Cost Book-Keeping: formula sheet

Key formulas

Non-integral entry rule

Dr. Cost control account / Cr. Cost Ledger Control A/c, for items arising outside the cost books

Purchases, wages paid and expenses incurred are credited to Cost Ledger Control A/c. Internal transfers between cost accounts do not touch it.

Stores Control A/c balance

Closing stock = Opening stock + Purchases + Returns from shop floor − Issues − Returns to supplier − Losses

The balance must equal the total of all Stores Ledger account balances.

WIP Control A/c balance

Closing WIP = Opening WIP + Direct material + Direct labour + Direct expenses + Overhead absorbed − Cost of goods completed

Use cost of production transferred to Finished Goods Control A/c.

Finished Goods Control A/c balance

Closing finished goods = Opening + Cost of production transferred − Cost of goods sold

Cost of goods sold is transferred to Costing Profit and Loss A/c.

Costing profit

Costing profit = Sales − Cost of goods sold − Under-absorbed overheads (+ over-absorbed overheads) − Administration and selling overheads where not absorbed

Sales are credited to Costing P&L and debited to Cost Ledger Control A/c. Adjust the overhead difference as the question directs.

Trial balance check

Total debit balances of cost ledger = Total credit balances of cost ledger

Cost Ledger Control A/c normally carries a credit balance equal to the net total of the debit balances of the other cost accounts.

Non-integral: key control account

Cost Ledger Control (General Ledger Adjustment) A/c is credited for materials purchased, wages and expenses, for opening balances of the cost-book asset accounts, and for profit transferred from Costing P&L A/c. It is debited for sales (Dr Cost Ledger Control A/c, Cr Costing P&L A/c), for closing balances of the cost-book asset accounts, and for loss transferred from Costing P&L A/c. Opening balances: Dr Stores Ledger Control, WIP Control and Finished Goods Control; Cr Cost Ledger Control A/c. Closing balances: Dr Cost Ledger Control A/c; Cr Stores Ledger Control, WIP Control and Finished Goods Control.

It is a cost-book account only. It stands in for all the financial accounts, such as cash, creditors and debtors, that sit outside the cost books.

Materials purchased (non-integral)

Dr Stores Ledger Control A/c; Cr Cost Ledger Control A/c

In the financial books the entry is Dr Purchases, Cr Creditors/Cash. The two entries are made in separate books.

Materials purchased (integral)

Dr Stores Control A/c; Cr Creditors/Bank A/c

A single entry. No Cost Ledger Control account appears.

Wages (integral)

Dr Wages Control A/c; Cr Bank A/c (and Cr Provident Fund, Employees' State Insurance or TDS payable for deductions). Then Dr WIP Control (direct) and Dr Overhead Control (indirect); Cr Wages Control

Wages Control should be nil after allocating direct and indirect wages.

Overheads (integral)

Dr Overhead Control A/c; Cr Bank/Creditors/Provision. Absorption: Dr WIP Control; Cr Overhead Control. Balance = under or over absorption

Transfer under or over absorption to Costing P&L A/c, unless the question says otherwise. Under-absorbed overhead (actual more than absorbed): Dr Costing P&L A/c, Cr Overhead Control A/c. Over-absorbed overhead (absorbed more than actual): Dr Overhead Control A/c, Cr Costing P&L A/c.

Cost of production and sales (integral system)

Dr Finished Goods Control; Cr WIP Control. On sale, two separate entries: (1) Dr Debtors; Cr Sales. (2) Dr Cost of Sales; Cr Finished Goods Control.

Sales is at selling price. Cost of sales is at cost. Cost of Sales transferred: Dr Costing P&L A/c, Cr Cost of Sales A/c. Sales transferred: Dr Sales A/c, Cr Costing P&L A/c. These entries are for the integral system only.

Cost of production and sales (non-integral system)

Dr Finished Goods Control; Cr WIP Control. On sale, in the cost books: (1) Dr Cost Ledger Control A/c; Cr Costing P&L A/c at selling price. (2) Dr Costing P&L A/c; Cr Finished Goods Control A/c at cost.

There is no Debtors or Sales account in the cost books. Debtors and Sales are recorded in the financial books (Dr Debtors, Cr Sales).

