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INTRODUCTION
The industrial resolution and spurt in the industrial growth lead to
maintenance of books of accounts in an accurate way. The primary objective of
accounting is to provide necessary information of business to the interested parties.
In order to provide relevant information to management for taking managerial
decisions and to provide information of wastages and losses of material, labour and
expenses, special concepts are required. In this connection, accounting is divided
into different branches, such as financial accounting, cost accounting and
management accounting. Therefore, the cost accounting concept is said to be a
recently developed concept.

COST ACCOUNTANCY:
The term, “Cost Accountancy” is applicable to the organisations which deals
with manufacturing works and providing of services. Cost accountancy means
application of costing and cost accounting principles, methods and techniques to the
practice of cost control and ascertainment of profitability. It provides information to
the management for taking managerial decisions. Thus, cost accountancy includes
several subject maters such as cost accounting, costing, methods of costing and
techniques of costing.

COST ACCOUNTING:
The term, “cost accounting” means the process of accounting for costs. It
starts with the recording of income and expenditure, or, the bases on which they are
calculated and ends with the preparation of periodical statements and reports for
ascertaining and controlling costs. Thus, cost accounting is a mechanism by which
costs or products or services are ascertained and controlled.
According to the ICMA, London, “cost accounting is an application of
accounting and costing principle, methods and techniques in the ascertainment of
costs and the analysis of savings and/or excess as compared with previous experience
or with standards”.

COSTING:
The term, “costing” is the techniques and process of ascertaining costs. The
ICMA, London, has defined costing as “the ascertainment of costs”. It deals with
principles concerning the determination of cost of products and services. The method
of costing used will vary from industry to industry. The methods of costing includes
historical costing, absorption costing, marginal costing, standard costing, job costing
, process costing, uniform costing, contract costing etc. According to Wheldon the
term, “costing” is referred to as classifying, recording cost of products or services;
the relation of those costs to sales value and the ascertainment of profitability.
As per Harley “Costing is a study of the expenses incurred in manufacturing a product
and conducting a business in such a manner that the expenses are analysed and
classified so as to enable the actual cost of any particular process or unit of production
to be determined with a minimum of error”.

COST :
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The term, “cost” is used very often in our day to day affairs. The Committee
on Terminology, American Institute of Certified Public Accountants defined cost as
“the amount, measured in money of cash expended or other property transferred,
capital stock issued services performed, or liability incurred in consideration of goods
or services received or to be received”.
According to ICMA, Landon, the term, “cost” is “the amount of
a. Actual expenditure incurred on a given thing; and
b. Notional expenditure attributable to a given thing”

Generally, cost has to be studied in relation to its purpose and conditions. Ryall, in
his dictionary of costing, defined costing as from a technical point of view, the term
cost may be used when referring to the cost of manufacturing only or the cost of
selling and distribution of goods, or to indicate the total cost of manufacturing, selling
and distribution”.
Therefore, by using the term total cost, factory cost, or prime cost there is
clearly indicated the nature of the items under consideration. Thus, a cost accountant
should be concerned with cost concepts, like total cost, marginal cost, standard cost,
conversion cost, direct and indirect cost etc.

OBJECTIVES OF COST ACCOUNTING

As cost accounting is developed to fulfil the needs of management, it should
provide detailed information about the cost to the interested parties. It is said to be
mechanism of accounting by which cost of services or products is ascertained and
controlled for different purposes. The following are the objectives of cost accounting.
1. To ascertain the cost of a product, job, contract, service or unit of production.
2. To assist the management in fixation of selling price of a product or service
3. To enable cost comparison, i.e., actual cost comparison with standards
4. To control the cost and minimize the cost of manufacturing
5. To determine the profitability of each product, process, department, cost unit
etc.
6. To provide necessary cost information to the management which, assists the
management in decision making process.
7. To minimize the wastages in cost elements and providing base for production
planning.
8. To provide base for formulating the operating policies like a). determination
of CVP relationship b).to shut down or operate c). to make or buy d). to
determine whether continue with the existing plant and machinery or to
replace it
9. To determine controlling efficiency of cost.

ADVANTAGES OF COST ACCOUNTING

The major limitations of financial accounting with respect to assisting the
management in decision making process and cost control are overcome with the cost
accounting. Therefore, the deficiencies of financial accounting became the
advantages of cost accounting. Cost accounting is not only useful to the management
but also to the employees, to the public and to creditors. The following are the
advantages of cost accounting.
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I. To the management
1. Reveals unprofitable activities
2. Facilitates decision making
3. Helps in fixing selling price
4. Helps in improving efficiency
5. Facilitates cost control
6. Enables inventory control
7. Minimizes wastage
8. Helps in budgeting
9. Establishes standards
II. To the employees
1. Job security
2. Fair wage policy
3. Rewards for efficient workers
III. To the creditors
1. Progress and prosperity
IV. To the government
1. Assisting in preparation of national plans
2. Subsidies and concessions
3. Utilization of resources
V. To the public
1. Removes wastages
2. Fair prices
3. Employment opportunities

I. To the management
1. Reveals unprofitable activities: Cost accounting provides information of
profitability of every activity that enables to ascertain the unprofitable
activities. The management can decide whether it is to be continued or
stopped.
2. Facilitates decision making: As a tool to the management, cost accounting
will provide necessary data i.e., product wise, department wise, cost centre
wise etc. This helps the management in decision making process.
3. Helps in fixing selling price: Cost accounting discloses the information of
cost of manufacture which helps the management in fixing the selling prices
of products or services. Marginal costing technique helps the management
in this process.
4. Helps in improving efficiency: Cost accounting will be the base for
establishment of standards for various items. The actuals are compared with
predetermined standards thereby the efficiency of cost elements will be
assessed and improved.
5. Facilitates cost control: Cost control is the fundamental objective of cost
accounting. Standard costing and budgetary control are techniques used to
control the various cost elements.
6. Enables inventory control: Good system of cost accounting helps in effective
inventory control through various techniques like ABC analysis, Stock
verification, VED analysis and levels of stock.
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7. Minimizes wastage: The actual cost of every element of cost will be
compared with the standards. This enables the management in identifying
the reasons for unfavourable variance and minimizes the wastage of
materials, labour and expenses.
8. Helps in budgeting: Cost accounting reveals both historical data and standard
cost of products which are considered as base for preparation of budgets.
Thus, cost accounting is a system of foresight.
9. Establishes standards: Cost accounting establishes standards for various
elements of cost. The standards are established with help of past experience
and information.
II. To the employees:
1. Job security: The good system of costing minimizes the wastage and
improves the profitability. This increases the prosperity of the firm in turn
and leads to better remuneration to employees and ensures job security.
2. Fair wage policy: Cost accounting introduces incentive wage schemes, bonus
plans etc., which ensures better reward to sincere and efficient workers. It
helps the management in implementing a good wage system to efficient
workers.
3. Rewards for efficient workers: Cost accounting measures the efficiency of
workers. The actuals are compared with standards thereby efficiency of the
workers will be ascertained and encouraged by rewards. This differentiation
will motivate the remaining workers to work hard and earn more wages.
III. To the creditors: A good system of cost accounting, generally, reveals the
progress and prosperity of the organization. The loan providers like banks,
financial institutions, creditors etc., always have a look at prosperity of the
organization before sanctioning the loans and advances.
IV. To the Government:
1. A good system of costing helps in preparation of national plans and
economic development.
2. Generally, the government will provides subsidy and make policies like
taxation, import, export etc.
3. Cost accounting minimizes wastage and reduces cost that leads to effective
utilization of resources like materials, labour, and other resources.
V. To the public
1. Cost accounting minimizes and removes the wastage of resources and
enables the consumers to get better quality products.
2. A good system of costing facilitates the consumers to get qualitative products
at a fair prices
3. As cost accounting reveals the progress and prosperity of the organization it
provides the employment opportunities.

LIMITATIONS OF COST ACCOUNTING

1. It is an expensive. It involves considerable amount of expenditure and two
set of accounts are to be maintained.
2. Some are felt it is not necessary and recently developed one. Many
organisations are functioning without cost accounting and they have
prosperity also.
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3. It involves huge paper work as cost accounting involves many forms and
statements.
4. The system of cost accounting is not applicable to all types of industries.
5. It becomes not suitable and failure in many cases.
6. It is not reliable as it depends on estimates or predetermined data.

RELATIONSHIP OF COST ACCOUNTING AND FINANCIAL ACCOUNTING

Financial accounting and cost accounting are the branches of accounting.
Financial accounting is meant for recoding, classifying, summarizing and analysis of
business transactions which are financial in nature. In financial accounting separate
set of principles and policies called as GAAPs are used to record the transactions.
Principles/ rules of Double entry system of accounting are followed while recording
the transaction. The fundamental objective of financial accounting is to recording of
business transactions and interprets the result to the interested parties. On the other
hand, cost accounting records the cost data and serves as tool to the management by
providing necessary information for decision making. It is also maintained under
double entry system of accounting. Therefore, both the accounting systems (financial
accounting and cost accounting) are concerned with systematic recording and
interpretation of results thereof to the interested parties. Both the systems are relying
on the same principles concerning debit and credit. But, cost accounting is much
more detailed than financial accounting. However, there are some differences
between financial accounting and cost accounting.

DIFFERENCES BETWEEN COST ACCOUNTING AND FINANCIAL

ACCOUNTING
Items Financial accounting Cost accounting
1. Purpose The primary purpose of financial Providing of detailed cost
accounting is preparation of final information to the management
accounts i.e., profit and loss for decision making, planning
account and balance sheet and and control is the purpose of
interpret the result to the cost accounting.
shareholders (owners) and
outsiders
2. Requirements Financial accounting is Maintaining of cost accounting
maintained in order to meet the is voluntary except in certain
requirements of Companies Act industries where it has been
and Income Tax Act. Keeping of obligatory to keep cost records
financial accounting is under the Companies Act.
mandatory.
3. Objective It classifies, records and analyses It records the expenditure in an
transactions in a subjective objective manner i.e., according
manner i.e., according to the to purpose for which costs are
nature of expenditure. incurred.
4. Stock Stock is always valued at cost or Stocks generally valued at cost.
valuation market price whichever is less.
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5. Analysis of In financial accounting, profit Cost accounting show the
cost and and loss accounting is prepared to detailed cost and profit data for
profit ascertain the profit or loss of the each product, cost unit, cost
business as a whole during a centre, department, process etc.
particular period.
6. Fixation of Financial accounting never One of the fundamental
selling price provides information with a view objectives of the cost accounting
to fix the selling price. is fixation of selling price
7. Period Financial reports i.e., profit and Cost reporting is continuous
loss account and balance sheet process and prepared according
are prepared on annual basis. to the requirements like daily,
weekly, monthly etc.
8. Control Financial accounting system Cost accounting always focuses
gives much importance to the on control aspect. Cost control
financial transactions. It does not is the primary objective of cost
give any importance to control accounting. Standard costing,
aspect. budgetary control are used.
9. Nature Financial accounting keeps Cost accounting is concerned
historical information. This not only with historical costs but
characteristic of financial also estimates for future.
accounting can be easily
understood in the context of the
purposes for which it was
designed.
10. Classificat- It makes no distinction between It makes clear distinction
ion of costs fixed and variable cost and between fixed and variable costs
controllable and uncontrollable and controllable and
costs. uncontrollable costs.

RELATIONSHIP OF COST ACCOUNTING AND MANAGEMENT

ACCOUNTING
Cost accounting and management accounting are the two branches of
accounting. Both are acts as aids to management. Now-a-days, the purpose of cost
accounting not only restricted to recording of cost data and cost finding but also serve
as an effective tool to the management in control. The objectives of cost accounting
and management accounting are same. The techniques of cost accounting like
marginal costing, standard costing, budgetary control, ratio analysis etc. are employed
in management accounting. In simple words, management accounting is an extension
of the managerial aspects of the cost accounting.

DIFFERENCES BETWEEN COST ACCOUNTING AND MANAGEMENT

ACCOUNTING
Items Cost accounting Management accounting
1. Purpose Cost accounting is concerned Management accounting is
with recording of cost i.e., concerned with study of impact
ascertainment, allocation, of cost and it’s affecting aspects.
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distribution of cost and account
of cost.
2. Aim Cost accounting reveals cost Management accounting is
information of a product, service, concerned with provide
department, cost centre, cost unit accounting information for
etc. decision making.
3. Period Cost accounting is concerned Management accounting is
with short term planning concerned with both short term
and long term planning.
4. Approach Cost accounting is deals with Management accounting is
historical approach i.e., it records generally futuristic in approach
past cost information. i.e., it always deals with future
estimates.
5. Scope Its scope is narrow as it confined Its scope is wider it covers the
to ascertainment and control of area of financial accounting,
cost cost accounting, taxation etc.
6. Relevance Its relevance and objectivity is Relevance and objectivity of
not higher when compared with data is higher than cost
management accounting. accounting.
7. Hierarchy The position of the cost Management accountant is
position accountant is placed lower than placed at higher level than cost
management accountant accountant.
IMPORTANT TERMS
1. COST UNIT
A cost unit is a unit of product, service or time or combination of these in
relation to which cost may be ascertained or expressed. According to the ICMA,
London, “cost unit is a quantitative unit of product or service in relation to which
costs are ascertained”. Generally, the cost units are the units of physical
measurements like numbers, weight, area, volume etc. Much attention is required to
the selection of cost unit. The unit of measurement must be clearly defined and
selected as costs are measure in relation to cost unit. The term, “cost unit” is
applicable to manufacturing concerns only. In the case of non-manufacturing
concerns it is very difficult to decide a suitable cost unit. While selecting a cost unit,
many factors like nature of business, management policy, availability of information
etc. have to be considered.
The following are some examples of cost units in different industries.
Name of the industry Cost unit
Automobile Number
Brick works Thousand
Cable Meter
Cement, steel, sugar Tonne
Chemicals Litre, kg, tonne
Confectionery Kg
Consultancy Per consulting hour
Cotton or jute Bale or per meter
Drugs Per batch
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Electricity Kilowatt hour
Flour Tonne
Furniture Number
Gas Cubic meter
Hospitals Per patient day
Mines and quarries Tonne
Nuts and bolts Gross or bags if standard weight
Oil, petrol Per litre
Paints Litre
Printing press Thousand copies
Railway Per passenger kilometer
Ship building Number
Shoes Pair or dozen pairs
Soap works Kg, litre
Transportation Tonne kilometer or passenger kilometer

2. COST CENTRE
A cost centre is a location, person or item of equipment or group of these for
which cost may be ascertained and used for cost control. According to the
terminology of ICMA, London, “cost centre is a location, function, items of
equipment in respect of which costs may be ascertained and related cost units for
control purpose”.
The cost centre may be a department or a machine or a plant or a salesmen
or a particular work etc. In certain cases cost centre and cost unit may be the same.
The number of cost centres and size of cost centre may vary from one organization.
It will depend upon the expenditure involved and the requirements or management
for the purpose of cost ascertainment and cost control. Too many cost centres tend
to be expensive but having too few cost centres do not serve the purpose of cost
ascertainment and cost control. The cost centres are two types viz., personal and
impersonal.
a. Personal Cost centre: A personal cost centre consists of a person or group of
persons. Costs like works manager, store keeper, sales manager may be
accumulated.
b. Impersonal Cost Centre: The impersonal cost centre consists of a location or item
of equipment or group of these like machine shop, milling machine etc.,
However, in a manufacturing concern there are different types of cost centres.
a. Production Cost Centre: Production cost centre is the cost centre where the raw
materials are converted into finished products. In other words, the cost centre
which engaged on regular production is called production cost centre. Machine
shops, welding shops, assembling shops are some examples for production
centres.
b. Service Cost Centre: Service cost centre is the cost centre which render service
to production cost centres. It assists the production cost centres. Raw material
stores, finished goods stores, personnel department, canteen, plant maintenance
department etc. are expels for service cost centres.
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c. Operation Cost Centre: An operation cost centre consists of machine and/or
persons carrying out similar operations. All machines or operators performing
the same operations are brought together under one centre.
d. Process Cost Centre: Process cost centre consists of a specific process or a
continuous sequence of operations. This type of cost centres are used at ail
refinaries, sugar industries and other processing industries.

