Cost Accounting · Cost Book-Keeping

Cost Book-Keeping Problems: Preparing Cost Ledger Accounts

Updated 10 October 2026 · Fact-checked

Cost book-keeping problems ask you to record a period's transactions in cost ledger accounts. In a non-integral system, post each item to control accounts, with the Cost Ledger Control Account as the other side of every outside item. Balance each account, then close to the Costing Profit and Loss Account to find profit.

Understand Preparing Cost Accounts and Ledger Account Problems

A cost book-keeping problem gives you a list of transactions for a period and asks you to show them in double-entry form. The aim is to trace cost from stores to work-in-progress (WIP), to finished goods, and to cost of sales, and then to find profit.

Most exam problems use the non-integral (cost ledger) system. Here the cost accounts are kept apart from the financial books. Items that come from outside the cost records, such as purchases, wages paid, expenses paid and sales, do not have a cost account on the other side. They use the Cost Ledger Control Account (also called the General Ledger Adjustment Account). It works as a mirror of the financial books. Its balance equals the total of all the cost ledger balances.

The main accounts are the Stores Ledger Control Account, Wages Control Account, Factory (Production) Overhead Control Account, Administration and Selling Overhead Control Accounts, WIP Control Account, Finished Goods Control Account and Costing Profit and Loss Account. Each one collects costs on the debit side and sends them on through the credit side.

The flow is simple. Materials and wages go to WIP if direct, and to overhead control if indirect. Factory overhead is absorbed into WIP at a predetermined rate. Any difference between actual and absorbed overhead is under- or over-absorption, and it goes to the Costing Profit and Loss Account. The cost of completed output moves from WIP to Finished Goods. The cost of goods sold moves out of Finished Goods to the Costing Profit and Loss Account. Sales are credited there. The balance is the profit or loss, which you transfer to the Cost Ledger Control Account.

You may also be asked for a statement of cost and profit. This is the same story as a cost sheet: materials consumed, prime cost, factory cost, cost of production, cost of goods sold, cost of sales and profit. If the question gives you ledger balances, build the statement from them.

Key rules to remember

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.

How to solve Preparing Cost Accounts and Ledger Account Problems questions

Use the same routine for any cost ledger question. It keeps each posting in the right account and lets you check the answer at the end.

1Read the whole question and list what is asked: which accounts, or a statement of cost and profit, or both. Note opening balances and closing figures.
2Set up the account headings first, leaving space. Open the Stores, Wages, Factory Overhead, WIP, Finished Goods, Costing P&L and Cost Ledger Control accounts.
3Enter opening balances of stores, WIP and finished goods on the debit side of their accounts. Credit the same total in the Cost Ledger Control Account.
4Post each transaction using its journal entry. Put outside items against Cost Ledger Control and internal transfers between control accounts. Tick each item in the question as you post it.
5Split items into direct and indirect. Direct materials and wages go to WIP. Indirect materials and wages go to Factory Overhead Control. Calculate the absorbed overhead from the rate given.
6Balance each account. The closing figure of stores, WIP and finished goods should match the figures given, or you find the missing one as a balancing figure. Transfer under- or over-absorption to the Costing P&L A/c.
7Post sales and cost of sales to the Costing P&L A/c, find profit, and transfer it to the Cost Ledger Control Account.
8Check: the Cost Ledger Control Account must balance, and its closing balance should equal total closing stores + WIP + finished goods.

Quickest way: T-account flow with running totals

When to use it: Use this when time is short and the question lists many transactions. It works best when you need only a few accounts or one profit figure.

Write the cost flow in one line: Stores → WIP → Finished Goods → Cost of Sales → Profit.
For each account, compute the debit total first, then subtract the credit side to get the closing balance or the missing figure.
Compute cost of production and cost of goods sold using the formula on the side, then check them against the account balances.
Find profit as Sales − Cost of sales ∓ overhead difference. Use it to balance the Cost Ledger Control Account without re-adding every line.
Write short narrations such as 'To Cost Ledger Control A/c' so the examiner can see each posting.

