Cost book-keeping refers to a system of recording various cost information in the books of accounts. There are two systems of cost book-keeping:
i. Integrated system
ii. Non-integrate system/interlocking system.
This is one in which cost accounts and financial accounts are combined in one set of books of accounts.
Non-integrate system/interlocking system
This is an alternative system where the cost and financial accounts are maintained independently. At the end of each period, two profits are calculated i.e. costing profits and the financial profit. Cost book keeping is based on control accounts. A control account is a summary account where entries are made from totals of transactions for a period. For example total raw materials purchased are recorded in “Material Control Account” also known as “Stores Ledger Control Account”. Cost book-keeping is based on the principle of double entry. The main control accounts for purposes of accumulating costs are:
- Raw materials control account.
- Wages control account.
- Production overhead control account.
- Work in progress control account.
- Administration overhead control account
- Finished goods control account.
- Selling and distribution overhead control account etc.
Double entry for integrated system
1. To record the purchase raw materials.
Dr. Raw material control account, Cr. Creditors/Bank account.
2. To record materials returned to suppliers.
Dr. Creditors control account, Cr. Raw materials control account.
3. To record the issue of direct materials to production.
Dr. Work in progress control account, Cr. Raw materials control account.
4. To record the issue of indirect materials to production
Dr. Production overhead control account, Cr. Raw materials control account.
5. Recording of labour is done in two stages.
a) To record total wages incurred.
Dr. Wages control account. Cr. Bank/wages payable account
b) To allocate the wages between direct and indirect wages
Dr. Work in progress control account (with direct wages). Dr. Production overhead control account (with indirect wages). Cr. Wages control account.
6. To record other indirect expenses (other than indirect materials and indirect labour)
Dr. Production overhead control account, Cr. Bank/expenses payable account.
7. To transfer the absorbed overhead to production.
Dr. Work in progress account (with absorbed production overhead), Cr. Production overhead control account.
Note: The balancing figure in the production overhead control account represents over or under absorbed overheads. This is transferred to the P & L account.
8. To record the cost of goods produced (fully complete goods)
Dr. Finished goods control account, Cr. Work in progress control account.
9. To record selling and distribution overheads incurred.
Dr. selling and distribution expenses control account. Cr. Bank/expenses payable account. NB: this is closed as an expense to the P&L account i.e. Dr. Profit & Loss account. Cr. Selling and distribution control account.
10. To record the cost of goods sold:
Dr. Cost of sales account. Cr. Finished goods control account
11. To record sales of goods:
Dr. Debtors or cash account, Cr. Sales account.
Given the sales, cost of sales and selling and distribution expenses, the net profit can be determined by preparing the profit and loss account.