ELEMENTS OF COST :

The term cost means the amount of resources used for manufacture of goods
or services. In other words, cost is the amount of expenditure incurred on or attributed
to a specified product or activity or cost unit. According to Anthony and Welsch cost
is a measurement of the amount of resources used for some purpose in terms of
money. The committee on terminology of the American institute of certified public
accounts defined “cost as the amount, measured in money, of cash expended or other
property transferred, capital stock issued, services performed, or a liability incurred
in consideration of goods and services received or to be received”.
However, the term cost cannot be exactly defined. It must always be studied
for which purpose it is incurred or under what circumstances it is paid. It can be used
in different ways. The term cost only could not give any clear ideas, unless some
phrases are used as prefix to that. It may use as manufacturing cost to express amount
incurred for manufacture of product. The word cost of selling and distribution is used
to express the cost incurred for selling and distribution of goods. It also indicates total
cost of goods which includes manufacturing cost, office cost and selling and
distribution cost.
Therefore, in order to convey the definite meaning of the word cost the nature
of the items under consideration should highlighted, like prime cost, direct cost, fixed
cost, variable cost, marginal cost etc.., thus the cost accountant should possess perfect
knowledge about the terms; like total cost, variable cost, fixed cost standard cost,
directed cost, in directed cost etc. the term cost may be classified into various items
based on the following terms i.e., a. Nature b. Behaviour c. Controllability d. Function
e. Normality g. Traceability.
a. Based on Nature or Element: Based on Nature of tem or cost, the costs are
classified into three categories namely, 1. Material Cost, 2. Wages or Labour
Cost and 3. Expenses. The term ‘Material Cost’ means cost incurred on
materials like raw materials, spares and stores, consumable stores, packing
materials etc., ‘Labour cost’ is the cost incurred on human resources engaged
in production process and at office. ‘Expenses’ means the cost incurred on
other items other than materials and labour. See next part of this chapter for
elaborate explanation of these items.
b. Based on Behavior: Based on Behavior of cost, the costs are classified into
Fixed Cost, Variable Cost and Semi-Variable Cost.
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i. Fixed Cost: Fixed Cost refers to the cost which tends to remain
unaffected by variations in volume of output. In other words, the cost
which accrues in relation to the passage of time and remains
unaffected by fluctuations in the level of operation, is called ‘Fixed

Fixed Cost
12000
Fixed Cost 10000
8000
6000
4000
2000
0
1 2 3 4 5
Year

Cost’. This is the cost incurred irrespective of level of operation.

These are paid based on time rather than output, hence, they are
known on period costs. Examples – Rent, salaries to staff,
depreciation, insurance, Interest etc., The Fixed Cost is constant, but
the Fixed Cost per unit varies according to the change in the volume
of Output.
ii. Variable Cost: Variable Cost is a cost which varies in direct proportion
to changes in the volume of output of Turnover. Variable Costs is also
known as direct cost. Variable Costs are related to production or
operation and directly allocated to cost centres. The cost which
accures in relation to the output is referred to as variable cost. The
total of variable cost varies according to the changes in the volume of
output where as the per unit variable cost is constant. The following
are the examples of variable costs, Direct materials, Direct Labour,
Direct expenses, Variable costs or overheads etc.,

Chart Title
15

10

0
1 2 3 4 5

iii. Semi Variable cost or Semi fixed cost: Semi variable cost include
both fixed cost and variable cost. This cost is fixed to certain level of
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output later on it changes. This cost is partly affected by fluctuations
in the volume of output and is partly fixed upto a certain volume of
production. Cost of telephone charges, salary to supervisor, repairs
and maintenance of plant etc. are the examples for semi variable costs.

Chart Title
800
600
400
200
0
1 2 3 4 5 6 7

Fixed cost Variable cost

Semi variable cost

c. Based on controllability: According to the controllability, the costs are

classified into controllable costs and uncontrollable costs.
i. Controllable costs: A cost which is influenced by an action of a
member of an undertaking or business unit is called controllable cost.
The cost which can be regulated by an authority (management) is
called controllable cost. Variable costs are referred to as controllable
costs as they can be controllable by the certain efforts. Both time
factor and managerial authority are considered, to control over these
costs. The following are examples, direct material cost, direct wages,
direct expenses, and other variable overheads.
ii. Uncontrollable costs: The costs which cannot influenced by the
action of a member of an undertaking are known as uncontrollable
costs.
The distinction between controllable and uncontrollable costs may not be
absolute. The uncontrollable cost of one individual may be controllable by another.
The cost which is considered as uncontrollable to the manager may be controlled by
the higher level of managerial authority. On the other hand, expenditure which is
uncontrollable during the short run may be controlled in the long run. Therefore,
controllability of an item of cost will depends upon managerial authority and time
factor involved.
d. Based on function or functional classification: Based on the functions
performed by manufacturing concern, the costs are classified into
i. Production or Manufacturing cost
ii. Administration cost or establishment cost
iii. Selling cost
iv. Distribution cost
v. Research and development costs
These are to be explained in the later part of the chapter.
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e. Based on decision making: For the purpose of decision making the costs are
classified into marginal cost, deferential cost, opportunity cost, sunk cost,
imputed cost etc.
i. Marginal cost: The term marginal cost include prime cost and
variable overheads. Thus, marginal cost is known as variable cost.
The management would always be considered only variable cost as
relevant cost for decision making in the decision making process.
Variable costs will be incurred in future whereas fixed cost remains
unchanged. Hence, variable cost will be referred to as most relevant
for decision making.
ii. Differential cost: The increase or decrease in the total cost which is
result of variation in operations is regarded as differential costs. It
consists of both variable and fixed costs. When the change results in
increase in cost it is called as incremental cost. When the change in
costs results in reduce due to decrease in output, is called as
decremental cost. The differential cost always be considered as
relevant cost for decision making.
iii. Opportunity cost: Opportunity cost is the economic resource or
benefit which is forgone as a result of choosing one alternative
instead of another alternative. The opportunity cost does not find
any place in financial accounting. It is computed for the purpose of
decision making by comparing the cost of one alternative with
another alternative. For example, amount withdrawn from fixed
deposit with a view to invest on a project, the interest on fixed deposit
which is lost is termed as opportunity cost.
iv. Sunk cost: Sunk cost is a cost which has already been incurred and
it cannot affect with the process of decision making. Thus, sunk cost
is irrelevant for decision making. It is also termed as non-
incremental cost.
v. Imputed cost: The cost in which do not involve any cash payment is
called imputed cost. It is also known as notional cost and appears in
the cost accounts only. Imputed costs are considered as relevant cost
in decision making. Imputed costs are estimated based on similar
situations and are treated as hypothetical costs. For example, rental
value of the company’s own buildings, interest on invested capital,
salary of a proprietor etc.
f. Based on Normality: Under this costs are classified into normal costs and
abnormal costs based on normality of incurring of expenses.
i. Normal cost: The cost which is incurred normally at a given level of
output in the conditions that level of output is achieved.
ii. Abnormal cost: The cost which in not normally be incurred at a given
output level in the conditions that level of output is attained.
g. Based on Traceability: Based on the traceability of cost with the product the
costs are classified into two categories such as direct cost and indirect cost.
i. Direct cost: The cost which is easily traced or identified with the
product is known as direct cost. In other words, the cost of various
materials and other resources which form a part of finished product
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and identifiable with the product or cost unit or cost centre is called
direct cost. It include the cost of all the direct materials consumed,
direct labour engaged and direct expenses paid.
ii. Indirect cost: Indirect cost is a cost which is difficult to trace and
identify with the product. The cost which is not possible to identify
with a particular product or the cost which is incurred as common to
several products is called indirect cost. It does not form a part of
finished product. The cost incurred on all indirect materials, indirect
labour engaged and indirect expenses paid aggregately known as
OVERHEADS.

ELEMENTS OF COST
Having a simple knowledge about total cost does not satisfies the
requirements of managerial people to take decision. In order to control the cost
effectively and to provide useful information to the management for decision making,
necessary data should be analysed and costs are to be classified. To serve this
purpose the total cost of a product classified into three elements which are popularly
known as elements of cost. The elements of cost consists of materials, labour and
expenses. The following chart will give clear idea of elements of cost.
ELEMENTS OF COST (TOTAL COST)

MATERIALS LABOUR EXPENSES

DIRECT INDIRECT DIRECT INDIRECT DIRECT INDIRECT

MATERIALS MATERIALS LABOUR LABOUR EXPENSES EXPENSES

PRIME COST

OVERHEADS

TOTAL COST

PRODUCTION ADMINISTRATIVE
OR OR SELLING DISTRIBUTION
MANUFACTURING OFFICE OVERHEADS OVERHEADS
OVERHEADS OVERHEADS
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1. Materials: In the case of manufacturing industries materials constitutes a very
significant proportion to total cost of finished product. Material costs account
for around 50% to 60% of the total cost of production. The term, “Materials”
mean the commodities which are used in the production process. It includes
physical commodities used to manufacture the final or finished product.
Materials are classified into a). Direct Materials and b). Indirect Materials.
a. Direct materials: The material which becomes a part of the finished product
or the material which enters into and form part of the product is known as
direct material. Direct materials also known as process materials and prime
materials. In other words, the materials which can be economically
identified in the product are called direct materials. The term direct materials
include
i. All the materials specially purchased for a certain job, process or
production order.
ii. All components or materials passing from one operation or process to
another
iii. All primary packing materials like cartons, cardboard boxes, wrappings
etc.
Note: In some cases a material may be direct but it is treated as indirect, because
it is used in small quantities and it is not economically feasible to
identified that quantity and negligible in cost. For example, nails used in
manufacturing shoes, glue used in cardboard boxes etc.
b. Indirect materials: The materials which cannot be identified in the finished
product are called indirect materials. Indirect materials, generally, low
value items when compared with direct materials. Lubricants, cotton, waste,
grease oils, small tools etc. are the examples for indirect materials.
However, some minor items of materials which enter into production and
form part of it are conveniently treated as indirect materials. Cost of thread
in garment manufacturing, cost of glue in cardboard boxes, cost of nails in
shoe making etc. are the examples. Indirect materials include the following
 Fuel, lubricating oil, grease etc.
 Tools of small value for general use.
 Consumable stores
 Printing and stationery materials
 Stores of small value used.
2. Labour: Labour is another major element of total cost which occupies next place
after materials cost. It is a key element to industrial under takings. The term,
“labour cost” referred to as wages paid to the workers employed in business
concern. In other words, the remuneration paid for physical and mental efforts
extended in production and distribution. According to the ICMA, London, “the
labour cost is the cost of remuneration (wages, salaries, commission, bonus etc.)
of the employees of an undertaking”. Labour engaged at production and other
individuals engaged as supporting staff are included in labour. The labour cost
is subdivided into direct labour and indirect labour.
a. Direct labour: Direct labour cost is also known as direct wages cost. The
labour cost which can be identified to a product, a process or a cost centre
is known as direct labour or direct wages. Direct wages are wages paid to
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the workers who are directly involved in the production process.
Therefore, direct labour also known as productive labour or operating
labour. In simple words, the wages paid to workers who involved in
creation of form i.e., form utility are regarded as direct wages. Direct
labour include the following.
i. Wages paid to labourers engaged in altering the condition, conformation
and composition of the product.
ii. Wages paid to inspectors, analysts etc. who are specially engaged or
required for such production.
iii. Wages paid to foremen, shop clerks etc. if they are specifically identified.
Note: The wages paid to foremen, shop clerks, charge hands are indirect in nature,
but they are treated as direct if they are identified with product accurately.
b. Indirect labour: Indirect labour is the labour cost which cannot be directly
engaged in the production of goods or job or process. In other words,
indirect labour is the labour which helps the direct labourers in the
production process. The cost incurred on indirect labour is called indirect
wages, which forms part in the overheads. Indirect labour include the
following items.
i. Wages paid to store keeper, time keeper, supervisors, who engaged at
production centres
ii. Salary paid to staff engaged at office.
iii. Salary paid to the staff engaged at marketing department.
iv. Salary paid to the service department staff.

3. Expenses: The term, “expenses” means cost incurred on expenses other than
materials and labour. It is the last element of total cost. In other words, the
total of all expenses incurred other than materials and labour is regarded as
expenses. As per the ICMA “the term expense is the cost of service provided
to an undertaking and the notional cost of the use of owned assets. Expenses
are also subdivided into direct and indirect expenses.
a. Direct expenses: The direct expenses are the expenses which are incurred
in the production. The expenses which can be identified and charged to a
product, process, or job are termed as direct wages. The direct expenses
also known chargeable expenses. In other word, these are the expenses
specially incurred for a job or unit or process and no way are they
connected with other jobs. The following are the expenses which include
in the form of direct expenses.
i. Cost of special designs, drawings or layout
ii. Hire of special tool or equipment which is hired for a particular job.
iii. Royalties paid
iv. Maintenance cost of special tools and equipments.
v. Travelling and conveyance expenses incurred in connection with a
particular job.
vi. Excise duty etc.
Direct expenses also known as productive expenses or process expenses.
b. Indirect expenses: The expenses which cannot be identified and allocated
to a product or process or job or cost unit are called indirect expenses. All
 16
indirect expenses incurred other than indirect materials and indirect labour
are included in indirect expenses. These expenses are incurred commonly
for all jobs, therefore, known as common expenses. Indirect expenses
include the following
i. All expenses relating to welfare of employees.
ii. Depreciation and maintenance of assets
iii. Lighting, electricity, bank charges, advertising etc.
iv. Other common expenses like insurance, rent and rates of factory and
office, cost of training of new employees etc.
4. Overheads: The term overheads means an aggregate of indirect material,
indirect labour and indirect expenses. Overheads may defined as total cost
of indirect materials, indirect labour and indirect expenses. The term indirect
means which cannot be chargeable to a job or product, process or operation
particularly and directly.
Definitions:
1. “The cost of indirect materials, indirect labour and such other expenses
including services as cannot conveniently be charged direct to cost units”
---- Weldon.
2. “The aggregate of indirect materials cost, indirect (wage)labour cost and
indirect expenses” --- ICMA, London.
3. “Overhead costs are operating costs of a business enterprise which cannot be
traced directly to a particular unit of output. Further such cost are invisible
or uncountable” ---- Blocker and Waltmer
The term, “Overheads” also known as “Oncost or Burdon or Convenience cost”.

