CMA Intermediate · Cost Accounting

Integrated Accounting System: formula sheet

Full chapter guide

Key formulas

Integrated system: what it removes: One set of books → one profit figure → no reconciliation statement; Because both records come from the same entries, the profit cannot differ.
Non-integrated system: balancing account: Cost Ledger Control A/c (General Ledger Adjustment A/c) represents all financial accounts in the cost books; Cost items brought into the cost books (purchases, wages, expenses) are debited to their cost accounts (stores, wages, overheads). The Cost Ledger Control A/c is credited with them, and also with profit. It is debited with sales (revenue) and with loss. For sales, debit Cost Ledger Control A/c and credit Costing Profit and Loss A/c. The net balance is carried down.
Typical integrated entry for material purchase: Stores Ledger Control A/c Dr. To Creditors / Bank A/c; One entry serves both financial and cost needs.
Typical integrated entry for sales: Debtors A/c Dr. To Sales A/c; and Cost of Sales A/c Dr. To Finished Goods Control A/c; Sales at selling price and cost of sales at cost, both in the same books.
Purchase of materials: Stores Ledger Control A/c Dr; To Creditors / Bank; Record at the cost of purchase, including any cost-related expenses the question tells you to include.
Issue of materials: Direct: WIP Control A/c Dr; Indirect: Factory Overhead Control A/c Dr; To Stores Ledger Control A/c; Indirect materials for the office go to Administration Overhead Control instead.
Payment of wages: Wages Control A/c (gross) Dr; To Bank (net); To PF / ESI / TDS payable (deductions); Debit the gross wages, not the net amount paid.
Allocation of wages: WIP Control (direct) Dr; Factory OH Control (indirect) Dr; Admin OH Control Dr; To Wages Control A/c; The Wages Control account must close to nil after the analysis.
Absorption of factory overhead: WIP Control A/c Dr; To Factory Overhead Absorbed A/c; Amount = predetermined rate × actual base, such as direct wages or machine hours.
Closing the absorbed account to control: Factory Overhead Absorbed A/c Dr; To Factory Overhead Control A/c; Pass this before the under or over absorption entry. It closes the Absorbed account, so Factory Overhead Control shows only the difference.
Under absorption: Costing Profit and Loss A/c Dr; To Factory Overhead Control A/c; Actual overhead exceeds absorbed overhead. This is a loss. Pass it after closing the Absorbed account to Control.
Over absorption: Factory Overhead Control A/c Dr; To Costing Profit and Loss A/c; Absorbed overhead exceeds actual overhead. This is a gain. Pass it after closing the Absorbed account to Control.
Under / over absorption amount: Actual overhead − Absorbed overhead; A positive result is under absorption. A negative result is over absorption.
Transfer of completed output: Dr Finished Goods Control A/c; Cr Work-in-Progress Control A/c (at cost of completed units); Cost of completed units = Opening WIP + costs added − Closing WIP − abnormal loss.
Cost of goods sold entry: Dr Cost of Sales A/c; Cr Finished Goods Control A/c (at cost); Add selling and distribution overheads to Cost of Sales, crediting the overhead control account.
Sales entry: Dr Debtors/Bank A/c; Cr Sales A/c (at selling price); Pass this in addition to the cost entry, not instead of it.
Abnormal loss entry: Dr Abnormal Loss A/c; Cr WIP Control A/c. Then Dr Stores/Bank (scrap value); Cr Abnormal Loss A/c; Net balance is written off: Dr Costing P&L A/c; Cr Abnormal Loss A/c.
Closing to profit: Dr Sales A/c; Cr Costing P&L A/c. Dr Costing P&L A/c; Cr Cost of Sales A/c; Sales is debited (closed) and Costing P&L credited. Cost of Sales is credited (closed) and Costing P&L debited. Balance of Costing P&L is profit (credit) or loss (debit).
Purchase of materials on credit: Stores Ledger Control A/c Dr. ; To Creditors (or Bank) A/c; Stores is debited at cost. Creditors are credited. Returns to suppliers reverse this entry.
