Bcom Cost Accounting Long Question Important Theory Notes 2

Bcom Cost Accounting Long Question Important Theory Notes 2

Bcom Cost Accounting Long Question Important Theory Notes 2 :-  


Long Answer Questions

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Q. 12. What do you mean by Cost-sheet ? What are its advantages ? Why is it prepared ? Prepare a cost sheet with imaginary figures.



Cost-sheet is a statement to show the different components Of the total cost. It generally shows the total cost as well as cost per unit. In other words, cost-sheet is a periodical document of cost’ designed to show the total cost and the unit cost of products in all analytical and detailed form. The cost-sheet divides cost information into Prime Cost, Factory Cost, Cost of Production and Total Cost.

cost-sheet may be prepared weekly, monthly, quarterly, half-yearly or yearly basis according to convenience. Cost-sheet may be prepared on the basis of actual data or on the basis of estimated data depending on the technique of costing employed and the purpose to be achieved.

Definition of Cost-sheet : The following are the definitions of cost-sheet :

According to I. C. M. A., London, “Cost-sheet is a document which provides for the assembly of estimated detailed cost in respect of a cost centre or a cost unit.”

According to W. W. Bigg, “The expenditure which has been incurred upon production for a period is extracted from the financial books and the store records and set out in a memorandum statement. If this statement is confined in the disclosure of the cost of the units produced during the period it is termed a cost-sheet.”

According to J. R. Batliboi, “Cost-sheet is a columnar statement which presents particulars of costs of a product of a specific period.”

 On the basis of aforesaid definitions, it is clear that the cost-sheet is a periodical statement designed to show the total cost and the unit cost of production in an analytical and detailed form. Cost-Sheet serves the following purposes :

(i)  It reveals the total cost as well as per unit cost.

(ii) It discloses the break up of the total cost, i.e. different components of the total cost.

(iii) It may show the percentage of each element of cost to total cost or sales.

(iv)  It helps the management to compare the costs of any two periods, and ascertain the inefficiencies, if any, in production.

(v) It provides important information to management for cost control.

(vi)  It acts as a guide to manufacture in formulation of suitable and definite policies and in fixing up the selling price.

Cost-sheets are of different types, e.g., simple cost-sheet, Period-wise comparative cost-sheet, comparative cost-sheet of two Or more products and estimated cost-sheet (for tender price).




Q. 13. Discuss the reasons for difference in results as shown by Cost Accounts and Financial Accounts. How will you reconcile them ? 


The following are the reasons of differences between the results of cost accounts and financial accounts :

(1) Difference in Direct Expenses : Generally, none of the books shows any difference due to direct expenses since transactions are accounted on actual basis in both the books. But, if amount Of these expenses have been written differently, then there will be difference in both the books.

(2) Difference in Overheads : Overheads are absorbed in cost accounts on the basis of estimation like percentage on direct materials, percentage on direct wages etc. may be more or less than the actual amount incurred. If the overheads are not fully absorbed, the amount in cost accounts is less than the actual amount, the i.e., shortfall is called under absorption. On the other hand, if overheads expenses in cost accounts are more than the actual, it is  called over absorption. Thus under or over absorption of overheads leads to difference in two accounts. Sometimes, selling and distribution expenses are ignored in cost accounts and as such costing profit will be higher and thus requires reconciliation.

(3) Items Excluded from Cost Accounts : There are a number of items which are included in financial accounts but find no place in cost accounts since these items are not related with cost accounts. These items may be divided into three parts : 

  1. Items of expenditure
  2. Items of appropriation of profit
  3. Items of income.
    1. Items of Expenditure : Some losses and expenses are of financial nature, therefore, they are included in financial accounts while not included in cost accounts. Examples of these items are as follows :
      1. To write off goodwill, preliminary expenses and underwriting commission,
      2. Expenses on the issue of shares and debentures,
      3. Donation,
      4. Capital expenditure and losses, 
      5. Penalties and punishments , 
      6. Loss arising from the sale of fixed assets,
      7. Loss on investment,
      8. Discount on debentures,
      9. Interest on debentures,
      10. Interest on capital,
      11. Losses due to scrapping of machinery,
      12. Expenses on transfer of company’s office.
    2. (b) Items of Appropriation of Profit : These are the items for which profits earned by an organisation are used. The examples of these items are as follows :
      1. Appropriation to sinking fund,
      2. Dividend paid,
      3. Transfer to general or specific reserves such as dividend equalisation reserve,
      4. Excess provision for depreciation of buildings, plant and for bad debts,
      5. Bonus,
      6. Capital expenditure specifically charged to revenue.
    3. Items of income : Just like expenses and losses having financial nature, certain items of receipts and profits •are also written in Financial Accounts and are not written in Cost Accounts, since these are not concerned with Cost Accounts. On account of writing these items in Financial Account, the profit increases in Financial Accounts as compared to Cost Accounts. Some important items are as follows :
      1. Fee received on the transfer of shares;
      2. Interest received on investments;
      3. Interest received from banks;
      4. Dividend received;
      5. Rent received, brokerage received, etc.;
      6. Abnormal profit.

