Chapter 7

Understanding Cost

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1. Introduction
2. Cost Centre and its Types
 Impersonal and Personal Cost Centres
 Production and Service Cost Centres
3. Concept of Cost and its Classification
 Direct Cost and Indirect Cost
 Fixed, Variable and Semi-variable/Semi-fixed Cost
 Controllable Cost and Uncontrollable Cost
 Normal Cost and Abnormal Cost
4. Elements of Cost
 Material

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  Labour
 Expenses
 Overheads
5. Components of Total Cost
 Prime Cost
 Factory Cost
 Cost of Production
 Cost of Goods Sold
6. Cost Sheet
7. Items excluded from cost accounts
8. Illustrations
9. Exercises

INTRODUCTION

Cost accounting is that branch of the accounting information system, which records, measures and reports
information about costs. Until the1980s, it was in the domain of the engineers and its integration with financial
accounting started only when accountants started to audit the cost records. However, the costing techniques play a
vital role in gathering and analyzing revenue and cost data to assist management in decision making. The
techniques of cost accounting help the management in profit planning (through marginal costing) and cost control
(through standard costing). Cost accounting is a management information system which analyses past, present
and future data to provide the basis for managerial decision making.
Keeping above in view, the present chapter makes an attempt to discuss the meaning, nature and classification of
cost along with preparation of cost sheet, so that it will be easier to comprehend concept marginal costing and
standard costing discussed in the subsequent chapters.

COST CENTRE AND ITS TYPES

A Cost Centre is defined as a location, person, or item of equipment (or a group of these) in (or connected with) an
undertaking, in relation to which costs may be ascertained and used for the purpose of cost control.
Correct identification of a cost centre is a pre-requisite for the successful implementation of cost accounting
process as the costs are ascertained and controlled with respect to the cost centres. Similarly, correct identification
of cost centre facilitates the fixation of responsibility in a correct manner. For example, a person in-charge of a cost
centre may be held responsible for the proper functioning and cost control in relation his/her cost centre. As cost
centres facilitate this control function, in many cases, they are termed as ‘Responsibility Centres’ (which is
discussed in detail in chapter 11). However, there is no fixed principle for deciding the number and size of cost
centres. It depends upon the nature and size of the organisation, expenditure involved, requirements of
management from cost control point of view and so on. However, following pattern of classification may be
followed to decide the cost centres.
Impersonal vs. Personal Cost Centres
An impersonal cost centre consists of location or item of equipment (or group of these). For example: a region of
sales, a branch, a department, a grinding machine and so on.
A personal cost centre consists of a person or a group of persons. For example: Finance Manager, Sales Manager,
Works Manager and so on.
Production vs. Service Cost Centres
Production cost centre is the one where the production activity is carried on. For example: Machine shop, Paint
shop, Assembly shops and so on.
Service cost centre is the one which assists the production activity. For example: Store Dept., Internal Transport
Dept., Labour Office, Maintenance Dept., Accounts/Costing Dept., and so on.

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CONCEPT OF COST AND ITS CLASSIFICATION

