COST ACCCOUNTING

MBA (UOS) Lecture 1

 Tracing the roots of Cost & Management
Accounting
Ø
Ø Economics Study of Individuals & Nations economic behaviour
according to any school of thought.An Arial View
Ø

Ø Accounting Process of systematic record keeping.

Ø
Ø Financial Accounting. Art of systematic record keeping for a
specific individual or Business entity  An on ground view.
Ø
Ø Cost Accounting.A step forward in financial Accounting,
dealing with individual items and their cost. A telescopic
view.
Ø
Ø Managerial Accounting.  Use of data of financial and Cost
accounting for decision making and forecasting  A Microscopic
view
Ø
Ø(UOS)
MBA Lecture 1
 Main Branches of Accounting
Difference in Governm ent & Com m ercial
o Governmental Account ing.
Accounting Purpose.

Expenses or Incom e st art ing Point .

o
Types of Account s.
o Financial St at em ent s.

Accounting, Audit .

o
o Cost Accounting,
o
o Managerial
Accounting,
o
o Tax Accounting.
o
o Auditing.

MBA (UOS) Lecture 1

 Cost Accounting.
q Cost Accounting is the art of ;
1. Recording Collection
2. Classifying  Processing and
3. Appropriate allocation of
 Expenditures for the determination of the
§ Cost of products or services produced


 and for the presentation of suitable arranged

date for the purpose of;
1. Control
2. Guidance of Management.


1.
2.

MBA (UOS) Lecture 1

 Managerial Accounting
Ø Use of financial and cost accounting data in the form
of;
Ø
1. Establishment of Budgets,
2. Standard costs,
3. Actual cost of operations, processes and activities or
products,


 For analyzing,


Ø Variances,
Ø Profitability,
Ø And social use of funds.


Ø
Ø

MBA (UOS) Lecture 1

 History of Cost & Management
Accounting.
v Ever since the use money replaced barter, people
have been concerned with costs.
v
v Industrial Revolution of 1780s a starting point of
industrial mass production and concern about
selling point.
v
v Mass production of war equipments in 1st world
war on cost plus profit basis.
v
v Increase in Corporate Culture, Globalization &
Competition fueling the managerial accounting.

MBA (UOS) Lecture 1

 Costing Terms
ü Cost.
o Replacement value of any product or service in
terms of money.
ü Expense.
o Expiration of cost either by sale of by use.
ü Expenditure.
o Amount spent on the purchase of capital assets.
ü Revenue.
o Total Sale proceed of a product or service received
in terms of money.
ü Profit or Income.
o Excess of Revenue over its corresponding expense
of cost.
ü Loss.
o Excess of expense of cost over resulting revenue.
ü
MBA (UOS) Lecture 1
 Difference in Cost & Financial
Accounting
q Cost Accounting
1. Internal Users
2. Specific Purpose statements
3. Must confirm to information needs
4. Data in Monetary and Unitary form
5. Statement on daily and weekly basis.
6. Emphasis on Control aspect.
7. Individual items.
8. Relates mainly to cost transactions.
9. Deals with actual and estimated
facts and figures.
10.Stocks are valued on Cost.
11.Positive & Normative Science.
12.
13.
14.
MBA (UOS) Lecture 1
qFinancial Account ing
1.Ext ernal Users.
2.General Purpose St at em ent s.
3.Must confirm t o GAAPs.
4.Dat a in Monet ary t erm s.
5.St at em ent s on annual or half
yearly basis.
6.Em phasis of Recording aspect .
7.Aggregat e Result s.
8.Relat es t o com m ercial
t ransact ions including cost ,
adm n an m arket ing
9.Deals m ainly wit h act ual fact s
and figures.
10.St ocks are valued on LCM.
11.Posit ive Science.
12.
13.
 Benefits of Cost & Management
Accounting.
1. Analysis of Costs.
2. Correct Analysis.
3. Disclosure of Inefficiencies.
4. Price determination.
5. Effective Control.
6. Cost Comparison.
7. Make or buy decision.
8. Departmental & Product line efficiency.
9. Basis of Budgeting.
10.Forecasting,
11.Shut down decision.
12.Supply of relevant information to management.
13.
14.

