Chapter 8

Cost Bookkeeping Ibrahim Sameer (MBA - Specialized in Finance,

B.Com – Specialized in Accounting & Marketing)

Accounting for Costs & ledger

Accounting

• Cost records are a detailed breakdown of the

information contained in the purchases account,

the wages and salaries account and all the

expense accounts in the nominal ledger.

Example of Direct & Indirect

Materials

• During one month, a company incurred materials

cost of MVR 28,000. There were no opening or

closing inventories at the beginning & end of the

month. Direct material cost were MVR 20,000 (all

paid for in cash), & indirect materials cost were

MVR 1,000 for production, MVR 5,000 for

administration & MVR 2,000 for sales &

distribution. All materials are kept in stores &

requisitioned when required.

Example of Direct & Indirect

Materials

Materials Inventory Account

Cash purchase 28,000 WIP (direct material

cost)

Production OH A/C

(indirect material cost)

Admin OH A/C

Sales & Dist’n OH A/C

20,000

1,000

5,000

2,000

28,000 28,000

Example of Direct & Indirect

Materials

WIP Account

Transfer from material

inventory A/C

20,000

20,000

Example of Direct & Indirect

Materials

Production OH Account

Transfer from material

inventory A/C

1,000

1,000

Example of Direct & Indirect

Materials

Administration OH Account

Transfer from material

inventory A/C

5,000

5,000

Example of Direct & Indirect

Materials

Sales & Distribution OH Account

Transfer from material

inventory A/C

2,000

2,000

Accounting for Labour Costs

Wages Control Account

Cash & deduction (=

gross wages & salaries)

XXX WIP (direct labour

cost)

Production OH A/C

(indirect production

labour cost)

Admin OH A/C (cost of

admin labour)

Sales & Dist’n OH A/C

(costs of sales &

distribution labour)

XXX

XXX

XXX

XXX

XXX XXX

Accounting for Labour Costs

WIP Account

Transfer from wages

control A/C (direct labour

cost)

XXX

XXX

Accounting for Labour Costs

Production OH Account

Transfer from wages

control A/C (indirect

production labour cost)

XXX

XXX

Accounting for Labour Costs

Administration OH Account

Transfer from wages

control A/C (cost of admin

labour)

XXX

XXX

Accounting for Labour Costs

Sales & Distribution OH Account

Transfer from wages

control A/C (costs of sales

& distribution labour)

XXX

XXX

Control Accounts

• A control account is an account which records total

cost, unlike an individual ledger account which

records individual Dr & Cr.

Cost Bookkeeping Systems

• There are two main cost bookkeeping systems,

interlocking systems and integrated systems.

Integrated Systems

• Modern cost accounting system (computerized)

integrate cost accounting information & financial

accounting information and are known as

integrated systems.

Interlocking Systems

• An interlocking system is a cost bookkeeping

system where separate ledger accounts are kept

for both the cost accounting function & financial

accounting function. Such system necessitates the

reconciliation of the profit produced by the

separate income statement.

Interlocking Systems

• The cost accounts use the same basic data

(purchases, wages & so on) as the financial

accounts, but frequently adopt different bases for

matters such as depreciation & inventory valuation.

Principal A/C in a System of

Interlocking A/C

• (a) the resources a/c

• Material control a/c or stores ledger control a/c

• Wages (& salaries) control a/c

• Production OH control a/c

• Administration OH control a/c

• Selling & distribution OH control a/c

Principal A/C in a System of

Interlocking A/C

• (b) accounts which record the cost of production

items from start of production work through to cost

of sales:

• WIP control a/c

• Finished goods control a/c

• Cost of sales control a/c

Principal A/C in a System of

Interlocking A/C

• (c) Sales a/c

• (d) The costing income statement

• (e) The under/over absorbed OH a/c

• (f) Cost ledger control a/c (in the cost ledger)

• (g) Financial ledger control a/c (in the financial

ledger)

Advantages of Interlocking

System

• They feature two ledgers, each of which fulfill

different purpose

Disadvantages of Interlocking

System

• Profits of separate cost & financial a/c must be

reconciled.

• They require more administration time.

• They are more costly to run.

Advantages of Integrated System

• It save administration time & cost, because only

one set of a/c need to be maintained instead of

two.

• There is also no need to reconcile the profits of the

separate cost and financial a/c.

Disadvantages of Integrated

System

• The main limitation of integrated a/c is that one set

of a/c is expected to fulfill two different purposes,

the cost a/c provide internal management

information & the financial a/c are used for external

reporting. At times external reporting & internal

management information may conflict.

Production Overhead Control

Account

• In production OH control A/c it will record all of the

total actual expenditure incurred on indirect costs

and the amount absorbed into individual units, job

or process.

Under / Over Absorption

• In an integrated accounting system the following is

the double entry for over absorption:

• Dr: OH control A/c

• Cr: Income statement

• In an integrated accounting system the following is

the double entry for under absorption:

• Dr: Income statement

• Cr: OH control A/c

Cost Bookkeeping System

Double entry for Absorption

Production OH • Dr: WIP A/c

• Cr: Production OH A/c

Notional cost

• In some interlocking costing system, there maybe

notional costs. These are costs that are introduced

into costing system in order to present a more

realistic measure of the cost of an item. The most

common types of notional cost are notional rent

and notional interest.

Notional cost

• Notional costs must be recorded in the cost

accounts. The actual notional cost is recorded as

Dr entry in the appropriate OH a/c, and the

corresponding Cr entry is to the cost accounting

income statement.

Questions & Answers

Thank You

Ibrahim Sameer Seek knowledge from cradle to grave