HH Cost Iu PDF

Cost &
IQRA University, Managerial

Accounting
Main Campus, Karachi
SOME BASIC THEORY FOR COST ACCOUNTING
ACCOUNTING
It is a study of systematic
 Recording
 Classifying
 Summarizing &
 Interpreting
all the business transaction in term of money By GAAP
COST
Cost is a forgoing, measured in monetary terms, incurred or potentially to be incurred to achieve a
specific objective. By AICPA
COST: ASSETS OR EXPENSE
Cost is something forgone in term of assets to achieve future benefit.
Assets: If future benefit has not yet achieved, it is an asset.
Expense: While, Expense is something, from which benefit has been achieved. In other
words expense is expired cost.
COST ACCOUNTING
It is branch of accounting that deals with the
 recording,
 classifying,
 summarizing, and
 interpreting
of information on a Cost Per Unit basis for the purpose of
a]. Planning and Controlling Operation
b]. Production costing
c]. Management decision making.
ELEMENTS/COMPONENTS OF COST
 Direct Material
 Direct Labour
 Factory Overheads
o Indirect material
o Indirect Labour
o Other Factory Expenses
 Factory Rent
 Heat, Power & Light
 Depreciation of Machines , Etc.
 Factory Related Expenses
INVENTORY STAGES
 Raw Material
 Work-In-Process/Goods in Progress/ Uncompleted Goods
 Finished Goods/ Completed Goods.
SOME IMPORTANT TERMS RELATING TO COST / COST TERMINOLOGIES:
Prime Cost = Direct Material + Direct Labour
Factory Cost = Prime Cost + Factory Over Head
Factory Over Head = Indirect Material and Labour + Other Factory Expenses
Conversion Cost = Direct Labour + Factory Over Head
From the desk of Mr. Muhammad Mubeen – M.Phil(Finance)-Bilkent, Ankara, Turkey, MS(Management
Science)-SZABIST, Karachi, FPFA-5516, CIB [Page 1 of 9]
Cost &
Accounting
PRACTICE QUESTIONS
Q.1
Direct Material = Rs. 50,000
Direct Labour = 75,000
Rent (Factory) = 5,000
Fuel & Power = 2,000
Rent (Office) = 3,000
Utility (Factory) = 3,000
Utility (Office) = 1,500
Factory Supervisor Salary = 5,000
Depreciation( Machines = 2,000
Indirect Material = 10,000
Indirect Labour = 5,000
Compute: i) Prime Cost ii) Factory Over Head
iii) Factory Cost iv) Conversion Cost
Q.2
Rent (Factory) = 6,000
Fuel & Power = 4,000
Rent (Office) = 2,500
Utility (Factory) = 4,500
Utility (Office) = 2,500
Factory Supervisor Salary = 7,500
Depreciation (Machines) = 3,500
Indirect Material = 18,000
Indirect Labour = 7,200
iii) Factory Cost iv) Conversion Cost
Q.3 Compute Factory Cost:
Conversion Cost = 150,000
Prime Cost = 100,000
Q.4 Compute Factory Cost:
Prime Cost = Rs. 250,000
Direct Material = 100,000
Conversion Cost = 380,000
Q.5
Material = Rs. 75,000 ( 80% Direct )
Labour = 100,000 ( 20 % Indirect )