Issue of direct materials: Work-in-Progress Control A/c Dr. ; To Stores Ledger Control A/c; Indirect material goes to Factory Overhead Control A/c instead. Abnormal loss of material goes to Costing P&L A/c.
Wages paid or payable: Wages Control A/c Dr. ; To Bank (or Wages Payable) A/c; Use the gross wages. Deductions such as PF and TDS are credited to their own liability accounts.
Allocation of wages: WIP Control A/c Dr. (direct) ; Factory Overhead Control A/c Dr. (indirect) ; Costing P&L A/c Dr. (abnormal idle time) ; To Wages Control A/c; Wages Control A/c should have a nil balance after allocation.
Overhead incurred and absorbed: Incurred: Factory Overhead Control A/c Dr. ; To Bank etc. | Absorbed: WIP Control A/c Dr. ; To Factory Overhead Control A/c; The balance left in Factory Overhead Control is under or over absorption. Transfer it to Costing P&L A/c.
Completion of production: Finished Goods Control A/c Dr. ; To WIP Control A/c; Transfer at the cost of goods completed.
Sale of goods: Debtors A/c Dr. (sales value) ; To Sales A/c | Cost of Sales A/c Dr. ; To Finished Goods Control A/c (cost); Two entries are needed: one at selling price and one at cost.
Closing of cost of sales and sales: Costing P&L A/c Dr. ; To Cost of Sales A/c | Sales A/c Dr. ; To Costing P&L A/c; Administration and selling overheads are debited to Cost of Sales A/c or directly to Costing P&L A/c, as the question's treatment requires.
Closing balance of an inventory account: Closing balance = Opening balance + Debits during the period − Credits during the period; The closing balances of stores, WIP and finished goods go to the balance sheet.
Cost profit to financial profit: Financial profit = Cost profit + Income only in financial books − Expenses only in financial books + Over-absorbed overhead − Under-absorbed overhead + Excess of cost-book charges over financial-book charges (e.g. notional costs) − Excess of financial-book charges over cost-book charges + Excess of financial closing stock over cost closing stock − Excess of financial opening stock over cost opening stock; Stock sign rule: for closing stock, add the excess of financial closing stock over cost closing stock, and deduct it if the financial closing stock is lower. For opening stock use the opposite sign: deduct the excess of financial opening stock over cost opening stock, and add it if the financial opening stock is lower. Treat every other item by asking: does it raise or lower the profit in the books I am moving to?
Financial profit to cost profit: Cost profit = Financial profit + Expenses only in financial books − Income only in financial books + Under-absorbed overhead − Over-absorbed overhead ± Stock valuation differences ± Notional items and depreciation differences; Exactly the reverse of the previous rule, so every sign flips. Going from cost profit to financial profit, add over-absorbed overhead and deduct under-absorbed overhead. Going from financial profit to cost profit, add under-absorbed overhead and deduct over-absorbed overhead.
Memorandum reconciliation account rule: Debit: items that reduce profit in the target books. Credit: items that increase profit in the target books. Opening figure is the profit of the starting books.; Balancing figure should equal the profit in the other set of books. If it does not, an item is missing or has a wrong sign.
Stock difference effect: Higher closing stock → higher profit. Higher opening stock → lower profit.; Use this to sign stock valuation differences correctly.
Overhead absorption difference: Under-absorption = Actual overhead − Absorbed overhead (if positive). Over-absorption = Absorbed overhead − Actual overhead (if positive).; Financial books bear the actual overhead. If the cost books absorb less than the actual overhead (under-absorption), cost profit is higher, so deduct it from cost profit to reach financial profit. If the cost books absorb more (over-absorption), cost profit is lower, so add it to cost profit to reach financial profit. In the reverse direction, from financial profit to cost profit, add under-absorbed overhead and deduct over-absorbed overhead.

