CA Intermediate · Cost and Management Accounting

Cost Accounting Systems: formula sheet

Full chapter guide

Key formulas

Integral system: purchase of materials: Stores Ledger Control A/c Dr. ; To Creditors / Bank A/c; Financial and cost entries combine in one entry.
Integral system: issue of materials: Work-in-Progress Control A/c Dr. (direct) ; Factory (Production) Overhead Control A/c Dr. (indirect) ; To Stores Ledger Control A/c; Direct materials go to WIP; indirect materials go to overhead.
Integral system: wages: Wages Control A/c Dr. ; To Bank, Provident Fund, Employees' State Insurance, Tax payable A/c. Then: WIP Control A/c Dr. / Overhead Control A/c Dr. ; To Wages Control A/c; Gross wages are debited to Wages Control. Deductions are credited to the respective liability accounts.
Integral system: overhead absorption and under/over absorption: WIP Control A/c Dr. ; To Overhead Control A/c (absorbed). Difference in Overhead Control A/c is transferred to Costing P&L A/c; Under-absorbed overhead is a debit balance, so it is a loss. Over-absorbed overhead is a credit balance, so it is a gain.
Integral system: completion and sale: Finished Stock Control A/c Dr. ; To WIP Control A/c. Then: Debtors Dr. ; To Sales A/c. And: Cost of Sales A/c Dr. ; To Finished Stock Control A/c; Sales is recorded at selling price. Cost of sales is recorded at cost. Both close to Costing P&L A/c.
Non-integral system: cost ledger entries: Stores Ledger Control A/c Dr. ; To Cost Ledger Control A/c (General Ledger Adjustment A/c); Cash, debtors, creditors and fixed assets are not in the cost books. Their effect is shown through the Cost Ledger Control A/c, which takes the other side of every cost entry that would otherwise involve them.
Non-integral system: reconciliation: Profit as per cost accounts ± differences = Profit as per financial accounts; Differences arise from items that appear in only one set of books, and from different valuation of stock.
Starting from cost profit: Profit as per financial accounts = Profit as per cost accounts + items that raise financial profit − items that reduce financial profit; Moving from cost profit to financial profit: add financial-only income, add back notional costs, add over-absorbed overhead and add higher closing stock in the financial books. Deduct financial-only expenses, under-absorbed overhead and lower closing stock in the financial books.
Starting from financial profit: Profit as per cost accounts = Profit as per financial accounts + items that raise cost profit − items that reduce cost profit; Reverse every adjustment compared with the first method.
Effect of stock valuation difference: Higher closing stock raises profit; higher opening stock reduces profit; Work out the difference in each stock between the two books and apply the direction to the book you are moving to.
Effect of overhead absorption: Over-absorbed overhead (cost books) = Absorbed − Actual. Cost books charged more than actual, so cost profit is lower than financial profit on this item. Under-absorbed overhead = Actual − Absorbed. Cost books charged less than actual, so cost profit is higher on this item.; Financial books record actual overhead. Moving from cost profit to financial profit, add over-absorption and deduct under-absorption.
Memorandum reconciliation account sides: Debit: items that reduce profit, plus the starting profit if it is a loss. Credit: items that increase profit, plus the starting profit.; The starting profit goes on the credit side (a starting loss goes on the debit side). Items that raise profit go on the credit side and items that reduce profit go on the debit side. The balancing figure is the profit as per the other set of books.
Purchase of materials: Stores Ledger Control A/c Dr. To General Ledger Adjustment A/c; Materials bought on credit or cash. Record at cost.
Issue of direct materials: WIP Control A/c Dr. To Stores Ledger Control A/c; Indirect materials go to Factory Overhead Control A/c instead.
