Cost Accounting

Cost Accounting
Introduction:The present business is characterized by severe competition.
Business endeavour to overcome competition in many ways. One of them is to sell
goods to consumers at a low price. Therefore it becomes necessary for
manufacturers to manufacture goods at a very low price and also maintain good
quality. These two factors become even more necessary if businesses have to
compete in the global markets.
This situation makes it very important for management of business to have up-to
date reliable and timely information regarding the costs incurred in the process of
production such as costs of raw materials, wages, expenses etc. Such information
enables the management to do the following – control costs, reduce costs, pay
attention to quality, improve productivity and also take several crucial decisions
relating to costs.

Meaning
• Cost – In a very general and broad sense, the term cost means price or an
expense. In the present context , cost has a more definite and focused
meaning. Therefore, cost, in this context means the actual or notional
expenditure incurred in order to manufacture or produce a commodity or a
service.
“Cost is the amount of expenditure incurred or attributable to a given
thing.”ICMA (London)
• Costing – Costing is the process of calculating the cost of manufacturing a
commodity or generating a service. Costing follows certain rules, guidelines,
norms etc in the process of calculating the cost.
“Costing is the process of ascertaining costs.” ICMA, London

• Cost Accounting – Cost Accounting is a more
formal and wider system than costing. It begins
with the recording of costs incurred in the process
of production of a commodity. These costs are
properly classified for the purpose of recording
and the cost of manufacturing the product is
calculated based on these records. Cost
Accounting also includes the activity of presenting
the information form the cost records for the
purpose of cost control. It calculates the cost in
terms of every product, service, contract, process
etc. and also analyses the cost under various
stages.

Objectives of Costing
1. To ascertain cost
Costing aims at ascertainment of the cost of manufacturing goods in terms
of both – the total production as well as a single unit manufactured. This is
done by using various methods to suit different situations and products.
Such cost ascertained becomes the basis of managerial decision.
2. To fix selling price
Every organization has to fix and quote its selling price in terms of one unit
for all its products. The basis for all its price fixation is the calculation of
cost price.
3. To control the cost
Every organization has to improve its efficiency by reducing the costs.
Costing provides comprehensive information and a sound basis for control of
costs and their reduction at a later stage.
4. To aid the management in its decision making
The management of every organization has to take crucial decisions such as
price fixation, price hike, price reduction, capacity utilization, introduction of
new products, withdrawal of existing products, make or buy etc. All these
decisions need information, which can be made available only by costing.

5. To measure and improve performance
Costing provides information to an organization to measure its
performance and also improve the same by setting standards.
6. To identify sources of wastage of materials, labour etc. and enable
the management to reduce them.
7. To provide information to the management relating to profitability
and also enable its maximization.
8. To enable the management to exercise effective control over raw-
materials, semi- finished goods and finished goods and ultimately
reduce the investment in these.
9. To facilitate the conduct of cost audit.
10. To guide the management in formulation of employee motivation
plans such as bonus schemes, incentive schemes etc.

Objectives of Costing
• Price fixation – Cost Accounting enables price fixation of the
products by providing information about the cost of production.
• Price quotations - Cost Accounting enables an organization to
calculate the cost of the products in advance of production based on
various estimates. Thus an organization can quote prices for tenders
and contracts.
• Cost control and cost reduction - Cost Accounting provides systems
for cost control such as standard costing and budgetary control. It
also provides for a system of cost reduction and ultimately enable
the organization to become more competitive.
• Profitable and unprofitable activities - Cost Accounting provides for
an analysis of the organization in terms of different departments
and activities. The unprofitable departments and activities can be
identified and either corrected or shut down.
• Measurement of efficiency - Cost Accounting provides systems to
measure the efficiencies of different inputs and thereby enable the
organization to maintain and even improve efficiency.

• Increasing the profit - Cost Accounting enables an
organization to increase its profit through reducing the cost
by avoiding wastage, inefficiency and under utilization.
• Reasons for profit or loss - Cost Accounting enables an
organization to identify the reasons for profit or loss and
thereby strengthen the organization.
• Information for comparison - Cost Accounting provides
information for comparison of the results for different
periods, different departments, different products etc.
• Helpful to consumers - Cost Accounting enables an
organization to cut its cost of production, sell at lesser prices
and thereby help consumers.
• Guidance to creditors and investors - Cost Accounting
provides guidance to creditors and investors about the
organization and thus assess the credit worthiness.

