision making as well as cost control and
cost reduction. Costing methods and techniques are explained below.
Methods of Costing :- The following are the methods of costing.
I. Job Costing :- This method is also called as job costing. This costing
method is used in firms which work on the basis of job work. There are
some manufacturing units which undertake job work and are called as job
order units. The main feature of these organizations is that they produce
according to the requirements and specifications of the consumers. Each job
may be different from the other
one. Production is only on specific order and there is no pre demand
production. Because of this situation, it is necessary to compute the cost of
each job and hence job costing system is used. In this system, each job is
treated separately and a job cost sheet is prepared to find out the cost of the
job. The job cost sheet helps to compute the cost of the job in a phased
manner and finally arrives the total cost of production.
II. Batch Costing :- This method of costing is used in those firms where
production is made on continuous basis. Each unit coming out is uniform in
all respects and production is made prior to the demand, i.e. in anticipation
of demand. One batch of production consists of the units produced from the
time machinery is set to the time when it will be shut down for maintenance.
For example, if production commences on 1st January 2007 and the
machine is shut down for maintenance on 1st April 2007, the number of
units produced in this period will be the size of one batch. The total cost
incurred during this period will be divided by the number of units produced
and unit cost will be worked out. Firms producing consumer goods like
television, air-conditioners, washing machines etc use batch costing.
III. Process Costing :- Some of the products like sugar, chemicals etc
involve continuous production process and hence process costing method is
used to work out the cost of production. The meaning of continuous process
is that the input introduced in the process I travels through continuous
process before finished product is produced. The output of process I
becomes input of process II and the output of process II becomes input of
the process III. If there is no additional process, the output of process III will
be the finished product. In process costing, cost per process is worked out
and per unit cost is worked out by dividing the total cost by the number of
units. Industries like sugar, edible oil, chemicals are examples of continuous
production process and use process costing.
IV. Operating Costing :- This type of costing method is used in service
sector to work out the cost of services offered to the consumers. For
example, operating costing method is used in hospitals, power generating
units, transportation sector etc. A cost sheet is prepared to compute the
total cost and it is divided by cost units for working out the per unit cost.
V. Contract Costing :- This method of costing is used in construction
industry to work out the cost of contract undertaken. For example, cost of
constructing a bridge, commercial complex, residential complex, highways
etc is worked out by use of this method of costing. Contract costing is
actually similar to job costing, the only difference being that in contract
costing, one construction job may take several months or even years before
they are complete while in job costing, each job may be of a short duration.
In contract costing, as each contract may take a long period for completion,
the question of computing of profit is to be solved with the help of a well
defined and accepted method.
Technique of Costing :- As mentioned above, costing methods are for
computation of the total cost of production/services offered by a fi rm. On
the other hand, costing technique help to present the data in a particular
format so that decision making becomes easy. Costing techniques also help
for controlling and reducing the costs. The following are the techniques of
costing.
I. Marginal Costing :- This technique is based on the assumption that the
total cost of production can be divided into fixed and variable. Fixed costs
remain same irrespective of the changes in the volume of production while
the variable costs vary with the level of production, i.e. they will increase if
the production increases and decrease if the production decreases. Variable
cost per unit always remains the same. In this technique, only variable costs
are taken into account while calculating production cost. Fixed costs are not
absorbed in the production units. They are written off to the Costing Profit
and Loss Account. The reason behind this is that the fixed costs are period
costs and hence should not be absorbed in the production.
Secondly they are variable on per unit basis and hence there is no equitable
basis for charging them to the products. This technique is effectively used
for decision making in the areas like make or buy decisions, optimizing of
product mix, key factor analysis, fixation of selling price, accepting or
rejecting an export offer, and several other areas.
II. Standard Costing :- Standard costs are predetermined costs relating to
material, labor and overheads. Though they are predetermined, they are
worked out on scientific basis by conducting technical analysis. They are
computed for all elements of costs such as material, labor and overheads.
The main objective of fixation of standard cost is to have benchmark against
which the actual performance can be compared. This means that the actual
costs are compared with the standards. The difference is called as ‘variance’.
If actual costs are more than the standard, the variance is ‘adverse’ while if
actual costs are less than the standard, the variance is ‘favorable’. The
adverse variances are analyzed and reasons for the same are found out.
Favorable variances may also be analyzed to find out the reasons behind the
same. Standard costing, thus is an important technique for cost control and
reduction.
III. Budgets and Budgetary Control :- Budget is defined as, ‘a quantitative
and/or a monetary statement prepared to prior to a defined period of time
for the policies during that period for the purpose of achieving a given
objective.’ If we analyze this definition, it will be clear that a budget is a
statement, which may be either in monetary form or quantitative form or
both. For example, a production budget can be prepared in quantitative
form showing the target production, it can also be prepared in monetary
terms showing the expected cost of production. Some budgets can be
prepared only in monetary terms, e.g. cash budget showing the estimated
receipts and payments in a particular period can be prepared in monetary
terms only. Another feature of budget is that it is always prepared prior to a
defined period of time which means that budget is always prepared for
future and that too a defined future.
Budgetary control involves preparation of budgets and continuous
comparison of actual with budgets so that necessary corrective action can
be taken. For example, when a production budget is prepared, the
production targets are laid down in the same for a particular period.
Budget and Budgetary Control is one of the important techniques of costing