MBA (UOS) Lecture 1

 CHAPTER 2

MBA (UOS) Lecture 1

 q Classification of Costs
1.By Nature or Elements.
2.

Ø Direct Material Costs.

Ø

Ø Direct Labour Costs.

Ø

Ø Factory Over Head Costs. i.e. Factory

supplies ,Lubricants, supervision,
inspection, defective work, Rent,
insurance, depreciation,
Maintenance and Repair, Power ,
Light and Head,
Ø Prime Cost = Direct Labour + Direct
Material
Ø Conversion Cost = Direct Labour+ FOH
Ø Flat Cost or Total Factory Cost.=
DM+DL+FOH
3.
MBA(UOS) Lecture 2
4.
 q Classification of
Costs
2.
 By Functions:
Ø Production, Administration, Selling &
Distribution
ØProduction costs.
Materials, Labour,
Factory over head.
ØAdministration Expenses:
admin * office Salary,
payroll taxes, rent,
depreciation, property
tax, auditing expenses,
Legal expenses,
Postage etc.
ØSelling & Distribution
expenses: Sales
MBA(UOS)
Salaries, sales
Lecture 2
Commission,
 q Classification of
Costs
3.Direct & Indirect Costs.
Ø Direct Cost are those which can easily and
conveniently be identified in a unit of cost.
Direct Material, Labour & FOH.
Ø
Ø Indirect costs are those which can not be easily
traced in the unit of cost. Depreciation,
Rent etc.
Ø
5.According to Variability.
Ø Fixed Costs
Ø In Total Remains Fixed.
Ø Per Unit decrease with increase in
production.
Ø Control rests with top management.
Ø Assigned by managerial decision.
MBA(UOS) Ø Lecture 2
 q Classification of
Costs
Ø Variable Costs
Ø In Total Increase with production level.
Ø Per Unit remains constant.
Ø Control rests with departmental head.
Ø Can be easily and accurately assigned
by departmental head.
Ø Semi Variable Costs
Ø A Combination of both fixed & Variable.
Ø Not zero even the production is zero.
Ø Increases with increase in production.
Ø


MBA(UOS) Lecture 2
 q Classification of
Costs
5.
 According to Controllability.
Ø Controllable Costs: Which are some how
controllable by management.
Ø Un Controllable Costs: Which are beyond the
control of management.
Ø
6.Capital or Revenue Costs.
Ø Capital costs are those which are for purchase
of fixed assets.
Ø Revenue costs are those which are for
purchase of current assets.
Ø
•
MBA(UOS) Lecture 2
 q Classification of
Costs
7.Normality.
Ø Normal costs are those which incurred at a
given level of out put.
Ø Abnormal Costs are those which do not
incurred at a given level of out put.
Ø
Ø

8.
 Classification by time.
Ø Historical Cost : The costs which are
ascertained after being incurrence.
Ø Predetermined costs. Estimated in advance.
•

MBA(UOS) Lecture 2
 q Classification of
Costs
9. Product & Period Costs.
Ø Product Costs are those which are directly related
with product.
Ø Period Costs are those which are not directly
related with product and are associated with
time period.
 10. Classification for managerial Decisions.
Ø Marginal Cost. Is the total of Direct Material, Direct
Labour and Variable Factory over Head.
Ø

Ø Differential Cost: Change in costs due to change in

level of output.
Ø

Ø Opportunity Cost. The cost of 2nd best alternative.

Ø

Ø Replacement Cost. Cost of replacement of an

existing asset or facility.
Ø
•
MBA(UOS) Lecture 2
 q Classification of
Costs
Ø Sunk Cost. Which have already been
incurred and are not relevant for decision
making.
Ø Out of Pocket Costs: which involve payment
of cash on the other hand there are
expenses like depreciation etc.
Ø Imputed or notional Costs: which are used
for decision making only like rent of own
building and interest on capital.
Ø Avoidable & Un avoidable Costs. Avoidable
cost are those which can be avoid by
eliminating a department of facility.
Ø


MBA(UOS) • Lecture 2
 CHAPTER 3

MBA (UOS) Lecture 1

 q Flow of Cost in a
Manufacturing Enterprise.
Cash Materia
Depreciable l
Assets Invento
Cost of Materials Purchased
Accounts ry
Payable
Accruals

Work in Process
Direct Material
Direct Labour
FOH
Other
Manufacturin
g Cost of Goods
Costs. Completed
Direct Laobur
FOH
Finishe
d
Goods
Invento Cost of Goods Sold
ry
MBA(UOS) Lecture 3
 q Cost Accounting Cycle
Ø Entries for Material Costing.