CLASSIFICATION OF OVERHEADS
For preparation of cost sheet, overheads are divided into manufacturing
overheads, administration overheads, selling overheads and distribution overheads
according to the functions performed.
a. Manufacturing Overheads: Manufacturing overheads also known as production
overheads, factory overheads or works overhead or factory oncost, works oncost.
Manufacturing overheads means the total of cost of indirect materials consumed,
cost of indirect labour engaged and other indirect expenses incurred at factory in
order to carryout operations or production process. The term, Manufacturing
includes all activities which starts with supply of raw materials and ends with the
primary packing of finished goods. Manufacturing overheads include the
following
i. Indirect materials:
Consumable stores like lubricants, cotton waste, grease oils, small tools,
factory stationery
Other direct materials which are minor or small in nature and conveniently
treated as indirect materials such as cost of thread in garment manufacturing,
cost of glue in cardboard boxes, cost of nails in shoe making etc.
ii. Indirect wages:
Wages of foremen, supervisors charge hands, inspectors, works clerical staff,
internal transport, tool room rent etc.
Idle time wages
 17
Overtime premium
Night shift allowance etc.
iii. Indirect expenses:
Factory related expenses like rent, rates, taxes, insurance repairs etc.
Depreciation on plant and machinery
Maintenance charges of plant and machinery
Power, fuel, coal consumed
Service department of expenses
Welfare and medical expenses of factory employees.
Factory overheads = Indirect materials + Indirect labour + indirect expenses of
factory

b. Administrative overheads: Administrative overheads also known as office

overheads or office oncost. The aggregate of cost of indirect materials, indirect
labour and indirect expenses incurred in the administration is called
administrative overheads. In other words, office overheads includes all expenses
incurred in the direction, control and administration of an undertaking. The
following are the examples of office overheads
i. Indirect Materials:
Printing and stationery which includes account books, files, ink, papers, pins,
clips, broomstick, carbon papers, stencil papers etc.
ii. Indirect wages:
Salaries to office staff, salaries paid to directors, accountants, cashiers, internal
auditors, office manager etc.
iii. Indirect expenses:
Rent, rates and taxes of office buildings, depreciation on office buildings,
depreciation on furniture, office lighting, office cleaning charges, insurance
on office buildings legal charges, audit fees, travelling allowances of office
staff, postage, telegrams, telephone rent, etc.
Administrative overheads = Indirect materials + Indirect labour + indirect expenses
of office

c. Selling overheads: Selling overheads consists of indirect materials cost, indirect

wages and indirect expenses that are incurred in promoting sales and retaining
the customers. In other words, all expenses in securing and retaining customers
for the products are known as selling expenses. These expenses are spent on
creating and maintaining demand for the product.
The aggregate of cost of indirect materials, indirect labour and indirect expenses
which are incurred from the time the products are in salable state until they are
sold. The following are included in selling overheads
i. Indirect materials
Printing and stationery, mailing literature, price lists, materials used for
display etc.
ii. Indirect labour
Salaries to sales department staff, marketing executives or sales
representatives, commission paid etc.
iii. Indirect expenses
 18
Show room rent, rates and taxes, sales office lighting, advertising expenses,
sales promotion expenses, bad debts collection charges, expenses for after
sales services etc.
Selling overheads = Indirect materials + Indirect labour + indirect expenses of office

d. Distribution overheads: Distribution overheads consists all the expenses

concerned with the delivery and distribution of finished goods to customers.
Distribution overheads means an aggregate of cost of indirect materials, cost of
indirect labour and indirect expenses incurred with respect to distribution of
goods fit for dispatch and make them available to customers. In simple words,
all expenses incurred from the time of product is completed until it reaches its
destination. The following are the important items of distribution overheads.
i. Indirect materials:
Printing stationery, oil, grease, spare parts of delivery van
ii. Indirect labour:
Wages paid to staff and workers engaged in connection with delivery goods
like dispatch clerk, wages to workers of loading and unloading, packers,
delivery van drivers, salaries of warehouse staff etc.
iii. Indirect expenses:
Freight and carriage outwards, warehouse rent, rates, taxes, and insurance,
maintenance expenses of warehouse, depreciation on delivery van, running
expenses of delivery expenses etc.
distribution overheads = Indirect materials + Indirect labour + indirect expenses of
distribution of goods
In the nutshell, the aggregate of cost of direct materials, cost of direct labour and
direct is known as prime cost.
Symbolically,
Prime cost = cost of direct materials + cost of direct labour + chargeable expenses.
The aggregate of cost of indirect materials, cost of indirect labour and indirect
expenses is called as overheads.
Symbolically
Overheads = cost of indirect materials + cost of indirect labour + indirect expenses

Total cost = Prime cost + overheads

Direct materials + Indirect materials = Cost of Materials

Direct labour + Indirect labour = Cost of Labour
Direct expenses + Indirect expenses = Expenses incurred
Prime cost + Over heads = Total cost

Total cost = Prime cost + Manufacturing overhead + administration overheads + selling

overheads + Distribution over heads
Therefore,
Prime cost = Direct materials + Direct labour + Direct expenses
Works or Factory cost = Prime cost + Factory overheads
Cost of production = Works cost + administration overheads
 19
Cost of goods sold = cost of production + opening stock of finished goods – closing
stock at the end of

Direct materials
+
Direct labour
+
Direct expenses
= Prime cost +
Manufacturing
overheads
= Works cost or +
Factory cost
Administration
overheads
= Cost of +
production
Selling and
distribution
overheads
= Total cost

COST SHEET
Cost sheet is a statement which is prepared to show the details of the total
cost of a product, process or job. The expenses of product are analyzed under
different classifications and presented in a form, which is popularly known as cost
sheet or statement of cost. In other words, cost sheet is a statement showing the total
cost under proper classification in a logical order.
1. ICMA, London, defined cost sheet as “statement which provides for the
assembling of the estimated detailed cost in respect of a cost centre or a cost
unit”
2. “The expenditure which has been incurred upon production for a period is
extracted from the financial books and the stores records, and set out in a
memorandum or a statement. If the statement is confined to the disclosure of
the cost of the units produced during the period, it is termed as a cost sheet”
----- Walter and Bigg
Cost sheet is a periodical statement, the period may be wee, month or year,
that is depend upon the organsiation. The statement of cost sheet discloses the details
of expenses incurred under different head, namely, prime cost, works cost, cost of
production, cost of sales. It also depicts the profit of a product or a process or a cost
unit. Cost per unit can be derived by dividing the total cost incurred during the period
by total number of units produced during the period.
Cost sheet can be prepared in ways such as by using the historical cost
information have been already incurred and by using the estimated figures. If cost
sheet is prepared with historical cost information the statement of cost is known as
 20
historical cost sheet. If it is prepared by using estimated information, the cost sheet
is known as estimated cost sheet.

SIGNIFICANCE OF COST SHEET

 It gives the break up details of the total cost under different elements in
logical order.
 It provides cost per unit
 It facilitates comparisons that enables cost control
 It helps in the preparation of cost sheet by relying on estimates i.e., tender or
quotations
 It also helps in fixing the selling price of a product
DIFFERENCES BETWEEN THE COST SHEET AND PRODUCTION ACCOUNT
Cost sheet is a statement, not an account, therefore, it is not prepared under
double entry system of accounting principles. It discloses the total cost under
different classification of cost. It also depicts the cost of sales and cost per unit.
Production account or manufacturing account is a ledger account which
consist of the cost, sales and profit. While preparing production account, the
principles of double entry system of accounting are followed. The items like opening
stock, all expenses relating to manufacturing process are charged or debited to the
production account and the amount of closing stock will be shown on the credit side
of the production account. The difference between debit side and credit side of this
account will be treated as cost of production and transferred to trading accounting.
Cost sheet Production account
1. Cost sheet is prepared in statement Production account is prepared in ledger
format account format
2. Expenses are classified to compute Expenses are not classified
prime cost, works cost, cost of
production and total cost
3. Principles of double entry system are Principles of double entry system are
not followed followed
4. Cost sheet can be prepared based on Production account is prepared on the
historical and estimated information basis of actual figures only.
5. It is used in preparation of tenders and It is not useful in preparation of tenders
quotations and quotations.

DIFFERENCES BETWEEN COST SHEET AND PRODUCTION STATEMENT

The cost of output can be ascertained under different classifications from the
statement known as cost sheet. The items of cost were extracted from the financial
records and presented in logical order. Thus, cost sheet reveals cost of a cost centre
or a cost unit. In other words, cost sheet is confined to record of expenses incurred.
When sales, stocks and profit are included in the cost sheet, it is called as
production statement.
Therefore, if the statement confined to disclose the cost of the units produced
during the period, is known as cost sheet, and the statement which records, both cost,
sales and profit is known as production statement. `
SPECIMEN OF COST SHEET
Cost sheet for the year/month ending --------
 21

Particulars ` `
Direct materials XXX
Direct labour or wages XXX
Direct expenses or chargeable expenses XXX
PRIME COST XXX
Add: Factory/Works/Manufacturing/ Production overheads
Indirect materials XXX
Indirect labour/wages XXX
Factory rent and rates XXX
Factory insurance XXX
Factory lighting & heating XXX
Factory managers salary XXX
Consumable stores XXX
Power and fuel XXX
Coal gas and water XXX
Depreciation on plant and machinery XXX
Depreciation on factory premises XXX
Repairs to factory premises XXX
Repairs to plant and machinery XXX
Supervisors salary XXX
Drawing expenses XXX
Design/estimation expenses XXX
Haulage XXX
Works oncost XXXX
Less: Sale of scrap XXX
Factory/works overheads XXX
FACTORY OR WORKS COST XXXX
Add: Office or Administrative Overheads
Office rent and rates XXX
Office salaries XXX
Office lighting XXX
Printing and stationery XXX
Telephone charges XXX
Postage & Telegrams XXX
Bank charges XXX
Insurance XXX
Legal expenses XXX
Audit fee XXX
Directors fee XXX
Depreciation on furniture XXX
Depreciation on office equipment XXX
Other office expenses XXX
Office oncost/ office overheads XXXX
COST OF PRODUCTION XXXX
Add: selling and distribution overheads
Sales men salaries XXX
 22
Advertising XXX
Godown / show room rent XXX
Sales promotion expenses XXX
Commission XXX
Travelling expenses XXX
Carriage outwards XXX
Depreciation on delivery van XXX
Maintenance of delivery van XXX
Free samples XXX
Bad debts XXX
Other sale related expenses XXX
Selling and distribution overheads XXXX
COST OF SALES / TOTAL COST XXXX
Profit or loss XXXX
SALES XXXX

THE FOLLOWING ARE THE ITEMS EXCLUDED FROM COST ACCOUNTING

The total cost of a product should include only those items of expenses which
are a charge against profit. Items of expenses which are relating to capital assets,
capital losses, payments by way of distribution of profits and matters of pure finance
should not form a part of the cost.
Following are the items which are not included in cost accounts:
(a) Purely Financial Charges:
a. Loss arising from the sale of fixed assets,
b. Loss on sale of investments,
c. Discount on shares and debentures,
d. Interest on bank loan, mortgages and debentures,
e. Expenses of the company’s share transfer office,
f. Damages payable,
g. Penalties and fines,
h. Losses due to scrapping of machinery,
i. Remuneration paid to the proprietor in excess of a fair reward for
services rendered,
j. Interest on capital,
k. Expenses of raising capital,
l. Cost discount.
(b) Appropriations of Profit:
(i) Donations and Charities,
(ii) Taxes on income and profits,
(iii) Dividend paid,
(iv) Transfers to reserves and sinking funds,
(v) Additional provision for depreciation on fixed assets and for bad
debts,
(vi) Capital expenditure specially charged to revenue.

(c) Writing off Intangible and Fictitious Assets:

 23
Goodwill, Patents and Copyrights, Advertisement, Preliminary Expenses,
Organization Expenses, Underwriting Commission, Discount on Issue of
Shares/Debentures.
(d) Purely Financial Incomes:
(i) Rent receivable,
(ii) Profits on the sale of fixed assets,
(iii) Transfer fees received,
(iv) Interest received on bank deposits,
(v) Dividend received,
(vi) Brokerage received
(vii) Discount, commission received.
(e) Abnormal Gains and Losses:
(i) Abnormal wastage of material,
(ii) Wages of abnormal idle time,
(iii) Cost of abnormal idle facilities,
(iv) Excessive depreciation,
(v) Abnormal gain on manufacturing.
1. From the following particulars prepare cost sheet
` `
Raw materials consumed 4,00,000 Direct wages 3,00,000
Chargeable expenses 1,00,000 Wages of foreman 80,000
Factory indirect wages 20,000 Store keeper wages 50,000
Lubricants 5,000 Rent – factory 80,000
Lighting – factory 80,000 Office 20,000
Office 1,00,000 Marketing division 20,000
Marketing division 60,000 Repairs to plant 38,000
Repairs to office premises 30,000 Consumable stores 80,000
Works manager salary 2,40,000 Office manager salary 1,00,000
Marketing manager salary 1,20,000 Printing 60,000
Stationery 40,000 Telephone charges 75,000
Office salaries 1,02,000 Salesmen salaries 1,40,000
Packing charges 1,05,000 Salesmen commission 23,000
Travelling expenses 50,000 Advertising 60,000
Insurance --- office 30,000 Carriage outwards 12,000
Factory 26,000 Warehousing 10,000
Office expenses 75,000
Solution
Cost sheet for the year ending ------
Particulars ` `
Raw materials 4,00,000
Direct wages 3,00,000
Chargeable expenses 1,00,000
Prime cost 8,00,000
Add: Factory Overheads
Wages of foremen 80,000
Factory indirect wages 20,000
Store keeper wages 50,000
 24
Lubricants 5,000
Factory rent 80,000
Factory lighting 80,000
Repairs to plant 38,000
Consumable stores 80,000
Works manager salary 2,40,000
Factory insurance 26,000
Factory overheads 6,99,000
Factory or works cost 14,99,000
Add: office overheads
Office rent 20,000
Office lighting 1,00,000
Repairs to office premises 30,000
Office managers salary 1,00,000
Printing 60,000
Stationery 40,000
Telephone charges 75,000
Office salaries 1,02,000
Office insurance 30,000
Office expenses 75,000
Office over heads 6,32,000
Cost of production 21,31,000
Add: selling and distribution overheads
Marketing division rent 20,000
Marketing division lighting 60,000
Marketing manager salary 1,20,000
Salesmen salaries 1,40,000
Packing charges 1,05,000
Salesmen commission 23,000
Travelling expenses 50,000
Advertising 60,000
Warehousing 10,000
Carriage outwards 12,000
Selling and distribution overheads 6,00,000
Total cost 27,31,000

2. From the following particulars calculate cost per unit

` `
Raw materials 3,30,000 Productive wages 3,50,000
Direct expenses 30,000 Unproductive wages 1,05,000
Factory rent 70,000 Factory lighting 20,000
Factory heating 20,000 Haulage 50,000
Motive power 40,000 Directors fee (works) 14,000
Dep. on delivery van 5,000 Office expenses 2,000
Advertising 3,000 Sales department salaries 12,000
Upkeep of delivery van 7,000 Stationery 9,000
Commission sales 15,000 Rent and taxes 5,000
 25
Legal expenses 2,000 Fuel 10,000
Factory insurance 13,000 Office insurance 5,000
Bank charges 2,000 Showroom rent 3,000
Depreciation on plant 20,000 Dep. on office buildings 10,000
Directors fee (office) 20,000 Factory cleaning 5,000
Bad debts 1,000 Estimating charges 8,000
Factory stationery 7,500 Printing 5,000
Dep. On factory buildings 6,000
Total output is 10,000 units
Solution
Cost sheet for the year ending -----
Particulars ` `
Raw materials 3,30,000
Productive wages 3,50,000
Direct expenses 30,000
Prime cost 7,10,000
Add: factory overheads
Unproductive wages 1,05,000
Factory rent 70,000
Factory lighting 20,000
Factory heating 20,000
Haulage 50,000
Directors fee (works) 14,000
Motive power 40,000
Fuel 10,000
Factory insurance 13,000
Depreciation on plant 20,000
Factory cleaning 5,000
Estimating charges 8,000
Factory stationery 7,500
Depreciation on factory buildings 6,000
Factory overheads 3,88,500
Factory or works cost 10,98,500
Add: office overheads
Office expenses 2,000
Stationery 9,000
Rent rates and taxes 5,000
Legal expenses 2,000
Bank charges 2,000
Office insurance 5,000
Depreciation on office buildings 10,000
Directors fee (office) 20,000
Printing 5,000
Office oncost 60,000
Cost of production 11,58,500
Add: selling and distribution overheads
Depreciation on delivery van 5,000
 26
Advertising 3,000
Sales department salaries 12,000
Upkeep of delivery van 7,000
Commission on sales 15,000
Showroom rent 3,000
Bad debts 1,000
Selling & distribution overheads 46,000
Total cost 12,04,500

Cost per unit = Total cost / Number of units produced

= `12,04,500 / 10,000 units = `120.45 per unit

3. The cost of sale of product A is made up as follows

`
Materials used in manufacturing 55,000
Materials used in primary packing 10,000
Materials used in selling product 1,500
Materials used in factory 750
Materials used in office 1,250
Labour for producing 10,000
Labour for factory supervision 2,000
Freight on materials purchased 5,000
Selling expenses 3,500
Direct expenses 5,000
Indirect expenses – factory 1,000
Administration expenses 1,250
Depreciation on office building and equipment 750
Depreciation on factory machines 1,750
Advertisement expenses 1,250
Prepare a statement of cost assuming that all the products manufactured are sold.
What should be the selling price to obtain a profit of 20% on selling price? (ANU
Mar 2013)
Solution
Cost sheet of product
Particulars ` `
Materials used in manufacturing 55,000
Materials used in primary packing 10,000
65,000
Add: Freight on materials purchased 5,000
Direct materials used 70,000
Labour for producing 10,000
Direct expenses 5,000
Prime cost 85,000
Add: Factory overheads
Materials used in factory 750
Labour for factory supervision 2,000
Indirect expenses - factory 1,000
 27
Depreciation on factory machines 1,750
Factory overheads 5,500
Factory / Works cost 90,500
Add: Office Overheads
Materials used in office 1,250
Administration expenses 1,250
Depreciation on office buildings 750
Office overheads 3,250
Cost of production 93,750
Add: Selling and Distribution Overheads
Materials used in selling 1,500
Selling expenses 3,500
Advertisement expenses 1,250
Selling overheads 6,250
Total cost 1,00,000
Profit (1,00,000 x 20/100-20) 25,000
Selling price 1,25,000
Note: When profit is to be estimated on selling price, the following formula is used
to calculate profit
Profit
Profit = Total cost X
Selling price - profit