used for cost control and also for performance evaluation.
 Unit or output costing
The unit of output costing is suitable for the industry, where goods are
manufactured in units and are identical in nature. As its name implies, unit
or output costing is a method of costing under which cost of a single
product, which is produced, by a continuous manufacturing process, is
ascertained or determined. It also determines the amount of each element
constituting such cost.
“Unit costing method is a method of costing applied to ascertain the cost per
unit or production where standard and identical products are
manufactures.”
Meaning of unit or output costing
Unit or output costing is a method of costing, which is applied in those
undertakings where units of output are identical and the cost units are
physical and natural. It is ideally used in those concerns, which produce
only one product or two or more grades of one product in large scale
continuously. This method is, therefore, most commonly used in case of
industries like mines, queries, collieries, breweries, brick-kilns, cement
works, proper mills, sugar milks, textile industry, electrical appliances etc.
The basic concept of this method of costing is to ascertain the cost per unit
of output. The cost per unit is ascertained by dividing the total cost incurred
on the production of a product by the number of unit of that product. In
other words, under this method, total cost is determined by adding all kinds
of incurred costs first the total production units to determine cost per unit.
This basis concept of this method can be expressed as follows:
Cost per unit or unit cost = total cost of production/ total quantity or
number of units produced
This costing method is also knows as single costing since the process of
production includes only one stage or a single operation. Under this method,
generally a statement called cost sheet is prepared to determine cost per
unit or total cost.
Importance of unit or output costing
Unit or output costing helps both in ascertainment and control of cost. It
determines cost per unit of the products on the basis of which the selling
price of products can be fixed. Thus, a unit or output costing has the
following importance:
1. Ascertainment of cost: it helps in ascertainment of total and cost and
cost per unit at different stages of production.
2. Controlling costs: it helps in controlling and reducing costs since time to
time costs are compared from previous period and leakages and wastage are
checked.
3. Fixation of selling price: it provides data about the cost of a job or
product and on the basis of such data appropriate selling price of the
product can be fixed.
4. Submitting tenders: it also helps the business in ascertaining the tender
price by providing information about estimated cost on the basis of part
data.
5. Formulating production policy: it acts as a guide to the manufacturer
and helps him in formulation a profitable production policy.
Limitations of unit or output costing
Unit or output costing is very much important method for ascertaining the
total cost and cost per unit, but it is not free from certain limitations. These
are as under:
1. Limitations of historical cost: unit or output costing, being basically of
historical nature, suffers from all the defects of historical costing.
2. Useful only for homogeneous products: this costing method can be
used only for homogeneous products and not for heterogeneous products.
3. Not sufficient for cost control: this costing system simply determines
total cost and per unit cost of the products which is by itself not sufficient
for cost control.
4. Arithmetical accuracy cannot be checked: under this system, generally
a statement is prepared which does not from a part of the double entry
system. Therefore, arithmetical accuracy cannot be checked under this
system
Methods of unit or output costing 
Unit or output costing is used to determine the cost per unit of production
in a specific period of time. For this, the following methods are used:
• Cost sheet
• Manufacturing account
Cost sheet
Cost sheet is "a document which provides for the assembly of the estimated
detailed cost in respect of a cost center pool a cost unit". It is a period's
document of cost designed to exhibit the total cost and the unit cost of
products in an analytically and detailed form. In other words, a cost sheet
present cost information in such a manner that it can show cost of total
production, quantity of production and  per unit cost of production.
Cost sheet is an operating statement. It analyses and classifies the expenses
on different items for a particular period in a tabular form. It may be
prepared weekly, monthly, quantity, half yearly or yearly at any convenient
interval of time. Similarly, it may be prepared on the basis of actual or
estimated cost depending on the purpose to be achieved. It is online
memorandum statement, not an account. It does not form a part of the
double entry system.
Purposes of cost sheet
A properly prepared statement of cost serves the following purposes: 
a. It helps in fixing selling pries more accurately.
b. It helps comparisons of costing of similar jobs or between costs of similar
periods.
c. It gives information for compilation of estimates. Quotations or tenders.
d. It provides useful information to trace wastage, loses and inefficiencies
and those affect economics.
e. It acts as a guide to the produced and help him in formulation a definitive
production policy.
Tender or quotation sheet
A manufacturing concern is frequently requirement to give tenders or
quotations for supply of goods manufactured by it. Again sometimes, it
needed to make and estimate of the price of the product to plan the
production wisely. The price at which a manufacturing concern agrees to
supply its goods is knows as tender or quotation price. Similarly, an
estimation of the price of the product in advance is knows as  price
estimation.
A tender or quotation is a formal written to supply goods or services or to do
a job for an agreed price i.e. tender or quotation price.
Preparation of tender sheet
Tender or quotation price is estimated price for future period. For
determination of tender or quotation price generally the following based are
used:
One the basis of percentages of overheads
When separate materials and labor costs, other overheads are given and
information for units are not given. Then tender or quotation price is
determined on the basis of percentages of overheads'. In this situation, the
following formulae are used to determine the percentages of overheads:
On the basis of output units
When units or quantity of production for previous period and units  or
quantity for tender or quotation are given but not the separate materials and
labor costs  for tender or quotation, then tender or quotation price is
determined on the basis of per unit cost. In this situation, the following
steps are used:
(i) The period cost-sheet is prepared by taking by previous period data
and by determining cost per unit of different components of costs.
(ii) Then after, an estimated cost sheet (i.e. statement of tender or
quotation) is prepared by multiplying tender or quotation units by cost
per unit of each components of past cost-sheet.
 Unit I: Unit Output Costing