Wages: Wages Control A/c Dr. To General Ledger Adjustment A/c; then WIP Control A/c Dr. (direct) and Factory Overhead Control A/c Dr. (indirect) To Wages Control A/c; Wages Control should be nil after allocation.
Overhead incurred: Factory Overhead Control A/c Dr. To General Ledger Adjustment A/c; Include only costs that belong in the cost books. Exclude purely financial items (e.g., income tax, dividends) and notional items unless the question says otherwise.
Overhead absorbed: WIP Control A/c Dr. To Factory Overhead Control A/c; Absorbed at predetermined rate.
Under/over-absorption: Under-absorbed = Actual overhead − Absorbed overhead; transfer to Costing P&L A/c; Balance on Factory Overhead Control A/c after absorption. Debit balance = under-absorption; credit balance = over-absorption.
Completed production: Finished Goods Control A/c Dr. To WIP Control A/c; Transfer at total cost of completed units.
Sales: (1) Cost of Sales A/c Dr. To Finished Goods Control A/c (cost of goods sold); (2) Cost of Sales A/c Dr. To Admin/Selling Overhead Control A/c; (3) Costing P&L A/c Dr. To Cost of Sales A/c (total of (1) and (2)); (4) General Ledger Adjustment A/c Dr. To Costing P&L A/c (sales value); Finished Goods is credited only with the cost of goods sold, at cost. Admin and selling overhead reach Cost of Sales through entry (2), not through Finished Goods. The total Cost of Sales is then closed to Costing P&L by entry (3). Sales are shown at selling price and credited to Costing P&L by entry (4).
Selling and administration overhead: Admin/Selling Overhead Control A/c Dr. To General Ledger Adjustment A/c; then Cost of Sales A/c Dr. To Admin/Selling Overhead Control A/c; These are normally charged to Cost of Sales, not WIP.
Costing profit: Costing profit = Sales − Cost of Sales − Under-absorbed overhead (+ over-absorbed overhead); The balance of Costing P&L A/c is transferred to General Ledger Adjustment A/c. A profit is credited to GLA A/c; a loss is debited to GLA A/c.
Closing stock of materials: Opening stock + Purchases − Issues to production − Issues to overheads (indirect) = Closing stock; This is the balance of Stores Ledger Control A/c. Adjust for any returns or losses given.
Work-in-Progress Control A/c: Opening WIP + Direct materials + Direct wages + Direct expenses + Overheads absorbed − Cost of goods completed = Closing WIP; Absorbed overheads, not actual overheads, go to WIP.
Overhead Control A/c balance: Actual overheads (debit) − Overheads absorbed (credit) = Under-absorbed (if debit) or Over-absorbed (if credit); The balance is transferred to Costing P&L. Under-absorption is a debit (loss). Over-absorption is a credit (gain).
Finished Goods Control A/c: Opening FG + Cost of goods completed − Cost of goods sold = Closing FG; Goods are transferred to Cost of Sales at cost, not at selling price.
Costing profit: Sales − Cost of sales − Under-absorbed overheads (or + Over-absorbed overheads); Also deduct selling and distribution costs and administration costs if they are charged through Cost of Sales.
Cost Ledger Control A/c check (non-integral): Closing balance (credit) = Closing stores + Closing WIP + Closing finished goods; Holds when all costing items are closed to Costing P&L and profit is credited to this account. Use it to verify your work.
Key non-integral entries: Purchases: Stores Dr, Cost Ledger Control Cr | Direct issue: WIP Dr, Stores Cr | Indirect issue: Overhead Control Dr, Stores Cr | Wages paid: Wages Control Dr, Cost Ledger Control Cr | Wages charged: WIP Dr and Overhead Control Dr, Wages Control Cr | Absorption: WIP Dr, Overhead Control Cr | Completion: Finished Goods Dr, WIP Cr | Sale: Cost of Sales Dr, Finished Goods Cr; Cost Ledger Control Dr, Costing P&L Cr; Learn this chain. Most problems use only these entries.
Key integrated entries: Purchases: Stores Dr, Creditors Cr | Wages paid: Wages Control Dr, Bank and Deductions Payable Cr | Sales: Debtors Dr, Sales Cr | Non-cash cost such as depreciation: Overhead Control Dr, Provision for Depreciation Cr; Same cost flow as above. Only the credit side differs, because it goes to real financial accounts.