Limitations of Cost Accounting
• Absence of uniformity in procedures – There is no uniformity
in the procedures followed in Cost Accounting. As a result of
which the same information will show different results when
different procedures are applied.
• Excessive dependence on conventions, estimates and flexible
factors – Such dependence makes it impossible to get exact
results.
• In-affordability of small firms – The installation and operation
of a Cost Accounting system is a little expensive and procedural.
Therefore small firms cannot afford it.
• Difficulty in futuristic applications – Its difficult to apply cost
accounting for certain futuristic aspects.

Difference between Financial Accounting and Cost Accounting:
Point of difference Financial Accounting Cost Accounting
1. Objective
2. Form of accounts
3.Nature of transactions
recorded
4. Terms of recording
To calculate the profit or loss
and also to determine the
financial position.
These are maintained
according to the guidelines of
the Income Tax Act of India
and the Companies Act of
India.
All the transactions of an
organization are recorded.
All the transactions are
recorded in terms of their
monetary values only
To calculate the cost of
production for the purposes of
price fixation and also cost
control.
These are maintained in a
way to suit the requirements
of the company itself
Only those transactions
relating to cost of
manufacture/operation are
recorded.
The transactions are recorded
in terms of monetary values
as well as quantity.

5. Nature of information
used
6. Valuation of stock
7. Periodicity of reporting
8.Provision for control
Financial Accounting deals
with actual facts and
figures.
Stocks are always valued at
their cost or market values
whichever are lesser.
The reporting is done
generally at the end of the
accounting year.
There is no provision for
controlling
Cost Accounting deals with
actual facts and figures and
also with estimates.
Stocks are always valued at
cost.
The reporting is done at the
request of the management.
There is a comprehensive
system to control the costs
of material, labour and
overheads through
techniques such as standard
costing, budgetary control
etc.

9. Efficiency analysis
10. Method of recording
11. Content of reporting
12. Compulsion
No information is provided
to compare the related
efficiencies of workers,
departments, products etc.
The Transactions are
recorded according to the
nature of them.
Reporting is always done in
aggregate.
Financial Accounting has to
be maintained and presented
according to the guidelines
issued by the Companies
Act.
Comprehensive information
is provided to find out and
compare the relative
efficiencies.
The transactions are
recorded according to the
purpose for which recording
is done.
Reporting is done in terms
of products, units,
departments etc.
Maintenance of Cost
Accounting is optional
(Except in certain industries
and they can be maintained
in any manner

13. Nature of costs recorded Financial Accounting deals with
historical costs only.
Cost Accounting deals with
historical as well as pre-
determined costs.
14. Statements prepared Following statements are generally
prepared – Profit and Loss account
and balance sheet are prepared.
Several statements are prepared
according to the requirement.
15. Information for pricing Financial Accounting does not
provide much information for price
fixation.
Cost Accounting provided detailed
information for price fixation and
also price quotations.
16. Responsibility fixation Financial Accounting does not
provide a basis for fixing
responsibility.
Cost Accounting provides a
comprehensive basis for
responsibility.
17. Decision making Financial Accounting provides
limited information for decision
making.
Cost Accounting provides
comprehensive information for
decision making.
18. Extent of transactions Only external transactions –
transactions between the organization
and the outside World only are
recorded.
External as well as internal
transactions – transaction between
two departments of an industry are
recorded.
19. Access to information Anybody can access financial
accounting information.
Cost Accounting information is
generally for the insiders of the
organization only.