COST SHEET
Production: XXX Period: xxx
Sr. No. Particulars Amount Amount
Opening stock of raw material xxx
+ Material purchased xxx
+ Carriage inward (Carriage on purchase) xxx
+ Octroi on purchase xxx
+ Royalty xxx
xxx
(-) Closing stock of raw material xxx
xxx
(-) Sale of scrap xxx
xxx
(-) Sale of gunny bag xxx
A Raw Material Consumed xxx
+ Direct Wages/Manufacturing wages/direct labour xxx
wages
+ Direct Expenses : xxx
B Prime Cost xxx
+ Factory on cost or Factory overhead or Works on cost:
Indirect expenses xxx
Indirect wages; Unproductive wages xxx
Machine repairing xxx
Factory Rent & Factory Lighting xxx
Estimating expenses (Forecasting Exp.) xxx
Drawing room expenses/Drawing office salary xxx
Salary of Factory Manager xxx
Depreciation of factory (Dep. Of Fact. Building) xxx
Depreciation & Maintenance of machinery xxx
Any expenses connected with factory xxx
Factory insurance & Taxes xxx
Printing & stationary for factory xxx
Director fee for factory xxx
Factory cleaning xxx
Loose tools consumed xxx
Depreciation of loose tools xxx
Indirect material xxx
Gas, coal, oil, grease, lubricants & water for factory xxx
Internal transporting expenses/ haulage xxx xxx
xxx
+ Opening stock of Work-in-progress: xxx
xxx
(-) closing Stock of work-in-progress : xxx
C Factory Cost (Work Cost) : xxx
Office on cost or office overhead :
 Director fee for office xxx
Printing & stationery for office xxx
Legal expenses for office xxx
Depreciation of office furniture xxx
Salary of office employee xxx
Depreciation of office building xxx
Office rent, Sundry office, Management expenses xxx
Administrative expenses xxx
Office insurance xxx
Salary of office manager xxx
General expenses and any expenses of office xxx
Bank fees xxx xxx
D Office Cost (Cost of Production) : xxx
+ Opening Stock of Finished Goods: xxx
xxx
(-) Closing Stock of Finished Goods: xxx
E Cost of Goods Sold: xxx
+ Selling and Distribution on cost :
Advertisement xxx
Commission to selling agent xxx
Carriage outward expenses (Carriage on sale) xxx
Godown rent (Exp. Of finished Goods/godown) xxx
Bad debt xxx
Repairing and maintenance of delivery vans xxx
Counting expenses/counting office salary xxx
Traveling expenses xxx
Rent of sales department xxx
Salary of sales manager xxx
Any expenses of sales department xxx
Lighting bill of sales department xxx
Exp. On stall in Industrial fair xxx
Exp. On show room xxx xxx
Total Cost : xxx
+ Profit xxx
Sales xxx