Purchase of materials

Stores Ledger Control A/c Dr. To Cost Ledger Control A/c (or Creditors in integral system)

Use the actual credit account named in the question.

Issue of material

WIP Control A/c Dr. (direct) and Factory Overhead Control A/c Dr. (indirect) To Stores Ledger Control A/c

Material returned to stores reverses this entry.

Wages paid

Wages Control A/c Dr. To Cost Ledger Control A/c (or Bank in integral system)

Wages Control collects the gross wages before the split.

Allocation of wages

WIP Control A/c Dr. (direct) and Factory Overhead Control A/c Dr. (indirect) To Wages Control A/c

Wages Control should close with nil balance after allocation.

Overheads incurred

Factory / Administration / Selling and Distribution Overhead Control A/c Dr. To Cost Ledger Control A/c (or Bank, Creditors)

Use a separate control account for each group.

Absorption of overheads

WIP Control A/c Dr. To Factory Overhead Control A/c; Finished Goods Control A/c Dr. To Administration Overhead Control A/c; Cost of Sales A/c Dr. To Selling Overhead Control A/c

Administration and selling treatment may differ if the question says so.

Under-absorption

Costing Profit and Loss A/c Dr. To Factory Overhead Control A/c

Actual overhead exceeds absorbed overhead.

Over-absorption

Factory Overhead Control A/c Dr. To Costing Profit and Loss A/c

Absorbed overhead exceeds actual overhead.

Absorbed overhead

Absorbed overhead = Predetermined rate × Actual base (hours, wages, units)

Compare with actual overhead to find the under or over absorption.

Basic idea

Profit as per cost books ± items of difference = Profit as per financial books

You can also go the other way, from financial profit to cost profit. Reverse every direction if you do.

Items only in financial books (starting from cost profit)

Add income only in financial books; deduct expenses and losses only in financial books

Examples: add interest or dividend received and profit on sale of assets. Deduct interest paid, donations, goodwill written off and loss on sale of assets.

Items only in cost books (starting from cost profit)

Add notional charges made only in cost books; deduct notional income only in cost books

Notional rent or interest on own capital lowered cost profit, so it is added back to reach financial profit.

Overhead absorption (starting from cost profit)

Add over-absorbed overhead; deduct under-absorbed overhead

Over-absorption = absorbed more than actual. Cost books were charged too much, so cost profit was too low.

Stock valuation (starting from cost profit)

Add: higher opening stock or lower closing stock in cost books. Deduct: lower opening stock or higher closing stock in cost books

Ask which book shows the higher profit. Higher closing stock or lower opening stock raises profit.

Memorandum account placement

Credit side: cost profit and items that raise financial profit. Debit side: items that reduce financial profit. Balancing figure = financial profit

If the cost books show a loss, it goes on the debit side.

Purchase of materials

Dr Stores Ledger Control A/c; Cr Cost Ledger Control A/c

Applies in the non-integral system. Purchases are recorded at cost.

Issue of direct material

Dr WIP Control A/c; Cr Stores Ledger Control A/c

Indirect material issued goes to Dr Factory Overhead Control A/c instead.

Wages

Dr Wages Control A/c; Cr Cost Ledger Control A/c. Then Dr WIP (direct) and Dr Overhead Control (indirect); Cr Wages Control A/c

Wages Control A/c must show nil balance after allocation, unless wages are outstanding.

Absorption of factory overhead

Dr WIP Control A/c; Cr Factory Overhead Control A/c (absorbed amount)

Absorbed amount = rate × base, for example % of direct wages.

Under- or over-absorbed overhead

Actual overhead − Absorbed overhead = Under-absorption (if positive)

Under-absorption: Dr Costing P&L A/c, Cr Overhead Control A/c. Over-absorption: the reverse.

Transfer of completed output

Dr Finished Goods Control A/c; Cr WIP Control A/c (cost of production)

Cost of production = Opening WIP + Materials + Wages + Absorbed factory overhead − Closing WIP.

Cost of goods sold

Opening FG + Cost of production − Closing FG

Credit Finished Goods Control A/c and debit Costing P&L A/c.