Cost Concepts
• Several terms are used in Cost Accounting and one can understand the subject effectively only when one has an understanding of these concepts.
a. Classification of Cost
• A cost is a very crucial aspect for any organization as it is the most important determinant of the selling price and ultimately the profit or loss.
• Therefore a proper understanding of all the classifications of cost enables an organization to deal with cost, more effectively.
• The following are the classifications of Cost:
I. Classification based on time:
Historical cost - This is a cost which has already been incurred.
Pre-determined cost – This is a cost which is estimated in advance of its incurrence
II. Classification based on management’s requirements:
1. Marginal cost – It is the total of variable cost i.e. the total of prime cost items and all the variable overheads. Fixed costs are ignored while calculating the
cost of products under this method.
2. Out-of-pocket cost – An out-of-pocket is that which involves payment of cash to outsiders. These costs are very relevant in price fixation.
3. Incremental or differential cost – This is the additional cost incurred on account of a new project, a new product to be manufactured, increase in scale of
production etc. If such a change results in a reduction in the cost it is called decremental cost.
4. Opportunity cost – This is the loss of income resulting from the withdrawal of an asset from its current use and applying it elsewhere. This is the
opportunity lost in terms of the income generated. Example: When a building which has been rented out is used for the purpose of industry itself, the
loss of rent which the building would have generated is called opportunity cost. Cost Accounting considers not only actual costs but also opportunity
costs. The other examples of opportunity costs are – amount of interest on capital, amount of salary of the proprietor if employed elsewhere etc.
Opportunity cost is also called notional cost, implicit cost or imputed cost. Opportunity cost also can be interpreted as the value of a benefit sacrificed
in favour of an alternate course of action.
5. Replacement cost – This is the cost which has to be incurred to replace an asset in the present price levels. Therefore, the original cost of the asset is not
considered but the cost of replacing it at the present price level is considered.
6. Imputed cost – This is a hypothetical or notional cost which does not involve any cash outflow but is considered only for management decision making.
This is similar to opportunity cost. Imputed costs also must be considered to calculate the actual costs of manufacture.
7. Sunk cost – This is a cost which has been incurred in the past and it cannot be recovered even if the business operations are shut down. Example: The cost
of installing a machine which cannot be got back even by selling the machine. Sunk
8. Relevant cost – This is a cost which has a bearing while decision making regarding a particular matter.

III. Classification according to functions:
1. Manufacturing or production cost – This is a cost which is incurred to manufacture a commodity or to convert raw materials into finished goods. This
includes the cost of purchasing the raw material, transporting them to the factory, getting them converted into finished goods, packaging them and
making them ready for sale. Therefore, manufacturing cost includes the cost of direct material, direct labour, direct expenses relating to production.
2. Office and administration cost – This is the cost of providing administration for the running of the industry. This includes the cost of formulating the
managerial policies, their implementation, maintenance of accounts, control of the organization etc.
3. Selling and distribution cost – This includes all the costs involved in selling the goods manufactured and also their physical distribution to the places of
consumption. It also includes the cost of creation of demand for the product. Examples: cost of advertising, salesmanship, market research,
transportation, warehousing, insurance. Selling and distribution cost is also called after production cost.
4. Research and development cost- Research refers to finding out new techniques of production, improving the existing production techniques and also
developing new technologies. Development refers to implementation of the new technologies, formulae in the actual production.
5. Pre-production cost – This is the cost which is incurred when a new industry is established or a new product is developed.
IV. Classification based on the variability of the cost in relation to the volume of production
1. Fixed cost – This is a cost which remains fixed irrespective of the changes in the volume of production. This cost does not change at all with the increase,
decrease or even with the total shut down of production. Example: Rent of the factory building, salary of the manager etc. Fixed cost is also called fixed
overhead, capacity cost or prime cost.
2. Variable cost – This cost varies in direct proportion to the changes in the levels of production. A 20% increase in the level of production will see a 20%
increase in the variable cost also. Similarly a 30% reduction in the volume of the production will result in a 30% drop in the variable cost also. Examples:
Cost of raw materials, wages when paid on piece rate etc.
3. Semi-variable or semi-fixed cost – This is the cost which is partly fixed and partly variable. Example: Telephone charges, royalty etc. This is also called
mixed
V. Classification based on controllability
1. Controllable cost – This is a cost which can be controlled by the exercise of managerial action.
2. Uncontrollable cost – This is a cost which cannot be influenced by managerial action.

Elements of Cost
Manufacturing organizations have to analyse the total cost of
manufacturing a product, in order to control the cost, offer the
products to the market at a low price and ultimately remain
competitive. This however requires the total cost of manufacture to
be divided under several categories.
It is in this context that the total cost of manufacture is classified under
three elements called the elements of cost. This element wise
classification of cost is based on the nature of the cost itself.
The following are the elements (classifications) according to the above
basis:
• Material cost
• Labour cost
• Expenses

Elements of Cost
_____________________________________|______________________________
| | I
Materials Labour Other Expenses
_____|_______ _____|_______ ______|_______
| | | | | |
Direct Indirect Direct Indirect Direct Indirect
|_____________________________|__________________________|
Overheads
___________________________________|______________________________
| | | | |
Production or Administration Selling Distribution Research and
Works Overheads Overheads overheads overheads development overheads