(4) Items Excluded from Financial Accounts : Some items are included only in Cost Accounts since these are concerned with production and their inclusion determine correct cost of production. But, in fact, their payments are not done, therefore, not included in financial accounts e.g., rent of own house, estimated managerial remuneration by doing work as manager himself. Thus, by not including these expenses in financial accounts, there arises a difference between cost accounts and financial accounts. 

(5) Difference in Methods of Charging Depreciation :There are several methods of charging depreciation and, generally, the amount of depreciation differs by the use of different depreciation methods. Sometimes, different methods of depreciation are used in both the accounts. Therefore, due to difference in the amount of depreciation, the profits also differ in the both types of accounts.

(6) Difference in Stock Valuation : In cost accounts, stocks are valued according to the system adopted in Stores Accounts, e.g., FIFO, LIFO, Average Price Method or other Methods. on the other hand, valuation of stock in financial accounts is based the principle of cost or market price, whichever is less. This results in some difference in profit or loss as shown by the two set of account Books.


If there is a difference in the profits shown by the Cost Accounts and Financial Accounts, the ‘Reconciliation Statement’ or ‘Reconciliation Account’ is prepared for removing differences in these two set of books. We have to follow the following process before preparing ‘Reconciliation Statement’ or ‘Reconciliation Account’:


On the basis of given informations, we have to compare every Cost Accounts item with Financial Accounts (i.e., P & L A/c and Balance Sheet) item and find out amounts of difference. We shall not consider those items which do not have any difference. 

For facilitating easy study, we have divided the items having differences into different heads, which are as under :

(i) Difference in Overheads : (A) Under charged overheads in Cost Accounts and how much amount has been under charged in Cost Accounts as compared to Financial Accounts. (B) Over charged overheads in cost account and how much amount has been over charged as compared to Financial Accounts.

(ii) Those expenses and losses which are shown in financial accounts i.e., debited in Profit & Loss Account but not included in Cost Accounts. 

(iii) Those profits and receipts which have been credited only in financial account i.e., profit and Loss Account but not been included in Cost Accounts.

(iv) Those items which have been written in Cost Accounts but not been included in Financial Accounts.

(v) If depreciation amount has been written lesser or more in Cost Account than Financial Account.

(vi) If opening stocks have been valued lower or more in Cost Account than Financial Account and what is the amount of difference.

(vii) If closing stocks have been valued lower or higher in Cost Account as compared to Financial Account and what is the amount of difference.

(viii) Difference in direct expenses (if there is a clear information) : (a) Excess amount charged in Cost Accounts (b) Lesser amount charged in Cost Accounts. In the absence of any clear information, it is assumed to have same amount upto prime cost in both the set of books of accounts. Similarly, the amount of sales is also assumed to be the same in both the set of books of accounts.


The statement which is prepared to tally the results, shown by cost accounts and financial accounts is known as Reconciliation Statement.


(1) To Depict the Causes of Difference : The purpose of preparing reconciliation statement is to show the causes of difference in profits of financial books and cost accounts. 

(2) To Judge the Accuracy of Costing Records : The purpose of reconciliation is to judge the accuracy of recording of books of both the sets. If the reconciliation is struck and the results tally, it gives a satisfactory and salutary idea that both the sets of books have been kept with accuracy.

(3) To Know the Items Unrecorded, or Recorded with a Difference, in any one Set of Books : It is in the financial books that several items are found recorded which do not find place in cost books. Apart from giving an idea of such items, the reconciliation shows the under/over-absorbed overheads, difference in stock valuation and depreciation charged.

(4) To Bring Perfectness in Cost Accounts : The cost accounts cannot be said to be perfect until the reconciliation statement is prepared. It is known as a last part of Cost Accounts. In the absence of reconciliation, the cost accounts are said to be incomplete.


Taking the profit of cost account to be the starting point :

 (i) Regarding Expenses Items : If an expense has been overcharged in cost accounts, it means that the profit of cost accounts has to be reduced to that extent. So, we should add the excess expenses to reconcile. Same is the analogy applicable to under-charged expenses which should be deducted. In short : 

  • Add : Items over-charged in Cost Accounts;
  • Less : Items under-charged in Cost Accounts.

(ii) Regarding Income Items : If an item of income has been under-recovered in cost accounts, it means that the profit stands reduced to that extent in cost accounts. So, we should add it to reconcile. In short :

  • Add : Items under-recovered in Cost Accounts;
  • Less : Items over-recovered in Cost Accounts.

(iii) Regarding stock valuation : 

(a) Opening stock :

  • Add : Over-valuation in Cost Accounts;
  • Less : Under-valuation in Cost Accounts.

(b) Closing stock :

  • Add : Under-valuation in Cost Accounts;
  • Less : Over-valuation in Cost Accounts.