 1. When Material is purchased. (Direct or

Indirect).
 Material Control Dr.
 Voucher Payable Cr.
 2. When Material is Returned (Direct or
Indirect).
 Voucher Payable Dr.
 Material Control Cr.
 3. When Material is returned after the
payment has been made. (Direct or
Indirect).
 Supplier’s Persona Dr.
 Material Control Cr.
 4. When Payment is made for purchase of
material.
MBA(UOS)  Voucher payable.
Lecture 3 Dr.
 q Cost Accounting
Cycle
Ø Entries for material Costing.
 5. When direct material is issued to production.
 (a) if one work in process account is maintained.
 Work in process Control Dr.
 Material Control Cr.
 (b) If Separate work in process accounts are maintained.
 Work in process Control Dr.
 Material Control. Cr.
 6. When direct material is returned to store
rooms.
 (a) If one work in process account is maintained.

Material Control Dr.
 Work in process control Cr.
 (b) If separate work in process accounts are maintained.
 Material Control Dr.

Work in process Material Cr.

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø Entries for Material Costing.
 7. When indirect material is issued to
production.
 F.O.H Control Dr.
 Material control Cr.
 8. When indirect material is returned to store
room.
 Material Control. Dr.
 F.O.H. Control Cr.


Ø ENTRIES FOR LABOUR COSTING.

1. When direct labour is charged to production.
 (a) If one work in process account is maintained.
 Work in process control. Dr.
 Payroll control. Cr.

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø ENTRIES FOR LABOUR COSTING.
Ø
1. When direct labour is charged to production.
2.
 (a) If separate work in process account is maintained.
 Work in process Labour. Dr.
 Payroll control. Cr.


 2. When Indirect Labour is charged to

production.
 F.O.H Control Dr.
 Payroll control Cr.

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø Entries for Labour Costing.
 3. When total payroll is recorded and
deductions are made.
 Payroll control. Dr.
 Income tax with held Cr.
 Insurance fund Cr.
 Provident fund Cr.
 any other deduction Cr.
 Accrued Payroll Cr.
 4. When Accrued payroll is approved for
payment.
 Accrued Payroll. Dr.
 Voucher payable. Cr.
 5. When wages and salaries are paid.
 Voucher payable Dr.
 Bank/Cash Cr.
MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
 6. When total payroll is distributed among
appropriate heads.
 Work in process Control Dr.
 FoH Control Dr.
 Selling Expenses Control Dr.
 Administrative Expenses Control Dr.
 Pay roll control Cr.
 7. When Employer’s contribution for provident
fund is recorded.
 F.O.H Control Dr.
 Selling Expenses Control. Dr.
 Administrative Expenses Control Dr.
 Provident Fund Cr.
 Group Insurance Cr.

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø Entries for F.O.H Costing.
 1. When F.O.H is applied to production .
 (a) When FOH is applied to production.

Work in process Control. Dr.
 F.O.H. Applied. Cr.


 (b) If Separate work in process accounts are maintained.


Work in Process F.O.H. Dr.
 F.O.H. Applied. Cr.


 2. When F.O.H Applied is transferred to F.O.H

Control Account.
 F.O.H Applied. Dr.
 F.O.H Control Cr.

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø Entries for F.O.H Costing.
 3. When Actual Cash F.O.H Expenses are
recorded.
 F.O.H Control Dr.
 Voucher Payable Cr.
 4. when Depreciation and Insurance expenses
etc are recorded.
 F.O.H Control. Dr.
 Accumulated Depreciation/Asset Cr.
 Prepaid Insurance Cr.
 5. For Disposing off the Under Applied F.O.H
Balance Work in process Control Dr.
 Finished Goods Dr.
 Cost of Goods Sold. Dr.
 Factory over head Control Cr.