Cost is the amount of resources given up in exchange of some goods and services. The resources are expressed in
money or money’s equivalent. In brief, cost is nothing but total of all expenses incurred for manufacturing a
product or attributable to a given thing.
CIMA defines the term Cost as “the amount of expenditure (actual or notional) incurred on or attributable to a
given thing.”
The given thing may be taken as a product, service or any other activity. While the actual expenditure refers to the
amount spent, the notional expenditure does not involve in any cash outlay. It does not reflect itself in the
accounting records. But, it is important for the purpose of comparison of cost and in decision making. The term
cost can be viewed from various angles.
Direct and Indirect Costs
Direct Cost indicates that cost which can be identified with the individual cost centres. It consists of direct material
cost, direct labour cost and direct expenses. It is also termed as ‘Prime Cost’. On the other hand, Indirect Cost
indicates that cost, which cannot be identified with the individual cost centres. It consists of indirect material cost,
indirect labour cost and indirect expenses. It is also termed as ‘overheads’. As it is not possible to identify these
costs with individual cost centres, such identification is done in the indirect way by following the process of
allocation, apportionment and absorption.
Fixed, Variable and Semi-variable/Semi-fixed Costs
Fixed cost indicates that portion of the total cost which remains constant at all the levels of production, irrespective
of any change in the later. As the volume of production increases, per unit fixed cost may reduce, but not the total
fixed cost.
Variable cost indicates that portion of the total cost which varies directly with the level of production. Higher the
volume of production, higher the variable cost and vice versa, though per unit variable cost remains constant at all
the levels of production.
Semi-variable or semi-fixed cost indicates that portion of the total cost which is partly fixed and partly variable in
relation to the volume of production.
Controllable and Uncontrollable Costs
Controllable cost indicates that cost which can be controlled by a specific number of person(s) in an organisation.
E.g. A person in charge of a responsibility centre may be in the position to control the costs in relation to that
responsibility centre only. On the other hand, uncontrollable cost indicates that cost which cannot be controlled by
a specific number of person(s) in the organisation. E.g. the costs relating to one responsibility centre cannot be
controlled by a person who is in-charge of another responsibility centre.
It should be noted here that a clear-cut distinction between controllable and uncontrollable costs may not be
possible. The cost which is controllable for one person may not be controllable by another one. In fact, no cost is
completely uncontrollable. The degree of controllability varies in relation to a particular individual and a level of
management. In a very broad sense, it can be said that the variable costs are controllable at the lower level of
management, while fixed costs are controllable at the top level of management.
Normal Cost and Abnormal Cost
Normal Cost indicates that cost which is normally incurred at a certain level of output under normal circumstances,
where as an Abnormal cost indicates that cost which does not incur normally at a certain level of output under
usual circumstances.

ELEMENTS OF COST

In a typical manufacturing organisation, the activity may consist of conversion of raw materials in to finished goods
with the help of labour and other services and selling those finished goods in the market to earn profits. In order to
interpret the term cost correctly and to ascertain the cost with respect to the centres, the cost attached with the
manufacturing process may be subdivided into what is known as ‘Elements of Cost. Broadly there can be three
elements of costs, such as:
(a) Material
(a) Labour
(b) Expenses

(A) MATERIAL
The substance from which the product is made is known as material. It may be in a raw or a manufactured state.
It may be direct material otherwise indirect.

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Direct Material
All material which becomes an integral part of the finished product and which can be conveniently assigned to
specific physical units is termed as “Direct Material”. Following are some of the examples of direct material:
(i) All material or components specifically purchased, produced or requisitioned from stores.
(ii) Primary packing material (e.g. cartoon, wrapping, cardboard, boxes etc.)
(iii) Purchased or partly produced components.
Direct material is also described as raw-material, process material, prime material, production material, stores
material, constructional material etc.
Indirect Material
All material which is used for the purpose ancillary to the business and which cannot be conveniently assigned to
specific physical units is termed as “Indirect Material”. Consumable stores, oil and waste, printing and stationery
etc. are a few examples of indirect materials. Indirect material may be used in the factory, in the office or in the
selling and distribution division.
(B) LABOUR
The Human effort needed for conversion of raw-materials into finished goods is called labour. Labour can be direct
as well as indirect.
Direct labour
Labour which takes an active and direct part in the production of a particular commodity is called direct labour.
Direct labour costs are, therefore specially and conveniently traceable to specific products. For example, in a
furniture mart, the carpenters engaged in conversion of raw wood to sofa sets, computer tables, windows, doors,
benches, etc. are said to be the direct workers. In an engineering workshop, the wages paid to the operators
working with laths, drilling, cutting, shaping machines can be specifically assigned to the products concerned.
Therefore, the direct labor costs can be traceable to individual products.
Direct labour is also described as process labour, productive labour, operating labour, manufacturing labour, direct
wages etc.
Indirect labour
Labour employed for the purpose of carrying out tasks incidental to goods or services provided, is indirect labour.
Such labour does not alter the construction, composition or condition of the product. It cannot be practically traced
to specific units of output wages of store–keepers, foreman, time–keepers, directors, fees, salaries of salesmen,
etc. are all examples of indirect labour costs.
Indirect labour may relate to the factory the office or the selling and distribution division.