Note : Reverse the treatment prescribed above (i) to (iii), if profit of financial accounts is taken to be the starting point for reconciliation.


Q. 14. Define Process Costing. Describe the general principles of this type of costing and give its salient features. To which industries is this method applicable ?

Ans. Process costing is a method of costing used to ascertain the cost of a product at each process or stage of manufacture. In this method, the costs of materials, wages and overheads are accumulated for each process separately, for a given period, and then carried forward cumulatively from one process to the next process till the last process is completed. In brief, this method of costing is used in those industries where mass production of identical units is undertaken on a continuous basis and finished products are subjected to a number of production stages, called processes before completion. industries like oil refining, chemical works, paints, textiles, paper making, distillation, etc. involve a number of manufacturing processes where process costing method is advantageously used. 

The main definitions of process costing are given below :

According to Lunt and Ripley, “Process costing is used to ascertain the cost of each stage of manufacture where material is passed through various operations to obtain a final product to result, with by-products in many cases at different stages.’ Thus, process costing is that aspect of operation costing which is used to ascertain cost of the product at each process or stage of manufacture.

According to Wheldon, “Process costing is a method of costing used to ascertain the cost of product at each process, operation or stage of manufacture.’

According to B. K. Bhar, “Process costing refers to costing of one or more processes involved while converting a raw material to finished product.’


Process costing is used to ascertain the cost of product at each process or stage of manufacture, where process production has the following features :

  • (i) Production is divided in clearly defined processes.
  • (ii) Various units produced in a particular process are identical.
  • (iii) Each process is a cost centre. Costs are accumulated for different processes.
  • (iv) Various processes are in ‘sequence so that there is continuous flow of production through processes.
  • (v) Output of one process is input for the succeeding process.
  • (vi) Following from the above costs cumulate in processes.


This costing method is applied to the industries where :

(1) Production is continuous except where plant and machinery is shut-down for repair, etc. The finished product of one process becomes the raw material of the next independent process and so on until the final product is obtained.

(2) Output is uniform and all units are exactly identical during one or more processes. 

(3) The sequence of operations for processing the product is specific and predetermined.

(4) Different products with or without by-products are simultaneously produced at one or more stages or processes Of manufacture. The valuation of by-products and apportionment of joint cost before point of separation is an important aspect of this method of costing. 

The process costing method is applied in the following industries :

(A) Chemical Industries such as chemicals, perfumery, soap, oil, medicines, etc.

(B) Manufacturing Industries such as iron and steel, cement, paper, rubber, ceramics, automobile plant, ice, paints industries, etc.

(C) Mining such as gas, gold, mineral oil, coal, sulphur, iron, zinc, etc.


The main objects or necessities of process costing method are as follows :

(1) To Calculate the Cost of Different Processes : Those items/commodities which are manufactured in different stages, the cost at every stage of manufacturing of the items is required to be calculated. It facilitates to establish control on costs. With the help of process costing, the cost of every process can be determined.

(2) To Know Departmental Efficiency and Economy : It is essential to determine the cost of every process for improving departmental efficiency and bringing economy. This work can be done with the help of process costing.

(3) To Know the Wastage in Various Processes : In industries which employ process costing, a certain amount of loss or wastage occurs at various stages of production. Such a loss/wastage may arise due to chemical reaction, evaporation, inefficiency, etc. It is, therefore, necessary to keep accurate records of both input and output. Where  loss occurs at a last stage of manufacturing, it is apparent that financial loss is greater. This is because more and more costs are incurred in processes as products move towards completion stage. Process wastage/losses may be classified into two categories : (a) normal, (b) abnormal.

(4) To Determine the Value of By-products : Different products with or without by-products are simultaneously produced at one or more stages or processes of manufacture. The valuation of by-products and apportionment of joint cost before point of separation is an important aspect of process costing method. 


(1) Establish Process Centres and Open Separate Account of Each Process Centre : The production activities of the factories are classified by process centres or departments. Each process centre or department includes a number of operations, none of which is separately measurable and each of which completes a distinct stage in manufacture of the product. We have to prepare separate account for each process.

(2) Accounts of Direct and Indirect Costs : In each process whatever expenses are incurred on materials, labour, direct expenses, indirect expenses, all are debited in the respective process account. Indirect expenses are apportioned on an appropriate basis and debited in the process account. If no base is given regarding allocation of indirect expenses, the apportionment is done on the basis of direct labour (wages.).

(3) Make Account of Physical Quantity : The units of raw material used in a particular process are debited in the same process account. The wastage and production in terms of physical quantities are credited in the respective process account.

(4) Determination of Cost Per Unit : The total cost of each process is divided by the total production of the process and average cost per unit for the period is obtained. 

Cost per unit = Total Process Cost /  Total Output

While calculating cost per unit, normal loss in production and incomplete units in the beginning and at the end of the period are taken into account.

