How are Cost Accounting Records Maintained [with Accounting Entries]!
Non-Integrated Accounting System:
The following important ledgers are maintained by the cost accounting department:
1. Cost Ledger:
This is the principal ledger in which the impersonal accounts (nominal and real accounts) are recorded.
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(a) Stores Ledger:
In this ledger, a separate account for each item in the stores is maintained.
(b) WIP Ledger:
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In this ledger, the production during a period and the cost incurred in production are recorded. Each job, unit, batch, or process is assigned a unique number, and the material costs, wages, and overheads applied are posted to the respective job or batch accounts.
(c) Finished Goods Ledger:
In this ledger, completed finished products are recorded. A separate account is opened for each type of product.
Each of the four above-mentioned ledgers is made self-balancing by maintaining a ‘general ledger adjustment account’ in cost ledger and control account of subsidiary ledgers. Cost ledger contains control accounts of subsidiary ledgers plus some other control accounts.
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Following are the important control accounts which are generally maintained in cost ledger:
(i) General Ledger Adjustment Account:
This account is often termed as ‘cost ledger contra account’. It is maintained in cost ledger to complete the double entry for items which come through financial accounts.
Under non-integrated accounting system, cost ledger is maintained only for cost accounting purpose. Therefore, personal accounts are not maintained in cost ledger.
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For example, wages paid in cash are recorded in financial accounts as follows:
Bank accounts are not maintained in cost ledger, and to complete the double entry, the ‘general ledger adjustment account’ is credited instead of the ‘bank account’.
The entry in cost ledger will be as follows:
Similarly, materials purchased and overheads incurred are debited to the appropriate control account with the corresponding credit to the ‘general ledger adjustment account’. In effect, the account represents personal accounts shown in financial accounting books.
Any transfer from cost books to financial books, e.g., the cost of ‘capital work’ performed by the factory, is entered in this account.
The balance in ‘general ledger adjustment account’ is periodically reconciled with an equal and opposite balance in the ‘cost ledger control account’ maintained in the financial accounting books. All items of expenditure and income, which affect the cost accounts, are recorded in ‘cost ledger control accounts’.
For example, for purchase of materials, the entry in financial books will be as follows:
In cost books, the entry will be as follows:
The cost ledger control account in financial accounting books is only a memorandum account and does not form part of the double-entry book keeping. The ‘general ledger adjustment account’ in cost ledger and the ‘cost ledger control account’ in financial accounting books make the system ‘inter-locking’.
(ii) Materials Control Account:
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This account shows the total number of transactions relating to materials, for example the total receipt as per invoice and the total number of transfers to stores ledger control as per ‘goods received notes’. However, the account is sometimes dispensed with, and only the stores ledger control account is maintained.
(iii) Stores Ledger Control Account:
This account is debited for receipt of materials as per the goods received notes and is credited for issue of materials as per materials-requisition or materials analysis sheet. The balance represents the total of stores accounts.
(iv) Work-In-Progress Ledger Control Account:
This account is debited for all expenses (e.g. direct material, direct wages, and manufacturing overheads) on jobs or other cost units in progress. It is credited by costs of completed units.
It represents the total work-in-progress at any given time. At the end of a period, the aggregate of balances in individual job accounts in subsidiary ledger must agree with the balance in this account.
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(v) Finished Goods Ledger Control Account:
This account is debited with the cost of completed units and is credited with the cost of units sold. It represents the cost of finished goods at any given time.
(vi) Wages Control Account:
This account is debited with the gross wages paid and is credited with the amount transferred to WIP control account (for direct labour), to appropriate overhead control account (for indirect labour), or to research or development account.
No subsidiary ledger is maintained for wages and, therefore, in the strict sense of the term, it is not a control account.
(vii) Factory Overhead Control Account:
This account is debited with the cost of indirect material, indirect labour, and indirect expenses incurred. It is credited with the amount recovered. The debit balance at the end of the accounting period represents under-recovery and the credit balance shows over-recovery of overheads.
No subsidiary ledger is maintained for factory overhead and, therefore, in the strict sense of the term, it is not a control account.
(viii) Administration Overhead Control Account:
All administration expenses are debited to this account. The amount assigned to finished goods is transferred to the ‘Finished Goods Ledger Control Account’ by crediting this account.
Alternatively, depending on the method of accounting, administration overhead is transferred either to ‘Costing Profit and Loss Account’ or to ‘Factory Overhead Account’ and ‘Selling and Distribution Overhead Account’.
This account is not a control account in its true sense.