Conversion Cost = 180,000 (Indirect Material and Labour are included)
Compute: i) Prime Cost ii) Factory Cost
Q.6
Material = Rs. 150,000 ( 25 % Indirect )
Labour = 200,000 ( 70% Direct )
Conversion Cost = 350,000 (Indirect Material and Labour are included)
Compute: i) Prime Cost ii) Factory Cost
Cost &
Accounting
Q.7 Factory Cost = Rs. 500,000
Prime Cost = three-fifth of the Factory Cost.
Direct Material = one-fifth of the Factory Cost.
Compute: i) Direct Labour ii) Conversion Cost
Q.8 Factory Cost = Rs. 800,000
Prime Cost = three-fourth of the Factory Cost.
Direct Material = one-third of the Prime Cost.
Compute: i) Direct Labour ii) Conversion Cost
Q.9
Prime Cost = Rs. 600,000 which is 75% of Factory Cost
Compute: i) Factory Overhead ii) Conversion Cost
Q.10
Prime Cost = Rs. 540,000 which is 60% of Factory Cost
Compute: i) Factory Overhead ii) Conversion Cost
Q.11
Material = Rs. 120,000 [ 15 % Indirect]
Labour = 150,000 [ 75 % Direct ]
Rent = 25,000 [ 40 % Office ]
Fuel & Power = 40,000 [ 100% Factory ]
Utilities Expense = 8,000 [ 25 % Factory ]
Supervisor Salaries = 30,000 [ 60 % Factory ]
Depreciation = 45,000 [ 15 % Furniture, 25% Factory Building, 15% Office
Building
& Remaining for Factory Machines ]
iii) Factory Cost iv) Conversion Cost [S.M]
RAW MATERIAL
Q.1. Raw Material - (opening) Rs. 6,000 Q.2. Raw Material - (opening) Rs. 8,500
Raw Material – Purchases 60,000 Raw Material - Purchases 65,000
Raw Material - Return 4,000 Raw Material - Return 1,500
Raw Material - (Ending) 3,000 Raw Material - (Ending) 4,800
Discount Received 2,000 Discount Received 1,200
Discount allowed 3,000 Discount allowed 2,600
Transportation In 2,000 Transportation In 1,500
Find Raw Material Consumed ? Find Raw Material Consumed ?
[S.M] [S.M]
Q.3. Raw Material – Consumed Rs. 60,000 Q.4. Raw Material - Consumed Rs. 75,000
Raw Material - Return 4,000 Raw Material - Return 6,000
Raw Material - opening 15,000 Raw Material - opening 12,000
Raw Material - ending 80% of Opening Raw Material - ending 75% of Opening
Find Raw Material Purchases ? Find Raw Material Purchases ?
Cost &
Accounting
COST OF GOODS MANUFACTURED
Total Manufacturing Cost + Opening Work-in-Process – Closing Work In Process
COST OF GOODS SOLD
Cost of Goods Manufactured + Opening Finished Goods – Closing Finished Goods.
A.B.C Manufacturing Co.
Statement of Cost of Goods Manufactured
For the year ended ____ 31, 200X
Direct Material Consumed xxxx
Direct Labour Consumed xxxx
Factory Over Heads
Indirect Material
Indirect Labour xxx
Other Factory Expenses. xxx
Total Factory Over Heads xxx xxxx
Factory /Manufacturing /Production Cost xxxxx
Add: Work In Process- opening xxx