(5) Transfer to Next Process : When one production process is completed, the quantity of production and its costs are transferred to next process and this is done till the completion of last process. But sometimes the whole production of a particular process is not transferred to the next process; some part is transferred to godown or sold directly and rest is transferred to the next process. But accounting treatment of all these items will be done in the credit side of the concerned process account.

(6) Transfer of Finished Goods : The total production and total cost of last process is transferred to Finished Stock Account. It is clear from the aforesaid discussion that in the process cost accounting method, separate process account is opened for each and •every process. All the expenses are debited in the respective process account. On the other hand, wastage, sale of residue, scrap or by-products, etc. are credited in the process account. The difference Of debit and credit side depicts the cost of production and production quantity of that particular process which is  transferred to the next Process. The production of last process is transferred to the Finished Stock Account.



Q. 15. Explain Normal Wastage, Abnormal Wastage and Abnormal gain and state how they should be dealt with in Process Cost Accounts ?


It is obvious to have some wastage in each process during the course of production. The wastage in manufacturing process may be divided into two categories :

(1) Normal Wastage : It is loss which is unavoidable on account of inherent nature of production process. Such loss can be estimated in advance on the basis of past experience or available data. It is generally given in terms of percentage in questions. The normal wastage is the normal loss which cannot be avoided, therefore, the burden of this loss is charged to the balance production, which increases the per unit cost of production. The following terminology should be understood along with normal wastage :

Normal Output :  Normal output is determined by deducting units of normal wastage out of total units supplied in any production process. In simple words, normal output means that quantity Of output which is estimated on the basis of past experience. 

Normal Cost of Production : Normal cost of production is determined after deducting the amount received from the sale of normal wastage out of gross cost of any production process. The producers generally determine selling price on the basis of this cost. 

Accounting Treatment of Normal Wastage : Where normal wastage possesses some value, the value is credited to the amount column of process account otherwise the column is left as blank. 

The following entries are done with regard to normal wastage :

(i) On the Sale Value of the Normal Wastage :

  • Normal Wastage A/c  ——- Dr.
  • To Process A/c

(Being sale value of normal wastage)

(ii) On Cash Received from the Sale of Waste Units :

  • Cash A/c ———–Dr.
  • To Normal Wastage A/c

(Being cash received from sale of waste units)

(2) Abnormal Wastage : Any loss caused by unexpected or abnormal conditions such as plants’ breakdown, sub-standard materials, carelessness, accident, etc., or loss in excess of the margin anticipated for normal process loss should be regarded as abnormal process wastage. For example, if 1,000 units are supplied in a process and on the basis of past experience the producer estimates 5% as normal wastage. The process produces 920 units. Here, 1000*5/100 = 50 units will be called as normal waste while the actual wastage is 1,000 — 920 80 units. Thus, on the basis of comparison of normal wastage and actual wastage, i+ is clear that actual wastage is greater than normal wastage (i.e., 80 — 50 30 units). This surplus: of actual wastage is called as abnormal wastage. Thus, these 30 units are of abnormal wastage.

The abnormal wastage may also be determined by comparing Actual Output with Normal Output. If actual output is less than the normal output, the difference of these two outputs is known abnormal wastage. For instance, in the above example the normal Production will be 1,000 — 50 950 units while actual production is given 920 units. Thus, the actual production is less than the normal Production by (950 — 920) 30 units. This will be called as abnormal wastage.

Accounting Treatment of Abnormal Wastage : The ValUation of abnormal waste units is done just like good units in order to avoid increase in the cost due to abnormal wastage. After  calculating the value of abnormal wastage, abnormal wastage account is debited and the concerned process account is credited. In short, the journal entry of abnormal wastage is done as follows :

  • Abnormal Wastage A/c ———Dr.
  • To Process A/c

(Being Cost of Abnormal Wastage accounted for)

For calculating cost of abnormal wastage, normal cost of the process is divided by Normal Output of the Process and multiplied by units of Abnormal Wastage. The formula is as follows :

If the wastage is also having some selling value, the accounting treatment for the amount received from selling the abnormal waste units will be done as follows :

  • Cash A/c ———————–Dr.
  • To Abnormal Wastage A/c

(Being amount received from sale of waste units)

It is obvious that the cost of abnormal wastage will be more than the selling value. Thus, the difference between the cost of those abnormal waste units and their selling price is known as loss. The difference of two, i.e., loss will be transferred to Profit and Loss A/c. The accounting entry will be as follows :

  • Profit and Loss A/c ————-Dr.
  • To Abnormal Wastage A/c

(Being balance of Abnormal Wastage transferred to P & L A/c)

On the basis of aforesaid accounting entries the Abnormal

Wastage A/c will be prepared as follows :



In case the actual production of a process is more than the expected production, the excess is known as abnormal effectives. This saving or gain is casual or temporary, therefore, the presence of abnormal effectives should not be allowed to affect the cost of good units in the normal circumstances. They, therefore, shall be valued at the rate at which the good units would have been valued had there been wastage at the normal rate. The amount shall be debited to the relevant Process Account and credited to ‘Abnormal Effective Account’ which will be closed by transferring to the Profit and Loss Account.

