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Cost and Management Accounting · Cost Accounting Systems

Preparation of Cost Ledger Entries and Problems

Updated 4 October 2026 · Fact-checked

Cost ledger entries record how costs flow from materials, wages and expenses through work in progress and finished goods to cost of sales. Integrated systems keep one set of books. Non-integral systems use a Cost Ledger Control Account as the balancing account. Journalise each flow, post it, then balance.

Understand Preparation of Cost Ledger Entries and Problems

A cost accounting system records the flow of cost from purchase to sale. Every cost first sits in a control account (Stores, Wages, Overheads). It then moves to Work-in-Progress (WIP), then to Finished Goods, then to Cost of Sales. Think of it as a pipeline. Each account is a tank, and each journal entry moves cost from one tank to the next.

In an integrated (integral) system, cost and financial accounts are kept in one set of books. Purchases are debited to Stores and credited to Creditors or Bank directly. There is no separate cost ledger and no reconciliation is needed, because there is only one profit figure.

In a non-integral system, cost accounts are kept separately from the financial books. Cost books record only cost items. They do not have Bank, Creditors, Debtors or Sales as personal or cash accounts. Every entry that would have touched those accounts goes to the Cost Ledger Control Account (also called General Ledger Adjustment Account) instead. This account is the balancing account of the cost books. Its closing balance should equal the total of the cost-side asset balances: stores, WIP and finished goods.

A Costing Profit and Loss Account collects cost of sales, under or over-absorbed overheads and any other costing items, and compares them with sales. In a non-integral system, the profit here may differ from the financial profit. That is why reconciliation is needed.

Most exam questions give a list of transactions plus opening balances. You are asked for journal entries, ledger accounts, a Costing P&L or a closing balance. The skill is routine: classify each item, pick the right debit and credit, post, and balance.

Key rules to remember

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.

How to solve Preparation of Cost Ledger Entries and Problems questions

Use this method for any journal entry or ledger account question on cost accounting systems.

  1. 1Identify the system. Check whether the question says integrated or non-integral. For non-integral, plan to use Cost Ledger Control A/c in place of Bank, Creditors and Debtors.
  2. 2Write down the opening balances. Stores, WIP and Finished Goods balances are debits. In a non-integral system their total is the opening credit of Cost Ledger Control A/c.
  3. 3Number each transaction and classify it: material, wages, expense, overhead, completion, sale or adjustment. Mark each item as direct or indirect.
  4. 4Write the journal entry for each transaction. Use the cost flow chain: Stores or Wages or Expenses, then WIP and Overheads, then Finished Goods, then Cost of Sales, then Costing P&L.
  5. 5Post to the ledger accounts in T-form. Show opening balances first. Show the other side's account name against each entry.
  6. 6Balance each control account. Find closing stores, closing WIP, closing finished goods and the overhead under or over-absorption.
  7. 7Prepare the Costing P&L: sales, less cost of sales, adjusted for under or over-absorption. Then transfer the profit to Cost Ledger Control A/c (non-integral) or to General P&L (integrated).
  8. 8Verify. In a non-integral system, Cost Ledger Control closing balance must equal the sum of closing stores, WIP and finished goods. If it does not, an entry is missing or posted to the wrong side.

Quickest way: Transaction-table method for MCQs and written answers

When to use it: Use it when time is tight, or when the question asks for only one or two balances such as closing WIP or profit.

  1. For MCQs, do not journalise fully. Compute the one account asked for using the formula for that account, such as opening + additions − transfers out.
  2. Remember that only absorbed overhead enters WIP. Actual overhead goes to Overhead Control. Many wrong options are built from this trap.
  3. For profit MCQs, use: Sales − Cost of sales ± overhead difference. Ignore items that never reach Costing P&L.
  4. For written answers, use one numbered line per transaction in the journal. Write the narration briefly. Examiners give step marks for each correct entry.
  5. Draw T-accounts only for the accounts asked. Show opening balance, each posting with its counter-account name, then the closing balance carried down.
  6. Finish with a one-line cross-check, such as Cost Ledger Control balance = stores + WIP + finished goods. Write it down, since it also shows your working.

Common mistakes in Preparation of Cost Ledger Entries and Problems

  • Debiting actual overheads to WIP instead of absorbed overheads.

    Students treat all overheads as a product cost without checking the absorption rate.

    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.

    Students carry over the habit of financial accounting entries.

    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.

  • Transferring finished goods to Cost of Sales at selling price.

    The sales figure is given and looks like the obvious number to use.

    Fix: Transfer at cost. Selling price goes only to the credit side of Costing P&L, against Cost Ledger Control (non-integral) or Debtors (integrated).