4. Find out is the appropriate cost sheet, the selling rate per ton of paper
manufactured by a paper mills in January 2016 from the following information.
a. Prime cost
b. Works cost
c. Total cost
d. Selling price
Direct materials
Paper pulp – 500 ton@ `50 per ton
Other materials – 100 tons @ `30 per ton
Direct labour
80 skilled men - @ `3 per day for 25 days
40 unskilled men - @ `2 per day for 25 days
Direct expenses
Special equipment – `4,000
Works overhead
Variable overheads – 100% on direct wages
Fixed overheads – 60% on direct wages
Administration overheads – 10% on works cost
Selling and distribution overheads – 15% on works cost
Profit – 10% on total cost
Sale of manufacture waste `800
Finished paper manufacture – 400 tonnes (ANU June 2013, CA Inter)

Solution
 28
For 400 tonnes Per ton
Particulars
` `
Direct materials
Paper pulp (500 x 50) 25,000
Other materials (100 x 30) 3,000 28000 70.00
Direct labour
Skilled men (80 x r.3 x 25) 6,000
Unskilled men (40 x r.2 x 25) 2,000 8000 20.00
Direct expenses (special equipment) 4000 10.00
Prime cost 40000 100.00
Add: works overheads
Variable overheads @ 100% on direct wages 8,000
Fixed overheads @ 60% of direct wages 4,800
12,800
Less: sale of manufacturing waste 800
Works overheads 12000 30.00
Works cost 52000 130.00
Add: office overheads
Administrative overheads @ 10% on works cost 5200 13.00
Cost of production 57200 143.00
Add: selling and distribution overheads
Selling and distribution overheads 7800 19.50
(15% on works cost)
Total cost 65000 162.50
Profit (65,000 x 10/100) 6500 16.25
Selling price 71500 178.75

TREATMENT OF STOCKS
There are three types of stocks in the manufacturing organization, namely,
stock of raw materials, work-in-progress/process and stock of finished goods. All
three varieties of stocks are considered while preparing cost sheet.
a. STOCK OF RAW MATERIALS: Stock of raw materials means unused raw
materials. In other words, the materials which are purchased for production
purpose but not issued to the production departments. When opening stock of
raw materials and closing of raw materials are given they will be adjusted to
the purchases of raw materials in order to arrive at raw materials consumed.
The following is the procedure of adjustment of stock of raw materials.
Particulars ` `
Opening stock of raw materials XXX
Add: Purchases of raw materials XXX
Add: Carriage inwards XXX XXX
XXX
Less: Closing stock of raw materials XXX
Raw materials consumed XXX
 29
b. STOCK OF WORK-IN-PROCESS: The term, “Work-in-process” means semi-
finished product. It is neither raw materials nor finished goods. As a partly
completed product stock of work-in-process should be adjusted to the
factory/works cost. When opening and closing stocks of work-in-process are
given, the factory cost or works cost before adjustment of these is known as
gross factory cost or gross works cost. The following is the procedure of
adjustment of stock of work-in-process.
Particulars `
Gross factory/works cost XXX
Add: Opening stock of work-in-process XXX
XXX
Less: Closing stock of work-in-process XXX
Factory or Works cost XXX

c. STOCK OF FINISHED GOODS: The term, “stock of finished” means goods

which are produced and ready to sale but not sold. In other words, it is an
unsold stock of finished goods. The opening and closing stock of finished
goods are adjusted to cost of production. The resulting figure is known as
“Cost of Goods Sold”. The following is the procedure of adjustment of stock
of finished goods.
Particulars `
Cost of production XXX
Add: Opening stock of finished goods XXX
XXX
Less: Closing stock of finished goods XXX
Cost of goods sold XXX

5. Prepare cost sheet showing (a) the cost per unit, and (b) profit for the period
Raw materials consumed : `15,000
Direct labour : ` 9,000
Machine hours worked : 900
Machine hour rate : `5
Administration overheads : 20% on works cost
Selling over heads : `0.50 per unit
Units produced : 17,100
Units sold : 16,000 at `4 per unit.
(ANU July 2012 & SVU Mar 14)
Solution
Cost sheet showing cost per unit and profit
17,100 units Per unit
Particulars
` `
Raw materials consumed 15,000 0.88
Direct labour 9,000 0.53
Prime cost 24,000 1.40
Add: Works overheads (900 hours x `5) 4,500 0.26
Works cost 28,500 1.67
Add: Administrative overheads (20% on Works cost) 5,700 0.33
 30
Cost of production 34,200 2.00
Add: Opening stock of finished goods 0
34,200
Less: Closing stock of finished goods (1,100 x `2) 2,200
Cost of goods sold 32,000
Add: Selling and distribution overheads 8,000 0.50
Total cost 40,000 2.50
Profit 24,000 1.50
Selling price 64,000 4.00
Note:
Unsold stock of finished goods = No. of units produced – No. of units sold
= 17,100 – 16,000 = 1,100
6. The following extract of costing information relate to commodity for the half year
ended 30th June, 2016
`
Purchase of raw materials 1,32,000
Rent, rates & insurance (works) 44,000
Direct wages 1,10,000
Carriage inwards 1,584
Stock on 1.1.2016
Raw materials 22,000
Finished products (1,600 tonnes) 17,600
Work –in – process 5,280
Cost of factory supervision 8,800
Sales 3,30,000
Stock on 30-6-2016
Raw materials 24,464
Finished products (3,200 tonnes) 35,200
Work –in – process 17,600
Advertising, discount and selling costs amounted to 75 paise per ton sold. 25,600
tons of commodity were produced during the period. You are required prepare cost
sheet for the half year ended 30-6-2016. (AU March 2013)
Solution
Cost sheet for the half year ended 30.6.2016
Particulars ` `
Raw materials as on 1.1.16 22,000
Add: Purhcase of raw materials 1,32,000
Add: Carriage inwards 1,584
1,55,584
Less: Raw materials on 30-6-2016 24,464
Materials consumed 1,31,120
Direct wages 1,10,000
Prime cost 2,41,120
Add: Factory Overheads
Rent rates and insurance (works) 44,000
Factory supervision 8,800 52,800
Gross Factory cost 2,93,920
 31
Add: Work-in-process on 1.1.16 5,280
2,99,200
Less: Work-in-process on 30.6.16 17,600
Factory cost 2,81,600
Add: Administrative Overheads ----
Cost of Production 2,81,600
Add: Finished goods on 1.1.16 17,600
2,99,200
Less: Finished goods on 30.6.16 35,200
Cost of Goods sold 2,64,000
Add: Selling Overheads
Advertising, selling costs (24,000 x 0.75) 18,000
Total cost 2,82,000
Profit 48,000
Sales 3,30,000

7. The following information has been obtained from the records of ABC
corporation for the period from June 1 to June 30, 2016
On June1, On June
Particulars 2016 30, 2016
` `
Cost of raw materials 60,000 50,000
Cost of work-in-process 12,000 15,000
Cost of stock of finished goods 90,000 1,10,000
Purchase of raw materials during June 2016 4,80,000
Wages paid 2,40,000
Factory overheads 1,00,000
Administration overheads 50,000
Selling and distribution overheads 25,000
Sales 10,00,000
Prepare a statement showing the following information
a. Raw materials consumed
b. Prime cost
c. Factory cost
d. Cost of goods sold
e. Net profit (AU July2013, ANU April 2015)
Solution
Cost sheet for the month of June 2016
Particular ` `
Raw materials as on 1.6.16 60,000
Add: Purchase of raw materials 4,80,000
5,40,000
Less: Raw materials on 30-6-2016 50,000
Materials consumed 4,90,000
Direct wages 2,40,000
Prime cost 7,30,000
Add: Factory Overheads 1,00,000
 32
Gross Factory cost 8,30,000
Add: Work-in-process on 1.6.16 12,000
8,42,000
Less: Work-in-process on 30.6.16 15,000
Factory cost 8,27,000
Add: Administrative Overheads 50,000
Cost of Production 8,77,000
Add: Finished goods on 1.6.16 90,000
9,67,000
Less: Finished goods on 30.6.16 1,10,000
Cost of Goods sold 8,57,000
Add: Selling Overheads 25,000
Total cost 8,82,000
Profit 1,18,000
Sales 10,00,000

8. Raja Electronics Ltd produces a standard product and provides you the following
information for the year ending 31st March, 2016
Particulars `
Raw materials : Opening stock 10,000
Purchases 85,000
Closing stock 4,000
Direct wages 20,000
Other direct expenses 10,000
Factory overheads – 100% of direct wages
Office overheads --- 10% of works cost
Selling expenses - `2 per unit
Finished goods: Opening stock (1,000 units) 16,000
Produced during the year 10,000 units
Closing stock – 2,000 units
Prepare cost sheet for the year ending 31st March 2016. Also ascertain the selling
price per unit so as to yield a profit of 20% on the selling price. (AU Mar 2011 ANU
Mar 2015)
Solution
Cost sheet for the year ending 31st March 2016
Per
For 10,000 units
Particular Unit
`
`
Opening stock 10,000
Add: Purchase of raw materials 85,000
95,000
Less: Closing stock 4,000
Materials consumed 91,000 9.10
Direct wages 20,000 2.00
Other direct expenses 10,000 1.00
Prime cost 1,21,000 12.10
 33
Add: Factory Overheads (100% of direct wages) 20,000 2.00
Factory cost 1,41,000 14.10
Add: Office Overheads (10% of Works cost) 14,100 1.41
Cost of Production 1,55,100 15.51
Add: Opening stock of Finished goods (1000 units) 16,000
1,71,100
Less: Closing stock of Finished goods (2000 units) 31,020
Cost of Goods sold 1,40,080 15.56
Add: Selling Overheads (9,000 units @ `2 18,000 2.00
Total cost 1,58,080 17.56
Profit 39,520 4.39
Sales 1,97,600 21.96

9. A manufacturing concern requires a statement showing the result of its

production operation for year 2010. cost records give the following information
1-1-2010 31-12- 2010
` `
Stock of Raw materials 40,000 50,000
Stock of Finished goods 1,00,000 1,50,000
Stock of Work in progress 10,000 14,000
Transactions during the year 2010
Indirect labour 50,000
Lubricants 10,000
Insurance on plant 3,000
Administrative expenses 1,00,000
Power 30,000
Direct labour 3,00,000
Purchase of raw materials 4,00,000
Sale commission 60,000
Salaries of salesman 1,00,000
Carriage outwards 20,000
Depreciation on machinery 50,000
Factory rent 60,000
Property tax on factory building 11,000
Sales 12,00,000
Prepare a statement of Cost and Profit showing a). Cost of Raw materials consumed;
b). Prime cost; c). Total Manufacturing Cost; d). Factory manufacturing cost; e). Cost
of Production; f). Cost of Goods sold; g). Cost of sales; and h). Profit
Solution
Cost sheet for the year ending 31-12-2016
Particular ` `
Raw materials as on 1.1.16 40,000
Add: Purchase of raw materials 4,00,000
4,40,000
Less: Raw materials on 31-12-2016 50,000
Materials consumed 3,90,000
 34
Direct wages 3,00,000
Prime cost 6,90,000
Add: Factory Overheads
Indirect labour 50,000
Lubricants 10,000
Insurance on plant 3,000
Power 30,000
Depreciation on machinery 50,000
Factory rent 60,000
Property tax on factory buildings 11,000 2,14,000
Gross Factory cost 9,04,000
Add: Work-in-process on 1.1.16 10,000
9,14,000
Less: Work-in-process on 31.12.16 14,000
Factory cost 9,00,000
Add: Administrative Overheads
Administration expenses 1,00,000
Cost of Production 10,00,000
Add: Finished goods on 1.1.16 1,00,000
11,00,000
Less: Finished goods on 31.12.16 1,50,000
Cost of Goods sold 9,50,000
Add: Selling Overheads
Salesmen commission 60,000
Salesmen salaries 1,00,000
Carriage outwards 20,000 1,80,000
Total cost 11,30,000
Profit 70,000
Sales 12,00,000

10. The accounts of Z Manufacturing Company for the year ended 31st December
2010 show the following
` `
Factory office salaries 6,500 Travelling expenses 2,100
General office salaries 12,600 Travelers salaries 7,700
Carriage outward 4,300 Productive wages 1,26,000
Repairs to plant, machinery 4,450 Dep. on plant, machinery 6,500
Bad debts written off 6,500 Dep. on furniture 300
Carriage on purchases 7,150 Directors fee 6,000
Rent rates taxes: Gas and water:
Factory 8,500 Factory 1,200
Office 2,000 Office 400
Sales 4,61,000 Managers salary 10,000
Stock of Materials: General expenses 3,400
31.12.2015 62,800 Income tax 500
31.12.2016 48,000 Dividends 1,000
 35
Materials purchased 1,85,000
¼ of managers salary is factory, ¾ is office. Prepare cost sheet. (KU March 2014)
Solution
Cost sheet for the year ending 31-12-2016
Particular ` `
Raw materials as on 1.1.16 62,800
Add: Purchase of raw materials 1,85,000
Carriage on purchases 7,150
2,54,950
Less: Raw materials on 31-12-2016 48,000
Materials consumed 2,06,950
Direct wages 1,26,000
Prime cost 3,32,950
Add: Factory Overheads
Factory office salaries 6,500
Repairs to plant 4,450
Rent , rates , taxes and insurance 8,500
Depreciation on plant and machinery 6,500
Gas and Water 1,200
Managers salaries (10,000 x 3/4) 7,500 34,650
Factory cost 3,67,600
Add: Office overheads
General office salaries 12,600
Rent , rates , taxes and insurance 2,000
Depreciation on furniture 300
Directors fee 6,000
Gas and Water 400
managers salaries (10,000 x 1/4) 2,500
General expenses 3,400 27,200
Cost of Production 3,94,800
Add: Selling Overheads
Carriage outwards 4,300
Bad debts written off 6,500
Travelling expenses 2,100
Travelers commission 7,700 20,600
Total cost 4,15,400
Profit 45,600
Sales 4,61,000

11. J.P Company submits the following data on 31st March 2016
`
Sales during the year 27,50,000
Inventory at the beginning of the year
Finished goods 70,000
Work in progress 40,000
 36
Purchase of materials for the year 11,00,000
Material inventories
At the beginning of the year 30,000
At the end of the year 40,000
Direct labour 6,50,000
Factory overhead is 60% of direct labour cost
Inventories at the end of the year
Work – in – process 60,000
Finished goods 80,000
Other expenses for the year
Selling expenses 10% of sales
Administrative expenses 5% of sales
Prepare cost sheet (KU July 2014)
Solution
Cost sheet JP Company limited for the year ended 31st March 2016
Particular ` `
Opening stock 30,000
Add: Purchase of raw materials 11,00,000
11,30,000
Less: Closing stock 40,000
Materials consumed 10,90,000
Direct wages 6,50,000
Prime cost 17,40,000
Add: Factory Overheads (60% of direct wages) 3,90,000
Gross Factory cost 21,30,000
Add: Work-in-process at the beginning 40,000
21,70,000
Less: Work-in-process at the end 60,000
Factory cost 21,10,000
Add: Administrative Overheads (5% of sales 1,37,500
Cost of Production 22,47,500
Add: Finished goods at the beginning 70,000
23,17,500
Less: Finished goods at the end 80,000
Cost of Goods sold 22,37,500
Add: Selling Overheads (10% of sales) 2,75,000
Total cost 25,12,500
Profit 2,37,500
Sales 27,50,000