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø Entries for Completion of Goods.
 (a) Under one Work in process.
 Finished goods Control Dr.
 Work in process Control. Cr.
 (b)Under separate works in process.
 Finished goods Dr.
 Work in process Material Cr.
 Work in process Labour Cr.
 Work in process F.O.H Cr.
Ø Entries for Sale of Finished Goods.
 1. For recording cost of goods sold.
 Cost of Goods Sold Dr.
 Finished Goods. Cr.

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø Entries for Sale of Finished Goods.
 2. For Recording Sales.
 Cash/ bank/ Accounts Receivable Dr.
 Sales Cr.
Ø Entries for Marketing & Administrative
Expenses.
 Marketing overhead control. Dr.
 Admn Overhead control Dr.
 Sundry Accounts. Cr.
Ø Closing of Accounts to Income Summery.
 1. Closing of sales.
 Sales Dr.
 Income Summery Cr.


MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
Ø Closing of Accounts to Income Summery.
 2. Transfer of Costs.
 Income Summery. Dr.
 Cost of Goods Sold. Cr.
 Marketing Overhead Cr.
 Admn, Overhead. Cr.


MBA(UOS) Lecture 3
 q Cost Accounting Cycle
Exercise.
o On may1, the trial balance of a Company shows:
Cash 25800
Accounts Receivables. 47700
Allowance for Dobutfull accounts. 2825
Finished Goods 78700
Work in process 85400
Material 44880
Building 120000
Accumulated Depreciation Building 48000
Equipment 237240
Accumulated Depreciation Equipment 115210
Accrued Payroll 6600
Account Payable 54270
Common Stock 80000
Retained Earining . 332855
Total 639760 639760

MBA(UOS) Lecture 3
 q Cost Accounting
Cycle
• During May, these transactions took place;
1. Material Purchased 40000
2. Direct Material Issued 65000
3. Indirect Material issued 3500
4. Material Returned to suppliers 900
5. Total Direct Payroll 80000
6. Total Indirect Labour 9500
7. Wages 75000
8. Sundry Manufacturing expenses 42000
9. Marketing & Admin Expenses incurred 8500
10. Account receivable collected. 300000
11. Accounts payable paid 135000
12. Depreciation to be provided for may at the rate of 2% per annum on
building; 105 per annum on equipment.
13. Factory overhead applied to production at 60% of Direct labour cost.
14. Work in process , May 31 75000
15. Cost of Goods Sold 205000
16. Sales on Account. 285000
Required: Journal entries for the above transactions.

MBA(UOS) Lecture 3
 CHAPTER 4

MBA (UOS) Lecture 1

 qSystems of Cost
Accumulation.
o What is a Casting System.
ü A Cost Accumulation system is a costing system
which is designed to suit the way goods are
processed or manufactured or the way that
services are provided.
ü Each firm will have a costing method which has
unique features.
ü There will be common features of the costing systems
of firms who are broadly in the sale line of
business.
ü Firms employing substantially different
manufacturing methods will have distinctly
different costing methods.
 What ever costing systems is employed the
basic costing principles relating to analysis,
allocation and apportionment will be used.

MBA(UOS) Lecture-4
 q Cost Accounting Information System

• Main themes of cost systems.

–
– Needed for effective Cost Control.
– Check on each cast center.
– Effective Chart of Accounts.
– Manual Records.
– Proper Statements.
– Electronic Data Processing.

MBA(UOS) Lecture-4
 q Cost Accounting Information
System
• Characteristics of an ideal costing system
1. Suitability to the business.
2. Simplicity.
3. Flexibility.
4. Economical.
5. Comparability.
6. Capability of presenting information at the desired
time.
7. Minimum changes in the existing setup.
8. Uniformity of forms.
9. Minimum clerical work.
10.Efficient system of material control.
11.Adequate wage procedure.
12.Departmentalization of expenses.
13.Reconciliation of cost and financial accounts.


MBA(UOS) Lecture-4
 q Cost Accounting Information
System
• Installation of a costing system
•
– Fundamental factors to be considered.
–
• Existing organization should be disturbed
as little as possible.
• There should be a gradual and smooth
introduction of the system.
• While over elaboration of records should be
avoided it would be false economy to
prune out essentials and impair
efficiency.