Abnormal gains or effectives may be calculated by any of the following formula :

Abnormal Gain =  Saving or Shortage of Actual Wastage over Normal Wastage

(i.e., Normal Wastage — Actual Wastage)


Excess of Actual Output over Normal Output

(i.e. , Actual Output — Normal Output)

The value or cost of Abnormal Gain is computed just like value or cost of Abnormal Wastage. Refer Formula :

Value or Cost of Abnormal Gain =  Normal cost / normal output

Accounting Treatment of Abnormal Gain

(i) Entry Related to Cost of Units of Abnormal Gain or Effectives :

  • Process A/c ————— Dr.
  • To Abnormal Effectives A/c

(Being Cost of…..units of abnormal effectives)

(ii) Entry for Amount that should be Received from the Sale of Abnormal

  • Abnormal Effectives A/c ———— Dr.
  • To Normal Wastage A/c

(Being sale value of units transferred to Normal Wastage A/c)

(iii) Entry for Closing Abnormal Effectives A/c :

  • Abnormal Effectives A/c ——— dr 
  • To P&L A/c

(Being balance transferred)



Closing of Normal Wastage Account in Case of Abnormal Gain : It is already clear that the Normal Wastage Account is Vdebited by units of normal wastage and their values. But in the case of abnormal effectives, actual wastage is less than normal wastage, thus, by selling the units of normal wastage, we cannot realise the amount which is shown in the debit side of normal wastage account. The following entry is made for this shortfall of the sales :

  1. Abnormal Effectives A/c ———- DR
  2. To Normal Wastage A/c

After posting the above entry, the normal wastage account will be closed.


Q. 16. What is meant by ‘Operating Costing’ ? In which industries is it used ? Prepare a Transport Operating Cost-sheet with imaginary figures.


Operating costing method is applied by undertakings providing services, not tangible products. Therefore, it is also called service costing, Operating costing is defined by the ICMA Terminology as  “that form of operation costing which applies where standardised services are provided either by an  undertaking or by a service cost centre within an undertaking.” The costs incurred in providing a service are called ‘Operating Costs’ and the method used for computing such costs is called ‘Operating Costing’. The method may also be used where the service is not fully standardised but quite homogenous or so similar that they can be regarded as identical. Transport companies, electricity supply companies, hospitals, hotels, canteen, etc., do not engage themselves in producing goods. They specialise in rendering services to the community.


As it is discussed above that this method of costing is applied to undertakings which provides services rather than production of commodities. These institutions may be classified into 5 categories which are as follows :

Service-Cost Unit : There are large varieties of services and therefore, there are different cost units for different services. Selection of a suitable cost unit for each service sometimes proves difficult. For some services cost units are simple involving only one characteristics, whereas in other cases, it may be composite reflecting two or more characteristics.

(1) Simple Cost Unit : A few examples are as follows :

(2) Composite Cost Unit : In this type more than one uni ts are combined together. For Examples :


The operating costs are generally ‘Periodic Costs’, accumulated for a period, say monthly, quarterly, half yearly or yearly, and they are related to the services rendered during that period. In certain cases, the operating cost can be terminal cost, e:g., when a bus is chartered out for a specific trip (i.e., students going on tour by bus), the cost ofsuch trip is worked out treating it as a specific job. The expenses of operating a service for a particular period are  grouped under suitable headings and their total is divided by the  number of service units for the same period, and thus cost per unit of service is obtained.




Q. 17. lt Vhat is Non-integrated Accounting System ? Discuss its objectives. Describe its main ledgers. 


Generally, financial and cost accounts are maintained separately by large scale concerns. In financial accounting there are s three type of accounts—Personal, Real and Nominal. In cost  accounts we are particularly concerned with nominal accounts and to some extent real accounts, which may be considered as impersonal accounts. As the cost books are maintained on the principle of double entry system, in cost books General Ledger Adjustment Account or Cost Ledger Control Account is maintained instead of Personal Accounts and Real Accounts. Although this method is based on double entry system but cost ledger is made self balancing by the use of control accounts.

Thus, under cost control accounts, cost and financial transactions are recorded in a separate set of books; separate ledgers for cost and financial accounts are maintained. Like financial accounts, cost control accounts are also kept by a double entry book-keeping method. The system of cost control aCcounts is also called non-integral or non- integrated system of cost accounts or interlocking accounting system.


In short, the advantages, uses or objects of Cost-Control Accounts are as follows :

I. Due to accounts are maintained on double entry system, verification of accuracy of double entry of all transactions can be done by the preparation of trial balance with the help of balance of accounts.

2. Detailed informations related to cost are always available which is more useful in future planning. 

3. Reconciliation of the results of cost and financial aCCOUnts can be done easily.

4. Control accounts summarise masses of detailed information contained in subsidiary records and as such are invaluable to management in policy formulation.