12. Siva Manufacturing Company Ltd presents the following data for the month of
August 2016
August 1st August 31st
Inventories
` `
Raw materials 80,000 86,000
 37
Work-in-process 80,000 1,20,000
Finished goods 1,40,000 1,80,000
Transactions during August month
Direct labour cost 1,60,000
Purchas od raw materials 3,60,000
Selling expenses 34,000
Administrative expenses 26,000
Sales 7,50,000
Direct labour cost is 160% of factory overhead
Prepare cost sheet (KU July 2014)
Solution
Cost sheet for the month of August 2016 of Siva Manufacturing Company Ltd
Particular ` `
Raw materials as on 1.8.2016 80,000
Add: Purchase of raw materials 3,60,000
4,40,000
Less: Raw materials on 31-8-2016 86,000
Materials consumed 3,54,000
Direct wages 1,60,000
Prime cost 5,14,000
Add: Factory Overheads (1,60,000/160%) 1,00,000
Gross Factory cost 6,14,000
Add: Work-in-process on 1.8.16 80,000
6,94,000
Less: Work-in-process on 31.8.16 1,20,000
Factory cost 5,74,000
Add: Administrative Overheads 26,000
Cost of Production 6,00,000
Add: Finished goods on 1.8.16 1,40,000
7,40,000
Less: Finished goods on 31.8.2016 1,80,000
Cost of Goods sold 5,60,000
Add: Selling Overheads 34,000
Total cost 5,94,000
Profit 1,56,000
Sales 7,50,000

13. The following data relate to the manufacture of a product during the month of
March 2016
`
Raw materials
Opening stock 30,000
Purchases 70,000
Closing stock 20,000
Wages 1,20,000
 38
Works oncost is 50% of wages, office oncost is 20% on works cost, Selling
oncost is 10% of works cost, profit is 20% on sales and number of units produced is
10,000. Prepare a statement showing the total cost and profit. (SVU Sep 2014)
Solution
Cost sheet showing total cost and profit for the month of March 2016
For 10,000 units Per unit
Particular
` `
Opening stock 30,000
Add: Purchase of raw materials 70,000
1,00,000
Less: Closing stock 20,000
Materials consumed 80,000 8.00
Direct wages 1,20,000 12.00
Prime cost 2,00,000 20.00
Add: Factory Overheads (50% of direct wages) 60,000 6.00
Factory cost 2,60,000 26.00
Add: Office Overheads (20 % on works cost ) 52,000 5.20
Cost of Production 3,12,000 31.20
Add: Selling Overheads (10% on Works cost) 26,000 2.60
Total cost 3,38,000 33.80
Profit 84,500 8.45
Sales 4,22,500 42.25

14. Prepare a cost sheet to show the total cost of production and cost per unit of goods
manufactured by Rama Devi & Co. for the month of December 2016
` `
Stock of raw materials (1.12.16) 18,000 Factory rent, rates 18,000
Stock of raw materials (31.12.16) 27,000 Purchase of raw materials 1,68,000
Manufacturing wages 42,000 Office expenses 3,000
Loss on sale of plant 1,800 General expenses 2,400
Advertisement charges 3,600 Income tax paid 12,000
Depreciation on plant 11,000
No. of units produced during the month 4,500 units. Stock of finished goods
was 300 and 600 units on 1st December 2016 and 31st December 2016 respectively.
The total cost of units on hand on 1st December 2016 was `16,800. (SVU Dec 2013)
Solution
Cost sheet for the month of December 2016
For 4,500 units Per unit
Particular
` `
Raw materials as on 1.12.16 18,000
Add: Purchase of raw materials 1,68,000
1,86,000
Less: Raw materials on 31-12-2016 27,000
Materials consumed 1,59,000 35.333
Direct wages 42,000 9.333
Prime cost 2,01,000 44.667
 39
Add: Factory Overheads
Factory rent 18,000
Depreciation on plant 11,000 29,000 6.444
Factory cost 2,30,000 51.111
Add: Office overheads
Office rent 3,000
General expenses 2,400 5,400 1.200
Cost of Production 2,35,400 52.311
Add: Opening stock of finished goods (300
Units) 16,800
2,52,200
Less: Closing stock of finished goods (600
units) 31,387
Cost of Goods sold 2,20,813 52.575
Add: Selling Overheads
Advertisement expenses 3,600 0.857
Total cost 2,24,413 53.432

15. Prepare a cost sheet to show the total cost of production and cost per unit of goods
manufactured by Rama Devi & Co. for the month of December 2016
` `
Stock of raw materials (1.12.16) 4,500 Factory rent, rates 4,500
Stock of raw materials (31.12.16) 6,750 Purchase of raw materials 42,000
Manufacturing wages 10,500 Office expenses 750
Loss on sale of plant 450 General expenses 600
Advertisement charges 900 Income tax paid 3,000
Depreciation on plant 2,750
No. of units produced during the month 4,500 units. Stock of finished goods
was 300 and 600 units on 1st December 2016 and 31st December 2016 respectively.
The total cost of units on hand on 1st December 2016 was `4,200. (SVU Mar 2013)
Solution
Cost sheet for the month of December 2016
For 4,500 units Per unit
Particular
` `
Raw materials as on 1.12.16 4,500
Add: Purchase of raw materials 42,000
46,500
Less: Raw materials on 31-12-2016 6,750
Materials consumed 39,750 8.833
Direct wages 10,500 2.333
Prime cost 50,250 11.167
Add: Factory Overheads
Factory rent 4,500
Depreciation on plant 2,750 7,250 1.611
Factory cost 57,500 12.778
Add: Office overheads
 40
Office rent 750
General expenses 600 1,350 0.300
Cost of Production 58,850 13.078
Add: Opening stock of finished goods (300
Units) 4,200
63,050
Less: Closing stock of finished goods (600
units) 7,847
Cost of Goods sold 55,203 13.144
Add: Selling Overheads
Advertisement expenses 900 0.214
Total cost 56,103 13.358

16. Prepare cost sheet showing (a) the cost per unit, and (b) profit for the period
Opening stock of raw materials : `1,20,000
Closing stock of raw materials : ` 8,000
Raw materials purchased : `7,50,000
Direct labour cost : `2,25,000
Machine hours worked : 5,600 hours
Machine hour rate : `5
Administration overheads : 25% on works cost
Selling over heads : `2 per unit
Units produced : 12,600
Units unsold : 300
You are required to prepare cost sheet (SVU Oct 12)
Solution
Cost sheet for the year ending 31st December 2016 of Avantika Industries
For 12,600 units Per
Particular
` unit `
Opening stock 1,20,000
Add: Purchase of raw materials 7,50,000
8,70,000
Less: Closing stock 8,000
Materials consumed 8,62,000 68.41
Direct wages 2,25,000 17.86
Prime cost 10,87,000 86.27
Add: Factory Overheads (5,600 hours @r.5 hr) 28,000 2.22
Factory cost 11,15,000 88.49
Add: Office Overheads (25 % on works cost ) 2,78,750 22.12
Cost of Production 13,93,750 110.62
Less: Closing stock of finished goods (300 x
33,185
110.62)
Cost of goods sold 13,60,565 110.62
Add: Selling Overheads (12,300 x 2) 24,600 2.00
Total cost 13,85,165 112.62
 41
17. The following cost details are extracted from the records of Rupa Vani Industries
for the year ending 31st December 2016
` `
Purchase of raw materials 60,000 Works overheads 24,000
Direct wages 50,000 Carriage 770
Stocks on 1.1.2016 Stocks on 31-12-2016
Raw materials 10,000 Raw materials 11,120
Finished stock (500 units) 8,000 Finished stock (1,000 units) 16,000
Work-in-process 2,400 Work-in-process 8,000
Sales 1,50,000
Selling and distribution expenses `0.50 per unit sold, total units produced
8,000 units. You are required to prepare a cost sheet indicating value of materials
consumed, works cost, cost of production, cost of sales and net profit for the period.
(SVU Mar 2012)
Solution
Cost sheet for the year ending 31st December 2016 of Rupa Vani Industries
Particulars ` `
Raw materials as on 1.1.2016 10,000
Add: Purchase of raw materials 60,000
Add: Carriage 770
70,770
Less: Raw materials on 31-12-2016 11,120
Materials consumed 59,650
Direct wages 50,000
Prime cost 1,09,650
Add: Factory Overheads 24,000
Gross Factory cost 1,33,650
Add: Work-in-process on 1.1.16 2,400
1,36,050
Less: Work-in-process on 31.12.16 8,000
Factory cost 1,28,050
Add: Administrative Overheads ----
Cost of Production 1,28,050
Add: Finished goods on 1.1.16 8,000
1,36,050
Less: Finished goods on 31.12.16 16,000
Cost of Goods sold 1,20,050
Add: Selling Overheads 3,750
Total cost 1,23,800
Profit 26,200
Sales 1,50,000

18. Sri Sidhartha furnishes you the following cost data to produce 20,000 units in the
month of March 2016, was as follows
Materials consumed `42,000, Direct wages `28,000, Factory overheads 25% on
wages, Administrative expenses Rs.5,000, Units sold 15,000 units at the rate of
 42
`5 per unit. You are required to prepare a statement of cost to identify cost of
goods sold and the net profit per unit. (SVU Mar 2011)
Solution
Cost sheet for the month of March 2016 of Sri Sidhartha
Particular ` `
Materials consumed 42,000 2.10
Direct wages 28,000 1.40
Prime cost 70,000 3.50
Add: Factory Overheads (25% of direct wages) 7,000 0.35
Factory cost 77,000 3.85
Add: Office Overheads (Administration expenses) 5,000 0.25
Cost of Production 82,000 4.10
Less: Stock of finished goods (5,000 x `4.10) 20,500
Total cost / Cost of Goods sold 61,500
Profit 13,500 0.90
Sales 75,000 5.00

19. The following cost details are extracted for production of 1,000 units in Varanasi
Industries for the month of December 2016
1.12.16 31-12-2016
Inventories
` `
Finished goods 34,720 31,500
Work-in-process 16,440 18,200
Raw materials 50,000 52,500
Transactions during August month
Sales 1,44,620
Direct wages 34,300
Non-productive wages 1,660
Works expenses 16,680
Office expenses 6,320
Selling expenses 8,420
Purchase of raw materials 43,800
Prepare statement of cost showing (a) Cost of materials consumed, (b) Works cost,
(c) Cost of Production, (d)Cost of goods sold and (e) Net profit (SVU Sep 10)
Solution:
Cost sheet for the month of December 2016 of Varanasi Industries
Particular ` `
Raw materials as on 1.12.16 50,000
Add: Purchase of raw materials 43,800
93,800
Less: Raw materials on 31-12-2016 52,500
Materials consumed 41,300
Direct wages 34,300
Prime cost 75,600
Add: Factory Overheads
Non-productive wages 1,660
 43
Work expenses 16,680 18,340
Gross Factory cost 93,940
Add: Work-in-process on 1.12.16 16,440
1,10,380
Less: Work-in-process on 31.12.16 18,200
Factory cost 92,180
Add: Administrative Overheads (Office expenses) 6,320
Cost of Production 98,500
Add: Finished goods on 1.12.16 34,720
1,33,220
Less: Finished goods on 31.12.16 31,500
Cost of Goods sold 1,01,720
Add: Selling Overheads (Selling expenses) 8,420
Total cost 1,10,140
Profit 34,480
Sales 1,44,620

20. The following cost details are extracted from the records of Arjun Co. Ltd for
production of 1,20,000 unit for the year ending December 2016.
` `
Plant maintenance 25,000 Lighting (for office) 6,300
Plant depreciation 8,100 Rates and taxes 3,900
Staff salaries 32,000 Management salaries 22,000
Power (for the plant 10,000 Indirect wages 37,100
Rental for lease hold equipment 9,600 Materials 2,64,000
Consumable stores 17,600 Wages 2,16,000
Selling expenses 30,000 General expenses 15,600
Sale proceeds from scrap 4,200 Cost of idle time 2,000
Rectification of cost of defective work 8,400
The average selling price was `5 per unit. The entire quantity produced
during the year was sold. Prepare cost and profit statement showing cost and net
profit per unit. (SVU Mar 2010)
Solution
Cost sheet of Arjun Co. Ltd for the year ending 31st December 2016
For 1,20,000 units Per unit
Particulars ` `
Materials 2,64,000 2.20
Wages 2,16,000 1.80
Prime Cost 4,80,000 4.00
Add: Works Overhead
Plant maintenance 25,000 0.21
Plant expenses 8,100 0.07
power 10,000 0.08
Indirect wages 37,100 0.31
Rent of leasehold equipment 9,600 0.08
consumable stores 17,600 0.15
 44
Cost of idle time 2,000 0.02
Rectification cost of defective work 8,400 0.07
1,17,800
Less: Sale of scrap -4,200
Works oncost 1,13,600 0.95
Works Cost 5,93,600 4.95
Add: Office Overheads
Lighting 6,300 0.05
Rates and taxes 3,900 0.03
Staff salaries 32,000 0.27
Management salaries 22,000 0.18
General expenses 15,600 0.13
Office Oncost 79,800
Cost of Production 6,73,400 5.61
Add: Selling Overheads
Selling expenses 30,000 0.25
Cost of sales / Total cost 7,03,400 5.86
Loss -1,03,400 -0.86
Sales 6,00,000 5.00

TENDER OR QUOTATION
Generally, in manufacturing concerns the management has to quote prices of
products to be supplied in future. The manufacturer of capital goods or consumer
durable products required to quote the price at which he can supply a particular
product. For this purpose, an estimated cost sheet is to be prepared, this is regarded
as quotation or tender. While preparing tender the manufacturer should be very
careful. The tender or quotation includes cost of materials, direct wages and
overheads. These are estimated with the help of past experience and information.
Cost of materials, direct labour cost and direct expenses of the product to be supplied
will be taken in to account. But the overhead charges are absorbed on the basis of a
suitable method of absorption like, percentage of direct materials or wages or works
cost or machine hour rate etc. A desired percentage of profit is added in order to
arrive at the price to be quoted.
While preparation of tender, usually, the overhead charges to be absorbed
may not be given. In such a case, Works oncost (overheads) will be estimated on the
basis of direct wages. Similarly, Administrative overheads and selling and
distribution overheads will be estimated on the basis of works cost. Desired
percentage of profit will be added to the total cost. The profit may be calculated on
total cost or on selling price. The following are the formulae used to ascertain the
profit.
If the profit is to be charged on total cost,
Profit = Total cost x Percentage of profit
If the profit is to be charged on selling price
Profit = Total cost x Percentage of profit / (Selling price – profit)
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
 45
Office overheads
Percentage of office overheads to works cost = X 100
Works cost

Selling overheads
Percentage of selling overheads to works cost = X 100
Works cost

Profit
Percentage of profit on selling price = X 100
Sales
Note:
1. Changes in prices of materials and direct wages will be considered
2. Changes in percentage of overheads will also be considered

21. From the following particulars, you are required to prepare cost sheet. Calculate
percentage of works on cost to wages, percentage of office overheads to works
cost
Particulars `
Stock of finished goods 31-12-2015 72,800
Stock of raw materials 31-12-2015 33,280
Purchases of raw materials 7,59,200
Productive wages 5,16,880
Sales 15,39,200
Stock of finished goods 31-12-2016 78,000
Stock of raw materials 31-12-2016 35,360
Works overhead charges 1,29,220
Office overheads 70,161
The company is intending to send a quotation for a large plant. The estimated
material cost is Rs.52,000 and wages Rs.31,200. The quotation is to make a profit
of 20% on selling price. Show what the amount of quotation would be if based
on the above percentage. (ANU July 2011, SVU Apr 01, Mar 05, 07 VSU Mar
2013, Sep 2014)
Solution
Cost sheet for the year ending 31-12-2016
Particulars `
Stock of raw materials (31-12-2015) 33,280
Add: Purchase of raw materials 7,59,200
7,92,480
Less: Stock of raw materials (31-12-2016) 35,360
Raw materials consumed 7,57,120
Productive wages 5,16,880
Prime cost 12,74,000
Add: Works overheads 1,29,220
Works cost 14,03,220
Add: Office overheads 70,161
Cost of production 14,73,381
Add: Stock of finished goods (31-12-2015) 72,800
15,46,181
Less: Stock of finished goods (31-12-2016) 78,000
 46
Cost of goods sold / Total cost 14,68,181
Profit 71,019
Sales 15,39,200

Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`1,29,220
= X 100
`5,16,880
= 25%

Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`70,161
= X 100
`14,03,220
= 5%
Statement of tender showing selling price
Particulars `
Raw materials consumed 52,000
Productive wages 31,200
Prime cost 83,200
Add: Works overheads 7,800
Works cost 91,000
Add: Office overheads 4,550
Cost of goods sold / Total cost 95,550
Profit 23,888
Sales 1,19,438
Profit
Profit = Total cost X
Total cost- Profit
= `95,550 x 20/(100-20)
= `23,888
22. From the following particulars, you are required to prepare cost sheet. Calculate
percentage of works on cost to wages , percentage of office overheads to works
cost
Particulars `
Stock of finished goods 31-12-2015 1,45,600
Stock of raw materials 31-12-2015 66,560
Purchases of raw materials 15,18,400
Productive wages 10,33,760
Sales 30,78,400
Stock of finished goods 31-12-2016 1,56,000
Stock of raw materials 31-12-2016 70,720
Works overhead charges 2,58,440
Office overheads 1,40,322
The company is intending to send a quotation for a large plant. The estimated
material cost is Rs.1,04,000 and wages Rs.62,400. The quotation is to make a
 47
profit of 20% on selling price. Show what the amount of quotation would be if
based on the above percentage (SVU Oct 2006)

Solution
Cost sheet for the year ending 31-12-2016
Particulars `
Stock of raw materials (31-12-2015) 66,560
Add: Purchase of raw materials 15,18,400
15,84,960
Less: Stock of raw materials (31-12-2016) 70,720
Raw materials consumed 15,14,240
Productive wages 10,33,760
Prime cost 25,48,000
Add: Works overheads 2,58,440
Works cost 28,06,440
Add: Office overheads 1,40,322
Cost of production 29,46,762
Add: Stock of finished goods (31-12-2015) 1,45,600
30,92,362
Less: Stock of finished goods (31-12-2016) 1,56,000
Cost of goods sold / Total cost 29,36,362
Profit 1,42,038
Sales 30,78,400
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`2,58,440
= X 100
`10,33,760
= 25%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`1,40,322
= X 100
`28,06,440
= 5%
Statement of tender showing selling price
Particulars `
Raw materials consumed 1,04,000
Productive wages 62,400
Prime cost 1,66,400
Add: Works overheads 15,600
Works cost 1,82,000
Add: Office overheads 9,100
Cost of goods sold / Total cost 1,91,100
Profit 47,775
Sales 2,38,875
 48
Profit
Profit = Total cost X
Total cost- Profit
= `1,91,100 x 20/(100-20) = `47,775

23. The accounts of machine manufacturing company disclose the following

information for the six months ending 31st December 2016
Particulars `
Materials used 1,50,000
Factory overheads 24,000
Direct wages 1,20,000
Office expenses 17,640
Prepare a statement of cost and calculate the price at which the company should quote
for the manufacturers of a machine requiring materials valued at `1,250 and wages
`750 so that the price may yield a profit of 20% on selling price
Solution
Cost sheet for the year ending 31-12-2016
Particulars `
Raw materials consumed 1,50,000
Productive wages 1,20,000
Prime cost 2,70,000
Add: Works overheads 24,000
Works cost 2,94,000
Add: Office overheads 17,640
Cost of production / Total cost 3,11,640
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`24,000
= X 100
`1,20,000
= 20%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`17,640
= X 100
`2,94,000
= 6%
Statement showing Tender price
Particulars `
Raw materials consumed 1,250
Productive wages 750
Prime cost 2,000
Add: Works overheads 150
Works cost 2,150
Add: Office overheads 129
Cost of goods sold / Total cost 2,279
Profit 570
Sales 2,849
 49

24. From the following particulars, you are required to prepare cost sheet. Calculate
percentage of works on cost to wages, percentage of office overheads to works
cost
Particulars `
Stock of finished goods 31-12-2015 72,800
Stock of raw materials 31-12-2015 33,280
Purchases of raw materials 7,59,200
Productive wages 5,16,880
Sales 15,39,200
Stock of finished goods 31-12-2016 78,000
Stock of raw materials 31-12-2016 35,360
Works overhead charges 1,29,220
Office overheads 70,000
The company is intending to send a quotation for a large plant. The estimated
material cost is Rs.52,000 and wages Rs.30,000. The quotation is to make a profit
of 20% on selling price. Show what the amount of quotation would be if based
on the above percentage. (SKU Mar 2014)
Solution Cost sheet for the year ending 31-12-2016
Particulars `
Stock of raw materials (31-12-2015) 33,280
Add: Purchase of raw materials 7,59,200
7,92,480
Less: Stock of raw materials (31-12-2016) 35,360
Raw materials consumed 7,57,120
Productive wages 5,16,880
Prime cost 12,74,000
Add: Works overheads 1,29,220
Works cost 14,03,220
Add: Office overheads 70,000
Cost of production 14,73,220
Add: Stock of finished goods (31-12-2015) 72,800
15,46,020
Less: Stock of finished goods (31-12-2016) 78,000
Cost of goods sold / Total cost 14,68,020
Profit 71,180
Sales 15,39,200
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`1,29,220
= X 100
`5,16,880
= 25%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`70,000
= X 100
`14,03,220
 50
= 4.99 or 5%
Statement of tender showing selling price
Particulars `
Raw materials consumed 52,000
Productive wages 30,000
Prime cost 82,000
Add: Works overheads 7,500
Works cost 89,500
Add: Office overheads 4,465
Cost of goods sold / Total cost 93,965
Profit 23,491
Sales 1,17,456
Profit
Profit = Total cost X
Total cost- Profit
= `93,965x 20/(100-20)
= `23,491

25. The following expenses are incurred in respect of Job No.2468 in Bose Co. Ltd
for the year ending 31-12-2016
` `
Direct materials 3,000 Direct expenses 1,000
Selling expenses 2,000 Selling price 18,000
Direct wages 4,000 Factory overheads 2,000
Administrative expenses 3,000
The company accepted a similar job in the month of January 2017 the estimated
cost details are as follows:
a. Materials `5,000, Direct wages `7,000, and Direct expenses `2,000
b. Charge factory overheads as a percentage of direct wages, administrative and
selling expenses as a percentage to factory cost
c. Add net profit 20% on selling price.
You are required to prepare a job cost sheet, for the job to be executed in the
month of January 2017 and ascertain its net profit.
Solution
Cost sheet for the year ending 31-12-2016 of Job No.2468 in Bose Co. Ltd
Particulars `
Direct materials 3,000
Direct wages 4,000
Direct expenses 1,000
Prime cost 8,000
Add: Factory Overheads 2,000
Factory cost 10,000
Add: Office overheads (Administrative expenses) 3,000
Cost of production 13,000
 51
Add: Selling and Distribution Overheads 2,000
Total cost 15,000
Profit 3,000
Sales 18,000
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`2,000
= X 100
`4,000
= 50%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`3,000
= X 100
`10,000
= 30%
Selling overheads
Percentage of selling overheads to works cost = X 100
Works cost
`2,000
= X 100
`10,000
= 20%
Statement showing tender price
Particulars `
Direct Materials 5,000
Direct Wages 7,000
Direct expenses 2,000
Prime cost 14,000
Add: Works overheads 3,500
Works cost 17,500
Add: Office overheads 5,250
Cost of production 22,750
Add: Selling and Distribution overheads 3,500
Total cost 26,250
Profit 6,563
Sales 32,813

26. The cost details of Aruna Company Limited for the year ending 31-12-2016 was
as follows
Materials consumed `3,50,000, Wages `2,50,000, Factory overheads `1,80,000,
Office expenses `1,68,000, Selling expenses `1,12,000, Administrative
expenses `50,000, Distribution expenses `70,000, No. of units produced 2,000.
Net profit `2,40,000, the company received an order for 500 units to supply. The
cost estimates are
a. Materials `4,000
b. Wages `2,500
c. Factory overheads give up by 20%
d. Distribution expenses give down by 10%
 52
e. Selling and Office and administrative expenses each give up by 10%
You are required to quote the price of cost so as to earn a profit as 10 percent on
sales price.
Solution
Cost sheet for the year ending 31-12-2016 of Aruna Company Limited
Particulars `
Materials consumed 3,50,000
Wages 2,50,000
Prime cost 6,00,000
Add: Factory Overheads 1,80,000
Factory cost 7,80,000
Add: Administrative Overheads
Office expenses 1,68,000
Administrative expenses 50,000 2,18,000
Cost of Production 9,98,000
Add: Selling and Distribution Overheads
Selling expenses 1,12,000
Distribution expenses 70,000 1,82,000
Total cost 11,80,000
Profit 2,40,000
Sales 14,20,000
Percentage of Factory overheads to direct wages
Factory overheads `1,80,000
= X 100 = X100 =72%
Wages `2,50,000
Percentage of Office expenses to works cost
Office expenses `1,68,000
= X 100 = X100 =21.54%
Works cost `7,80,000
Percentage of Administrative expenses to works cost
Administrative expenses `50,000
= X 100 = X100 =6.41%
Works cost `7,80,000
Percentage of selling expenses to works cost
Selling expenses `1,12,000
= X 100 = X100 =14.36%
Works cost `7,80,000
Percentage of distribution expenses to works cost
Distribution expenses `70,000
= X 100 = X100 =8.97%
Works cost `7,80,000

Statement showing tender price

Particulars `
Materials consumed 4,000
Wages 2,500
Prime cost 6,500
Add: Factory Overheads
72% of Wages 1,800
Add: Increase by 20% 360 2,160
 53
Factory cost 8,660
Add: Office overheads
Office expenses (21.54% of works cost) 1,865
Add: Increase by 10% 187 2,052
Administrative expenses (6.41% of works cost 555
Add: Increase by 10% 56 611
Cost of production 11,323
Add: Selling and Distribution overheads
Selling expenses (14.36% of works cost) 1,243
Add: Increase by 10% 124 1,368
Distribution expenses (8.97% of works cost) 777
Less: Decrease by 10% 78 699
Total cost 13,390
Profit (10% on selling price) 1,488
Tender price 14,878

27. The cost structure of an article, the selling price of which is `500 is as follows
Direct materials : 50% of the total cost
Direct labour : 30% of the total cost
Overheads : Balance amount
Due to anticipated increase in existing material price by 20% and in the
existing labour rate by 10%, the existing profit would come down by 30%, if the
selling price remains unchanged.
Prepare a comparative statement showing the cost, profit and sale price under
the present conditions and with the increase expected for future, assuming the same
percentage of profit on cost as at present had to be earned. (Calculations may be
made to the nearest rupee) (ICWAI)
Solution
Let X be the total cost per unit
Let Y be the profit per unit
Thus, X+Y= `500 per unit
Statement showing the Present and Expected cost
Items Present cost Increase Expected cost
Direct Materials 0.50X 20% = 0.10X 0.60X
Direct Labour 0.30X 10% = 0.03X 0.33X
Overheads 0.20X -- 0.20X
Total X 0.13X 1.13X
When selling price remains the same, profit is reduced by 30% i.e.,
X+Y = 500 -- 1
1.13X + 0.70Y = 500 -- 2
For solving the equations, multiply 1 by 0.70
0.70X + 0.7Y = 350 –3
Subtracting 3 from 2
1.13 X + 0.70 Y = 500
0.70 X + 0.70Y = 350
0.43 X + 0 = 150
 54

X = 150/0.43 = 349
Y = 500 – 349 = 151
Percentage of profit on sales = `151/`500 x 100 = 30.2%
Statement showing present and expected cost
Items Present cost Increase Expected cost
Direct Materials (50%) `174 (20%) `36 `210
Direct Labour (30%) `105 (10%) `10 `115
Overheads (20) ` 70 -- `70
Total 349 46 395
Profit @30.2% on sales 151 30.2% 171
Selling price 500 566

28. Usha Sree Co. Ltd is producing 1000 TVs during the year ending 31-3-2016. The
cost details are as follows
Stock of finished goods 1.4.2015 --- `18,200
Stock of raw materials 1.4.2015 --- `8,320
Purchase of raw materials `1,89,800
Productive wages `1,29,220
Sale of finished goods `3,84,800
Stock of finished goods 31.3.2016 `19,500
Stock of raw materials 31.3.2016 `8,840
Works overheads `32,300
Office expenses `17,540
The company is about to send a tender for supply of 250 units
The cost estimates are as follows
(a) Materials `13,000, (b) Wages `7,800 (c) Factory overheads and office
overheads are in the same percentage on direct wages and factory cost
respectively. Prepare a statement of cost and ascertain the sale price per unit by
adding 20% of profit on selling price. (SVU March 2012)
Solution
Cost sheet for the year ending 31-3-2016
Particulars `
Stock of raw materials (31-3-2015) 8,320
Add: Purchase of raw materials 1,89,800
1,98,120
Less: Stock of raw materials (31-3-2016) 8,840
Raw materials consumed 1,89,280
Productive wages 1,29,220
Prime cost 3,18,500
Add: Works overheads 32,300
Works cost 3,50,800
Add: Office overheads 17,540
Cost of production 3,68,340
Add: Stock of finished goods (31-3-2015) 18,200
3,86,540
Less: Stock of finished goods (31-3-2016) 19,500
 55
Cost of goods sold / Total cost 3,67,040
Profit 17,760
Sales 3,84,800
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`32,300
= X 100
`1,29,220
= 25%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`17,540
= X 100
`3,50,800
= 5%
Statement of tender showing selling price
Particulars `
Raw materials consumed 13,000
Productive wages 7,800
Prime cost 20,800
Add: Works overheads 1,950
Works cost 22,750
Add: Office overheads 1,137
Cost of goods sold / Total cost 23,887
Profit 5,972
Sales 29,859
Profit
Profit = Total cost X
Total cost- Profit
= `23,887x 20/(100-20)
= `5,972

29. A manufacturing company cost data is as follows

Raw materials `6,00,000 Productive wages `5,00,000
Works overheads `1,00,000 Office expense `60,000
Prepare cost sheet to calculate a). Works cost, b) Total cost, c) Percentage of
works overheads on productive wages, and d) Percentage of office expenses on
works cost. From the above data prepare quotation price for a product whose
raw materials `6,000, wages `3,000 and company charges 25% profit on selling
price. (YVU March 2015)
Solution Cost sheet for the year ending ---
Particulars `
Raw materials consumed 6,00,000
Productive wages 5,00,000
Prime cost 11,00,000
Add: Works overheads 1,00,000
Works cost 12,00,000
Add: Office overheads 60,000
 56
Cost of production / Total cost 12,60,000
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`1,00,000
= X 100
`5,00,000
= 20%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`60,000
= X 100
`12,00,000
= 5%
Statement showing tender price
Particulars `
Raw materials consumed 6,000
Productive wages 3,000
Prime cost 9,000
Add: Works overheads (20% of wages ) 600
Works cost 9,600
Add: Office overheads (5% on Works cost) 480
Cost of goods sold / Total cost 10,080
Profit 3,360
Sales 13,440
Profit
Profit = Total cost X
Total cost- Profit
= `10,080 x 25/(100-25)
= `3,360

30. The account of Pleasant Company Ltd show for 2016

Materials `3,50,000, Labour `2,70,000, Factory overheads `81,000, and
administrative overheads `56,080.
What price should be quoted for a refrigerator? It is estimated that `1,000 in
materials, and `700 in labour will be required for one refrigerator. Absorb
factory overheads on the basis of labour, and administration overheads on the
basis of works cost. A profit of 12½ on selling price. (YVU July 2015 SVU Dec
2013)
Solution
Cost sheet for the year ending 31-12-2016
Particulars `
Raw materials consumed 3,50,000
Productive wages 2,70,000
Prime cost 6,20,000
Add: Works overheads 81,000
Works cost 7,01,000
Add: Office overheads 56,080
Cost of production / Total cost 7,57,080
 57
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`81,000
= X 100
`2,70,000
= 30%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`56,080
= X 100
`7,01,000
= 8%
Statement showing tender price
Particulars `
Raw materials consumed 1,000
Productive wages 700
Prime cost 1,700
Add: Works overheads (30% of wages ) 210
Works cost 1,910
Add: Office overheads (8% on Works cost) 153
Cost of goods sold / Total cost 2,063
Profit 295
Sales 2,358