(C) EXPENSES
Other than the material and labour, this is the cost of services provided to the organisation (and the notional cost
of assets owned). It may be of two types: direct or indirect.
Direct expenses
These are expenses which can be directly, conveniently and wholly allocated to specific cost centers or cost units.
Examples of such expenses are: hire of some special machinery required for a particular contract, cost of defective
work incurred in connection with a particular job or contract etc. Direct expenses are sometimes also described as
‘chargeable expenses’.
Indirect Expenses
These are the expenses which cannot be directly, conveniently and wholly allocated to cost centers or cost units.
They are apportioned. Examples are rent, rates and insurance. They may relate to the factory, the office and
administration and selling and distribution divisions.
The above elements of cost can be shown as below.

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While the aggregate of Direct Material Cost, Direct Labour Cost and Direct Expenses is termed as ‘Prime Cost’, the
aggregate of Indirect Material Cost, Indirect Labour and Indirect Expenses is termed as ‘Overheads’.

OVERHEADS

As stated above, the aggregate of Indirect Material cost, Indirect Labour cost and Indirect Expenses is termed as
‘Overheads’, which may be classified under the following three categories:
(a) Factory Overheads (also termed as ‘Production/Works/Manufacturing Overheads’)
(b) Office and Administration Overheads.
(c) Selling and Distribution Overheads.
Factory Overheads
These overheads consist of all overhead costs incurred from the stage of procurement of material till the stage of
production of finished goods. They include:
 Indirect Material: such as; consumable stores, cotton waste, oil and lubricants, etc.
 Indirect Labour Cost: such as wages paid to foreman/storekeeper, works manager’s salary, etc.
 Indirect Expenses: such as carriage inward, cost of factory lighting/power expenses, rent/insurance/
repairs for factory building/machinery, depreciation on factory building or machinery, etc.

Office and Administration Overheads

These overheads consist of all overhead costs incurred for the overall administration of the organization. They
include:
 Indirect Material: such as stationery items, office supplies etc.
 Indirect Labour cost: such as salaries paid to Accounts and Administration staff, Directors’ remuneration
etc.
 Indirect Expenses: such as postage/telephone, rent/insurance/repairs/depreciation on office building,
general lighting, legal/audit charges, bank charges etc.
Selling and distribution Overheads
These overheads consist of all overhead costs insured from the stage of final manufacturing of finished goods till
the stage of sale of goods in the market and collection of dues from the customers. They include:
 Indirect Material: such as packing material, samples etc.
 Indirect Labour: like salaries paid to sales personnel, commission paid to sales manager etc.
 Indirect Expenses: like carriage outwards, warehouse charges, advertisement, bad debts, repairs and
running of distribution van, discount offered to customers etc.

The above classification of overheads can be shown as below:

COMPONENTS OF TOTAL COST

Components of total cost are:

PRIME COST

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It consists of direct material, direct wages and direct expenses. In other words “Prime cost represents the
aggregate of cost of material consumed, productive wages,
and direct expenses”. It is also known as basic, first, flat
or direct cost of a product

Prime Cost = Direct material + Direct Wages + Direct

expenses

Illustration 1
Calculate prime cost from the following information:
Direct material - Rs. 40,000,
Direct labour - Rs. 30,000
Direct expenses - Rs. 25.000
Solution
Prime cost = Direct Material + Direct labour + Direct
expenses
= Rs. 40,000 + Rs.30, 000 + Rs. 25,000
= Rs. 95,000
Direct material means cost of raw material used or consumed in production. It is not necessary that all the material
purchased in a particular period is used in production. There is some stock of raw material in balance at opening
and closing of the period. Hence, it is necessary that the cost of opening and closing stock of material is adjusted in
the material purchased.
Opening stock of material is added and closing stock of raw material is deducted in the material purchased and we
get material consumed or used in production of a product. It is calculated as:

Material Consumed = Material purchased + Opening stock of material – Closing stock of

material.

