In many small firms, costing system is maintained on memorandum
statements whereby cost calculations are made on rough sheets, formal documents, books, cards etc. which are not a part of a set of accounts maintained on double entry principles. The recordings and computations of costs are thus outside the formal accounting system. And there is no doubt that valuable information can be obtained from such a system. But this type of system has the disadvantage of absence of general control and the likelihood of these memorandum records not being available when required. However, in those concerns which have a formal system of cost accounting, cost book-keeping can be organised in either of the following two ways :
- Cost accounting system independent of financial accounting, known as Independent or Non-integral Cost Accounting; or
- An accounting system, which contains both cost and financial accounts in a single set of account books, known as Integral Accounting.
Thus, the cost accounts may be integrated with or kept separately
from the financial accounts.
20.2 NON-INTEGRAL COST ACCOUNTING SYSTEM
In this system, cost accounts are distinct from financial accounts. In
other words, cost accounting department maintains a set of books of cost accounts based on the principles of double entry book keeping which is separate from financial books of accounts.
In financial books there are three types of accounts :
- Personal e.g. debtors and creditors.
- Real e.g. cash, stocks, fixed assets, etc.
- Nominal e.g. wages, lighting, heating, discounts, rent and rates, carriage etc.
In cost accounts, there are no personal accounts because cost
accounts do not show relationship with outsiders. In real accounts, only stocks are shown in cost accounts. The main emphasis is on nominal accounts where costs are analysed in detail. Thus cost accounting department is concerned mainly with the ascertainment of income and expenditure of the business. It is particularly interested in nominal accounts, to some extent in real accounts but in no way with personal accounts.
Ledgers to be Maintained : The following four important ledgers are maintained by the costing department :
- Cost ledger : This is the principal leader in cost books which controls all other ledgers in the costing department. It contains all impersonal accounts and is similar to General Ledger of financial accounts. It contains, inter alia, a number of control accounts like stores ledger control accounts, wages control account, factory overhead control account etc. and also a cost ledger control account to make the cost ledger self-balancing.
- Stores ledger : This ledger maintains a separate account for each item of store (raw material, components, consumable stores, etc.). It is used for recording receipts, issues and balances of stores both in quantity and amount.
- Work-in-progress ledger or job ledger : It contains a separate account for each job in progress. Each such account is debited with the material costs, wages and overhead chargeable to the jobs and credited with the cost of work completed. The balance in this account represents the cost of unfinished work.
- Finished goods ledger : It contains an account for each item of finished product.
As stated above, the cost ledger is the principal ledger. Other ledgers, i.e, stores ledger, work-in-progress ledger and finished goods ledger are referred to as subsidiary ledgers of the cost accounting department. The cost ledger is made self-balancing by opening a control account for each of these subsidiary ledgers.
20.3 MEANING OF CONTROL ACCOUNTS
Control accounts are the total accounts in the cost ledger. In these
accounts, entries are made once in each accounting period on the basis of the periodical totals of transactions in related subsidiary ledgers and books. For examples, stores ledger control account represents stores ledger in a summary form. Purchases of individual items of stores shown in individual accounts in the stores ledger are totalled and shown in stores ledger control account as total purchases. Similarly, other individual debits and credits in individual accounts in stores ledger are abstracted, totalled and taken to stores ledger control account. Thus the opening balance of this control account should always equal the total of opening balances on each individual account in the stores ledger. In the same way, a control account is also kept for each of the other subsidiary ledgers i.e. job ledger and finished goods ledger. In addition, a control account is opened for cost ledger with the main object of completing the double entry.
The main advantages of control accounts are:
- Control accounts present the management with a summary of detailed information contained in various subsidiary ledgers.
- It makes possible the division of accounting work among ledger keepers, thereby resulting in specialisation in work.
- It permits prompt preparation of Profit and Loss Account and Balance Sheet at the end of each period by providing stock figures without delay.
- It provides internal check leading to greater accuracy of records.
20.4 PRINCIPAL ACCOUNTS TO BE MAINTAINED
The principal accounts to be maintained in the cost ledger and their
functions are summarised below :
- Stores Ledger Control Account : This account deals with material transactions and is a summary of the value of stores received, issued and balance in store. Receipts are posted from goods received note or invoices to the debit side of this account. Similarly issues of materials are posted from material requisitions or materials issue analysis sheet to the credit side of this account. The balance of this account represents the total balance of stock which should agree with the aggregate of the balances of individual accounts in the Stores Ledger.
- Wages Control Account : This account records wage transactions in aggregate. Postings are made from wages analysis sheet. This account is debited with gross wages (paid and accrued) and is closed by transfer of direct wages to work-in-progress and indirect wages to factory, administration and selling and distribution overhead control accounts.