Profit
Profit = Total cost X
Total cost- Profit
= `2,063 x12.5/(100-12.5)
= `295

31. The accounts of machine manufacturing company disclose the following

information for the year ending 31-12-2016
Materials `1,50,000, Direct wages `1,20,000, Factory overheads `30,000, and
administrative expenses `15,000
Prepare cost sheet of the machines and calculate the price which the company
should quote for the manufacture of a machine requiring materials valued `1,250
and productive wages `750. So that the price yield a profit of 20% on the selling
price. (YVU Mar 2014)
Solution
Cost sheet for the year ending 31-12-2016
Particulars `
Raw materials consumed 1,50,000
Productive wages 1,20,000
Prime cost 2,70,000
Add: Works overheads 30,000
Works cost 3,00,000
Add: Office overheads 15,000
Cost of production / Total cost 3,15,000
Percentage of factory overheads to direct wages = Factory overheads X 100
 58
Direct wages
`30,000
= X 100
`1,20,000
= 25%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`15,000
= X 100
`3,00,000
= 5%
Statement showing tender price
Particulars `
Raw materials consumed 1,250
Productive wages 750
Prime cost 2,000
Add: Works overheads (25% of wages ) 188
Works cost 2,188
Add: Office overheads (5% on Works cost) 109
Cost of goods sold / Total cost 2,297
Profit 574
Sales 2,871
Profit
Profit = Total cost X
Total cost- Profit
= `2,297 x 20/(100-20)
= `574

32. The following information is extracted from the manufacturing account of a

factory for the year ending 31st December 2016
Materials consumed `6,00,000, Direct wages `4,00,000, Factory expenses
`2,40,000, Administrative expenses `1,50,000
During the year 2017 the factory received a request from a customer for supply
of a machine for which the estimated cost of materials of `40,000 and `30,000
in wages. What should be the quotation price if the factory desires to make a
profit of 20% on selling price (YVU Sep 2014)
Solution
Cost sheet for the year ending 31st December 2016
Particulars `
Raw materials consumed 6,00,000
Productive wages 4,00,000
Prime cost 10,00,000
Add: Works overheads 2,40,000
Works cost 12,40,000
Add: Office overheads 1,50,000
Cost of production / Total cost 13,90,000
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
 59
`2,40,000
= X 100
`4,00,000
= 60%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`1,50,000
= X 100
`12,40,000
= 12.10%
Statement showing tender price
Particulars `
Raw materials consumed 40,000
Productive wages 30,000
Prime cost 70,000
Add: Works overheads (60% of wages ) 18,000
Works cost 88,000
Add: Office overheads (12.10% on Works cost) 10,648
Cost of goods sold / Total cost 98,648
Profit 24,662
Sales 1,23,310
Profit
Profit = Total cost X
Total cost- Profit
= `98,648 x 20/(100-20)
= `24,662

33. The following details are available from a company books

` `
Material cost 2,40,000 Wages 2,00,000
Factory overheads 1,20,000 Distribution expenses 56,000
Office expenses 1,34,400 Selling expenses 89,600
Profit 1,68,000
The company decided to take up one work order. The costing department
estimates that the material required would cost `32,000 and wages `20,000.
Assuming that the factory by overheads rate increase by 20% distribution
expenses decrease by 10% sales and office expenses will increase by 12½%. The
work order is to be made keeping a net profit of 20% on the total cost. State what
would be the amount of the tender? (YVU Mar 2013)
Solution
Cost sheet for the year ending ------
Particulars ` `
Materials consumed 2,40,000
Wages 2,00,000
Prime cost 4,40,000
Add: Factory Overheads 1,20,000
Factory cost 5,60,000
Add: Administrative Overheads
Office expenses 1,34,400 1,34,400
 60
Cost of Production 6,94,400
Add: Selling and Distribution Overheads
Selling expenses 89,600
Distribution expenses 56,000 1,45,600
Total cost 8,40,000
Profit 1,68,000
Sales 10,08,000
Percentage of Factory overheads to direct wages
Factory overheads `1,20,000
= X 100 = X100 =60%
Wages `2,00,000
Percentage of Office expenses to works cost
Office expenses `1,34,400
= X 100 = X100 =24%
Works cost `5,60,000
Percentage of selling expenses to works cost
Selling expenses `89,600
= X 100 = X100 =16%
Works cost `5,60,000
Percentage of distribution expenses to works cost
Distribution expenses `56,000
= X 100 = X100 =10%
Works cost `5,60,000
Statement showing tender price
Particulars `
Materials consumed 32,000
Wages 20,000
Prime cost 52,000
Add: Factory Overheads
60% of Wages 12,000
Add: Increase by 20% 2,400 14,400
Factory cost 66,400
Add: Office overheads
Office expenses (24% of works cost) 15,936
Add: Increase by 12.5% 1,992 17,928
Cost of production 84,328
Add: Selling and Distribution overheads
Selling expenses (16% of works cost) 10,624
Add: Increase by 12.5% 1,328 11,952
Distribution expenses (10% of works cost) 6,640
Less: Decrease by 10% 664 5,976
Total cost 1,02,256
Profit (10% on total cost ) 20,451
Tender price 1,22,707

34. The account of Pleasant Company Ltd show for 2016

Materials `7,00,000, Labour `5,40,000, Factory overheads `1,62,000, and
administrative overheads `1,12,160.
What price should be quoted for a refrigerator? It is estimated that `2,000 in
materials, and `1,400 in labour will be required for one refrigerator. Absorb
 61
factory overheads on the basis of labour, and administration overheads on the
basis of works cost. A profit of 12½ on selling price. (SVU Sep 2015)
Solution
Cost sheet for the year ending 31-12-2016
Particulars `
Raw materials consumed 7,00,000
Productive wages 5,40,000
Prime cost 12,40,000
Add: Works overheads 1,62,000
Works cost 14,02,000
Add: Office overheads 1,12,160
Cost of production / Total cost 15,14,160
Factory overheads
Percentage of factory overheads to direct wages = X 100
Direct wages
`1,62,000
= X 100
`5,40,000
= 30%
Office overheads
Percentage of office overheads to works cost = X 100
Works cost
`1,12,160
= X 100
`14,02,000
= 8%
Statement showing tender price
Particulars `
Raw materials consumed 2,000
Productive wages 1,400
Prime cost 3,400
Add: Works overheads (30% of wages ) 420
Works cost 3,820
Add: Office overheads (8% on Works cost) 306
Cost of goods sold / Total cost 4,126
Profit 589
Sales 4,715
Profit
Profit = Total cost X
Total cost- Profit
= `4,126 x12.5/(100-12.5)
= `289.37 or 289
35. The following details are available from a company books
` `
Material cost 6,00,000 Wages 5,00,000
Factory overheads 3,00,000 Distribution expenses 1,40,000
Office expenses 3,36,000 Selling expenses 2,24,000
Profit 4,20,000
The company decided to take up one work order. The costing department
estimates that the material required would cost `8,000 and wages `5,000.
 62
Assuming that the factory by overheads rate increase by 20% distribution
expenses decrease by 10% sales and office expenses will increase by 15%. At
what price should the product be sold so as to earn the same rate of profit as in
2016 (SVU Mar2014)
Solution
Cost sheet for the year ending ------
Particular ` `
Materials consumed 6,00,000
Wages 5,00,000
Prime cost 11,00,000
Add: Factory Overheads 3,00,000
Factory cost 14,00,000
Add: Administrative Overheads
Office expenses 3,36,000
Cost of Production 17,36,000
Add: Selling and Distribution Overheads
Selling expenses 2,24,000
Distribution expenses 1,40,000 3,64,000
Total cost 21,00,000
Profit 4,20,000
Sales 25,20,000
Percentage of Factory overheads to direct wages
Factory overheads `3,00,000
= X 100 = X100 =60%
Wages `5,00,000
Percentage of Office expenses to works cost
Office expenses `3,36,000
= X 100 = X100 =24%
Works cost `14,00,000
Percentage of selling expenses to works cost
Selling expenses `2,24,000
= X 100 = X100 =16%
Works cost `14,00,000
Percentage of distribution expenses to works cost
Distribution expenses `1,40,000
= X 100 = X100 =10%
Works cost `14,00,000
Percentage of profit on total cost
Profit `4,20,000
= X 100 = X100 =20%
Total cost `21,00,000

Statement showing tender price

Particulars `
Materials consumed 8,000
Wages 5,000
Prime cost 13,000
Add: Factory Overheads
60% of Wages 3,000
Add: Increase by 20% 600 3,600
Factory cost 16,600
 63
Add: Office overheads
Office expenses (24% of works cost) 3,984
Add: Increase by 12.5% 598 4,582
Cost of production 21,182
Add: Selling and Distribution overheads
Selling expenses (16% of works cost) 2,656
Add: Increase by 12.5% 398 3,054
Distribution expenses (10% of works cost) 1,660
Less: Decrease by 10% 166 1,494
Total cost 25,730
Profit (10% on total cost ) 5,146
Tender price 30,876

36. Kowsalya Radio Co. Ltd furnishes the following information for 10,000 Radios
manufactured during the year ending 31st December 2015
` `
Materials 90,000 Power 8,000
Factory indirect wages 15,000 Cost of defective work 3,000
Sale of scrap 2,000 Plant depreciation 8,000
Direct wages 60,000 Consumable stores 4,000
Factory lighting 5,500 Selling expenses 5,500
Clerical salaries 33,500 Plant repairs 3,500
The net Selling price (per unit) `31.60
All units were sold the cost estimation for the year ending 31-12-2016 was as follows
a. Materials and direct wages cost will increase by 10%
b. Selling price per unit was reduced to `31
c. Number of units produced 15,000 radios
d. Factory overheads recovered as a percentage of direct wages and office and
selling expenses on a percentage of factory cost
You are required to prepare cost statement for the year ending 31-12-2016, showing
various elements of cost, cost per unit and net profit. (SVU Mar 2013)
Solution
Statement showing cost and profit per unit for the year ending 31-12-2015
Particulars `
Materials consumed 90,000 9.00
Wages 60,000 6.00
Prime cost 1,50,000 15.00
Add: Factory Overheads
Power 8,000
Factory indirect wages 15,000
Cost of defective work 3,000
Plant depreciation 8,000
consumable stores 4,000
Factory lighting 5,500
Plant repairs 3,500
47,000
Less: Sale of scrap 2,000 45,000 4.50
 64
Factory / Works cost 1,95,000 19.50
Add: Administrative Overheads
Clerical salaries 33,500 3.35
Cost of Production 2,28,500 22.85
Add: Selling and Distribution Overheads
Selling expenses 5,500 0.55
Total cost 2,34,000 23.40
Profit 82,000 8.20
Sales 3,16,000 31.60
Percentage of Factory overheads to direct wages
Factory overheads `45,000
= X 100 = X100 =75%
Wages `60,000
Percentage of Office expenses to works cost
Office expenses `33,500
= X 100 = X100 =17.18%
Works cost `1,95,000
Percentage of selling expenses to works cost
Selling expenses `5,500
= X 100 = X100 =2.82%
Works cost `1,95,000
Statement showing selling price for the year ending 31-12-2016
Particulars `
Materials 9.00
Add: Increase 0.90 9.90 1,48,500
Labour 6.00
Add: Increase 0.60 6.60 99,000
Prime cost 16.50 2,47,500
Add: Factory overheads 4.95 74,250
Factory cost or Works cost 21.45 3,21,750
Add: Office Overheads 3.69 55,275
Cost of production 25.14 3,77,025
Add: Selling overheads 0.61 9,075
Total cost 25.74 3,86,100
Profit 5.26 78,900
Selling price 31.00 4,65,000

37. The following cost details are for production of 2000 sewing machines of Aneela
Co Ltd for the year 2016
` `
Materials consumed 1,60,000 Wages 2,40,000
Manufacturing expenses 1,00,000 Office expenses 1,80,000
Selling expenses 60,000 Sales 8,00,000
The company plans to produce 3,000 sewing machines for the year ending 31 st
December 2017. You are required to submit an estimated cost sheet, showing the
price at a profit of 10% on selling price. The other details are as follows.
a. Materials cost increased by 20%
b. Wages rates are expected to raise by 5%
 65
c. Manufacturing expenses will raise in proportion to the combined cost of
material and wages
d. Selling expenses per unit remains the same
e. Other expenses remain un effected
Solution
In the books of Aneela Co. Ltd
Cost sheet for the year ending 31-12-2016 for manufacturing of 2,000 sewing
machines
For 2000 units Per unit
Particulars
` `
Materials consumed 1,60,000 80.00
Wages 2,40,000 120.00
Prime cost 4,00,000 200.00
Add: Factory Overheads
Manufacturing expenses 1,00,000 50.00
Factory / Works cost 5,00,000 250.00
Add: Administrative Overheads
Office expenses 1,80,000 90.00
Cost of Production 6,80,000 340.00
Add: Selling and Distribution Overheads
Selling expenses 60,000 30.00
Total cost 7,40,000 370.00
Profit 60,000 30.00
Sales 8,00,000 400.00
Cost sheet for the year ending 31-12-2017 for manufacturing of 3,000 sewing
machines (Statement of tender)
Per unit For 3000 units
Particulars
` `
Materials 80.00
Add: Increase 16.00 96.00 2,88,000
Labour 120.00
Add: Increase 6.00 126.00 3,78,000
Prime cost 222.00 6,66,000
Add: Factory overheads {(50/200) x 222} 55.50 1,66,500
Factory cost or Works cost 277.50 8,32,500
Add: Office Overheads 60.00 1,80,000
Cost of production 337.50 10,12,500
Add: Selling overheads 30.00 90,000
Total cost 367.50 11,02,500
Profit 40.83 1,22,500
Selling price 408.33 12,25,000
38. The following details are available from a company books
` `
Material cost 3,00,000 Wages 2,50,000
Factory overheads 1,50,000 Distribution expenses 70,000
 66
Office expenses 1,68,000 Selling expenses 1,12,000
Profit 2,10,000
The company decided to take up one work order. The costing department
estimates that
a. The material required would cost `4,000 and
b. Wages `2,500.
c. Factory by overheads rate increase by 20%
d. Distribution expenses decrease by 10%
e. Sales and office expenses will increase by 15%.
At what price should the product be sold so as to earn a profit as 10% on slaes
price (SVU Mar 2011)
Solution
Cost sheet for the year ending ------
Particular ` `
Materials consumed 3,00,000
Wages 2,50,000
Prime cost 5,50,000
Add: Factory Overheads 1,50,000
Factory cost 7,00,000
Add: Administrative Overheads
Office expenses 1,68,000
Cost of Production 8,68,000
Add: Selling and Distribution Overheads
Selling expenses 1,12,000
Distribution expenses 70,000
Total cost 10,50,000
Profit 2,10,000
Sales 12,60,000
Percentage of Factory overheads to direct wages
Factory overheads `1,50,000
= X 100 = X100 =60%
Wages `2,50,000
Percentage of Office expenses to works cost
Office expenses `1,68,000
= X 100 = X100 =24%
Works cost `7,00,000
Percentage of selling expenses to works cost
Selling expenses `1,12,000
= X 100 = X100 =16%
Works cost `7,00,000
Percentage of distribution expenses to works cost
Distribution expenses `70,000
= X 100 = X100 =10%
Works cost `7,00,000
Statement showing tender price
Particulars `
Materials consumed 4,000
Wages 2,500
Prime cost 6,500
Add: Factory Overheads
 67
60% of Wages 1,500
Add: Increase by 20% 300 1,800
Factory cost 8,300
Add: Office overheads
Office expenses (24% of works cost) 1,992
Add: Increase by 12.5% 249 2,241
Cost of production 10,541
Add: Selling and Distribution overheads
Selling expenses (16% of works cost) 1,328
Add: Increase by 12.5% 166 1,494
Distribution expenses (10% of works cost) 830
Less: Decrease by 10% 83 747
Total cost 12,782
Profit (10% on selling price ) 1,420
Tender price 14,202