Important points
(1) If the production in units is given in the problem, in that problem we have
to calculate per unit cost and for that we have to prepare the column of per
unit.
(2) If the work-in-progress is given in the problem, in that problem don’t
prepare the column of per unit.
(3) Selling and distribution expenses will be charge on only sold out goods
(not on production).
(4) In the problem of bricks and slate carriage inward will be include in
factory on cost.
(5) In the problem of cloth and T.V. manufacturing company scrap will be
deduct from Factory oncost (and not from material)
(6) Formula for calculating production :
Sales (in units) xxx
(+) Closing stock of finished goods (in units) xxx
xxx
(-) Opening Stock of finished goods (in units) xxx
Production (in units) xxx

(7) Formula for calculating the sales in units

Opening stock of finished goods (in units) xxx
(+) Production (in units) xxx
xxx
(-) Closing Stock of finished goods (in units) xxx
Sales (in units) xxx

(8) If the opening and closing stock of finished goods in units is given in the
problem but valuation of that stock is not given, in that case this valuation
will be taken on office cost.
(9) At the time of adding the opening stock of finished goods and at the time
of deducting the closing stock of finished goods, in that case don’t take the
calculations in the column of per unit.
(10) Following expenses will not be include in cost sheet :
a. Interest on capital
b. Income tax
c. Loss on sale of fixed assets / investment
d. Goodwill / Preliminary expenses / Discount on issue of share / Under
writers commission, written off
e. Cash discount
f. Donation
g. Interest on bank loan / debenture
h. Provision for general reserve
i. Dividend paid
j. Office transfer expenses
(11) Following income will not be include in cost sheet :
a. Discount / Dividend / Interest / Commission received
b. Share transferred fees received
c. Miscellaneous receipt
d. Profit on sale of fixed assets / Investment.

*****
 UNIT OUTPUT COSTING AND TENDER

1) From the following information you are required to prepare a statement of

cost.
Raw material Purchased 66,000 Stock of work-in-progress 35,000
(30 Sept. 2011)
th

Direct wages 52,500 Sales 2,11,000

Indirect wages 2,750 Factory rent & insurance 15,000
Stock of Raw material (1 Sept 2011)
st
91,500 Depreciation of plant 3,500
Stock of finished goods (1stSept 2011) 54,000 Other factory expenses 10,000
Stock of finished goods (30th Sept 31,000 Wages & commission 6,500
2011) (selling dept)
Stock of Raw Material (30 Sept 2011)
th
75,000
Stock of work-in-progress (1 Sept 28,000 Advertisement
st
3,500
2011)
Carriage inward 1,500 Carriage outward 2,500
Other office expenses 6,500 Office rent & taxes 2,500
2) M/s Pande & Sons has furnished you the following information prepare
Statement of cost.
Raw material consumed 33,000 Factory lighting 2,200
Productive wages 35,000 Factory heating 1,500
Unproductive wages 10,500 Motive power 4,400
Direct expenses 3,000 Haulage 3,000
Factory rent, rates & taxes 7,500 Advertisement 300
Salary of selling department 1,500 Depreciation of office --
Direction of fees (factory) 1,000 Equipment 600
Directors fees (office) 2,000 Office Printing stationary 900
Factory cleaning 500 Office rent 500
Misc. expenses 200 Water supply 1,200
Dep. Of office building 1,000 Factory insurance 1,100
Bad debts written off. 100 Office insurance 500
Commission 1,500 Legal expenses 400
Factory printing & stationary 750 Bank charges 50
Depreciation of delivery van 900

3) Prashant Products Ltd. has furnished you the following information.

Stock of Raw material (31stDec 47,000 Depreciation of factory building 7,100
2011)
Stock of Raw material (31stDec 50,000 Depreciation of furniture 600
2012)
Purchase of Raw material 2,08,000 Director fess 6,000
Drawing office salary 9,600 Fuel & water (factory) 1,500
Counting office salary 14,000 Fuel & water (office) 300
Carriage inward 8,200 General expenses 5,000
Carriage outward 5,100 Manager salary 12,000
Cash discount 3,400 Repair, renewal of factory 10,600
building
Productive wages 1,40,000 Rent, taxes & insurance (factory) 3,000
Rent, taxes & insurance (office) 1,000 Bad debts written off. 4,700
Traveling expenses 3,100 Traveling agents salary 8,400
During the week Manager is spending 40 hours in a factory and 8 hours in
office out of 48 hours duty, throughout the year.