- Factory Overhead Control Account : This account deals with factory overhead expenses in aggregate. It is debited with indirect material cost, indirect wages and indirect expenses and is credited with overheads absorbed and transferred to work in-progress. The balance in this account represents under or over-absorbed overheads and is transferred to Overhead Adjustment Account or Costing Profit and Loss Account.
- Work-in-progress Ledger Control Account : This account starts with opening balance of work-in-progress and is debited with materials, labour and factory overheads charged. It is credited with cost of finished goods. Closing balance of this account shows the value of unfinished jobs.
- Finished Goods Ledger Control Account : This account starts with opening balance of finished goods. It is debited with cost of finished goods transferred from work-in-progress control account and the amount of administration overheads absorbed. This account is credited with cost of sales. The closing balance of this account represents the cost of goods remaining unsold at the end of the period.
- Administration Overhead account : This account is debited with administration overhead cost and is credited with overheads absorbed by finished goods. The balance in this account represents under or over absorbed overheads which is transferred to Overhead Adjustment Account or to Costing Profit and Loss Account.
However, when administration overheads are excluded from costs,
the entire amount is straight away transferred to Costing Profit and Loss Account. And when administration overheads are apportioned to production and selling and distribution overheads, the amounts are transferred to the respective accounts.
- Selling and Distribution Overhead Account : This account is debited with selling and distribution overhead incurred and credited with selling and distribution overhead absorbed. Its balance represents under or over absorbed overhead.
- Cost of Sales Account : This account is debited with the cost of goods sold by transfer from finished goods ledger control account and selling and distribution overheads absorbed. It is closed by transfer to Costing Profit and Loss Account.
- Overhead Adjustment Account : This account is debited with underabsorbed overheads for factory, administration and selling and distribution overheads and is credited with over-absorbed overheads. The balance in this account represents the net amount of over or under-absorption which is transferred to Costing Profit and Loss Account.
Sometimes this account is not maintained and the amount of under
or overabsorbed overheads is directly transferred to Costing Profit and Loss Account.
- Costing Profit and Loss Account : This account is debited with the cost of sales, abnormal losses and under-absorbed overheads. It is credited with sale value of goods sold, abnormal gains and over-absorbed overheads. The balance in this account represents costing profit or loss which is transferred to cost ledger control account.
- Cost Ledger Control Account : This account is also known as General Ledger Adjustment Account or Financial Ledger Control Account. The purpose of this account is to complete the double entry and make the cost ledger selfbalancing. As no personal accounts are kept in the cost books, then in order to complete the double entry, all transactions which arise in financial accounts are debited or credited to the cost ledger control account. For example, wages paid amount to Rs. 250 and as no cash or bank account is maintained in the cost ledger, then in order to complete the double entry, the following entry will be made so as to credit cost ledger control account in place of cash or bank :
Wages Account Dr. Rs. 250
To Cost Ledger Control Account Rs. 250
This account is sometimes disrespectfully referred to as “dustbin
account” because it is for disposing of the odds and ends of double entry which lack a home.
Thus the cost ledger control account is equivalent to debtors,
creditors and cash or bank accounts in the financial ledger. Sales are debited to this account and net profit or loss is also transferred to this account. All transfer entries of internal nature which affect only cost accounts and have no implications in financial accounts do not appear in cost ledger control account. For example transfer from stores ledger to work-in-progress, from work-in-progress to finished goods, etc. are not shown in cost ledger control account. The balance of cost ledger control account represents the total of all balances of impersonal accounts.
20.5 JOURNAL ENTRIES
The use of double entry system in costing records will help in the
preparation of trial balance for the costing transactions. The entries for various transactions which can be made with the help of control accounts are mentioned below :
Journal Entries in Cost Books
|Particulars of Transactions||Cost Journal Entries|
|1.||Purchase of materials||Stores Ledger Control A/c Dr.
To General Ledger Adjustment A/c
|2.||Returns to suppliers||General Ledger Adjustment A/c Dr. To Stores Ledger Control A/c|
|3.||Material purchased specially||Work in-progress Control A/c Dr.|
|for a job||To General Ledger Adjustment A/c|
|4.||Direct material issued from||Work-in-progress Control A/c Dr.|
|stores to jobs, capital orders||Capital Order No.. A/c Dr.|
|or service order.||Service Order No… A/c Dr. To Stores Ledger Control A/c|
|5.||Issue of indirect materials||Factory Overhead A/c Dr.