Illustration 2

Calculate prime cost from the following information:

Opening stock of raw material = Rs. 12,500
Purchased raw material = Rs. 75,000
Expenses incurred on raw material = Rs. 5,000
Closing stock of raw material = Rs. 22,500
Wages = Rs. 47,600
Direct expenses = Rs. 23,400
Solution

Calculation of raw material consumed

Raw material consumed = Opening stock of material + purchases of Raw material + expenses incurred on raw
material - closing stock of raw material
= Rs 12,500 + Rs 75,000 + Rs 5,000 – Rs 22,500
= Rs. 92,500 – Rs 22,500
= Rs. 70,000
Prime cost = Raw material consumed + Direct labour + Direct expenses
= Rs 70,000 + Rs 47,600 + Rs 23,400
= Rs 1, 41,000

FACTORY COST

In addition to prime cost, it includes works or factory

overheads. Factory overheads consist of cost of indirect
material, indirect wages, and indirect expenses incurred
in the factory. Factory cost is also known as works cost,
production or manufacturing cost.

Factory Cost = Prime cost + Factory

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 overheads

Illustration 3
Calculate works cost or factory cost from the following details:

Raw material consumed = Rs 50,000

Direct wages = Rs20, 000
Direct expenses = Rs 10,000
Factory expenses 80% of direct wages
Opening stock of work in progress = Rs 15,000
Closing stock of work in progress = Rs 21,000
Solution
Calculation of factory cost

Particulars Amount Amount

(Rs) (Rs)
Direct material consumed 50,000
Add:- Direct wages 20,000
Add:- Direct Expenses 10,000
-------------
Prime cost 80,000

Add:- Factory expenses 16,000

-------------
-
Current manufacturing cost 96,000
Add:- Opening stock of work in progress 15,000
-------------
-
Total goods processed during the period 1,11,000
Less:- Closing sock of work in progress 21,000
-------------
-
Factory cost or Work Cost 90,000
COST OF PRODUCTION
If office and administrative overheads are added to factory or works cost, total cost of production is arrived at.
Hence the total cost of production is calculated as:

Total Cost of production = Factory Cost + office and administration

overheads

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Illustration 4
Calculate cost of production from the following information
Raw material purchased = Rs 42,500
Freight paid = Rs 5,000
Labour charges = Rs 12,500
Direct expenses = Rs 10,000
Factory overhead 80% of direct labour charges
Administrative overhead = 10% of work cost
Opening stock closing stock
Raw material 8,000 10,000
Work in progress 7,500 9,000

Solution

Calculation of cost of production

Particulars Amount Amount
(Rs) (Rs)
Material purchased 42,500
Add:- freight 5,000
Total cost of material purchased 47,500
Add:- Opening stock of Raw material 8,000
Material available for consumption 55,500
Less:- Closing stock of Raw material 10,000
Raw material consumed 45,500
Add:- Direct labour charges 12,500
Add:- Direct expenses 10,000
Prime cost 68,000

Add: Factory overhead 10,000

Current manufacturing cost 78,000
Add: Opening stock of work in progress 7,500
Total goods processed during the period 85,500
Less: Closing stock of work in progress 9,000
Factory cost 76,500
Add: Administrative overhead 7,650
Cost of production 84,150

COST OF GOODS SOLD

It is not necessary, that all the goods produced in a period are sold in the same period. There is stock of finished
goods in the opening and at the end of the period. The cost of opening stock of finished goods is added in the total
cost of production in the current period and cost of closing stock of finished goods is deducted. The cost of goods
sold is calculated as:
Cost of goods sold = Total cost of production + Opening stock of Finished goods – Closing stock of finished goods

COST OF SALES
If selling and distribution overheads are added to the total cost of production, total cost is arrived at. This cost is
also termed as cost of Sales.
Hence the total cost is calculated as:

Total Cost = Cost of Goods sold + Selling and distribution overheads

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SALES
If the profit margin is added to the total cost, sales are arrived at. Excess of sales over total cost is termed as
profit. When total cost exceeds sales, it is termed as Loss.

