integrated and non integrated system of accounting
TRANSCRIPT
INTEGRATED AND NON INTERATED SYSTEM OF ACCOUNTS
CHAPTER 1 - COST ACCOUNTING SYSTEM
1.1 INTRODUCTION
Cost accounting is a process of collecting, analyzing, summarizing and evaluating
various alternative courses of action. Its goal is to advise the management on the most
appropriate course of action based on the cost efficiency and capability. Cost accounting
provides the detailed cost information that management needs to control current
operations and plan for the future.[1]
Since managers are making decisions only for their own organization, there is no need for
the information to be comparable to similar information from other organizations.
Instead, information must be relevant for a particular environment. Cost accounting
information is commonly used in financial accounting information, but its primary
function is for use by managers to facilitate making decisions.
Unlike the accounting systems that help in the preparation of financial reports
periodically, the cost accounting systems and reports are not subject to rules and
standards like the Generally Accepted Accounting Principles. As a result, there is wide
variety in the cost accounting systems of the different companies and sometimes even in
different parts of the same company or organization. A cost accounting system is a
system designed for managers to help them make decisions and includes; input
measurement basis, inventory valuation method, cost accumulation method and cost flow
assumption. The type of costs that come into an inventory may be pure historical costing
or standard costing.
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DIFINITION OF COST ACCOUTING SYSTEM
Meaning & Definition Cost- “the amount of expenditure (actual or notional) incurred on,
or attributable to a specified thing or activity”-CIMA, London Costing-”the techniques
and processes of ascertaining cost”-CIMA, London
Cost Accounting “Cost Accounting is the application of accounting and costing
principles, methods and techniques in the ascertainment of costs and the analysis of
savings and/or excesses as compared with previous experience or with standards”-CIMA,
London
1.2IMPORTANCE OF COST ACCOUNTING
The limitation of financial accounting has made the management to realize the
importance of cost accounting. The importance of cost accounting is as follows:
1. Importance to Management
Cost accounting provides invaluable help to management. It is difficult to indicate
where the work of cost accountant ends and managerial control begins. The
advantages are as follows:
Helps in ascertainment of cost
Cost accounting helps the management in the ascertainment of cost of
process, product, Job, contract, activity, etc., by using different techniques
such as Job costing and Process costing.
Aids in Price fixation
By using demand and supply, activities of competitors, market condition to
a great extent, also determine the price of product and cost to the producer
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does play an important role. The producer can take necessary help from his
costing records.
Helps in Cost reduction
Cost can be reduced in the long-run when cost reduction program me and
improved methods are tried to reduce costs.
Elimination of wastage
As it is possible to know the cost of product at every stage, it becomes
possible to check the forms of waste, such as time and expenses etc., are in
the use of machine equipment and material.
Helps in identifying unprofitable activities
With the help of cost accounting the unprofitable activities are identified, so
that the necessary correct action may be taken.
Helps in checking the accuracy of financial account
Cost accounting helps in checking the accuracy of financial account with
the help of reconciliation of the profit as per financial accounts with the
profit as per cost account.
Helps in fixing selling Prices
It helps the management in fixing selling prices of product by providing
detailed cost information.
2. Importance to Employees
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Worker and employees have an interest in which they are employed. An efficient
costing system benefits employees through incentives plan in their enterprise, etc.
As a result both the productivity and earning capacity increases.
3. Cost accounting and creditors
Suppliers, investor’s financial institution and other moneylenders have a stake in
the success of the business concern and therefore are benefited by installation of
an efficient costing system. They can base their judgment about the profitability
and prospects of the enterprise upon the studies and reports submitted by the cost
accountant.
4. Importance to National Economy
An efficient costing system benefits national economy by stepping up the
government revenue by achieving higher production. The overall economic
developments of a country take place due to efficiency of production.
5. Data Base for operating policy
Cost Accounting offers a thoroughly analyzed cost data which forms the basis of
formulating policy regarding day to day business.
1.3ADVANTAGES OF COST ACCOUNTING
The science of cost accounting has developed primarily to serve the needs of the
management. The techniques of cost accounting are the best tools by which management
may conduct a business towards profitable operations. It is so much allied to management
that it is difficult to indicate where the cost accounting ends and managerial control
begins.