5. Control accounts provide internal check and permit prompt preparation of P & L A/c at the end of each period without waiting for all work to be done in balancing individual subsidiary ledgers.


Depending on the size of an organisation, the cost department may maintain one or more ledgers. Four important ledgers kept by the cost department are as follows :

1. Cost Ledger : This is the principal ledger, ‘in which all accounts relating to income and expenditure are kept. Hence, it contains all impersonal accounts. It is made self-balancing by maintaining therein a control account for each of the other ledgers.

In short, Cost Ledger contains the following control accounts :

  1. General Ledger Adjustment Account;
  2. Store Ledger Control Account;
  3. Work-in-Progress Ledger Control Account;
  4. Finished Goods Ledger Control Account;
  5. Wages Control Account;
  6. Factory Overhead Control Account;
  7. Office Overhead Control Account;
  8. Selling and Distribution Overhead Control Account;
  9. Cost of Sales Account;
  10. Costing Profit and Loss Account;
  11. Overhead Suspense Account.

2. Stores Ledger : In this ledger all stores (raw materials and supplies used in the manufacture and distribution of goods or in the upkeep of plant and equipment) accounts are kept. A separate account is opened for each item of stores. It is used for recording receipts, issues and balances of stores both in quantity and amount.

3. Work-in-Progress Ledger : This ledger contains all accounts of various jobs and products in process. Eachjob/product is assigned a specific number for identification. All expenditures incurred are debited to the concerned job/product account. When job/product is completed, the same is transferred to the relevant account into the finished goods ledger.

4. Finished Goods Ledger : Accounts of all finished products are kept in this ledger. As soon as a product is complete, it is transferred from the work-in-progress ledger to the finished goods ledger. A separate account is opened for each type of finished product.



Q. 18. What do you understand by ‘Integrated Accounts’ and what are the principles involved therein ? State the advantages of ‘Integrated Accounts’? (Meerut, 2007)


Integral or integrated accounting is the name given to a system of accounting in the case of which cost and financial accounts are maintained in the same set of books. The two separate set of accounts maintained under the interlocking system, are merged into a composite system. Thus, the term ‘integral’ or ‘integrated’ accounting means the merger of both financial and cost accounts, and maintenance of only one integrated ledger containing both financial and cost records. Under the integrated system, accounts are maintained in such a way as to give full information required for cost accounting purposes as well as for financial accounting. 

In other words, Integrated accounting records provide the necessary information for ascertainment of cost of each unit, batch or job or any other cost unit and simultaneously financial statements viz., Profit and Loss Account and Balance Sheet can be  prepared without any distortion of the financial accounting information. In this system transactions are recorded based on double entry-book keeping and costs are classified on the basis of function which enables the firm in ascertainment of product cost with necessary classification.

For Example, the purchase of raw material is analysed by its nature and instead of posting it to the purchases account as in financial accounts, directly posted into Stores ledger Control Account, Work-in-progress Ledger Control Account or Overhead Account. Similarly the payment of direct wages instead of posting into direct wages account, posting is directly made into wages control account or overheads control account.

CIMA defines that integrated accounting system refers to the inter-locking of the financial and cost accounting systems to ensure all relevant expenditure is absorbed into the cost accounts. Under this accounting system transactions are classified both according to their function and nature.


The essential features of an integrated accounting system are as follows :

(i) All control accounts for stores, work-in-progress and finished goods are maintained in the general ledger itself;

(ii) Wages and Overhead accounts are maintained in the usual manner. At the end of the period, these are analysed, and transfers are made to the relevant accounts such as service departments, production work-in-progress, departments, etc.;

(iii) Accruals and prepaid expenses are brought into account for each cost period instead of at the time of preparing financial statements.


The success of an integrated accounting system depends upon certain pre-requiéites which should be ensured before the system is introduced i.e., the following principles should be taken into  consideration while designing such a system :

1. Determine the Degree of Integration : The extent to which cost and financial accounts are to be integrated should be determined in view of specific requirements of the business. In some organisations the accounts are integrated only upto the stage of prime cost or factory cost. For costing purposes other overheads are recorded separately only in memorandum form. In other organisations cost and financial accounts are fully integrated. Generally complete integration is preferable over partial integration.

‘2. Co-ordination of Work : Proper co-ordination should be established between financial accounting personnel and costing personnel both f’or generating correct information and using it effectively, 

3. Proper Procedure for Accruals and Prepayments : It is also necessary to see that a proper procedure is laid down for treatment of accruals, prepayments and other adjustments necessary for preparing interim accounts.

4. Maintain Control Accounts : In place of classifying expenditure according to its nature, control accounts may be prepared for each of the elements of cost, such as : Material Control Account, Direct Labour Control Account, Factory Overhead Control Account, Selling and Distribution Overhead Control Account.