  • Forgetting to treat the under or over-absorbed overheads in Costing P&L.

    Students stop after cost of sales and forget the Overhead Control balance.

    Fix: Always balance Overhead Control A/c after absorption. Move under-absorption to the debit and over-absorption to the credit of Costing P&L.

  • Putting indirect materials and indirect wages into WIP.

    Indirect and direct items are not separated when the question gives a combined figure.

    Fix: Split each issue or wage figure into direct and indirect. Direct goes to WIP. Indirect goes to Overhead Control.

  • Ignoring deductions from gross wages in integrated systems.

    Students credit Bank with the gross wages figure.

    Fix: Debit Wages Control with gross wages. Credit Bank with net wages paid and credit PF, ESI or other payables with the deductions.

Worked examples

Example 1

A company maintains non-integral cost accounts. Opening balances: Stores ₹50,000; WIP ₹30,000; Finished Goods ₹40,000. During the period: (i) materials purchased ₹2,00,000; (ii) materials issued: direct ₹1,60,000 and indirect ₹10,000; (iii) wages paid ₹90,000, of which direct ₹70,000 and indirect ₹20,000; (iv) factory overheads incurred ₹50,000; (v) factory overheads absorbed at 80% of direct wages; (vi) cost of goods completed ₹2,90,000; (vii) goods sold for ₹4,50,000, their cost being ₹3,00,000. Prepare the journal entries, find the closing balances and the Costing P&L profit.

Show the solution
  1. Opening credit of Cost Ledger Control A/c = 50,000 + 30,000 + 40,000 = ₹1,20,000.
  2. (i) Stores Ledger Control Dr ₹2,00,000; Cr Cost Ledger Control ₹2,00,000.
  3. (ii) WIP Control Dr ₹1,60,000; Overhead Control Dr ₹10,000; Cr Stores Ledger Control ₹1,70,000.
  4. (iii) Wages Control Dr ₹90,000, Cr Cost Ledger Control ₹90,000. Then WIP Control Dr ₹70,000; Overhead Control Dr ₹20,000; Cr Wages Control ₹90,000.
  5. (iv) Overhead Control Dr ₹50,000; Cr Cost Ledger Control ₹50,000.
  6. (v) Absorbed overhead = 80% × 70,000 = ₹56,000. WIP Control Dr ₹56,000; Cr Overhead Control ₹56,000.
  7. (vi) Finished Goods Control Dr ₹2,90,000; Cr WIP Control ₹2,90,000.
  8. (vii) Cost of Sales Dr ₹3,00,000; Cr Finished Goods Control ₹3,00,000. Sales are recorded once, in the Costing P&L: Cost Ledger Control Dr ₹4,50,000; Cr Costing P&L ₹4,50,000.
  9. Closing stores = 50,000 + 2,00,000 − 1,70,000 = ₹80,000.
  10. Overhead Control: debits 10,000 + 20,000 + 50,000 = ₹80,000; credit ₹56,000; under-absorbed ₹24,000. Transfer: Costing P&L Dr ₹24,000; Cr Overhead Control ₹24,000.
  11. Closing WIP = 30,000 + 1,60,000 + 70,000 + 56,000 − 2,90,000 = ₹26,000.
  12. Closing Finished Goods = 40,000 + 2,90,000 − 3,00,000 = ₹30,000.
  13. Costing P&L, debit side: Cost of Sales ₹3,00,000 (Costing P&L Dr; Cr Cost of Sales) and under-absorbed overheads ₹24,000 = ₹3,24,000. Credit side: Sales ₹4,50,000. Net profit = 4,50,000 − 3,24,000 = ₹1,26,000.
  14. Transfer the net profit: Costing P&L Dr ₹1,26,000; Cr Cost Ledger Control ₹1,26,000. Costing P&L now balances: debits 3,00,000 + 24,000 + 1,26,000 = ₹4,50,000 = sales credit. The profit is the balancing figure of the sales credit, not an extra amount.
  15. Check: Cost Ledger Control credits = 1,20,000 (opening) + 2,00,000 + 90,000 + 50,000 + 1,26,000 (profit) = ₹5,86,000. Debit (sales) ₹4,50,000. Closing credit balance = 5,86,000 − 4,50,000 = ₹1,36,000 = 80,000 + 26,000 + 30,000. It agrees.

Answer: Closing stores ₹80,000; closing WIP ₹26,000; closing finished goods ₹30,000; under-absorbed overheads ₹24,000; Costing P&L profit ₹1,26,000. Cost Ledger Control closing balance ₹1,36,000 (credit).