Common mistakes in Preparing Cost Accounts and Ledger Account Problems

Posting purchases or wages paid to a cost account on both sides instead of the Cost Ledger Control Account.
Students copy financial accounting thinking, where cash or creditors would be the other side.
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.
The question lists total issues and total wages together, and students post the whole figure to WIP.
Fix: Split every material issue and wage figure into direct and indirect. Indirect goes to Factory Overhead Control.
Debiting WIP with actual factory overhead instead of the absorbed amount.
Students see actual expenses in the question and move them straight across.
Fix: Absorb at the rate or percentage given. Send the difference to Costing P&L as under- or over-absorption.
Forgetting opening balances in the Cost Ledger Control Account.
Opening stock, WIP and finished goods are entered in their accounts, but the matching credit is skipped.
Fix: Credit Cost Ledger Control A/c with the total of all opening balances. Debit it with the total of closing balances.
Adding administration and selling overhead to WIP or finished goods without being told to.
Students include all overheads in production cost.
Fix: Unless the question says otherwise, treat administration and selling overheads as period costs charged to the Costing P&L A/c via cost of sales.
Leaving out the transfer of profit, so the Cost Ledger Control Account does not balance.
Students stop at the Costing P&L A/c balance.
Fix: Finish with Dr Costing P&L A/c and Cr Cost Ledger Control A/c for the profit. Then test that the control account balances.

Worked examples

Example 1

Opening balances: Stores ₹2,00,000; WIP ₹1,50,000; Finished Goods ₹1,00,000. During the period: materials purchased ₹5,00,000; direct materials issued ₹4,20,000; indirect materials issued ₹30,000; wages paid ₹2,90,000, of which direct ₹2,50,000 and indirect ₹40,000; other factory expenses paid ₹1,10,000; factory overhead absorbed at 70% of direct wages; administration overhead ₹60,000 and selling overhead ₹45,000 paid; sales ₹10,50,000. Closing balances: Stores ₹2,50,000; WIP ₹1,45,000; Finished Goods ₹1,50,000. Prepare the cost ledger accounts in a non-integral system and find the profit.

Show the solution

Opening balances entry: Dr Stores 2,00,000, Dr WIP 1,50,000, Dr Finished Goods 1,00,000; Cr Cost Ledger Control A/c 4,50,000.
Stores Ledger Control A/c: Dr opening 2,00,000 + purchases (from Cost Ledger Control) 5,00,000 = 7,00,000. Cr to WIP 4,20,000, to Factory Overhead Control 30,000, closing balance 2,50,000. Total 7,00,000.
Wages: Dr Wages Control 2,90,000 (Cr Cost Ledger Control). Cr Wages Control: WIP 2,50,000 and Factory Overhead Control 40,000.
Factory Overhead Control A/c: Dr stores 30,000 + wages 40,000 + Cost Ledger Control (other expenses) 1,10,000 = 1,80,000 actual. Absorbed = 70% × 2,50,000 = 1,75,000, credited to WIP. Under-absorbed 5,000 is credited here and debited to Costing P&L A/c. Total credit 1,80,000.
WIP Control A/c: Dr opening 1,50,000 + materials 4,20,000 + wages 2,50,000 + overhead absorbed 1,75,000 = 9,95,000. Cr closing 1,45,000; transfer to Finished Goods 8,50,000. Total 9,95,000.
Finished Goods Control A/c: Dr opening 1,00,000 + from WIP 8,50,000 = 9,50,000. Cr closing 1,50,000; cost of goods sold to Costing P&L 8,00,000. Total 9,50,000.
Administration overhead 60,000 and selling overhead 45,000: Dr their control accounts, Cr Cost Ledger Control. Then transfer both to Costing P&L A/c.
Costing P&L A/c: Dr cost of goods sold 8,00,000; administration 60,000; selling 45,000; under-absorbed overhead 5,000; total debit 9,10,000. Cr sales 10,50,000. Profit = 10,50,000 − 9,10,000 = 1,40,000 (debit side balancing figure), transferred to Cost Ledger Control A/c.
Cost Ledger Control A/c check: Cr opening 4,50,000 + purchases 5,00,000 + wages 2,90,000 + other factory expenses 1,10,000 + administration 60,000 + selling 45,000 + profit 1,40,000 = 15,95,000. Dr sales 10,50,000 + closing stores 2,50,000 + closing WIP 1,45,000 + closing finished goods 1,50,000 = 15,95,000. It balances.