Material Cost – This refers to the cost of all the materials which are consumed in the process
of production of a product.
• Examples
• Product Manufactured Material cost being the cost of
1. Cotton cloth Cotton yarn
2. Furniture Wood
3. Bricks Clay
4. Footwear Leather
5. Sweets Sugar
• The material cost is further divided into two classifications as follows:
• Direct material cost
Examples of direct materials – components in the manufacture of automobiles,cotton in the
process of spinning yarn, rubber in the manufacture of tyres, diamonds in the making of
jewellery, batteries used in a mobile phone etc.
• Indirect material cost -
Examples: Grease or lubricants used in machines, chemicals used as catalysts, cotton waste
used in the maintenance of machines, small tools and components used, stationery used
in the office, finishing materials used in jewellery etc.

Labour cost
• No organization can work without employees, in this context called
labourers or labour. Labour cost refers to the total amount paid by an
organization towards its employees as their remuneration. This may take
any form such as salary, wage, bonus, incentives, allowances, perquisites
etc.
The labour cost is further divided into two classifications as follows:
• Direct labour cost - Examples of direct labour cost: wages paid to
construction laburers in a construction, a weaver weaving cloth, a
mechanic operating machines, carpenter making furniture and goldsmith
making jewellery.
• Indirect labour cost - Examples of indirect labour cost – remuneration paid
to employees in the personal department, employees in the accounts
department, employees in the security department, employees in the
stores, general supervisor

Expenses
All the costs incurred in an organization other than material cost and labour cost are called expenses.
Examples of expenses: Travelling expenses, consultation charges, general advertising expenses, excise duty paid, local taxes paid
etc.
The expenses are further divided into two classifications as follows:
• Direct expenses - Examples of direct expenses: Freight charges incurred on the purchase of materials meant specifically for a
specific job, royalty paid for a specific product, cost of operating a machine for a specific job, cost of specific designs or
templates for a particular product.
• Indirect expenses - Examples of indirect expenses: Rent of factory building, depreciation of office furniture, telephone
expenses, insurance of office building, lighting expenses, cleaning expenses.
• Overheads
• The total or aggregate amount of indirect material cost, indirect labour cost and indirect expenses is called ‘overhead’.
Overheads cannot be conveniently charged directly to cost units. Overheads are costs incurred in a general way for the
organization.
• Overheads are also called ‘on cost’.
• The equations of overheads:
• Overhead = indirect material cost + indirect labour cost + indirect expenses.
• Indirect material cost = Overhead – indirect labour cost – indirect expenses.
• Indirect labour cost = Overhead – indirect material cost – indirect expenses.
• Indirect expenses = Overhead – indirect material – indirect labour cost.

Preparation of Cost Sheet
Cost sheet is a statement prepared to show the cost of production in an industry in
terms of total and also in several stages. It also shows the cost at every stage in terms
of total production and each unit. This can be prepared for any period of time such as a
week, month, quarter year, half year or a year based on the requirement of the industry.

Specimen of a cost sheet – Cost sheet or statement of cost for ------ (No of units produced)
Amount Total Cost Costper Unit
Direct Materials
Opening Stock of raw materials
Add Carriage inwards
Less closing stock of raw materials
Raw materials used/consumed
Direct Labour
Direct or Chargeable Expenses
Prime Cost
Add Factory or works overheads/on cost/expenses;
Indirect materials such as grease, chemicals etc. consumed at the factory
Indirect wages – wages of helpers, factory supervisor etc.
Factory rent, lighting, maintenance expenses etc.
Depreciation and maintenance expenses of the factory building
Cost of technical expenses.
Depreciation and maintenance expenses of the factory plant and machinery.
Cost of transporting raw materials in the factory.
Power consumed
Total Factory or Works overheads/on cost/expenses
Factory or Works Cost
Add Opening stock of Work in progress
Less closing stock of work in progress
Add: Office & Administration Overheads/on cost/expenses:
Office rent, taxes, insurance, repairs.
Office building maintenance, repairs, depreciation.
Stationery consumed in the office.
Postage, telephone, courier, internet charges, currency for the mobile phones.
Legal expenses , Audit charges
Salaries of office staff.
Total Office and Administrative overheads/ on cost / expense
Xxx
xx
-------
Xxx
Xxx
--------
Xx
Xx
Xx
Xx
xx
Xx
Xx
Xx
--------
Xx
xx
Xx
Xx
Xx
Xx
-----------
Xxxx
Xxxx
Xxxxx
----------
xxxxx
Xxxx
--------
Xxxxxx
Xxx
Xxxx
Xxxxx
------------
Xx
Xx
Xx
------
Xx
Xx
------
Xx
Xx
Xx
---------
xx