Sales = Total Cost + Profit

COST SHEET

The various elements/components of the cost as discussed above can be presented in the form of a statement,
popularly known as ‘Cost Sheet’ or ‘Cost Statement’. The cost sheet may be prepared separately for each cost
centre and may have the columns like cost per unit or cost of previous period etc.
A Proforma cost sheet is shown below:

Proforma Cost Sheet

Total Cost per

Particulars
Cost unit
Direct Materials
Opening stock of materials
Add Purchases of materials
Less Closing stock of materials
(a) Materials consumed
Direct Wages
Direct Expenses
PRIME COST
Add Factory Overheads
Factory rent, rates, taxes
Fuel-power and water
Lighting and Heating
Indirect wages
Depreciation, Repairs
Salaries of Works Manager etc.
Indirect Materials
Drawing office and works office expenses
Depreciation on factory land and building
Less Scrap value
Defective work

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 Add Work in progress (opening)
Less Work in progress (closing)
WORKS COST

Add Office/Administration overheads

Office rent, insurance, lighting, cleaning
Office salaries, telephone, law and audit expenses,
General Manager’s salary
Printing and stationery, Maintenance, repairs, upkeep of
office bldg, Bank charges and miscellaneous expenses

COST OF PRODUCTION
Add Opening stock of finished goods
Less Closing stock of finished goods
COST OF GOODS SOLD
Add Selling and Distribution Overheads
Showroom expenses, salesmen’s salaries &
commission, bad debts, discounts, warehouse rent,
carriage outwards, advertising, delivery expenses,
samples and free gifts etc.
COST OF SALES
Add Net Profit or deduct net loss
SALES

The above relationship among the various elements of costs can also be explained in a better way with the help of
following diagram.

Notes: The difference between sales and factory/works cost is termed as ‘Gross Profit’ and the difference between
sales and cost of sales is termed as ‘Net Profit’ or ‘Operating Profit’. As such, the difference between Gross Profit
and Office and Administration Overheads and Selling and Distribution may be different from the ‘Net Profit’ or
‘Operating Profit’. This Net Profit may be different from the net Profit as disclosed by the financial statement in the
form of Profit and Loss Account. This is due to the fact that the Profit and Loss Account considers the various non-
operating incomes/expenses or incomes/expenses of purely financial nature (as discussed below) while they may
be ignored by the cost statement.

ITEMS EXCLUDED FROM COST ACCOUNTS

There are certain items which are included in financial accounts but not in cost accounts. These items fall into three
categories.
a) Appropriation of profits

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  Appropriation to sinking funds.
 Dividends paid
 Taxes on income and profits
 Transfers to general reserves
 Excess provision for depreciation of buildings, plant etc. and for bad debts
 Amount written off as goodwill, preliminary expenses, underwriting commission, discount on
debentures issued; expenses of capital issue etc.
 Capital expenditures specifically charged to revenue
 Charitable donation
b) Matters of pure finance
Purely financial charges
 Losses on sale of investments, buildings, etc.
 Expenses on transfer of company’s office
 Interest on bank loan, debentures, mortgages, etc.
 Damages payable
 Penalties and fines
 Losses due to scrapping of machinery
 Remuneration paid to the proprietor in excess of a fair reward for services rendered.
Purely financial incomes
 Interest received on bank deposits
 Profits made on the sale of investments, fixed assets, etc.
 Transfer fees received
 Rent receivable
 Interest, dividends, etc. received on investments.
 Brokerage received
 Discount, commission received

c) Abnormal gains and losses

 Losses or gains on sale of fixed assets.
 Loss to business property on account of theft, fire or other natural calamities.

In addition to above abnormal items (gain and losses) are also excluded from cost accounts. Alternatively, these
may be taken to costing profit and loss account.
Illustration 5

Prepare cost sheet from the following particular in the book of B. M. Radhika

Raw material purchased = Rs. 1, 20,000

Paid freight charges = Rs 10,000
Wages paid to laborers = Rs 35,000
Directly chargeable expenses = Rs 25,000
Factory on cost = 20% of prime cost
General and administrative expenses = 4% of factory cost
Selling and distribution expenses = 5% of production cost
Profit 20% on sales
Opening stock Closing stock
Raw material 15,000 20,000
Work in progress 17,500 24,000
Finished goods 20,000 27,500

Solution

Cost sheet of B. M. Radhika Amount

Raw material purchased 1,20,000

Add: freight charges 10,000
----------
Total cost of raw material purchased 1,30,000
Add: opening stock of raw material 15,000
-----------