Answer: Cost of production ₹8,50,000; cost of goods sold ₹8,00,000; under-absorbed overhead ₹5,000; profit ₹1,40,000. The Cost Ledger Control Account balances at ₹15,95,000.

Example 2

From the following, prepare a statement of cost and profit and give the entry to close the profit. Raw material: opening ₹80,000; purchases ₹3,20,000; closing ₹60,000. Direct wages ₹1,50,000. Factory overhead is 80% of direct wages. WIP: opening ₹40,000; closing ₹55,000. Administration overhead ₹30,000; selling overhead ₹25,000. Finished goods: opening ₹70,000; closing ₹90,000. Sales ₹7,20,000.

Show the solution

Materials consumed = 80,000 + 3,20,000 − 60,000 = 3,40,000.
Prime cost = 3,40,000 + direct wages 1,50,000 = 4,90,000.
Factory overhead = 80% × 1,50,000 = 1,20,000. Gross factory cost = 4,90,000 + 1,20,000 = 6,10,000.
Adjust WIP: add opening 40,000 and deduct closing 55,000. Cost of production = 6,10,000 + 40,000 − 55,000 = 5,95,000.
Adjust finished goods: cost of goods sold = 70,000 + 5,95,000 − 90,000 = 5,75,000.
Add administration 30,000 and selling 25,000. Cost of sales = 5,75,000 + 55,000 = 6,30,000.
Profit = Sales 7,20,000 − Cost of sales 6,30,000 = 90,000.
Closing entry: Dr Costing P&L A/c ₹90,000; Cr Cost Ledger Control A/c ₹90,000.

Answer: Prime cost ₹4,90,000; cost of production ₹5,95,000; cost of goods sold ₹5,75,000; cost of sales ₹6,30,000; profit ₹90,000, transferred to the Cost Ledger Control Account.

Exam tips

Draw all account headings first and post line by line, ticking each transaction in the question. Cost book-keeping marks are lost mainly through missed items.
Show narrations such as 'By Wages Control A/c' and totals for every account. Step marks are given for correct postings even if the final profit is wrong.
In MCQs, look for the one-line trap: indirect items going to overhead, the Cost Ledger Control Account as the other side, or under-absorption going to Costing P&L.
Use balancing figures to find missing items, such as closing WIP or goods transferred. Then verify that the Cost Ledger Control Account balances.
If the question asks for both ledger accounts and a statement of profit, prepare the statement from the ledger totals so the two profit figures agree.

Practice questions from Cost Book-Keeping

Preparing Cost Accounts and Ledger Account Problems in other exams

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

Preparing Cost Accounts and Ledger Account Problems: frequently asked questions

What is the first step in solving a cost book-keeping problem?

List the accounts you need and write their headings. Then post the opening balances and each transaction in order. This keeps direct and indirect items apart and avoids missed postings.

Why is the Cost Ledger Control Account used?

In the non-integral system, cost accounts are separate from the financial books. Items such as purchases, wages paid and sales have no cost account on the other side. The Cost Ledger Control Account takes that side and keeps the cost ledger a complete double-entry system.

Where do under-absorbed or over-absorbed overheads go?

The difference between actual and absorbed factory overhead is transferred to the Costing Profit and Loss Account. Under-absorption is a debit there and over-absorption is a credit, unless the question gives another treatment.

Do administration and selling overheads go into WIP?

Not unless the question says so. In most exam problems they are treated as period costs and charged to the Costing Profit and Loss Account as part of cost of sales. Read the question for any instruction on treatment.