Add selling and distribution expenses:
Salesmen’s salary, commission.
Sales commission.
Packing materials
Discount and rebate
Transport expenses
Warehousing expenses
Maintenance, repairs, fuel expenses of the
delivery vans.
Showroom expenses
Maintenance, repairs of sales office
Salesmen’s travelling expenses
Bad debts
Advertisement, sales promotion expenses.
Total Selling and Distribution expenses
Cost of goods sold
Add Opening stock of Finished goods
Less Closing stock of Finished goods
Total cost/Cost of sales
Add Profit
Sales
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Xx
----------------
Xxxx
----------
Xxxx
Xxx
Xxx
------------
Xxxx
Xxxx
-------------
xxxxxx
Xx
---------
Xx
------------
Xx
Xx
-------
xxx

• The following information has been gathered from the books of M/s. Mecano Industries for the year ended Mar 31, 2013.
• Rs.
• Materials consumed 1,00,000
• Direct wages 40,000
• Indirect expenses at factory 10,000
• Indirect materials at factory 6,000
• Salesmen’s salaries 96,000
• Office salaries 60,000
• Depreciation of machinery 10,000
• Direct expenses 20,000
• Indirect wages at factory 5,000
• Factory rent 1,2000
• Packing materials consumed 10,000
• Office lighting expenses 6,000
• Stationery consumed 1,000
• Selling expenses 11,000
• Depreciation of office furniture 5,000
• Prepare a cost sheet.

Statement of Cost and Profit of M/s. Mecano Industries for the year
ended Mar 31, 2013.
Particulars Amount Amount
Direct Materials
Add Direct Wages
Add Direct Expenses
Prime Cost
Add Factory overheads
Indirect expenses at factory
Indirect materials at factory
Depreciation of machinery
Indirect wages at factory
Factory rent
Factory /Works Cost
Add Office an administrative Overheads
Office salaries
Office lighting expenses
Stationery consumed
Depreciation of office furniture
Cost of production
Add Selling and Distribution overheads
Selling expenses
Package materials
Salesman commission
Total Cost
1,00,000
40,000
20,000
----------------
10,000
6,000
10,000
5,000
12,000
60,000
6,000
1,000
5,000
----------------
11,000
10,000
96,000
1.60,000
43,000
------------
2,03,000
72,000
-----------
2,75,000
1,17,000
------------
3,90,000

• From the following information, prepare a cost sheet for the
month of December, 1989:
Particulars Amount
Stock on hand – 1st December 1989
Raw materials
Finished goods
Stock on hand – 31st December 1989
Raw materials
Finished goods
Purchases of raw materials
Carriage on purchases
Work-in-progress, 1-12-1989 at works cost
Work-in-progress, 31-12-1989 at works cost
Sale of finished goods
Direct wages
Non productive wages
Direct expenses
Factory overheads
Administrative overheads
Selling and distribution overheads
25,000
17,300
26,200
15,700
21,900
1,100
8,200
9,100
72,300
17,200
800
1,200
8,300
3,200
4,200

Cost Sheet for the month ended 31st December, 1989
Particulars Amount
Stock on 1-12-1989
Add: Purchases
Carriage on purchases
Less: Closing stock on 31.12.1989
Material consumed
Direct wages
Direct expenses
Prime Cost
Factory overheads
Non productive wages
Add: Opening stock of work-in-progress
Less: Closing stock of work-in-progress
Works Cost
Add Administration overheads
Cost of Production
Add: Opening stock of finished goods
Less: Closing stock of finished goods
25,000
21,900
1,100
48,000
26,200
21,800
17,200
1,200
40,200
8,300
800
49,300
8,200
57,500
9,100
48,400
3,200
51,600
17,300
68,900
15,700

Cost of Goods Sold
Add Selling and distribution overheads
Cost of Sales
Profit
Sales
53,200
4,200
57,400
14,900
72,300