MBA(UOS) Lecture-4
 q Cost Accounting Information
System
• Steps for installation of costing system.
•
1. Objective identification (costing or management).
2. Studying the existing organization and routine.
3. Deciding the structure of cost accounts.
4. Determine the cost rates.
5. Introducing the system.
6. Organizing the cost office.
• Store accounts.
• Labour Accounts.
• Cost accounts.
• Cost Control.
7. Relationship of cost office to other departments.
8.
•
MBA(UOS) Lecture-4
 q Cost Accounting Information
System
• Practical difficulties in installing a costing
system.
1. Lack of support form top management.
2. Resistance from the existing accounting staff.
3. Non cooperation at other levels of organization.
4. Shortage of trained staff.
5. Heavy cost of operating the system.
• Steps to overcome practical difficulties.
1. Support from the top management.
2. Utility of system to existing staff.
3. Workers confidence for cooperation.
4. Training of existing accounting staff.
5. Cost system according to specific requirement of
the concern.
6. Proper supervision.
7.
MBA(UOS) Lecture-4
 q Cost Accounting Information
System
• Cost Unit.
1. It is a device for the purpose of breaking up or
separating cost into smaller sub divisions
attributable to products or services.
2. It is the unit of product, service or time in relation
to which costs may be ascertained, e.g. tonne
in case of coal.
3. It must be clearly defined and selected before the
process of cost finding can be started.
4. It must not be too big or small.
5. It must be so selected that expenditure can be
associated with it.
6. Must be appropriate to the needs of business.

MBA(UOS) Lecture-4
 qSystems of Cost
Accumulation.
v Methods of Costing.
•

– Methods to be used for the ascertainment of cost

of production differ from industry to industry.
– It primarily depends on the manufacturing process
and also on the methods of measuring the
departmental and finished products.
–

v Basically there are two methods of costing;

–

1. Specific order costing or job/terminal costing.

2. Operation costing or process or period costing.
–

MBA(UOS) Lecture-4
 qSystems of Cost
Accumulation.
1. Specific Order Costing :
 is the category of basic costing methods
applicable where the work consists of separate
jobs, batches or contracts each of which is
authorized by a specific order or contract. In this
category are included job costing, batch costing
and contract costing.


2. Operation Costing:
 Is the category of basic costing methods
applicable where standardized goods or services
result from a sequence of repetitive and more or
less continuous operations or process to which
costs are charged before being averaged over
units produced during the period.


MBA(UOS) Lecture-4
2.
 qSystems of Cost
Accumulation.

1. Job Costing:
– costs are collected and accumulated for each
job, work order or project separately.
– Each job can be separately identified; so it
becomes essential to analyze the cost according
to each job.
– A Job card is prepared for each job for cost
accumulation.
– This method is applicable to printers, machine tool
manufacturers, foundries and general
engineering workshops.
• Requisites for job costing:
– A sound system of production control.
– Comprehensive works documents.
– An appropriate time booking system.
– A well organized basis to the costing system
with clearly defined cost centers.


MBA(UOS) Lecture-4
 qSystems of Cost
Accumulation.
2. Contract Costing:
3.
– Used for big jobs which are spread over long
periods of time.
– A separate account is kept for each individual
contract.
– Mostly used for construction contracts.
– This method is used by builders, civil engineering
contractors, constructional and mechanical
engineering firms etc.
–
–

MBA(UOS) Lecture-4
 qSystems of Cost
Accumulation.
3. Batch Costing.
4.
– Extension of job costing.
– A batch may represent a number of small orders
passed through the factory in a batch.
– Each batch is treated as a unit of cost and
separately costed.
– The cost per unit is determined by dividing the cost
of the batch by the number of units produced in
a batch.
– This method is mainly applied in biscuits
manufacture, garments manufacture and spare
parts and components manufacture.
–

MBA(UOS) Lecture-4
 qSystems of Cost
Accumulation.
4. Process Costing:
– Suitable for industries where production is
continuous.
– Manufacturing is carried on by distinct and well
defined processes.
– The finished product of one process becomes the
raw material of the subsequent process,
– Different products with or without by-products are
produced simultaneously.
– Products produced during a particular process are
exactly identical.
– Unit and total cost of each department are
ascertained.
– A separate account is opened for each process to
which all expenditure incurred thereon is
charged.
MBA(UOS) – Examples are textile
Lecture-4 industries, Chemical
Industries, Tanneries, Paper Manufacture etc.
 q Systems of Cost Accumulation.