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Cost Accounting has many advantages. The following are the most important advantages
of a good cost accounting system:
1. Profitable and unprofitable Activities:
In Cost Accounting profitable and unprofitable activities are disclosed. Management can
take steps to eliminate or to reduce those activities from which little or no profit is
earned. It can change the method of production in order to render such activities more
profitable.
2. Classification and Subdivision of costs:
Costs are accumulated and classified by every possible division of business. In a good
costing system data regarding costs by functions, departments, processes, jobs or orders,
contracts and services can be easily computed. Thus it helps management to ascertain the
profitability of each product, sales area, division etc. in order to improve profit.
3. Cost Finding and Price-Fixing:
It provides accurate cost data which help in the fixation of selling price and for
submitting quotations. In periods of depression it enables the management to determine
the extent to which prices can be reduced.
4. Control of Materials and supplies:
Since in all types of cost accounting, materials and supplies must be accounted for in
terms of departments, processes, and units of production or services; a system of
receiving, handling, and issuing materials and supplies is an essential part of cost control.
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This will eliminate or reduce misappropriation, embezzlement, obsolescence, and losses
from scrap, defective, and spoiled materials and supplies.
5. Control of Wages and Salaries:
Cost Accounting activities encourage accounting for labour by jobs and by operations. In
many manufacturing concerns daily summary reports are prepared to show the number of
hours and minutes worked and the wage rate for each worker per job or operation.
Cost Accounting is a benefit to the employer by establishing standards to measure the
efficiency of labour to assist in assignment of work to employees best fitted for it, and to
determine the unit cost of labour arising from each activity.
6. Overhead costs:
The Cost accountant first separates costs into direct and indirect items. Direct costs
consists of materials and labour that can be definitely
7. Helps in adverse periods:
Cost accounting helps in the periods of economic recession, trade depression and trade
competition. In such periods, the management should concentrate on measures to be
taken to minimize loss. While taking decision during such periods, cost accounting
extends a helping hand to the management to resolve crisis.
8. Price fixation, Floating tenders, Quotations etc.:
Cost records play a vital role in fixing the price of a product, service or process. Cost
accounting facilitates such task.
9. Eliminates wastages:
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Cost of the article or process at each and every stage can be determined with the help of
cost records, thereby minimizing wastages that occur.
10. Maximizes profit:
Cost accounting helps in maximizing profit, choosing apt approach for its production.
Non-profitable lines may be avoided.
11. Facilitates comparison:
Cost records provide data to compare different periods, which in turn helps the
management to take future course of action promptly.
12. Preparation of final accounts:
Cost records provide the necessary accounting information for the preparation of profit
and loss account and balance sheet at specified periods promptly.
13. Inventory control:
Costing helps to a great extent with respect to control of stock of raw materials, work-in-
progress and finished goods.
14. Increasing productivity:
Productivity of material and lab our is inevitable for any organization to attain growth
and expansion. Costing helps in these areas to increase productivity.
15. Enhancing efficiency:
As costs are determined at each stage, wastages can be detected and remedial measures
can be taken without delay; efficiency of an organization is enhanced, which in turn
maximizes the profitability.
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16. Boon to creditors:
Costing records serve as a reliable and authentic document by which creditors (investors,
banks and money-lending institutions etc.) can repose faith on business organizations and
extend advances without any hesitation and with confidence.
17. Beneficial to employees:
Costing records are easily accessible and transparent to employees because of which
they are benefitted monetarily by way of incentive, bonus etc. This strengthens the
cordial relationship between the employer and employee, and industrial peace
environment prevails.
18. Boost to national economy:
Prosperity in industrial sector will reflect in the general economy of any nation by way of
increased revenue to the government. Better system of cost accounting paves the way to
achieve higher GDP growth of the nation.
1.4 OBJECTIVES OF COST ACCOUNTING
The main objectives of cost accounting are:
1. To determine the cost of a product, process or service
2. To analyze, classify and record all expenditures with respect to the cost of product,
process or service in order to determine its cost
3. To provide necessary information to the management in time
4. To provide data needed for periodical preparation of profit and loss account and
balance sheets
5. To serve as a guide by providing actual data for comparison
6. To facilitate price fixation and offering quotations
7. To assist budgetary control
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8. To assist cost control and cost reduction
9. To record the relative production results in each unit of plant to examine efficiency
10. To provide the basis for production planning and for avoiding wastages of
materials and stores
11. To provide data for different periods and various volumes of output for effective
planning and future expansion of business
12. To provide the basis for making decisions such as:
1. To shut down or operate
2. To make or buy
3. To continue with existing plant/machinery or to replace it
4. To determine cost–volume–profit relationship
13. To assist the management in devising suitable policy decisions in other key areas
1.5 BASIC DOCUMENT USED IN COST ACCOUNTING
The following documents are used for collecting and classifying various costs:
(1)Material requisition note:
A document which authorizes and records the issue of materials for use.