Quick revision

In an integrated system, one set of books holds cost and financial records, so no reconciliation is needed.
Non-integrated systems keep separate cost and financial books and need reconciliation of profits.
Purchase of materials: Stores Ledger Control A/c Dr to Creditors or Cash A/c.
Issue of direct materials: Work-in-Progress Control A/c Dr to Stores Ledger Control A/c.
Issue of indirect materials: Factory Overhead Control A/c Dr to Stores Ledger Control A/c.
Wages paid are first debited to Wages Control A/c, then split into direct (to WIP) and indirect (to overhead control).
Factory overhead absorbed: WIP Control A/c Dr to Factory Overhead Control A/c.
The balance left in an overhead control account is under- or over-absorbed overhead, transferred to Costing Profit and Loss A/c.
Completed output moves from WIP Control to Finished Goods Control at cost.
Cost of goods sold is transferred from Finished Goods Control to Cost of Sales A/c, and sales are credited at selling price.
In reconciliation, items that appear only in one set of books, such as interest or income tax, explain profit differences.
Differences in stock valuation and in overhead treatment are the other common reasons for profit differences.

Common mistakes

Saying integrated accounts need a reconciliation statement. Fix: Remember that one set of books gives one profit. Reconciliation belongs to separate books only.
Using a Cost Ledger Control Account in an integrated system. Fix: Use Cost Ledger Control only for non-integrated books. In integrated books, credit creditors, bank or the relevant control account.
Debiting net wages instead of gross wages to Wages Control. Fix: Always debit the gross wages. Credit bank with the net amount and credit each deduction to its own liability account.
Debiting indirect materials to WIP. Fix: Check the question for words like 'indirect', 'consumables' or 'factory repairs'. These go to Factory Overhead Control.
Recording sales at cost instead of selling price. Fix: Pass two entries on a sale: Debtors to Sales at selling price, and Cost of Sales to Finished Goods at cost.
Transferring the full WIP cost to Finished Goods even when there is an abnormal loss. Fix: Take out the abnormal loss first by crediting WIP. Only the cost of good completed units goes to Finished Goods.
Treating indirect material or indirect wages as direct and debiting them to WIP Fix: Split every issue and every wage figure into direct, indirect and abnormal. Direct goes to WIP, indirect to Factory Overhead Control, abnormal to Costing P&L.
Leaving under or over absorbed overhead in the Factory Overhead Control A/c Fix: Always balance the Factory Overhead Control A/c. Debit balance means under absorption and goes to the debit of Costing P&L. Credit balance means over absorption and goes to the credit.
Adding a financial expense to cost profit when moving to financial profit. Fix: Always ask which way you are moving. Going from cost profit to financial profit, an expense only in financial books is deducted.
Including appropriations such as dividend paid or transfer to reserve in the reconciliation as if they were normal expenses without noting their nature. Fix: Treat them as items only in financial books. Include them only if the starting profit is before appropriation, and follow the profit definition given in the question.

Exam tips

Start every difference question with the one-line anchor: one set of books versus two, and say reconciliation is not needed in the integrated system.
In entry questions, write the narration only if time permits, but always show each ledger account with a balancing figure so you earn step marks.
Learn the standard control account names: Stores Ledger Control, Wages Control, Works Overhead Control, WIP Control, Finished Goods Control, Cost of Sales.
In MCQs, check whether the question says integrated or non-integrated before reading the options; the trap is often a feature of the other system.
For advantage or limitation questions, give four to five points with one explaining phrase each, rather than a bare list.
In the MCQ section, work out only the debit account. The first option that debits the correct control account usually decides the answer.
In written answers, put the account names in full (for example, Wages Control A/c) and add a one-line narration. This earns step marks even if a figure is wrong.
Show working for the gross wages, net payment and absorbed overhead separately, so the examiner can give partial marks.