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 Cash of raw material available 1,45,000
Less: closing stock of raw material 20,000
-----------
Raw material consumed 1,25,000
Add: wages paid to laborers 35,000
Add: Directly chargeable expenses 25,000
-----------
Prime cost 1,85,000
Add: Factory overhead 20% of prime cost 37,000
------------
Current manufacturing cost 2,22,000
Add: Opening stock of work in progress 17,500
------------
Total goods processed during the period 2,39,500
Less: closing stock of work in progress 24,000
------------
Factory on work cost 2,15,500
Add: General & administrative expenses 4% of factory cost 8,620
------------
Cost of production 2,24,120
Add: opening stock of finished goods 20,000
------------
Goods available for sales 2,44,120
Less: closing stock of finished goods 27,500
------------
Cost of goods sold 2,16,620
Add: selling and distribution expenses 5% of production 11,206
cost ------------
Cost of sales 2,27,826
Add:- Profit 56,956.50
-------------
Sales 2,84,782.50

Illustration 6

Prepare cost sheet in the book of M. B. Rehman from the following particulars.
Opening stock:

Raw material = Rs 5,000

Finished goods = Rs 4,000
Closing stock:

Raw material = Rs 4,000

Finished goods = Rs 5,000
Raw material purchased = Rs 50,000
Wages paid to laborers = Rs 20,000
Chargeable expenses = Rs 2,000
Rent and Taxes =Rs 7,400
Power = Rs 3,000
Experimental expenses = Rs 600
Sale of wastage of material = Rs 200
Office management salary = Rs 4,000
Office printing & stationery = Rs 200
Salaries to salesman = Rs 2,000
Commission to traveling agents = Rs 1,000
Sales = Rs 1, 00,000

Solution
Book of B. M. Rehman
Cost sheet

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 Particular Details (Rs) Amount (Rs)

Raw material purchased 50,000

Add: Opening stock of raw material 5,000
-------------

Raw material for consumption 55,000

Less: closing stock of raw material 4,000
-------------

Raw material consumed 51,000

Less: Sale of wastage of materials 200
------------- 50,800
Add: Direct labour 20,000
Add: Direct chargeable expenses 2,000
----------
Prime cost 72,800
Add: Factory overhead
Rent & Taxes 7,400
Power 3,000
Experimental charges 600
------------- 11,000
Factory cost 83,800
Add: Administrative overhead:-
Office management salary 4,000
Office printing & stationery 200
------------- 4,200
Cost of production 88,000
Add: Opening stock of finished goods 4,000
----------
Goods available for sales 92,000
Less: closing stock of finished goods 5,000
----------
Cost of goods sold 87,000
Add: selling and distribution overhead:-
Salaries of salesman 2,000
Commission to traveling agent 1,000
------------- 3,000
Cost of sales 90,000
Profit 10,000
----------
Sales 1,00,000

Illustration 7

The following inventory data relate to Natabar Ltd.

Inventories
Opening Closing
Finish goods Rs 1,100 Rs 950
Work in progress Rs 700 Rs 800
Raw materials Rs 900 Rs 950
Additional information
Cost of goods available for sales = Rs 6840
Total goods processed during the period = Rs 6540
Factory on cost = Rs 1670
Direct material used = Rs 1930
Requirements
(i) determine raw material purchase
(ii) determine the direct labour and cost incurred
(iii) determine the cost of goods sold

Solution

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(i)Raw material purchased
Raw material consumed =opening stock + purchases – closing stock
OR Rs 1,930 = Rs 900 + Purchases – Rs 950
OR Rs 1,930 + Rs 50 = purchases
Rs 1,980 = Raw material purchased

(ii) Direct labour cost

Cost of goods processed during the year = Rs 6,540
Less: Opening work in progress = Rs 700
------------
Rs 5,840
Less: Factory overheads = Rs 1,670
-----------
Prime cost = Rs 4,170
Less: Raw material consumed = Rs 1930
------------
Direct labour cost = Rs 2,240

(i) Cost of goods sold

= cost of goods available for sales – closing stock finished goods
= 6840 – 950 = Rs 5890