Example 2

A company follows an integrated accounting system. There are no opening balances. During the month: (i) materials purchased on credit ₹1,00,000; (ii) materials issued: direct ₹70,000 and indirect ₹8,000; (iii) gross wages ₹60,000, of which ₹5,000 is deducted for employees' contributions and the rest paid by bank; wages are direct ₹45,000 and indirect ₹15,000; (iv) depreciation on factory plant ₹12,000; (v) factory overheads absorbed ₹40,000; (vi) goods completed at cost ₹1,40,000; (vii) credit sales ₹1,80,000, cost of goods sold ₹1,20,000. Pass journal entries and find the profit.

Show the solution
  1. (i) Stores Ledger Control Dr ₹1,00,000; Cr Creditors ₹1,00,000.
  2. (ii) WIP Control Dr ₹70,000; Factory Overhead Control Dr ₹8,000; Cr Stores Ledger Control ₹78,000.
  3. (iii) Wages Control Dr ₹60,000; Cr Bank ₹55,000; Cr Employees' Deductions Payable ₹5,000.
  4. Then WIP Control Dr ₹45,000; Factory Overhead Control Dr ₹15,000; Cr Wages Control ₹60,000.
  5. (iv) Factory Overhead Control Dr ₹12,000; Cr Provision for Depreciation ₹12,000.
  6. (v) WIP Control Dr ₹40,000; Cr Factory Overhead Control ₹40,000.
  7. (vi) Finished Goods Control Dr ₹1,40,000; Cr WIP Control ₹1,40,000.
  8. (vii) Debtors Dr ₹1,80,000; Cr Sales ₹1,80,000. Cost of Sales Dr ₹1,20,000; Cr Finished Goods Control ₹1,20,000.
  9. Actual overheads = 8,000 + 15,000 + 12,000 = ₹35,000. Absorbed ₹40,000. Over-absorbed ₹5,000. Entry: Factory Overhead Control Dr ₹5,000; Cr Costing P&L ₹5,000.
  10. Closing entries: Costing P&L Dr ₹1,20,000; Cr Cost of Sales ₹1,20,000. Sales Dr ₹1,80,000; Cr Costing P&L ₹1,80,000.
  11. Costing P&L: credits = sales 1,80,000 + over-absorption 5,000 = ₹1,85,000; debit = cost of sales ₹1,20,000. Profit = 1,85,000 − 1,20,000 = ₹65,000.
  12. Transfer the profit: Costing P&L Dr ₹65,000; Cr General P&L (retained earnings) ₹65,000. Costing P&L is now closed.
  13. Closing balances: stores 1,00,000 − 78,000 = ₹22,000; WIP 70,000 + 45,000 + 40,000 = 1,55,000, less 1,40,000 = ₹15,000; finished goods 1,40,000 − 1,20,000 = ₹20,000.

Answer: Profit = ₹65,000, transferred to General P&L. Closing stores ₹22,000; closing WIP ₹15,000; closing finished goods ₹20,000; over-absorbed overheads ₹5,000.

Exam tips

  • Write a short note on your system choice at the top, such as 'non-integral: Cost Ledger Control used'. It shows the examiner your approach even if a figure goes wrong.
  • Number every journal entry so it matches the transaction number in the question. This makes marking easy and helps you spot missed items.
  • In MCQs, check whether the question asks for actual or absorbed overheads, and for closing figures or transfers. Many wrong options are traps on this one point.
  • Always end with a check in non-integral problems: Cost Ledger Control closing balance equals the sum of stores, WIP and finished goods.
  • If the question mentions a financial profit, expect a follow-up on reconciliation. Keep your Costing P&L neat so the differences are easy to trace.

Practice questions from Cost Accounting Systems

Preparation of Cost Ledger Entries and Problems in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Preparation of Cost Ledger Entries and Problems: frequently asked questions

What is the difference between integrated and non-integral accounting in problems?

In an integrated system, one set of books carries both cost and financial entries, so you use Bank, Creditors and Debtors directly. In a non-integral system, cost books are separate and use Cost Ledger Control A/c instead of those accounts. The cost flow through stores, wages, WIP and finished goods is the same in both.

Where does the Cost Ledger Control Account balance come from?

Its opening balance equals the opening stores, WIP and finished goods. It is credited with cost items such as purchases, wages paid and expenses incurred. It is debited with sales and credited with profit. The closing balance equals the cost-side assets.

Where do I show under-absorbed or over-absorbed overheads?

Balance the Overhead Control Account after posting absorption. Move a debit balance (under-absorption) to the debit of Costing P&L. Move a credit balance (over-absorption) to the credit of Costing P&L.

Do I need to reconcile cost and financial profit in this topic?

Only if the question asks. Integrated systems need no reconciliation, because there is only one profit. For non-integral systems, expect a separate reconciliation question that explains the differences between the two profits.