4) The following extract of costing information relates to commodity for the half
year ended 30th June 2012
Purchase of raw material 1,32,000 Stock on 30th June 2012
Direct wages 1,10,000 Raw material 24,464
Carriage inward 1,584 Finished goods (3200 tons) 35,200
Stock on 1 Jan 2012
st
Work in progress 17,600
Raw material 22,000 Cost of factory supervision 8,800
Finished goods (1600 tons) 17,600 Sale of finished goods 3,30,000
Work in progress 5,280 Office rent 44,000
Advertising & selling cost 75 paisa per ton sold. 25,600 tons of commodity was
produced during the period. You are required to prepare a statement showing the
cost & profit.
9) From the following Trial Balance of M/s Gogetter Co. on 30th Sept. 2012.
Particulars Amount Particulars Amount
Inventories : - Finished stock 80,000 Sales 7,68,000
Raw material 1,40,000 Purchase Return 4,800
Work in progress 2,00,000
Office Appliances 17,400
Plant & Machinery 4,60,500
Building 2,00,000
Sales return & rebates 14,000
Material purchased 3,20,000
Freight incurred on material 16,000
Direct labour 1,60,000
Factory supervision 10,000
Repairs & upkeep factory 14,000
Heat light & power 65,000
Rates & taxes 6,300
Indirect labour 18,000
Miscellaneous factory exp. 18,700
Sales commission 33,600
 Sales Travelling 11,000
Sales Promotion 22,500
Distribution Dept. exp 18,000
Office salaries & expenses 8,600
Interest on borrowed funds 2,000
7,72,800 7,72,800
Further details are available as follows :-i) Closing inventories :- a) finished
goods Rs.1,15,000 b) Raw material Rs.1,80,000 c) Work in process Rs.1,92,000
(ii) Accrued expense on :- a) Direct labour Rs.8,000 b) Indirect labour Rs.1,200
c) Interest on Borrowed funds Rs.2,000 (iii) Depreciation to be provided on :-
a) office appliance @ 5% b) Plant & Machinery @ 10% c) Building @ 4% (iv)
Distribution of the following costs :- heat, light & power to factory, office and
distribution in the ratio of 8:1:1; Rates & taxes two thirds to factory and one
third to office. Depreciation on Buildings to factory, office and selling in the
ratio of 8:1:1.
10) A manufacturer makes two kinds of pens AX and XB. The following
particulars relate to these pens for the month of Dec. 2012.
Particulars XA XB
Pens manufactures in units 25,000 12,000
Direct costs (in Rs.):-
Material 3,140 2,650
Wages 9,400 5,700
Power etc. 2,100 1,410
14,640 9,760
Other Costs:- Factory supervision Rs.3,600; Packing wages & expenses Rs.400;
Management expenses Rs.4,440. You are required to prepare a statement
showing the cost of each kind of pen when ready for dispatch taking the
following into consideration :-
i) Factory supervision to be charge in proportion to direct costs.
ii) Packing expenses to be apportioned in the ratio that direct costs plus
factory supervision cost of XA bear to similar costs of XB.
iii) Management expense to be charged in proportion to the pens
manufactured.
11) Jolly Shoes Co. manufactures two payers of shoes A and B. Production costs
for the year ended 31st March 2012 were:
Direct Material 15,00,000
Direct wages 8,40,000
Production overheads 3,60,000
27,00,000
There was no work in progress at the beginning or at the end of the year. It is
ascertained that (a) Direct material in type A consist twice as much as that in
type B shares. (b) The direct wages for type B shoes were 60% at those of type
 A shoes. (c) Production overhead was the same per pair of A and B type (d)
Administrative overhead for each type was 150% of direct wages. (e) Selling
expenses was Rs.1.50 per pair. (f) Production during the year were. Type A :-
40,000 pairs of which 36,000 were sold. Type B :– 1,20,000 pairs of which
1,00,000 were sold. (g) Selling price was Rs.44 for Type A and Rs.28 for Type
B. Prepare statement showing cost and profit.
12) X and Y Shoes Polish Company Ltd. Manufacturer’s Black and Brown Polish
in one standard size of tin retailing at Rs.1.08 and Rs.1.20 respectively.
Following data are supplied to you.
Direct Material : Polish Rs.7,38,000
Tins Rs.2,88,000
Sales for the Direct wages Rs.2,44,800 year were
Black Production overheads Rs.3,67,200 14,40,000 tins
and brown Administrative & selling overheads Rs.1,22,400 6,00,000 tins.
The details of opening and
closing stock in units are given below :
Particulars Black Brown
Opening stock 48,000 1,60,000
Closing stock 1,08,000 60,000
The opening stock of black and brown polish was valued at its production
cost of Rs.0.804 per tin and Rs.0.864 per tin respectively. The cost of raw
material for brown polish is 10% higher than that for black but there is no
difference in the cost of tins. Direct wages for brown are 8% higher than those
of black polish and production overheads are considered to vary with direct
wages. Administrative and selling overhead is absorbed at a uniform rate per
tin of polish sold.
Prepare a statement to show the cost and profit per tin of polish.
13) The Sanika Toys company manufacturers of two types of toys X and Y.
Manufacturing cost for the year ended 31st Dec. 2012 were.
Direct Material Rs.2,00,000
Direct wages Rs.1,12,000
Production overheads Rs.48,000
Manufacturing cost Rs.3,60,000
There is no work in progress at the beginning or at the end of the year. It is
ascertained that:-
(A) Direct Material in type X, cost twice as much as Direct Material in type Y.
(B) The Direct wages for type Y were 60% of those for type X. (C)
Administration overhead for each grade was 200% of Direct Labour. (D)
Selling cost was 25 paisa per toy for each type of toy. (E) Production during
the year was: - Type X:- 40,000 toys of which 36,000 were sold. Type Y:-
1,20,000 toys of which 1,00,000 were sold. (F) Selling price were Rs.7 per toy X
and Rs.5 per toy Y.
Prepare statement showing the total cost per toy for each type of toy and the
 profit made on each type of toy.
14) Manasi Manufacturing Co. manufactures two types of Products A and B, The
information for the year ended on 31st March 2012 is as under :
Rs.
Material 6,75,000
Wages 9,90,000
Works overhead 1,95,000
(1) Direct material used per unit in Product A were, 3 times that of Product B.
(2) Wages per unit in Product B were 2/3rd that of Product A.
(3) Works overhead per unit were the same for both the products.
(4) Administration overheads were 100% of the prime cost in each of the
products.
(5) Selling and Distribution cost was Rs.6 per unit sold for both A and B.
(6) 35000 units of A were produced out of which 32000 units were sold @
Rs.100 per unit.
(7) 30000 units of Product B were produced out of which 25000 units were
sold @ Rs.65 per unit.
Prepare a cost-sheet showing cost and profit in total as well as in per unit.
 TENDER
(1) Titan company has furnished you the following information during the
period of 3 months, within which company has manufactured 5000 wrist
watches of one size and one type.
Stock of Wrist watches on 1st Jan 2012 Nil
Stock of wrist watches on 31 Mar. 2012
st
20,000
Stock of Raw material on 1 Jan 2012.
st
15,000
Stock of Raw material on 31 Mar. 2012
st
5,000
Purchase of raw material 65,000
Direct wages 1,50,000
Indirect wages 35,000
Sales 3,00,000
Company is required to place a tender for 1,500 wrist watches of the same size
and type. If the company wants to earn the same percentage of profit, state
the cost of tender to be mentioned.