Questions

1. Mention the elements of cost

2. Explain the classification of direct labour
3. How the overheads are different from the expenses?
4. What are the components of direct cost?
5. Write the formula of calculating the raw material consumed
6. Explain the meaning of cost of goods sold and cost of sales
7. Explain the meaning of
(a) First cost
(b) Works cost and works on cost
(c) Cost of production and goods available for sales
8. Opening stock of raw material - Rs 15,000
Closing stock of raw material - Rs 20,000
Material purchased - Rs 1, 20,000
Find raw material consumed
(Ans. 1, 15,000)
9. Raw material consumed - Rs 1, 02,000
Raw material for consumption - Rs 1, 10,000
Raw material purchased - Rs 1, 00,000
Find opening & closing stock of raw material
(Ans. Rs 10,000 and Rs 8,000)
10. Prime cost - Rs 1, 85,000
Current manufacturing cost - Rs 2, 22,000
Total goods processed during the period - Rs 2, 39,500
Works cost - Rs 2, 15,000
Find factory overheads, opening and closing stock of work in progress
(Ans. Rs 37,000, Rs 17,500 and Rs 24,000)
11. Cost of production - Rs 11,206
Goods available for sales - Rs 12,206
Cost of goods sold - Rs 10,831
Cost of Sales - Rs 11, 391
Sales - Rs 12,000
Find opening and closing stock of finished goods, selling expenses and profit or loss

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 (Ans. Rs 1,000, Rs 1,375, Rs 560 and Rs 609 profit)
12. Direct material consumed Rs 60,000
Direct labour 50% of material consumed
Direct expenses - 33¹/³% of direct labour
Factory overheads - 40% of direct labour
Office overheads - on cost 66²/³% of works
Find office cost
(Ans. Rs 1, 20,000)
13. From the following particulars prepare a cost sheet showing the total cost per tone for the period ended
31st December 2010
Rs Rs
Raw material 33,000 Director’s fees (office) 2,000
Productive wages 35,000 Factory cleaning 500
Direct expenses 3,000 Sundry office expenses 200
Unproductive wages 10,500 Estimating 800
Factory rent and terms 7,500 Factory stationery 750
Factory lighting 2,200 Office stationery 900
Factory heating 1,500 Factory insurance 1,100
Motive power 4,400 Office insurance 500
Haulage 3,000 Legal expenses 400
Director’s fees (works) 1,000 Rent of warehouse 300
Depreciation of Unkeeping of delivery 700
vans
- plant and machinery 2,000 Bank charges 50
- office building 1,000 Commission on sales 1,500
- delivery vans 200 Loose tools written off 600
Bad debts 100 Rent and taxes (office) 500
Advertising 300 Water supply 1,200
Sales department salaries 1,500

The total output for the period has been 10,000 tones.
(Ans. Prime cost Rs 71,000 works cost Rs 1,08,050 office cost Rs 1,13,600 total cost Rs 1,18,200 cost per
tone Rs 11.82)
14. Prepare a cost sheet to show the total cost of production and cost per unit of goods manufactured by a
company for the month of July 2011. Also find out the cost of sales.

Rs Rs
Stock of raw materials 3,000 Factory rent & rates 3,000
1-7-2011
Raw materials purchased 28,000 Office rent 500
Stock of raw materials 4,500 General expenses 400
31-7-2011
Manufacturing wages 7,000 Discount on sales 300
Depreciation on plant 1,500 Advertisement 600
Loss on sale of a part of plant 300 Expenses to be charged fully income tax 2,000
paid

The number of units produced during July 2011 was 3,000

The stock of finished goods was 200 and 400 units on 1-7-2011 and 31-7-2011 respectively. The total
cost of units on hand on 1-7-2011 was Rs 2,800. All these had been sold during the month.

(Ans. Prime cost Rs 33,500 factory cost Rs 38,000 cost of production Rs 38,900 cost of sales Rs 37416)

15. The following particulars relating to the year 2011 have been taken from the books of a chemical works
manufacturing and selling a chemical mixture:

Rs Rs
Stock on 1st Jan. 2011
Raw materials 2,000 2,000
Finished mixture 500 1,750
Factory stores ------ 7,250
Purchases

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 Raw materials 1,60,00 1,80,000
0
Factory stores ------ 24,250
Sales
Finished mixture 1,53,05 9,18,000
0
Factory scrap ------ 8,170
Factory wages ------ 1,78,650
Power ------ 30,400
Depreciation of machinery ------ 18,000
Salaries:
Factory ------ 72,220
Office ------ 37,220
Selling ------ 41,500
Expenses
Direct ------ 18,500
Office ------ 18,200
Selling ------ 18,000
Stock on 31st December 2011
Raw material 1,200
Finished mixture 450
Factory stores ------ 5,550