Quick revision

Integral system: one set of books for cost and financial accounting, so no separate reconciliation is needed.
Non-integral system: separate cost and financial books, linked through control accounts.
Cost Ledger Control Account and General Ledger Adjustment Account act as the link between the two sets of books in the non-integral system.
Under non-integral accounting, the cost ledger is a self-balancing set of accounts.
Items only in financial books: going from financial profit to cost profit, add back financial-only charges (income-tax, interest paid) and deduct financial-only incomes (interest, dividend received). Income-tax is an appropriation of profit, not a cost, so it never enters cost accounts.
Abnormal losses are charged to the Costing Profit and Loss Account, not added to the cost of production. They cause a profit difference only if the two sets of books treat them differently.
Stock valuation differences affect the profit of the two sets of books.
Cost books charge absorbed overheads and financial books charge actual overheads. If the under- or over-absorbed overhead is transferred to the Costing Profit and Loss Account, there is no reconciling item. A difference arises only when it is not transferred. In that case, over-absorbed overhead (absorbed more than actual) means cost books charged more than actual, so cost profit is lower than financial profit. Under-absorbed overhead means cost books charged less than actual, so cost profit is higher. From cost profit to financial profit, add over-absorbed overhead and deduct under-absorbed overhead. From financial profit to cost profit, do the reverse: deduct over-absorbed and add under-absorbed overhead.
In a reconciliation, adjust each item in the right direction. Ask whether it increases or decreases profit.
Present entries in order, with a short narration, and show ledger accounts with proper totals and balances.

Common mistakes

Debiting wages net of deductions instead of gross wages to Wages Control A/c. Fix: Debit gross wages to Wages Control. Credit bank for net pay and the deduction accounts for the rest.
Recording sales at cost in the Finished Stock account. Fix: Record sales at selling price against debtors. Record cost of sales separately at cost from Finished Stock.
Adding financial-only expenses to cost profit Fix: Financial books charged the expense and cost books did not, so financial profit is lower. Deduct it when moving from cost to financial profit.
Reversing the direction of over- and under-absorption Fix: Over-absorbed overhead means cost books charged more than the actual, so cost profit is lower on this item. Add it when moving from cost profit to financial profit. Under-absorbed overhead means cost books charged less than actual, so cost profit is higher. Deduct it.
Posting cash, debtors or creditors in the cost ledger Fix: Use General Ledger Adjustment A/c as the other side of every external item.
Taking indirect materials or wages to WIP Fix: Only direct items go to WIP. Indirect items go to Factory Overhead Control.
Debiting actual overheads to WIP instead of absorbed overheads. Fix: Debit actual overheads to Overhead Control. Debit WIP only with the absorbed amount (rate × base). The difference goes to Costing P&L.
Using Bank, Creditors or Sales in non-integral cost books. Fix: In non-integral cost books, use Cost Ledger Control A/c for every entry that would involve a financial account. Use real accounts only in integrated systems.

Exam tips

Learn the difference between the two systems in a table-like list of points: ledgers, reconciliation, duplication, accounts used. A 4 to 5 point answer scores full marks.
In journal entry questions, write narrations and show direct and indirect items separately. Step marks are awarded per entry.
Always compute under- or over-absorbed overhead and transfer it to Costing P&L A/c. Questions often hide this step.
For MCQs, look for the words 'Cost Ledger Control A/c' (non-integral) or 'single set of books' (integral).
In theory questions, give both merits and demerits when asked for an evaluation. Mention that integral accounting needs trained staff and a good chart of accounts.
Write the starting profit first and label it clearly, so the examiner sees your direction.
Use a table-like list with additions and deductions headed separately; step marks follow each correct item.
Read the question for the words 'financial only', 'notional' and 'stock valuation'; each signals a standard adjustment.