(2) BSA-SLR Co. wants to submit the tender for 500 bicycles to earn the same
percentage of profit from the output of last 6 months. The details are as under.
Stock of material on 1st Jan 2012 50,000
Stock of material on 30 June 2012.
th
7,000
Raw material purchased during 6 months 75,000
Direct wages paid during 6 months 1,50,000
Indirect expenses 25,000
Stock of finished goods 1 Jan 2012.
st
Nil
Stock of finished goods 30 June 2012.
th
50,000
During the period of 6 months 2000 bicycles were manufactured and sold. It is
assumed that from 1st July increase in the cost of wages will be 10% and
increase in the cost of material will be 15%. The 2000 bicycles manufactured in
last 6 months were sold for Rs.2,70,000.

(3) GSC company has manufactured 4000 electric pump. The particulars of
expenses are as follows.
Stock of Raw material 1st Oct. 2011. 35,000
Stock of Raw material 31 Mar. 2012.
st
4,900
Stock of finished goods 1 Oct 2011.
st
Nil
Stock of finished goods 31 Mar, 2012.
st
35,000
Purchases 52,500
Factory on cost 17,500
Sales 1,89,000
Wages 95,000
Office on cost 10,000
From 1 April 2012 expected rise in the cost of material will be 15% and in
st
 wages 10%. You are required to prepare a tender for 1000 electric pumps to
gain same percentage of profit.