5. Operation (0ne) Costing.

– Suitable for industries where manufacture is
continuous and Units are identical.
– There is natural or standard unit of cost.
– Object of this method is to ascertain the cost per
unit of out and cost of each item of such cost.
– Cost per unit is determined by dividing the total
expenditure incurred during a given period by
the number of units produced during that
period.
– This method is applied in industries like mines,
quarries, oil drilling, breweries, cement works,
brick works.

MBA(UOS) Lecture-4
 q Systems of Cost Accumulation.
 6. Service Costing.
– Suitable for industries which render services as
distinct from those which manufacture goods.
– Is used to ascertain the cost of services rendered.
– Usually there is a compound unit in such
undertaking.
– Is applied in transport undertaking, power supply
companies, municipal services, hospitals, hotels.

MBA(UOS) Lecture-4
 q Systems of Cost Accumulation.

7. Operation (Multiple) Costing.

– Consists of a number of distinct operations.
– It refers to conversion costs.
– It takes into consideration the rejections in each
operation for calculating input units and cost.
– The different operations in machine screw are
stamps, knurl, thread and trim.
– The cost per unit is determined with reference to
final output.

MBA(UOS) Lecture-4
 q Systems of Cost Accumulation.

8. Multiple Costing.
– It represents the application of more than one
method of costing in respect of same product.
– This is suitable for industries where a number of
component parts are separately produced and
subsequently assembled into a final product.
– In such industries each component differ from the
other as to price, material used and process of
manufacture undergone.
– Necessary to ascertain the cost of each component
(Process costing may be used for this purpose)
– To ascertain final product cost batch costing may
be applied
– Used in factories manufacturing cycles,
automobiles, engines, radios, typewriters, aero
planes and other complex products.
–

MBA(UOS) Lecture-4
 q Types of Costing
 Following are the main types of costing for
ascertaining costs.
1. Uniform Costing: It is the use of same costing
principles and/or practices by several
undertakings for common control or comparison
of costs.
2. Marginal Costing: It is the ascertainment of marginal
cost by differentiating between fixed and
variable costs. It is used to ascertain the effect
of changes in volume or type of out on profit.
3. Standard Costing: A comparison is made of the
actual cost with a pre arranged standard and the
cost of any deviation is analysed by causes.
4. Absorption Costing: It is the practice of charging all
costs, both variable and fixed to operations,
processes or products. This differ from
marginal costing where fixed costs are excluded.


MBA(UOS) Lecture-4
Differences Bet ween Job-Order
and Process Cost ing
Job
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orddeerr cost
costing
ing Pr
Proce
ocess
ss cost
costin
ingg
–Many
–Many jobs jobs are
are –A
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during tthe
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ime.e.
–Cost
–Costss areare –Cost
–Costss are
are
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ed by
by accum
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ulateded by by
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jobs. depart
departm ment
ents. s.
–J
–Job
ob cost
cost sheet
sheet is
is tthe
he –Depart
–Departm ment
ent
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–Unit
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MBA(UOS) Lecture-4
 CHAPTER 5

MBA (UOS) Lecture 1

 Financial Statements for
Manufacturing Concerns
v Financial Statements are the final product of
an accounting entity/system. A typical set
of financial statements include;

1. Income statement.
2. Balance Sheet.
3. Statement of Cash Flows.


v In manufacturing concerns the following are

the main final statements.
v

1. Cost of Goods Sold Statement( a part of Income

Statement)
2. Income Statement.
3. Balance Sheet

MBA(UOS) Lecture 5 55
 Income Statement
 Name of Concern
 Income Statement
 For the Period Ended on----

Descript ion Rs. Rs. Rs.
Sales 000
Less cost of goods sold 000
Gross Profit 000

Less Commercial Expenses.