• Prepare a cost sheet from the following information pertaining to the year ended Mar
31, 2013, in the books of M/s. Mahalakshmi Industries.
Raw materials purchased
Wages paid (direct)
Freight on purchases of direct materials
Import duty on purchases of direct materials
Indirect materials consumption
Factory wages
Factory rent
Factory general expenses
Sale value of scrap
Office salaries
Office stationery consumed
Office rent
Sales commission
Packing and transportation (sales)
Sales office expenses
1,16,000
1,84,000
10,000
20,000
15,000
90,000
1,10,000
30,000
60,000
11,000
1,55,000
10,000
9,000
72,000
30,000
10,000
90,000

Add:
Factory/Works Overheads:
Indirect materials consumed
Factory wages
Factory rent
Factory general expenses
Less: Sale value of scrap
Factory/Works cost
Add:
Office and administration Overheads:
Office stationery consumed
Office salaries
Office rent
Cost of production
15,000
90,000
1,10,000
30,000
60,000
9,000
1,55,000
10,000
72,000
3,05,000
6,35,000
11.000
6,24,000
2,46,000
8,70,000

Add:
Selling and distribution Overheads:
Sales commission
Packing and transportation (Sales)
Total cost/Cost of sales
30,000
10,000
90,000 1,30,000
10,00,000

• Prepare a statement of cost and profit from the following information, in
the books of M/s. Precision Tools Co; for the half year ended Mar 31, 2013.
Also show the costs at each stage in terms of cost per unit and also the total.
Direct materials consumed
Direct labour charges paid
Direct labour charges outstanding
Prime cost expenses
Factory materials consumed
Salary of the factory staff paid
(This includes prepaid Rs. 10,000)
Factory expense including depreciation
Factory rent
Office expenses
Interest received
Penal charges paid
Indirect materials consumed at office
Office salaries
Packing materials used
Salesmen’s salaries
Sales Office expenses
2,10,000
1,00,000
90,000
1,00,000
90,000
2,50,000
20,000
50,000
50,000
16,000
15,000
10,000
2,40,000
10,000
1,20,000
20,000

• Prepare a statement of cost and profit from the following information, in
the books of M/s. Precision Tools Co; for the half year ended Mar 31, 2013.
Also show the costs at each stage in terms of cost per unit and also the total.
Prime cost expenses
Factory rent
Office expenses
Interest received
Penal charges paid
Office salaries
2,10,000
1,00,000
90,000
1,00,000
90,000
2,50,000
20,000
50,000
50,000
16,000
15,000
10,000
2,40,000

Prepare a statement of cost and profit from the following information, in the books of M/s.
Precision Tools Co; for the half year ended Mar 31, 2013. Also show the costs at each stage in
terms of cost per unit and also the total.
Prime cost expenses
Factory rent
Office expenses
Interest received
Penal charges paid
Office salaries
2,10,000
1,00,000
90,000
1,00,000
90,000
2,50,000
20,000
50,000
50,000
16,000
15,000
10,000
2,40,000
10,000
1,20,000
20,000

In the books of Precision Tools Co;
Statement of cost and profit for the half year ended Mar 31, 2013 (Production 10,000
units)
Direct labour charges including (Rs. 1,00,000+Rs. 90,000)
Prime cost expenses
Prime Cost
Add:
Factory/Works Overheads:
Salary of the factory staff minus prepaid (Rs.2,50,000 – Rs.
10,000)
Factory expenses including depreciation
Factory rent
Factory/Works Cost
Add:
Office and administration Overheads:
Indirect materials consumed at the office
Office salaries
Office expenses
Cost of production
2,10,000
1,90,000
1,00,000
5,00,000
90,000
2,40,000
20,000
50,000
9,00,000
10,000
2,40,000
50,000
12,00,000
21
19
10
50
9
24
2
5
90
1
24
5
120

Add:
Selling and distribution Overheads:
Total cost or cost of sales
Profit
Sales
10,000
1,20,000
20,000
13,50,000
1,50,000
15,00,000
1
12
2
135
15
150

• The following information related to the year ended Mar 31, 2013 has been
drawn from the books of M/s. Saleem Foundries:
Raw materials consumed
Direct wages
Factory expenses/overheads
Office and administration expenses/overheads
Selling and distribution expenses/overheads
Profit
The above company has received an order for the supply of goods in
April 2013, regarding which the following information is made
available: Materials required Rs. 25,600/- ; Wages Rs. 30,000/-
During April 2013, the cost of factory overheads has gone up by
20%, office and administration expenses have increased by 10% and
selling and distribution expenses have decreased by 10%.
Factory overheads are based on direct wages and office and
administration overheads and selling and distribution overheads are
based on factor cost.
Calculate the selling price to be quoted for the execution of the
order, to get the same percentage of profit as in the year ended Mar
31, 2013.
3,20,000
2,00,000
80,000
60,000
90,000
1,50,000