(4) The following figure relate to the costing of manufacturer of electric fan of
uniform size and quality for a period of 3 months.
Complete stock 1st October 2012 Nil
Complete stock 31 December 2012.
st
20,250
Stock of Raw material 1 October 2012.
st
5,000
Stock of Raw material 31 December 2012.
st
3,500
Factory wages 75,000
Indirect charges 12,500
Material purchased 32,500
Sales 1,12,500
The number of fans manufactured during the three months was 3000. Prepare
a statement showing the cost per fan and the price to be quoted for 750 fans to
realize the same percentage of profit as well realized during the months
referred above assuming identical costs.
(5) Wox cooler company has provided you the following information Prepare a
statement of cost & tender.
Stock of raw material 31st Dec. 2011 42,000
Stock of raw material 31 Dec 2012.
st
20,400
Stock of finished goods 31 Dec. 2011.
st
19,200
Stock of finished goods 31 Dec. 2012.
st
45,000
Wages 2,98,200
Purchases 4,45,500
Sales 8,88,000
Factory on cost 65,604
Office on cost 53,286
Company wants to submit a tender for a machinery which will require
material of Rs.30,000 and wages of Rs.18,000 and which will show a profit of
20% on sales. Factory overheads based on direct wages and an office
overhead is based on factory cost.
(6) The books of Account of ABC Company Ltd. engaged in the manufacturing of
electric pumps shows for 2012; the followings. Material Rs.1,00,000; Direct
wages Rs.2,00,000. Work overheads exp. Rs.50,000; office overheads exp.
Rs.35,000.
Show the Prime cost, the work cost and the total cost of manufacture, the
percentage that the work overheads expenses bear to direct wages and
percentage the office overheads expenses bear to the work cost. What price
should the company quote to manufacture electric pump. Which will require
material worth Rs.800 and Rs.1000 for wages, so that it will yield a profit of
10% on selling price?
(7) In respect of a factory the following figures have been obtained for the year
2012. Cost of material Rs.6,00,000; wages for labour Rs.5,00,000; Factory
overheads Rs.3,00,000; Administration charges Rs.3,36,000; selling charges
Rs.2,24,000; Distribution charges Rs.1,40,000; Profit Rs.4,20,000. A work order
has been executed in 2013 and the following expenses have been incurred.
Material Rs.8000; Wages Rs.5000. Assuming in 2009 the rate of factory
overhead has gone up by 20%. Distribution charges have been gone down by
10% and Selling and Administration charges each gone up by 12% at what
price should the product be sold, so as to earn the same rate of profit on the
selling price as in 2012. Factory overhead is based on direct labour and
Administration selling & distribution charges on factory cost.
(8) The following cost data are available from the books for the year ended 31 st
March 2012. Direct material 9,00,000; Direct wages 7,50,000; Profit 6,09,000
selling & Distribution overhead 5,25,000; Administration overhead
Rs.4,20,000, Factory overhead 4,50,000. Prepare a cost sheet. In 2011 - 12 the
factory has received an order for a number of jobs. It is estimated that the
direct material would be Rs.12,00,000 and direct labour would cost
Rs.7,50,000. What would be the price for these jobs if the factory intends to
earn the same rate of profit on sales, assuming that the selling & distribution
overhead has gone up by 15%. The factory recovers factory overhead as a
percentage of direct wages and administration and selling & distribution
overheads as a percentage of work cost, based on the cost rates prevalent in
the previous year?
(9) A scooter manufacturer had produced 100 scooter at a total cost of Rs.3,08,000
during the year 2012. and sold for Rs.4000 each. Particulars of expenses are as
follows (1) Material Rs.1,00,000 (2) Direct wages Rs.1,50,000 (3) Factory on
cost Rs.30,000 (4) Office on cost Rs.28,000. For the year 2013 he estimates as
follows:-
a) Each scooter will require material of Rs.1,000 and wages of Rs.1,500.
b) Ratio of wages with factory on cost & office on cost with factory cost. The
percentage for both the expense will be same for 2013. If selling price will
increase by Rs.80. Show the profit that will earn by per scooter.
(12) Vijay scooter Ltd. has manufactured 175 scooter in the year 2012 and sold out
for Rs.5,400 per scooter. The cost was made up of.
Material 2,82,000
Direct wages 3,24,000
Factory on cost 48,600
Office on cost 65,460
Total 7,20,060
For the next year 2013, he estimates:-
a) That each scooter will require material of Rs.1,600 and wages of Rs.1800.
b) That the percentage of factory on cost to wages and office on cost to factory
 cost as of the last year. (c) Prepare statement of cost showing the profit he
should earned per scooter, if selling price is reduced by Rs.200.
13) Bharat electronics company has manufactured 10,000 T.V. sets in year 2012. The
particulars of expense are as follow.
Material 90,000 Sale of scrap 2,000
Motive power 10,000 Plant repairs 11,500
Indirect wages 15,000 Direct wages 60,000
Repair charges of faulty work 3,000 Consumable stores 2,000
Selling expenses 5,500 Heating 5,500
Office expenses 33,500 Net selling price 31.60
From 1 Jan 2012. It was agreed that the sales price should be reduced by 60
st