Total Work Put in Process xxxxx
Less: Work In Process- Closing (xxx)
Total Cost of Goods Manufactured. Xxxxx

SCHEDULE FOR RAW MATERIAL CONSUMED
Opening Raw Material xxx

Add: Raw material Purchases xxxx
Less: Purchases - Return (xxx)
Purchases - Discount (xxx)
Add: Transportation- In xxxx
Total Purchases of Raw Material xxxxx
Raw Material Available for Consumption xxxxx
Less: Raw Material- Ending (xxxx)
Raw Material Consumed Xxxxx
Practice Questions for Manufacturing Concern
QUESTION – 1
From the following data for the year ending June, 1997, determine.
A] The cost of goods manufactured for this year and also
B] The cost of goods sold
Direct Material purchased Rs. 200,000
Direct Labour Costs 210,000
Manufacturing Overhead Cost. 175,000
Inventories were counted and priced as below:
June 30, 1997 June 30, 1996
Inventory of direct Materials. Rs. 50,000 Rs. 40,000
Inventory of work in process 80,000 75,000
Inventory of finished goods 25,000 30,000 [C,97]
Cost &
Accounting
QUESTION – 2
The following data have been taken from the book of Manufacturing Company Ltd. For the year
1997-98.
Inventories July 1 June 30
Raw Materials Rs. 16,000 Rs. 18,000
Goods In Process 24,000 22,000
Finished Goods 12,000 26,000
Data for the Year
Sales Rs. 480,000
Purchases ( Raw Materials ) 110,000
Purchase discount 2,000
Direct Labour 90,000
Factory Over Head 98,000
Operating Expenses 70,000
REQUIRED:
a) Statement of Cost of Goods Manufactured b) Income Statement [B,98]
QUESTION – 3
The following data have been taken from the book of Ubaida Company Ltd. For the year 2002-03.
Data for the Year
Sales Rs. 960,000 Purchases ( Raw Materials ) Rs. 410,000
Purchase discount 15,000 Direct Labour incurred 175,000
Purchase Return 20,000 Transportation Inward 10,000
Rent (Factory) 35,000 Fuel & Power 55,000
Rent (Office) 3,000 Utility (Factory) 13,000
Utility (Office) 1,500 Transportation Outward 15,000
Factory Supervisor Salary 8,000 Depreciation ( Furniture) 10,000
Depreciation( Machines) 20,000 Other Operating Expenses 45,000
REQUIRED:
a) Statement of Cost of Goods Manufactured b) Income Statement [S.M]
QUESTION – 4
The following data have been taken from the book of Ghani Manufacturing Company Ltd. for the
year 2003-04.
Data for the Year
Sales Rs. 900,000 Purchases ( Raw Materials ) Rs. 310,000
Discount received 10,000 Direct Labour payment 250,000
Carriage Inward 25,000 Purchases Return (Raw materials) 10,000
Factory Expenses excluding Indirect Material and Labour amounted to Rs. 150,000, Indirect Labour is
20% of total payment & Direct Material is 90% of Total Raw Material Consumption.Total Administrative
and Selling Expenses amounted to 15% of Sales.
REQUIRED: a) Statement of Cost of Goods sold b) Income Statement [S.M]
Cost &
Accounting
QUESTION – 5
From the following data, Prepare Cost of Good Sold Statement
Material consumed = Rs. 150,000 [ 20 % Indirect]
Labour incurred = 200,000 [ 75 % Direct ]
Rent = 35,000 [ 20 % Office ]
Fuel & Power = 45,000 [ 100% Factory ]
Utilities Expense = 10,000 [ 35 % Factory ]
Supervisor Salaries = 30,000 [ 60 % Factory ]
Depreciation = 45,000
[ 10 % Furniture, 15% Office Building, 25% Factory Building & Remaining for Factory Machines]
Inventories Opening Closing
Raw material Rs. 45,000 80% of Opening
W-I-Process 75% of Closing 80,000
Finished Goods 90,000 20% of Cost of Goods Manufactured [S.M]
QUESTION – 6**
Following information relates to commodity ‘ A ‘ of a manufacturing concern for their one month
operations:
Stock of Materials- Ending Rs. 31,400 Stock of Materials- Beg. Rs. 24,000
Material purchases 92,500 Carriage and Cartage Outward 2,150
Carriage and Cartage Inward 3,575 Drawing office Salaries 3,250
Counting House Salaries 6,300 Cash Discount Allowed 1,450
Bad Debts written off 3,250 Repair of Plant 2,225
Rent, Rates & Maintenance-Factory 4,250 Sales 230,500
Rent, Rates, & Maintenance-Office 1,000 Travelling Expenses 1,050
Traveller Salaries & Commission 3,850 Production Wages 63,000
Depreciation- Machinery 3,250 Depreciation- Office Furniture 150
Director’s Fee 3,000 Energy and Gas – Factory 600
Managers Salary (¾ Factory- ¼ Office) 5,000 Energy and Gas – Office 200
General Expenses – Factory 1,700 Process Inventory – Ending 16,200
Process Inventory – Beginning 20,500 Finished Goods - Beginning 10,600
Finished Goods Inventroy- ending 5,400
REQUIRED:
A] Cost of Goods Manufactured Statement B] Income Statement [C, 93]
QUESTION – 7
The accounting records of Alladen Manufacturing Co. include the following information relating to
the year ended December 31, 1996. December 31 January 1
Materials inventory Rs. 60,000 Rs. 47,500
Goods in Process Inventory 18,750 20,000
Finished Goods inventory ( January 1 5,000 units ) ? 95,000
Raw materials Purchases Rs. 142,500
Direct Labour cost 97,500
Factory overhead cost 221,250
22,500 units were manufactured and 20,000 units were sold.
REQUIRED:
a) Prepare a statement of cost of finished goods manufactured for 1996.
b) Compute the cost of producing a single unit during 1996.
c) Compute the cost of goods sold during 1996, assuming that the FIFO inventory costing
d) Compute Inventory of Finished Goods on December 31, 1996 assuming that FIFO Method [B,96]
Cost &
Accounting
QUESTION – 8*
The books of Fazal Electronics Company Limited engaged in manufacturing of colour television.
Annual production capacity of the company is 15,000 televisions. During the year 1998, the company sold
12,000 televisions. Other informations for the year ending 31st December, 1998 were as follows:
Dec 31 Jan 1
Rs. ( in Thousands) Rs. ( in Thousands)
Material 3,000 5,000
Finished Goods ? 823
Work – in – Process 1,500 4,000
Finished Goods ( Units ) 500 100
Material Purchased 41,650 Direct Labour 21,000
Factory Over head 34,902 Selling Expenses 8,560
General & Admin. Expenses 9,656 Sales 127,200
REQUIRED:
1. Income Statement for the year ending 31st December 1998.
2. Number of units manufactured.
3. Cost per unit manufactured.
4. Value of Finished Goods Inventory as on 31st December, 1998
5. Net Profit per Unit Cost. [C,99]
QUESTION – 9**
Following transactions were recorded in the books of Wahid Electronics Est., for the month of April 1989.
Beginning Inventories: Rs. Ending Inventories: Rs
Materials 19,000 Materials 8,900
Work – In – Process 7,500 Work – In – Process 15,700
Finished Goods 26,000 Finished Goods 21,750
Transactions for the months were:
Material Purchased 275,000 Consumable & supplies (Indir. Mat.) 54,000
Utilites (Factory 60%, Office 40%) 60,000 Wages (Factory 70%, Office 30%) 90,000
Salaries – Office Staff 30,000 Salaries – Sales Staff 10,000
Travelling Expenses – Sales 25,500 Factory Overheads 16,000
Depreciation 15,500 Distribution Expenses 3,850
Sales 550,000
REQUIRED:
A] Cost of Goods manufactured and Sold statement for the year ended Dec. 31, 1990.
B] Income Statement for the year ended Dec. 31, 1990. [C,92]
FACTORY OVER HEADS (ACTUAL AND APPLIED)
If Factory Over heads [Applied] is given, we include Applied Factory Overhead in the Statement of
Cost of Goods Manufactured. Then the Difference between Applied Factory Overhead and Actual Factory
Overhead will be adjusted in Statement of Cost of Goods Sold.
A.B.C Manufacturing Co.
Statement of Cost of Goods Sold
Cost of Goods Manufactured ( Applied ) xxxx
Add: Finished Goods – Opening xxxx
Total Finished Goods Available For Sale xxxx
Less: Finished Goods – Ending (xxxx)
Cost of Goods Sold ( Applied ) xxxx
Add/Less: Under/Over Applied Factory Overhead xxxx
Cost of Goods Sold ( Actual ) xxxxx
Cost &
Accounting
QUESTION – 10
Material Used Rs. 60,000 ( 80% Direct); Labour Incurred Rs. 80,000 ( 25 % Indirect ); Other
Factory Over Head Incurred Rs. 75,000. Factory Overhead applied at 120% of Direct Labour.
Prepare Cost of Goods Manufactured and Cost of Goods Sold at(actual) & at (Applied) [S.M]
QUESTION – 11**
The following data have been extracted from the records of A.B.C. Manufacturing Company:-
Inventory Accounts Jan. 1: Inventory Accounts Dec 31:
Material Rs. 45,000 Materials Rs. 38,000
Work- in- Process 15,000 Work – in – Process 12,000
Finished Goods 10,000 Finished Goods 17,000
The following transactions took place during the year 1990:
Direct Material Purchased Rs. 6,500
Indirect Materials Purchased and used 10,000
Factory Payroll Rs. 38,000 out of which Rs. 8,000 represented indirect labour. Other factory overhead cost
incurred Rs. 25,000. Factory overhead applied to production at the rate of 150% of direct labour cost.
Selling expenses Rs. 20,000 Admin Expenses 17,000
Financial Management Income 2,000 Financial Management Expense 3,000
Sale for the year 236,000 Sales return and Allowances 2,500
Carriage inward 4,000
REQUIRED:
A] Cost of Goods manufactured and Sold statement for the year ended Dec. 31, 1990.
B] Income Statement for the year ended Dec. 31, 1990. [C, 91]
QUESTION – 12.** 
Kaay Company’s Cost of Good Sold for the month ended June 30, 1995 was 645,000. Ending Material
Inventory was 10% higher than beginning Inventory and Work In Process ending Inventory was 80% of
beginning Inventory. Factory overhead applied was 50% of Direct Labour. Other Information pertaining to
inventories and production for the month of June, 1995 is as follows:
Beginning Inventories: June 1, 1995
Direct Material Rs. 340,000
Work – In – Process 270,000
Finished Goods 212,000
Material Purchased during the month 328,000
Finished Goods Inventory June 30, 1995 215,000
REQUIRED:
A] Prepare a Schedule of Cost of Goods Manufactured for the month of June 1995. [C,95]
B] Prepare a Schedule to Compute the Prime cost Incurred during the month.
C] Prepare a Schedule to Compute the Conversion Cost charged to Work– in–Process during the
month.
QUESTION – 13.** 
The payroll records of the Weber Company show payments for labor of Rs. 400,000, of which Rs.
80,000 is indirect labor. Materials requisitions show Rs. 300,000 for materials used, of which Rs. 280,000
represents direct materials. Other manufacturing expenses total Rs. 124,000. Finished goods on hand at the
end of the period are stated at cost, Rs. 176,000, of which Rs. 40,000 is direct materials cost. Factory
overhead is allocated on the basis of direct labor cost.
REQUIRED:
The amount of direct labor and the amount of factory overhead in Finished Goods [M.U: P2.1]
Cost &
Accounting
QUESTION – 14.**
On October 1, the Florida Company had the following inventories: Materials, $ 24,000; work in
process, $ 12,000; and finished goods, $ 35,000. During the month, materials purchases totaled $ 56,000.
Direct labor for October was $40,000, at a uniform wage of $ 6.40 per hour. Marketing and administrative
expenses for the month amounted to 10% of net sales. Inventories on October 31 were as follows: materials,
$ 20,000; work in process, $8,000; and finished goods, $ 40,000. Net sales for October totaled $ 200,000.
Factory overhead is applied on the basis of $ 8 per direct labor hour.
REQUIRED:
a]. Prime Cost c]. Conversion Cost e]. Income from Operations[Net Income]
b]. Cost of goods manufactured d]. Cost of goods sold [M.U: E6]
QUESTION – 15.**
The following information was taken from the accounting records of MUSLIM CORPORATION:-
Inventories Jan.1, 1982 Dec. 31, 1982
Raw Materials 132,000 144,000
Goods in process 97,200 81,900
Data for the year ended December 31,,1982
Cost of goods manufactured Rs. 2,430,000
Factory Overhead, 80% of Direct Labour 535,200
The company also paid transportation cost of Rs. 90,000 on material purchased. Materials worth
Rs. 48,900 was also returned to suppliers.
Required:
Prepare a statement of cost of goods manufactured for the year ended December 31, 1982. Some
information needed for this statement is not listed above but can be derived from the data given. Show
supporting computation for:
i) Total cost of goods in process during the year ii) Direct Labour
iii) Cost of raw material used iv) Cost of raw material available for use
v) Purchasing of raw materials (gross) [B, 82]
QUESTION – 16.**
The Books of Memon Manufacturing company were destroyed in a fire accident, but some how
following information were obtained:
Sales Rs. 600,000
Finished Goods(opening) 72,000
Work in Process (ending) 80,000
Work in Process (opening) 100,000
Raw Material – (Ending) 70,000
Raw Material – Returns 5,000
For the Missing Information, The company was referring percentages pertaining to Previous year’s
figures.
 Gross Profit Rate was 25% on Sales, Net Profit was 50% of Gross Profit
 Selling Expenses were 10% of Cost of Goods Sold,
 Finished Goods (ending) were 10% of Cost of Goods Manufactured,
 Raw Material (ending) was 140% of Raw Material (Opening)
 It was also analyzed that Direct Labour was 20% of Prime Cost and 25% of Conversion Cost
Required:
a] Income statement b] Cost of Goods manufactured
c] Calculate Raw material Purchases [S.M]

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Cost &

IQRA University, Managerial

Add: Work In Process- opening xxx

Total Cost of Goods Manufactured. Xxxxx

Opening Raw Material xxx

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