(ix) Selling and Distribution Overhead Control Account:
Selling and distribution costs are debited to this account and at the end of the year, it is closed by transfer to cost of sales account.
This is also not a control account in the true sense.
(x) Costs of Sales Account:
Cost of goods sold and selling and distribution overheads are debited to this account. The account is closed by transfer to Costing Profit and Loss Account.
(xi) Overhead Adjustment Account:
Under-absorbed overheads and over-absorbed overheads are debited or credited to this account by transfer from the respective overhead control account. Depending on the method of disposal, any balance in this account is transferred either to overhead suspense account or to Costing Profit and Loss Account or to work-in-progress ledger control account, finished goods ledger control account, and cost of sales account.
(x) Costing Profit and Loss Account:
This account is debited with cost of sales, under-recovery of overheads, abnormal losses, etc., and is credited with the sales value of goods sold, over-recovery of overheads, abnormal gains, etc. The closing balance of this account represents the costing profit or loss which should be reconciled with the financial profit or loss.
(a) Capital Orders:
On many occasions, firms manufacture or fabricate machineries and equipment internally. A capital order is opened for each such capital work, and all costs are booked against such capital orders.
Once the job is successfully completed, it is taken out from work-in-progress ledger and transferred to capital order account.
The accounting entry will be as follows:
At the end of the period, the asset is transferred from cost ledger to financial books as follows:
The above entries close the capital order account in the cost ledger.
(b) Repair Orders:
Costs of special repair and maintenance jobs are accounted for in a manner similar to accounting for costs of capital orders.
When the repair work is completed, the repair order is closed.
The entry will be as follows:
(c) Special Order:
On receipt of a special order, a production order is issued and all expenses are booked against the production order.
On completion of the job, if it is despatched directly to the customer without taking the same to finished goods, the entry will be as follows:
Reconciliation of Costing and Financial Profit:
Where separate sets of books are maintained for cost accounting and financial accounting purposes, the profit disclosed by Costing Profit and Loss Account might differ from that shown in financial accounts. Therefore, it is important that they should be reconciled periodically.
Difference might arise due to the following:
1. Appropriation of Profit Not Dealt with in Cost Accounts:
(a) Dividends.
(b) Income tax and other taxes based on profit.
(c) Transfer to a reserve or any other fund.
(d) Additional depreciation to cover replacement costs of assets.
(e) Additional provision for doubtful debts.
(f) Amortization of goodwill and other intangible assets.
(g) Amortization of fictitious assets, e.g., preliminary expenses, etc.
2. Purely Financial Items:
(a) Profits or losses on sales of investments.
(b) Loss of capital assets.
(c) Expenses on issues and transfers of capital stock, shares and bonds, etc.
(d) Expenses and other losses (discount, premium on redemption of bonds, debentures, etc.)
(e) Interest on debentures and other borrowings.
(f) Damages payable under law, fines, and penalties.
(g) Non-operating income, e.g., dividend and interest received.
(h) Rent receivable. However, if a rented business premises is sublet, rent receivable is deducted from rent payable.
3. Purely Cost Accounting Matters:
Notional costs, for example rent of owned premises.
4. Items which are accounted for differently in cost accounting and financial accounting:
(a) Different Bases of Stock Valuation:
In financial accounts, as a matter of prudence, stock is valued at the lower cost and net realizable value, while in cost accounts, it is valued at cost. Moreover, items of costs which are included in determining costs of raw materials, work-in-progress, and finished goods differ. E.g., in financial accounts, costs of transporting finished goods to the location of sale is included in the cost of finished goods, while in cost accounts it is excluded.
(b) Overhead:
In cost accounts, overhead is recovered at pre-determined rates and the amount recovered may differ from actual expenses incurred. If under- or over-recovery is not charged off to Costing Profit and Loss Account, the profit under the two sets of books would differ.
(c) Abnormal losses are excluded from Cost Accounts, while in Financial Accounts such losses are incorporated in the nominal accounts, e.g., purchases, wages, etc.
(d) Depreciation in Cost Accounts, in certain circumstances, is charged on the basis of units produced or hours worked, while in Financial Accounts, it is usually treated as an annual charge.
Integral Accounting (or Integrated System):
Under integral accounting system, instead of operating two sets of records, only one set of accounts is operated. As only one set of book serves the needs of both financial accounting and cost accounting, personal accounts and real accounts are maintained according to financial accounting rules.
However, under this system, nominal accounts follow the principle of cost accounting system. The emphasis is on functional analysis, e.g., manufacturing overheads, rather than on analysis by nature, e.g., salaries, rent, and rates.