paisa and was confirmed to Rs.31. Due to increase in efficiency, the output will
increase by 50% and there will be increase in cost of material and wages by
10%. Prepare statement of cost for 2012 and estimated statement cost for 2013.
14) M/s VE Engineering Company Ltd. has manufactured 2000 sewing machines.
The particulars of expense are as follows:-
Material consumed 1,60,000 Selling expenses 60,000
Wages 2,40,000 General expenses 40,000
Factory on cost 1,00,000 Salaries 1,20,000
Rent, Rates & insurance 20,000 Sales 8,00,000
Company plans for 2013 to manufactured 3000 sewing machines showing a
profit at 10% on sales. 1) Increase in the cost of material by 20%. 2) Increase in
the cost of wages by 10%. 3) Factory on cost will increase in joint proportion
of material and wages. 4) Per unit selling expense will remain same. 5) Other
expenses will remain unaffected by the rise in output.
15) M/s ABC company Ltd. has provided you the financial position for the year
31st March 2012. You are required to prepare a statement of cost and also
prepared proposed statement of cost for 2013.
Trading & P & L A/c for the year ended 31st March 2012.
Particulars Amount Particulars Amount
Cost of material 80,000 Sales 4,00,000
Direct wages 1,20,000
Factory expenses 50,000
Gross profit 1,50,000
4,00,000 4,00,000
Office salaries 60,000 Gross profit 1,50,000
Rent, Rates & insurance 10,000
Selling expenses 30,000
General expenses 20,000
Net profit 30,000’
1,50,000 1,50,000
For the next year, it is estimated that, output will go up by 200 Fridge, out of
 the last year’s 1000 fridge. Increase in cost of material by 20%; increase in cost
of wages by 5%. Factory on cost will increase in joint proportion of material &
wages. Per unit selling expenses remain same and other expenses will remain
unaffected, by the rise in output.
16) The Raj Narayan Co. has furnished you the summarized Trading P & L A/c
for the year ending on 31 st March 12 in which 800 Typewriter were sold by the
Co. Trading & profit & loss a/c for the year ended 31st March 2013.
Particulars Amount Particulars Amount
Material 32,000 Sales 1,60,000
Direct wages 48,000
Factory expenses 20,000
Gross profit 60,000
1,60,000 1,60,000
Office salaries 24,000 Gross profit 60,000
Rent, Rates & insurance 4,000
Selling expenses 8,000
General expenses 12,000
Net profit 12,000
60,000 60,000
Following is the estimates were made by costing department of company for
the year ending 31st March 2013.
(a) The output & sales of typewriter will be 1000 units. (b) The price of
material will rise by 25% on the previous year’s level. (c) Wages during the
year will rise by 12.5%. (d) Manufacturing expense will rise in proportion to
the combined cost of material and wages. (e) Selling cost per unit will remain
unchanged. (f) Other expense will be remaining unaffected by the rise in
output.
From the above information prepare a cost statement showing the price at
which a typewriter would be marked so as to show a profit of 10% on the
selling price.
17) The cost structure of an article the selling price of which is Rs. 45,000 is as
follows.
Direct material 50% of Total cost
Direct labour 20% of Total cost
Overhead’s 30% of Total cost
An increase of 15% in the cost of material and 25% in the cost in labour is
anticipated. These increased costs in relation to the present price would cause a
25% decrease in the amount of present profit per article. You are required to
prepare :- a statement of profit per article as at present.
18) The metal product company produces a sewing machine that sells for Rs.300.
An increase of 15% in cost of material and 10% in cost of labour is anticipated.
 If the only figures available are those given below. What must be the selling
price to give the same percentage of profit as before?
A) Material cost has been 45% of cost of sales. B) Labour cost has been 40% of
cost of sales. C) Overheads costs have been 15% of cost of sales. D) The
anticipation increased cost in relation to the present sales price would cause
35% decrease in the present gross profit.
19) The cost structure of an article, the selling price of which is Rs.500, is as follows.
Direct material 50% of total cost; direct labour 30% of total cost; overhead
balance.
Due to anticipated increase in existing material price by 20% and in the existing
labour rate by 10% the existing profit would come down by 30% if the selling
price remains unchanged.
Prepare comparative statement showing the cost, profit & selling price under
the present conditions and with the increase expected for the future assuming
the same percentage of profit on cost as under the present conditions had to be
earned. (Calculations may be made to the nearest rupee)
20) Indian plastic makes an average profit of rs.1.25 per plastic bucket on a selling
price of Rs.16 per piece by producing 60,000 buckets or 60% of the potential
capacity. Its cost of sales per piece is:

Particular Rs.
Direct Material 5.00
Direct Wages 1.65
Work overheads 5.00(50%fixed)
Admin overhead 2.70(fixed)
Sales overhead 0.40(25%variable)
During the current year it intends producing the same number but anticipate
that fixed charges will go up by 10%, while the rate of direct labour and direct
material will increase 3.33% and 6% respectively. There is no scope for
increasing the selling price due to keen competition. Under this situation, it
obtains an offer from Indian Railway for further 20% of its capacity. What
minimum price per piece should be quoted to the railway to insure that it earns
an overall profit of Rs.1,00,000.
Prepare a statement for a submission to your client.
21) The cost manufacturing 5000 units of a commodity comprises:
Amount
a) Material 20,000
b) Wages 25,000
c) Chargeable expenses 400
d)Fixed overheads 16,000
e) Variable overheads 4,000
for manufacturing every 1000 extra units of a commodity the cost of production
increases as follows:
a) Material: proportionately
b) Wages: 10% less proportionately
c) Chargeable expenses: no extra cost
d) Fixed overheads Rs.200 extra
e) Variable overheads: 25% less than proportionately.
Calculate the estimated cost of producing 8000 units of a commodity and show
how much it will defer if a flat rate of factory overheads based on wages were
charged.

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