Sales and profit

Dr Cost Ledger Control A/c; Cr Costing P&L A/c (sales). Profit: Dr Costing P&L A/c; Cr Cost Ledger Control A/c

Profit = Sales − Cost of sales ∓ under/over-absorption.

Quick revision

• Non-integral system keeps separate cost and financial books, linked by the Cost Ledger Control Account.
• Integral system uses one set of books, so there is no control account and no reconciliation.
• Material issued to production: debit Work-in-Progress Control, credit Stores Ledger Control.
• Indirect material issued: debit Overhead Control, credit Stores Ledger Control.
• Wages: gross wages go to Wage Control, then direct wages to Work-in-Progress and indirect wages to Overhead Control.
• Overheads absorbed are debited to Work-in-Progress and credited to Overhead Control.
• Under-absorbed overhead means actual is more than absorbed; over-absorbed means absorbed is more than actual.
• Items of pure financial nature, such as interest received or income-tax paid, are not in cost accounts.
• In reconciliation, start with the profit of one set of books and adjust each difference in the correct direction.
• Starting from financial profit, add items that make cost profit higher (for example, items in cost books but not in financial books that add to profit) and deduct items that make it lower. Starting from cost profit, do the reverse.
• Stock valuation differences: other things equal, a higher closing stock valuation gives a higher profit, and a higher opening stock valuation has the opposite effect, giving a lower profit.
• Balance every ledger account and check that the control account totals agree with the subsidiary records.

Common mistakes

• Crediting Cost Ledger Control A/c for internal transfers such as materials issued to WIP. Fix: Use Cost Ledger Control only when the other side of the entry lies outside the cost books. Issues to production go Dr. WIP Control, Cr. Stores Control.
• Debiting indirect materials or indirect wages to WIP Control. Fix: Separate direct from indirect first. Only direct goes to WIP. Indirect goes to Overhead Control.
• Using Cost Ledger Control A/c in an integral system. Fix: In integral accounts, credit Bank, Creditors or the real financial account. Cost Ledger Control appears only in the non-integral system.
• Recording sales at cost in the Sales account and Debtors. Fix: Pass two entries: Dr Debtors, Cr Sales at selling price; and Dr Cost of Sales, Cr Finished Goods at cost.
• Debiting WIP for indirect material or indirect wages. Fix: Only direct material and direct wages go to WIP. Indirect items go to Factory Overhead Control and reach WIP only through absorption.
• Posting wages directly to WIP without Wages Control. Fix: Show Wages Control A/c Dr. on payment, then allocate from it. Examiners give marks for the control step.
• Adding under-absorbed overhead and deducting over-absorbed overhead when starting from cost profit. Fix: Remember that under-absorbed means cost books charged too little, so cost profit is too high and needs a deduction. Over-absorbed is added. Reverse both if you start from financial profit.
• Getting the direction wrong for opening and closing stock. Fix: Higher closing stock raises profit. Higher opening stock lowers profit. Decide which book has the higher profit, then add or deduct accordingly.
• Posting purchases or wages paid to a cost account on both sides instead of the Cost Ledger Control Account. Fix: In a non-integral system, any item with no cost account on the other side goes to Cost Ledger Control A/c. Cash, creditors and bank do not appear in the cost ledger.
• Charging indirect materials and indirect wages to WIP. Fix: Split every material issue and wage figure into direct and indirect. Indirect goes to Factory Overhead Control.

Exam tips

• Most questions ask for control accounts, journal entries or a trial balance. Check which one is asked before you start, and give only that.
• Always write the account name in full, such as Stores Ledger Control A/c, and add a one-line narration to each journal entry. Step marks depend on a clear layout.
• For MCQs, the usual traps are what the Cost Ledger Control A/c is called, which entries pass through it, and the difference between control and subsidiary ledgers. Learn these three points well.
• Keep a quick check on every answer: the trial balance must agree, and each control account must equal the total of its subsidiary ledger.
• If a theory part appears, give the difference between cost ledger and general ledger in two or three clear points, then support it with a short example.
• Read the question for the word integral, integrated or non-integral. The credit side of most entries changes with it.
• Write a short narration under each entry. Narrations help the examiner see your logic when a figure is wrong.
• For theory, give merits and demerits in separate bullet lists, and add a one-line definition of each system first.