Cost sheet and statement of profit for the year ended Mar 31, 2013
(Prepared for the purpose of calculating the rates of overheads)
Raw materials consumed
Direct wages
Prime cost
Add Factory Overheads:
Factory/Works cost
Add:Office and administration Overheads:
Cost of production
Add:Selling and distribution Overheads:
Total cost/cost of sales
Add:Profit
Selling price/Sales….
3,20,000
2,00,000
80,000
60,000
90,000
5,20,000
80,000
6,00,000
60,000
6,60,000
90,000
7,50,000
1,50,000
-----------
9,00,000

Calculation of percentages/rates
1) Factory overheads as a percentage on direct wages = 80,000x 100 = 40%
2,00,000
2) Office and administration overheads as a percentage of factory cost.=
60,000 x 100 = 10%
6,00,000
3) Selling and distribution overheads as a percentage of factory cost
= 90,000 x 100 = 15%
6,00,000
4) Profit as a percentage of the total cost = 1,50,000 x 100 = 20%
7,50,000
• The above percentages are used to calculate the price to b e quoted for the order.

The price is calculated through the following statement:
Statement of estimated cost, profit and selling price for the order received in
April 2013
Direct material
Direct wages
Prime cost
Add: Factory overheads @ 40%of direct wages
= 30,000 x 40 = 12,000 + 2,400 (20% of 12,000 =2,400) 12,000+2,400
100
Factory cost
Add: Office and administration overheads @ 10 % of
Factory cost
= 70,000 x 10 = 7,000 + (10% of 7000=700)7,000+700=7,700
100
Cost of production
Add: Selling and distribution overheads @ 15% of
Factory cost
= 70,000 x 15= 10,500 – 1,050(10% of 10,500)=10500-1050 = 9,450
100
Total cost /cost of sales
Add: Profit @20% on total cost (20% x 87,150)
Selling price
25,600
30,000
14,400
7,700
9,450
55,600
14,400
70,000
7,700
77,700
9,450
87,150
17,430
1,04,580

Prepare a cost sheet from the following information, drawn from the books of M/s
Hercules Manufacturing Co; for the quarter ended Mar 31, 2013.
Stocks
Raw materials – Opening
Closing
Work-in-progress - Opening
Closing
Finished goods - Opening
Closing
Wages – Productive
Unproductive
Factory expenses
Office expenses
Selling expenses
Distribution expenses
Counting house salaries
Inspection fee
Sales
70,000
60,000
1,40,000
1,60,000
2,70,000
3,00,000
3,00,000
1,10,000
50,000
2,40,000
1,80,000
90,000
60,000
40,000
24,00,000

• Also calculate the percentage of factory expenses of current period to direct wages
that of office expenses to works cost and profit to sales.
• Solution:
In the books of M/s Hercules Manufacturing Co;
Statement of cost and profit for the quarter ended Mar 31, 2013
Raw materials:
Opening stock
Add: Purchases
Less: Closing stock
Raw materials Consumed
Productive wages
Prime cost
Add: Factory/works overheads
Unproductive wages
Inspection fee
Factory expenses
Gross factory/works cost
Add: Opening stock of work-in-progress
Less: Closing stock of work-in-progress
70,000
10,10,000
10,80,000
60,000
1,10,000
40,000
50,000
10,20,000
3,00,000
13,20,000
2,00,000
15,20,000
1,40,000
16,60,000
1,60,000
15,00,000

Add: Office and administration expenses
Office expenses
Counting house salaries
Cost of production
Add: Opening stock of finished goods
Less: Closing stock
Cost of goods sold
Add: Selling and distribution expenses
Selling expenses
Distribution expenses
Total cost/cost of sales
Profit
Sales
2,40,000
60,000
1,80,000
90,000
3,00,000
18,00,000
2,70,000
20,70,000
3,00,000
17,70,000
2,70,000
20,40,000
3,60,000
24,00,000

• Calculation of percentages
1) Percentage of factory expenses of current period to direct wages
= 2,00,000 x 100 = 66.67%
3,00,000
2) Percentage of office expenses to works cost= 3,00,000 x 100 = 20%
15,00,000
3) Percentage of profit on sales= 3,60,000 x 100 = 15%
24,00,000

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