5. Coding : All accounts and expense/cost categories should be appropriately coded. Coding should be easily comprehensible and well understood by everybody in the organisation. The coding system is essential for mechanised accounting. It should facilitate efficiency in consolidation and analysis of accounting and costing information.

6. Regular Cost Analysis : All costs related to material, labour and overheads as recorded in stores, labour and overhead control accounts should be regularly analysed and appropriately transferred to work-in-progress or finished goods or cost of sales account. 

7. Maintain Separate Record of Special Items : There are a number of items which are treated differently for purposes of financial accounting and for cost analysis. A separate record should be maintained of all such items. These items include :

(i) Items of pure financial nature, e.g., cash discount, interest on capital, etc.

(ii) Appropriations of profit, e.g., dividends declared, transfers to reserves, goodwill written off, etc.

(iii) Valuation of stocks as the basis of valuation may be different for purposes of financial reporting and for cost



The following are the main advantages of integral accounting system :

1. Abolition of Duplication of Work : There is no duplication Of recording and effort as in non-integral system and as such this system is simple and economical.

‘2. No Need to Prepare Reconciliation Statement : Since Only one set of accounts are maintained; consequently, there will be Single profit figure. Hence, there is no need to prepare any reconciliation statement.

3. Co-ordination in Accounting Function : This system tends to co-ordinate the functions of different sections of the accounts department since all efforts are integrated and directed towards achievements of one aim that is providing a high level of efficiency.

4. Automatic Check on Correctness of Cost Data : Cost and financial informations are readily made available and there is an automatic check on the correctness of the cost data.

5. Facilitates Mechanised Accounting : The system creates conditions which are eminently suitable for the introduction of mechanised accounting.

6. Avoids Delay in Obtaining the Data : As cost accounts are posted directly from the books of original entry, there is no delay in obtaining cost data. 

7. Simplification of Accounting Procedures : Integrated accounting facilitates simplification of accounting procedures and centralisation of accounting function for achieving more effective control.


The system suffers from the following limitations :

(i) Merging of financial books and cost books in tApa single set of books makes it complicated.

(ii) Hundred percent integration is neither done many times nor feasible in many cases. As a result the need for preparing a reconciliation statement remains.

(iii) The system may not serve the purpose of detailed costing and financial information required by large business houses on a continuing basis.


Q. 19. Define Cost Audit. Describe the objectives of Cost Audit. Give a specimen of Cost Audit Report.


In simple words, cost audit is the audit of cost records. It is an audit process for verification of the cost of  manufacture or production of any article on the basis of accounts relating to utilisation of material, labour and other items of costs as maintained •by an enterprise in accordance with the accepted principles of cost accounting.

The following are some of the definitions of cost audit : 

According to ICMA, London, “Cost audit is the verification of cost accounts and a check on the adherence to the cost accounting plan.”

According to Smith and Day, “By the term ‘Cost-Audit’ is meant the detailed checking of the costing system, techniques and accounts to verify their correctness and to ensure adherence to the objective of cost accounting.”

Conclusion : Thus, from the above definitions, it can be clearly understood that the cost audit is the detailed checking as well as verification of the correctness of costing techniques, systems and cost accounts. It also ensures the adherence of cost accounting plans.


The cost audit has the following objects :

(i) To verify the correctness of costs and cost accounting records.

(ii) To check that the cost accounting plan drawn for the firm has been adhered to.

(iii) To make technical estimates to know what the costs should have been and in the light of such estimates offer comments on the actual costs.

(iv) To detect and prevent errors and frauds in preparing cost records.

(v) To help in the improvement of operational efficiency and profitability of the organisation by reduced cost of production/services. 

(vi) Ensuring optimum utilization of human, physical and financial resources of the enterprise.


The Statutory cost audit was introduced for the first time in India by an amendment of the Companies Act in 1965. According to Section 209(1)(d) of the Companies Act, the Central Government may require certain companies engaged in manufacturing, processing, production or mining, to keep books of accounts pertaining to utilization of materials, labour and other items of cost as may be prescribed. 

It is clear that all the industries engaged in manufacturing, processing or mining, etc., are not required to keep the books of account, but only such comapnies or class of companies would do so as are required by the Central Government, as a regular feature. The Central Government has by now directed some 42 industries to keep books and maintain cost accounts. To name a few, such industries are : Cement, Cycle, Caustic soda, Tyres and tubes,  Room air-conditioners, Refrigerators, Electric lamps, Electric fans, Electric motors, Fluorescent tubes, Automobile batteries, Motor vehicles, Tractors, Aluminium, Vanaspati, Bulk drugs, Sugar, Infant milk food, Industrial alcohol, Jute goods, Paper, Rayon, Dyes, Soda ash, Cotton Textiles, Polyester, Nylon, Dry cell batteries, Sulphuric Acid, etc. Many more industries ‘will be covered in course of time if the Central Government so desires. 

