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CMA Final · Strategic Cost Management · Back Flush Accounting

Mehra Gears uses back flush accounting with trigger points at (1) purchase of raw materials and (2) sale of finished goods; no WIP or finished goods inventory account is maintained. Standard cost per unit is Rs 400 (materials Rs 260, conversion Rs 140). During April, materials purchased were Rs 13,00,000, actual conversion costs were Rs 7,50,000, and 5,000 units were sold. Which entry correctly records cost of goods sold at standard?

Debit COGS Rs 20,00,000, credit raw material Rs 13,00,000 and conversion cost applied Rs 7,00,000. Back flushing charges standard cost of units sold, 5,000 x Rs 400. The Rs 50,000 excess of actual conversion cost over applied remains as under-applied overhead, not part of COGS.

  1. ADebit COGS Rs 20,00,000; credit Raw Material inventory Rs 13,00,000 and Conversion cost control Rs 7,00,000Correct
  2. BDebit COGS Rs 20,00,000; credit Raw Material inventory Rs 13,00,000 and Conversion cost control Rs 7,50,000
  3. CDebit COGS Rs 20,50,000; credit Raw Material inventory Rs 13,00,000 and Conversion cost control Rs 7,50,000
  4. DDebit COGS Rs 13,00,000; credit Raw Material inventory Rs 13,00,000

Explanation

COGS at standard = 5,000 x Rs 400 = Rs 20,00,000. Materials component = 5,000 x 260 = Rs 13,00,000; conversion applied = 5,000 x 140 = Rs 7,00,000. The Rs 50,000 excess of actual over applied conversion cost remains as under-applied conversion cost. Option 2 wrongly credits actual conversion cost, ignoring that COGS uses standard.

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