Marketing Expenses 000
Administrative Expenses 000 000

Income from operations 000

Less provision for income tax 000
Net Income 000

MBA(UOS) Lecture 5 56
 Cost of Goods Sold Statement
Name of Concern
Cost of Goods Sold Statement
For the period ended on
Descript ion Rs. Rs. Rs.
1. Direct Material:
Opening Raw material Inventory. 000
Add: Purchase of Raw material. 000
Less: Purchase Discount. 000
Return & Allowances. 000 000
Gross Purchases 000
Add: Carriage In 000
Freight, cartage etc. 000 000 000
Net Purchases 000

MBA(UOS) Lecture 5 57
 Cost of Goods Sold Statement
Name of Concern
Cost of Goods Sold Statement
For the period ended on

Descript ion Rs. Rs. Rs.

Cost of Mat erial available for sale. 000
Less: ending Raw m at erial invent ory 000
Cost of Material Used 000

2. Add: Direct Labour Cost 000

3. Add: Applied F.O.H 000
Total Factory Cost. 000

MBA(UOS) Lecture 5 58
 Cost of Goods Sold Statement
Name of Concern
Cost of Goods Sold Statement
For the period ended on

Descript ion Rs. Rs. Rs.

Add: Opening Work in Process inventory 000

Cost of Goods to be Manufactured. 000
Less: Ending Work in Process inventory. 000
Cost of Goods Manufactured 000

MBA(UOS) Lecture 5 59
 Cost of Goods Sold Statement
 Name of Concern
 Cost of Goods Sold Statement
 For the period ended on
Descript ion • Rs. Rs. Rs.

5. Add: Opening Finished Goods inventory 000

Cost of goods available for sale. 000
Less: Ending Finished Goods Inventory 000
Cost of goods sold (at Normal) 000
Add/Less: (Under/Over applied) FOH 000
Cost of Goods Sold at Actual 000

MBA(UOS) Lecture 5 60
 Cost of Goods Sold Statement

• Generally FOH can not be estimated exactly at the

time of manufacture of goods. It is calculated
and distributed to goods manufactured at the
end of year. In order to complete the cost of
goods an estimated amount of factory over head
is charged to the cost of goods manufactured
and sold statement and it is known a s applied
FOH.
• When Cost of goods sold is calculated by taking
applied FOH the cost of goods sold is called Cost
of Goods sold at normal.
• If the applied FOH is more than actual FOH it is
called over applied FOH.
• If the applied FOH is less than Actual FOH it is called
Under Applied FOH.
•
MBA(UOS)
• Lecture 5 61
•
 Cost of Goods Sold Statement
• Over applied FOH is deducted from cost of goods sold
at normal.
• Under applied FOH is added in Cost of goods sold at
normal.
• After the adjustment of Over or under applied F.O.H
cost of goods sold at actual is calculated.
• When the amounts of Total payroll and Direct Payroll is
given the difference between Total and Direct
payroll is not always indirect labour only. It may be
marketing and Admin payroll as well.
• Entire production consists of : Cost of Goods Sold,
Finished goods ending inventory, Work in process
ending inventory.

MBA(UOS) Lecture 5 62
 Cost of Goods Sold Statement
• Ending stock is considered as a source of income, Greater
the ending stock in relation to purchases greater will be
the gross profit.
• Increase in inventory is deducted from relevant cost.
• Decrease in inventory is added in the cost.
• Unit cost of material, labour and FOH can be ascertained as follows:
 Material Labour FOHConsumed 000
000 000
Add opening WIP 000 000 000
Available for Use 000 000 000
Less Ending WIP 000 000 000
Net in Process 000 000 000
Cost per Unit= Net in process (Material or Labour or FOH)

 #of Units manufactured



 Unit Cost of Manufactured: Cost of Goods Manufactured

 #of Units Manufactured

MBA(UOS) Lecture 5 63
 Balance Sheet
 Name of Concern
 Balance Sheet
 As on
Assets & Properties Rs. Liabilities & Equities Rs

Cash Current Liabilities

Marketable Securities Long term Liabilities
Accounts receivables Common Stock
Inventories: Retained Earnings
Finished Goods
Work in process
Materials
Property Plant & Equipment
Less Depreciation Total Liabilities & Equities
Total Assets

MBA(UOS) Lecture 5 64