To Stores Ledger Control A/c
|6.||Materials returned from jobs||Stores Ledger Control A/c Dr.|
|to stores||To Work-in-progress Control A/c|
|7.||Transfer of materials from||Receiving Job A/c Dr.|
|one job to another||To Giving Job A/c|
|8.||Normal wastage of materials||Factory Overhead A/c Dr.|
|and stores||To Stores Ledger Control A/c|
|9. Abnormal waste of materials||Costing P & L A/c Dr.
To Stores Ledger Control A/c
|10. Payment of direct wages as||Wages Control A/c Dr.|
|well as indirect wages||To General Ledger Adjustment A/c|
|11. Allocation of direct labour||Work-in-Progress Control A/c Dr.
Capital Order No… A/c Dr.
Service Order No… A/c Dr.
To Wages Control A/c
|12. Allocation of indirect labour||Factory Overhead Control A/c Dr.
Admn. Overhead Control A/c Dr.
Selling & Distr. Overhead Control A/c Dr. To Wages Control A/c
|13. Abnormal idle time cost||Costing P & L Account Dr. To Wages Control A/c|
|14. Normal idle time cost||Factory Overhead Control A/c Dr. To Wages Control A/c|
|15. Expenses incurred||Factory Overhead Control A/c Dr.
Admn. Overhead Control A/c Dr.
Selling and Distr. overhead Control A/c Dr. To General Ledger Adjustment A/c
|16. Allocation of works||Work-in-Progress Control A/c Dr.|
|expenses||To Factory Overhead Control A/c|
|17. Production expenses||Factory Overhead Suspense A/c Dr.|
|chargeable to incomplete||To Factory Overhead Control A/c|
Carry down the amount as debit balance in the Factory Overhead A/c
|18. Absorption of administration||Finished Stock Ledger Control A/c Dr.|
|expenses||To Adm. Overhead Control A/c|
|19. Administration Overheads||Admn. Overhead Suspense A/c Dr.|
|applicable to incomplete||To Admn. Overhead Control A/c|
|jobs.||(or carry down as debit balance)|
|20. Absorption of selling and||Cost of Sales A/c Dr.|
|distribution overheads||To Selling & Distr. Overhead Control A/c|
|21. Overhead under-absorbed||Overhead Adjustment A/c Dr. To (Appropriate) Overhead A/c|
|22. Overhead over-absorbed||(Appropriate) Overhead A/c Dr.
To Overhead Adjustment A/c
|23. Transfer of balance on||(i) In case of debit balance|
|Overhead Adj. A/c||Costing P&LA A/c Dr.
To Overhead Adjustment A/c
(ii) In case of credit balance Overhead Adjustment A/c Dr. To Costing P & L A/c
|24. Transfer of completed jobs||Finished Stock Ledger Control A/c Dr.|
|Finished Goods Ledger||To Work-in-Progress Control A/c|
|25. Transfer of cost of goods||Cost of Sales A/c Dr.|
|sold||To Finished Stock Ledger Control A/c|
|26. Transfer of cost of sales||Costing P & L A/c Dr.|
|A/c to P & L A/c||To Cost of Sales A/c|
|27. Sales||General Ledger Adjustment Dr. To Costing P & L A/c|
|28. Transfer of profit or loss||In case of profit :
Costing P & L A/c Dr.
To General Ledger Adjustment A/c
(Reserve the entry in the case of loss)
|29. Transfer of capital order||General Ledger Adjustment A/c Dr.|
|to financial books||To Capital Order A/c|
|30. For service orders||(Respective) Overhead A/c Dr. To Service Order No… A/c|
In cost accounting, the cost books are basically maintained under
the two systems namely (a) Non-Integral or Non-Integrated Cost Accounting and (b) Integrated Cost Accounting. The system is called non-integral when cost and financial transactions are kept separately. On the contrary, when cost and financial transactions are integrated, the accounting system is known as integrated. Under the system of non-integral accounting separate ledgers are maintained for cost and financial transaction. The financial accountants look after financial transactions and the cost accountants are responsible for cost accounting transactions. The cost accounting department maintains the stores ledger, work-in-progress ledger, finished goods/stock ledger and cost ledger. Cost Ledger is main ledger and records impersonal accounts i.e. accounts relating to income and expenditure.
Control accounts: Control accounts are the total accounts in the cost ledger.
Integrated cost accounting: When cost and financial transactions are integrated, the accounting system is known as integrated cost accounting.
20.8 SELF ASSESSMENT QUESTIONS
- Non-integrated accounting is one of the systems of cost control accounting to keep cost books.
- Define non-integrated accounting.
- Explain the system of non-integrated accounting and state the principalledgers that are to be maintained
- You wish to institute control accounts in respect of materials purchased and used in your factory. What purposes do control accounts serve? What accounts would you institute and from what sources would the entries be derived?