It is worth mentioning that the scope of statutory requirement of cost audit has been much widened with effect from April, 2011. According to communique of Ministry of Corporate Affairs, “All companies manufacturing bulk drugs, formulations, fertilisers, sugar, industrial alcohol, electricity, petroleum industry and tele-communications, etc. and having an annual turnover of more than Rs. 20 crores, will have to carry out a cost audit. For companies manufacturing cement, tyres and tubes, steel plants, steel tubes and pipes, paper, insecticides, glass, paint and varnishes and aluminium, the annual turnover threshold has been fixed Rs. 100 crore.

Any company that has its debt or equities listed on stock exchanges, or is in the process of doing so, will also have to carry out cost audit even if it does not fall within the turnover criteria. These companies will have to file cost audit reports for financial year commencing on or after 1st April, 2011 audited by a qualified cost auditor.

Appointment of Cost Auditor (Section 233B) : The auditor, under this section, shall be appointed by the Board of Directors of the company in accordance with the provisions of Section 224(1B) and with the previous approval of the Central Government.

Qualification of Cost Auditor : Section 233(B) :-  of the Companies Act, 1956, says that a Cost Auditor must be a Cost Accountant within the meaning of Cost and Works Accountant Act, 1959. With the Companies (Amendment) Act 1974, a qualified Chartered Accountant has also been permitted to do cost audit only for such period, where the Central Government is of the opinion that the sufficient number of cost accountants are not available to conduct cost audit.

Disqualifications of Cost Auditor : A person referred to in Sub-section (3) or Sub-section 4 of Section 226 shall not be appointed or re-appointed for conducting the audit of cost accounts.

[Section 233 (B) (5a) ]

As regards to above Section, following are some disqualifications of appointment of cost auditor :

1. An employee of the company cannot be appointed as an auditor.

2. Any person who has been appointed as a financial auditor cannot be appointed as a cost auditor.

3. A company cannot be appointed as a cost auditor. 

4. A person who is indebted to the company for an amount exceeding Rs. 1,000 cannot be appointed as a cost auditor.

 Powers and Duties of a Cost Auditor (Section 233B) :cost auditor has the same powers and duties in relation to an audit conducted by him under Section 233B, as a statutory auditor of a company has under Section 227(1). 

Procedure for Cost Audit : The Companies Act has not laid down any particular procedure for the conducting of cost audit; however, the Central Government may issue instructions regarding the different points to be covered by cost auditor. The cost auditor should pay special attention to the following records :

1. Records of materials,

2. Labour records,

3. Records of overhead charges,

4. Depreciation,

5. Work-in-progress records,

6. Stores and spare-parts records.


The salient features of the Cost Audit (Report) Rules, 2001 are given below :

1. The Cost Audit Report is required to be submitted to the Central Government, in the prescribed form, with a thereof to the company which is subject to Cost Audit within one hundred eighty days from the end of the company’s financial year to which the Cost Audit Report relates.

2. The clarifications, if any, required by the Central Government on the Cost Audit Report shall be furnished by the  Cost Auditor within thirty days of the receipt of the communication in that regard.

3. The concerned company shall make available the cost accounting records to the Cost Auditor within one hundred and thirty-five days from the end of the financial year of the company.

4. Incase of failure of Cost Auditor to submit his report within 180 days and/or to furnish the clarification(s) sought by the Central Government within 30 days of the receipt of the communication in that behalf, he shall be liable for fine which may extend to five thousand rupees.

 If the company fails to furnish the cost accounting records to the cost auditor within 135 days from the end of financial year of the company, the company and every officer of the company (including person referred to in Sub-Section (6) of Section 209 of the Act) who is in default shall subject to the provisions of Section 223B, be punishable with fine which may extend to five thousand rupees and when the contravention is continuing, with further fine upto five hundred rupees for each day of default. 

5. The cost audit report is required to be accompanied by the Annexure thereto containing the information and data as prescribed. 

The specimen of Cost Audit Report is given below :


I/We having been appointed as auditor(s) under Section 233-B of the Companies Act, 1956, (therein after referred to as the “Cost Ltd. (herein after referred to as the Company) have examined the books of accounts prescribed under clause (d) of of section 209 of the said Act and other relevant records of the year ended maintained by the Company and report that :

* I/We have obtained all the information and explanation which to the best of my/our knowledge and belief were necessary for the purpose of this audit. 

* Proper cost accounting records as required under clause (d) of sub-section (1) of Section 209 of the Companies Act, 1956 (1 of 1956) have/have not been kept by the Company. 

* Proper return adequate for the purpose of my/or cost audit have/have not been received from branches not visited by me/us.

* The said records and books give/do not give the information required by Companies Act, 1956 in the manner so required, and 

* In my/our opinion, the Company’s cost accounting records have/have not been properly kept so as to give a true and fair view of the cost of production, processing, manufacturing or mining activities, as the case may be and marketing of the product under reference. 

The matters contained in the Annexure to this report form part of this  report, which is also subject to my/our observations made therein.

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