Chapter 8 Cost Bookkeeping Ibrahim Sameer (MBA - Specialized in Finance, B.Com – Specialized in Accounting & Marketing) Accounting for Costs & ledger Accounting
• Cost records are a detailed breakdown of the information contained in the purchases account, the wages and salaries account and all the expense accounts in the nominal ledger.
Example of Direct & Indirect Materials
• During one month, a company incurred materials cost of MVR 28,000. There were no opening or closing inventories at the beginning & end of the month. Direct material cost were MVR 20,000 (all paid for in cash), & indirect materials cost were MVR 1,000 for production, MVR 5,000 for administration & MVR 2,000 for sales & distribution. All materials are kept in stores & requisitioned when required. Example of Direct & Indirect Materials
Materials Inventory Account Cash purchase 28,000 WIP (direct material cost) 20,000 Production OH A/C (indirect material cost) 1,000 Admin OH A/C 5,000 Sales & Dist’n OH A/C 2,000 28,000 28,000 Example of Direct & Indirect Materials
WIP Account Transfer from material inventory A/C 20,000
20,000 Example of Direct & Indirect Materials
Production OH Account Transfer from material inventory A/C 1,000
1,000 Example of Direct & Indirect Materials
Administration OH Account Transfer from material inventory A/C 5,000
5,000 Example of Direct & Indirect Materials
Sales & Distribution OH Account Transfer from material inventory A/C 2,000
2,000 Accounting for Labour Costs
Wages Control Account Cash & deduction (= XXX WIP (direct labour gross wages & salaries) cost) XXX Production OH A/C (indirect production labour cost) XXX Admin OH A/C (cost of admin labour) XXX Sales & Dist’n OH A/C (costs of sales & distribution labour) XXX XXX XXX Accounting for Labour Costs
WIP Account Transfer from wages control A/C (direct labour cost) XXX XXX Accounting for Labour Costs
Production OH Account Transfer from wages control A/C (indirect production labour cost) XXX XXX Accounting for Labour Costs
Administration OH Account Transfer from wages control A/C (cost of admin labour) XXX XXX Accounting for Labour Costs
Sales & Distribution OH Account Transfer from wages control A/C (costs of sales & distribution labour) XXX XXX Control Accounts
• A control account is an account which records total cost, unlike an individual ledger account which records individual Dr & Cr. Cost Bookkeeping Systems
• There are two main cost bookkeeping systems, interlocking systems and integrated systems.
Integrated Systems
• Modern cost accounting system (computerized) integrate cost accounting information & financial accounting information and are known as integrated systems. Interlocking Systems
• An interlocking system is a cost bookkeeping system where separate ledger accounts are kept for both the cost accounting function & financial accounting function. Such system necessitates the reconciliation of the profit produced by the separate income statement. Interlocking Systems
• The cost accounts use the same basic data (purchases, wages & so on) as the financial accounts, but frequently adopt different bases for matters such as depreciation & inventory valuation. Principal A/C in a System of Interlocking A/C
• (a) the resources a/c
• Material control a/c or stores ledger control a/c
• Wages (& salaries) control a/c
• Production OH control a/c
• Administration OH control a/c
• Selling & distribution OH control a/c Principal A/C in a System of Interlocking A/C
• (b) accounts which record the cost of production items from start of production work through to cost of sales:
• WIP control a/c
• Finished goods control a/c
• Cost of sales control a/c Principal A/C in a System of Interlocking A/C
• (c) Sales a/c
• (d) The costing income statement
• (e) The under/over absorbed OH a/c
• (f) Cost ledger control a/c (in the cost ledger)
• (g) Financial ledger control a/c (in the financial ledger) Advantages of Interlocking System
• They feature two ledgers, each of which fulfill different purpose Disadvantages of Interlocking System
• Profits of separate cost & financial a/c must be reconciled.
• They require more administration time.
• They are more costly to run.
Advantages of Integrated System
• It save administration time & cost, because only one set of a/c need to be maintained instead of two.
• There is also no need to reconcile the profits of the separate cost and financial a/c.
Disadvantages of Integrated System
• The main limitation of integrated a/c is that one set of a/c is expected to fulfill two different purposes, the cost a/c provide internal management information & the financial a/c are used for external reporting. At times external reporting & internal management information may conflict. Production Overhead Control Account
• In production OH control A/c it will record all of the total actual expenditure incurred on indirect costs and the amount absorbed into individual units, job or process. Under / Over Absorption
• In an integrated accounting system the following is the double entry for over absorption:
• Dr: OH control A/c
• Cr: Income statement
• In an integrated accounting system the following is the double entry for under absorption:
• Dr: Income statement
• Cr: OH control A/c
Cost Bookkeeping System Double entry for Absorption Production OH • Dr: WIP A/c
• Cr: Production OH A/c Notional cost
• In some interlocking costing system, there maybe notional costs. These are costs that are introduced into costing system in order to present a more realistic measure of the cost of an item. The most common types of notional cost are notional rent and notional interest. Notional cost
• Notional costs must be recorded in the cost accounts. The actual notional cost is recorded as Dr entry in the appropriate OH a/c, and the corresponding Cr entry is to the cost accounting income statement. Questions & Answers Thank You
Ibrahim Sameer
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