The stock of finished mixture at the end of 2011 is to be valued at the factory cost of the mixture for that
year. The purchase price of raw–materials uncharged throughout 2011. Prepare a statement giving the
maximum possible information about cost and its break up for the year 2011.
(Ans. Prime cost Rs 3,77,800 factory cost Rs 5,16,200 cost of production of finished mixture sold Rs
5,71,852 cost of sales Rs 6,31,352)

16. Calculate
a) Value of raw-materials consumed
b) Total cost of production
c) Cost of goods sold and
d) The amount of profit from the following particulars:

Rs Rs
Opening stock Power 2,000
Raw – materials 5,000 Factory heating and lighting 2,000
Finished goods 4,000 Factory insurance 1,000
Closing stock Experimental Expenses 500
Raw – materials 4,000 Sales of wastage of materials 200
Finished goods 5,000 Office management salaries 4,000
Raw – materials 50,00 Office printing and stationery 200
purchased 0
Wages paid to labourers 20,00 Salaries of salesmen commission of traveling 2,000
0 agent
Chargeable expenses 2,000
Factory rent, rates & taxes 5,000 Sales 1,00,000

(Ans. (a) Rs 50,800, (b) Rs 87,500, (c) Rs 89,500, (d) Rs 10,500)

[Hint sales of raw-materials wastage of Rs 200 has been deducted from the cost of raw-materials]

17. The cost of the sale of product ‘X’ is made up as follows:

Rs
Materials used in manufacturing 10,20
Materials used in packing materials 2,500
Materials used in selling the product 350
Materials used in office 75
Materials used in factory 125
Labour required in producing 2,500
Salary paid to works manager and other principal officers of the factory 450
Expenses – indirect office 250
Expenses – direct factory 1,000
Bad debts 300

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 Packing expenses 150
Lighting and heating charges of the factory 200
Expenses – indirect factory 125

Assuming that all the products manufactured are sold, what should be the selling price to obtain a profit of
20% on cost price?
[Ans. Prime cost Rs 16,200, works cost Rs 17,100 cost of sales Rs 18,225 sales Rs 21,870]

18. Calculate the prime cost, factory cost, total cost of production and cost of sales from the following
particulars:
Rs.
Raw materials consumed 12,000
Directly chargeable expenses 500
Wages paid to labourers 2,500
Grease, oil, cotton waste etc. 25
Salary manager and clerks 1,750
Insurance of stock of raw materials 300
Consumable stores 400
Printing and stationery
Factory 50
Office 200
Sales deptt. 100
----- 350

Rent of office building 150

Depreciation :
Factory premises 200
Office furniture 50
Delivery vans 75
----- 325
Power and fuel 500
Contribution to provident fund of factory employees 1,000
Salaries of administrative directors 100
Bank charges 75
Cost of samples 250
Salaries of sales manger 300
Advertising 500
Packing material 350
Storage in stocks of finished goods 20
[Ans. Prime cost Rs 15,000, factory cost Rs 19225 total cost of production Rs 19,800 cost of sales Rs
21,395]
19. A firm has purchased a plant to manufacture a new product, the cost data for which is given below:

Estimated annual sales 24,000 units

Estimated costs
Material Rs 4.00 per unit
Direct labour Rs 0.60 per unit
Overheads Rs 24,000 per year
Administrative expenses Rs 28,800 per year
Selling expenses 15% of sales
Calculate the selling price if profit per unit is Rs
1.02

[Ans. Rs 9.20]

20. Prepare a cost sheet from the following data to find out profit and cost per unit:

Raw materials consumed Rs 1,60,000

Direct wages Rs 80,000
Factory overheads 20% of direct wages
Office overheads 10% of factory cost
Selling overheads 12,000
Unit produced 4,000
Units sold 3,600
Selling price Rs 100 per unit

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[Ans. Prime cost Rs 2,40,000, factory cost Rs 2,56,000, cost of production Rs 2,81,600, cost of sales Rs
2,65,440, profit Rs 94,560]

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