39. The following figures have been from the books of a firm
Raw materials : Opening (31-12-2015) 80,000
Closing (31-12-2016) 60,000
Finished goods : Opening (31-12-2015) 20,000
Closing(31-12-2016) 15,000
Purchase of Raw materials 3,00,000
Direct wages 2,40,000
Factory expenses 2,40,000
Office over heads 1,00,000
Sales 9,79,000
Prepare cost sheet and on its basis find out the price that can be quoted for a job
requiring Rs.4,000 in materials and Rs.6,000 in wages. Factory overheads are to
be calculated as a percentage of wages and office overheads as a percentage of
works cost. Rate of profit is to be the same.
Solution
Cost sheet for the year ending 31-12-2016
Particulars `
Stock of raw materials (31-12-2015) 80,000
Add: Purchase of raw materials 3,00,000
3,80,000
Less: Stock of raw materials (31-12-2016) 60,000
Raw materials consumed 3,20,000
Productive wages 2,40,000
Prime cost 5,60,000
Add: Works overheads 2,40,000
Works cost 8,00,000
Add: Office overheads 1,00,000
Cost of production 9,00,000
Add: Stock of finished goods (31-12-2015) 20,000
 68
9,20,000
Less: Stock of finished goods (31-12-2016) 15,000
Cost of goods sold / Total cost 9,05,000
Profit 74,000
Sales 9,79,000
Percentage of Factory overheads to direct wages
Factory overheads `2,40,000
= X 100 = X100 =100%
Wages `2,40,000
Percentage of Office expenses to works cost
Office expenses `1,00,000
= X 100 = X100 =12.5%
Works cost `8,00,000
Statement showing tender price
Particulars `
Raw materials consumed 4,000
Productive wages 6,000
Prime cost 10,000
Add: Works overheads (100% of wages) 6,000
Works cost 16,000
Add: Office overheads (12.5% of works cost) 2,000
Cost of goods sold / Total cost 18,000
Profit {(74,000/9,05,000) x 18,000} 1,472
Sales 19,472
40. The following cost information have been obtained from the books of an
engineering company for the year ending 30th June 2016
Cost of materials 1,20,000
Wages 1,00,000
Factory overhead 60,000
Distribution expenses 28,000
Administrative expenses 67,200
Selling expenses 44,800
Profit 84,000
A work order has been received on 1st September 2016 for which materials
Rs.16,000 and labour Rs.10,000 is expected to incur. The cost estimation for
other expenses is as follows:
a. Factory overhead gone up by 20 percent
b. Distribution charges gone down by 10 percent
c. Selling and administrative charges went up by 12½ percent
What price should the product quoted so as to earn the same (earlier) rate of profit
on the selling price?
Solution
Cost sheet for the year ending ------
Particular ` `
Materials consumed 1,20,000
Wages 1,00,000
Prime cost 2,20,000
 69
Add: Factory Overheads 60,000
Factory cost 2,80,000
Add: Administrative Overheads
Office expenses 67,200
Cost of Production 3,47,200
Add: Selling and Distribution Overheads
Selling expenses 44,800
Distribution expenses 28,000
Total cost 4,20,000
Profit 84,000
Sales 5,04,000
Percentage of Factory overheads to direct wages
Factory overheads `60,000
= X 100 = X100 =60%
Wages `1,00,000
Percentage of Office expenses to works cost
Office expenses `67,200
= X 100 = X100 =24%
Works cost `2,80,000
Percentage of selling expenses to works cost
Selling expenses `44,800
= X 100 = X100 =16%
Works cost `2,80,000
Percentage of distribution expenses to works cost
Distribution expenses `28,000
= X 100 = X100 =10%
Works cost `2,80,000
Percentage of profit on selling price
Profit `84,000
= X 100 = X100 =16.67%
Selling price `5,04,000
Statement showing tender price
Particulars `
Materials consumed 16,000
Wages 10,000
Prime cost 26,000
Add: Factory Overheads
60% of Wages 6,000
Add: Increase by 20% 1200 7,200
Factory cost 33,200
Add: Office overheads
Office expenses (24% of works cost) 7,968
Add: Increase by 12.5% 996 8,964
Cost of production 42,164
Add: Selling and Distribution overheads
Selling expenses (16% of works cost) 5,312
Add: Increase by 12.5% 664 5,976
Distribution expenses (10% of works cost) 3,320
Less: Decrease by 10% 332 2,988
Total cost 51,128
Profit (16.67% on selling price ) 10,228
 70
Tender price 61,356

41. From the following data prepare cost and production statement of M/s Popular
stove manufacturing company for the year 2016
`
Stock of materials on 1-1-2016 35,000
Stock of materials on 31-12-2016 4,900
Purchases 52,500
Factory wages 95,000
Factory expenses 17,500
Establishment expenses 10,000
Completed stock on hand 1-1-2016 Nil
Completed stock on hand 31-12-2016 35,000
Sales 1,89,000

The number of stoves manufactured during the year was 4,000. The company
wants to quote for a contract for the supply of 1,000 stoves during 2016. The
stoves are of the same quality but cost of materials increased by 15% and labour
by 10%. Prepare a statement showing the price to be quoted to give the same
percentage of profit on turnover as was realised during 2017, assuming that the
cost per unit of overhead charges will be same as in the previous year.
Solution
Cost sheet for the year ending 31-12-2016 of M/s Popular stove manufacturing
company
For 4,000 stoves Per unit
Particulars
` `
Stock of materials (1.1.2016) 35,000
Add: Purchases 52,500
87,500
Less: Stock materials (31-12-2016) 4,900
Materials consumed 82,600 20.65
Wages 95,000 23.75
Prime cost 1,77,600 44.40
Add: Factory Overheads
Manufacturing expenses 17,500 4.38
Factory / Works cost 1,95,100 48.78
Add: Administrative Overheads
Office expenses 10,000 2.50
Cost of Production 2,05,100 51.28
Add: Finished stock (1.1.2016) ----
2,05,100 51.28
Less: Finished stock (31-12-2016) 35,000
Total cost 1,70,100
Profit 18,900
Sales 1,89,000
Statement showing quotation price for supply of 1000 stoves
 71
Per stove For 1,000
Particulars
` stoves (`)
Materials 20.650
Add: Increase (15%) 3.100 23.750 23,750
Labour 23.750
Add: Increase (10%) 2.375 26.125 26,125
Prime cost 49.875 49,875
Add: Factory overheads 4.375 4,375
Factory cost or Works cost 54.250 54,250
Add: Office Overheads 2.500 2,500
Total cost/ Cost of production 56.750 56,750
Profit 6.306 6,306
Tender price 63.056 63,056

42. From the following data prepare cost and production statement of M/s Karuna
Coolers manufacturing company for the year 2016
`
Stock of materials on 1-1-2016 52,500
Stock of materials on 31-12-2016 7,350
Purchases 78,750
Factory wages 1,42,500
Factory expenses 26,250
Establishment expenses 15,000
Completed stock on hand 1-1-2016 Nil
Completed stock on hand 31-12-2016 52,500
Sales 2,88,500

The number of coolers manufactured during the year was 6,000. The company
wants to quote for a contract for the supply of 1,500 coolers during 2016. The
coolers are of the same quality but cost of materials increased by 15% and labour
by 10%. Prepare a statement showing the price to be quoted to give the same
percentage of profit on turnover as was realised during 2017, assuming that the
cost per unit of overhead charges will be same as in the previous year.
Solution
Cost sheet for the year ending 31-12-2016 of M/s Karuna coolers manufacturing
company
For 6,000 Coolers Per unit
Particulars
` `
Stock of materials (1.1.2016) 52,500
Add: Purchases 78,750
1,31,250
Less: Stock materials (31-12-2016) 7,350
Materials consumed 1,23,900 20.65
Wages 1,42,500 23.75
Prime cost 2,66,400 44.40
Add: Factory Overheads
 72
Manufacturing expenses 26,250 4.38
Factory / Works cost 2,92,650 48.78
Add: Administrative Overheads
Office expenses 15,000 2.50
Cost of Production 3,07,650 51.28
Add: Finished stock (1.1.2016) 0
3,07,650 51.28
Less: Finished stock (31-12-2016) 52,500
Total cost 2,55,150
Profit 33,350
Sales 2,88,500
Statement showing quotation price for supply of 1,500 coolers
Per stove For 1,500
Particulars
` coolers (`)
Materials 20.650
Add: Increase (15%) 3.100 23.750 35,625
Labour 23.750
Add: Increase (10%) 2.375 26.125 39,188
Prime cost 49.875 74,813
Add: Factory overheads 4.375 6,563
Factory cost or Works cost 54.250 81,375
Add: Office Overheads 2.500 3,750
Total cost/ Cost of production 56.750 85,125
Profit 6.306 9,458
Tender price 63.056 94,583
43. Following are the particulars for the production of 800 fans the year ending 31st
March 2015
Particular `
Cost of materials 32,000
Direct wages 48,000
Manufacturing expenses 20,000
Office salaries 24,000
Rent and taxes 4,000
Selling expenses 8,000
General expenses 12,000
Sales 1,60,000

Following estimates were made by the costing department of the company for the
year ending 31st March 2016
a. The output and sales will increase to 1,000 fans
b. The price of material will raise by 25 percent
c. Wages during the year will raise by 12½ %
d. Manufacturing charges will raise in proportion to the combined cost of
material and wages
e. Selling cost per unit will remain unchanged
f. The other expenses will remain unaffected by the raise output.
 73
Prepare a cost sheet showing the price at which the fans would be marked so as
to show a profit of 12½ % on selling price.
Solution
Cost sheet for the year ending 31st March 2015
For 800 Per fan
Particulars
Fans ` `
Materials consumed 32,000 40.00
Wages 48,000 60.00
Prime cost 80,000 100.00
Add: Factory Overheads
Manufacturing expenses 20,000 25.00
Factory / Works cost 1,00,000 125.00
Add: Administrative Overheads
Office salaries 24,000
General expenses 12,000
Rent and rates 4,000 40,000 50.00
Cost of Production 1,40,000 175.00
Add: Selling and Distribution
Overheads
Selling expenses 8,000 8,000 10.00
Total cost 1,48,000 185.00
Profit 12,000 15.00
Sales 1,60,000 200.00
Statement showing cost and profit for 1000 fans (statement of tender)
Per fan For 1,000
Particulars
` fans `
Materials 40.00
Add: Increase 10.00 50.000 50,000
Labour 60.00
Add: Increase 7.50 67.500 67,500
Prime cost 117.500 1,17,500
Add: Factory overheads 29.375 29,375
Factory cost or Works cost 146.875 1,46,875
Office expenses 24.000 24,000
General Expenses 12.000 12,000
Rent and rates 4.000 4,000
Cost of production 186.875 1,86,875
Add: Selling overheads 10.000 10,000
Total cost 196.875 1,96,875
Profit 28.125 28,125
Selling price 225.000 2,25,000
44. Cooling limited manufactured and sold 1,000 refrigerators in the year ending 31st
Dec 2016. The summarized trading and profit and loss Account is set out below:
Particulars ` Particulars `
To Cost of Material 80,000 By Sales 4,00,000
To Direct Wages 1,20,000
 74
To Other Manufacturing cost 50,000
To Gross profit c/d 1,50,000
4,00,000 4,00,000
To Staff salaries 60,000 By Gross profit b/d 1,50,000
To Rent rates & taxes 10,000
To Selling expenses 30,000
To General Expenses 20,000
To Net profit 30,000
1,50,000 1,50,000
For the year ending 31st Dec 2017 it is estimated that
a. Output and sales will be 1,200 refrigerators.
b. Prices of material will go up by 20% on the level of previous year
c. Wages will rise by 5%
d. Manufacturing costs will rise in proportion to be the combined cost of material
and wages
e. Selling cost per unit will remain unaffected
You are required to submit a statement to the board of directors showing the
price at which the refrigerators should be marked so as to show profit of 10% on
selling price
Solution
Cost sheet for the year ending 31st December 2016
Particulars 1,000
Materials consumed 80,000 80.00
Wages 1,20,000 120.00
Prime cost 2,00,000 200.00
Add: Factory Overheads
Manufacturing expenses 50,000 50.00
Factory / Works cost 2,50,000 250.00
Add: Administrative Overheads
Staff salaries 60,000
General expenses 20,000
Rent and rates 10,000 90,000 90.00
Cost of Production 3,40,000 340.00
Add: Selling and Distribution
Overheads
Selling expenses 30,000 30,000 30.00
Total cost 3,70,000 370.00
Profit 30,000 30.00
Sales 4,00,000 400.00
Statement showing cost and selling price for manufacture of 1200 refrigerators
Particulars 1,200
Materials 80.00
Add: Increase 16.00 96.000 1,15,200
Labour 120.00
Add: Increase 6.00 126.000 1,51,200
Prime cost 222.000 2,66,400
 75
Add: Factory overheads 55.500 66,600
Factory cost or Works cost 277.500 3,33,000
Staff salaries 50.000 60,000
General Expenses 16.667 20,000
Rent and rates 8.333 10,000
Cost of production 352.500 4,23,000
Add: Selling overheads 30.000 36,000
Total cost 382.500 4,59,000
Profit 42.500 51,000
Selling price 425.000 5,10,000
45. All India water proof manufactures Ltd manufactures and sold 850 water proofs
in the year ending 31st Dec 2016. The summarized trading and profit and loss
Account is set out below
Particulars ` Particulars `
To Cost of Material 64,000 By Sales 3,20,000
To Direct Wages 96,000
To Other Manufacturing cost 40,000
To Gross profit c/d 1,20,000
3,20,000 3,20,000
To Staff salaries 48,000 By Gross profit b/d 1,20,000
To Rent rates & taxes 8,000
To Selling expenses 16,000
To General Expenses 24,000
To Net profit 24,000
1,20,000 1,20,000
For the year ending 31st Dec 2017 it is estimated that
a. Output and sales will be 1,000 water proofs.
b. Prices of material will go up by 25% on the level of previous year
c. Wages will rise by 12.5%
d. Manufacturing costs will rise in proportion to be the combined cost of
material and wages
e. Selling cost per unit will remain unaffected
You are required to submit a statement to the board of directors showing
the price at which the water proofs should be marked so as to show profit of
12% on selling price
Solution
Cost sheet for the year ending 31st December 2016
For 850 Per
Particulars
units ` unit `
Materials consumed 64,000 75.29
Wages 96,000 112.94
Prime cost 1,60,000 188.24
Add: Factory Overheads
Manufacturing expenses 40,000 47.06
Factory / Works cost 2,00,000 235.29
Add: Administrative Overheads
 76
Staff salaries 48,000
General expenses 24,000
Rent and rates 8,000 80,000 94.12
Cost of Production 2,80,000 329.41
Add: Selling and Distribution
Overheads
Selling expenses 16,000 16,000 18.82
Total cost 2,96,000 348.24
Profit 24,000 28.24
Sales 3,20,000 376.47
Statement showing cost and selling price for manufacture of 1200 refrigerators
Per unit For 1000
Particulars
` unit `
Materials 75.29
Add: Increase 18.82 94.118 94,118
Labour 112.94
Add: Increase 14.12 127.059 1,27,059
Prime cost 221.176 2,21,176
Add: Factory overheads 55.294 55,294
Factory cost or Works cost 276.471 2,76,471
Staff salaries 48.000 48,000
General Expenses 24.000 24,000
Rent and rates 8.000 8,000
Cost of production 356.471 3,56,471
Add: Selling overheads 18.824 18,824
Total cost 375.294 3,75,294
Profit 51.176 51,176
Selling price 426.471 4,26,471

46. The cost structure of an article, the selling price of which is `45,000 is as follows
Direct materials : 50%
Direct labour : 20%
Overheads : 30
Due to anticipated increase in existing material price by 15% and in the
existing labour rate by 25%, the existing profit would come down by 25%, if the
selling price remains unchanged.
Prepare a comparative statement showing the cost, profit and sale price under
the present conditions and with the increase expected for future, assuming the same
percentage of profit on cost as at present had to be earned. (Calculations may be
made to the nearest rupee) (ICWAI)
Solution
Let X be the total cost per unit
Let Y be the profit per unit
Thus, X+Y= `45,000 per unit
Statement showing the Present and Expected cost
Items Present cost Increase Expected cost
 77
Direct Materials 0.50X 15% = 0.075X 0.575X
Direct Labour 0.20X 25% = 0.050X 0.250X
Overheads 0.30X -- 0.300X
Total X 0.125X 1.125X
When selling price remains the same, profit is reduced by 30% i.e.,
X+Y = 45,000 -- 1
1.125X + 0.75Y= 45,000 -- 2
For solving the equations, multiply 1 by 0.75
0.75X + 0.75Y = 33,750 –3
Subtracting 3 from 2
1.125 X + 0.75Y = 45,000
0.75 X + 0.75Y = 33,750
0.375 X + 0 = 11,250
X = 11250/0.375 = 30,000
Y = 45,000 – 30,000 = 15,000
Percentage of profit on total cost = `15,000/`30,000 x 100 = 50%
Statement showing present and expected cost
Items Present cost Increase Expected cost
Direct Materials (50%) `15,000 (15%) `2,250 `17,250
Direct Labour (20%) `6,000 (25%) `1,500 `7,500
Overheads (30) ` 9,000 -- `9,000
Total `30,000 3,750 33,750
Profit @30% on sales `15,000 25% `16,875
Selling price `45,000 `50,625