(2)Material returns note:
A document which records the returns of unused materials.
(3) Material transfer note:
A document which records the transfer of materials from one store to another,
from one cost centre to another, or from one unit to another.
(4) Material issue analysis sheet:
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A document which is a classified record of materials issues, returns and transfers.
(5) Lab our Time Record:
A document which records the amount of time spent by an employee, showing the
analysis between a numbers of activities during a payment period.
(6) Wages analysis Sheet:
A document which is a classified record of time and / or wages complied from lab
our time records.
(7) Expenses analysis Sheet:
A document which classified record of expenses.
(8) Cost journal voucher:
A document which provides the details necessary to support an entry in the cost
A/C.
(9) Machine Time Record:
A document which records the amount of time an items of equipment is operated
or remain idle, and the work done by the machine, and which may record the cost
of the time so recorded.
CHAPTER 2 – INTEGRATED SYSTEM OF ACCOUNTS
2.1 INTRODUCTION
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Integrated accounting system involves the combination of cost accounting and financial
accounting records. In this system, only one set of books of accounts are maintained. This
set of books fulfils the principles of cost accounting and financial accounting. In this
system, nominal accounts follow the principles of cost accounting. Real accounts and
personal accounts are kept in accordance with financial accounting principles.
Integrated accounting system may be defined as “the inter-locking of financial and cost
accounting systems to ensure that all relevant expenditure is absorbed into the cost
accounts. Under this system, transactions are classified according to both their function
and nature”. Under this system, double-entry system of book keeping is followed for
recording transactions.
DEFINTION OF INTEGRATED SYSTEM
CIMA has defined integrated system as “ a system in which the financial and cost
accounts are inter-locked to ensure that all relevant expenditure is absorbed into the cost
accounts.” Under this accounting system transactions are classified both according to
their function and natures.
2.2 FEATURES OF INTEGRATED ACCOUNTING:
Account budget setup capability
Check printing in batch or on demand
Electronic check request feature automatically creates an Accounts Payable record
Recurring journal entries tool
Payroll import functionality
Search and view accounts by date range, accounting period or any other aspect
Print or export grid results to Excel
Trial balance, income statement, balance sheet and statement of cash flows
capabilities
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Trust balances by matter
Ability to transfer monies between trust accounts
Support for multiple checking accounts with different check formats per account
Bank statements can be downloaded for reconciliation
Track and manage vendor and payee relationships
Process 1099 information
Account-split capabilities to automatically distribute a check or adjustment among
multiple accounts
Compensation formulas automate the splitting of fee income postings
Support for matter level, client level or partial payments
Management of unapplied cash
Support for write-offs
Group, sort or filter search results
Period-based analysis
2.3 ADVANTAGES OF INTEGRAL SYSTEM OF ACCOUNTING
1. Duplication of work avoided:
Keeping unnecessary accounting records is avoided, by which duplication of
accounting work is eliminated to a great extent.
2. Saves time and money:
Instead of cost ledger, control account, general ledger adjustment account,
purchases account and stores ledger account, only one set of books are maintained
and thus save time and money.
3. Reconciliation problem:
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As there will be only one figure for profit or loss, the problem of reconciliation of
profits, as shown by cost and financial books, will not arise.
4. Accuracy:
Correct and reliable data can be obtained under this system and as such the results
will be more accurate.
5. Control on cost:
In this system, all expenses are included in cost accounts. It leads to an automatic
check on costs and ensures better control over it.
2.4 DISADVANTAGES OF INTEGRATED SYSTEM :
1. This system has to fulfill the requirements of both the cost and the financial
accounts. Because of this, it is a complicated procedure.
2. In any case, perfect integration cannot be possible.
3. This system may not be suitable for large-scale manufacturing factories.
2.5 PREREQUISITES FOR SUCCESSFUL INTEGRATED SYSTEM OF
ACCOUNTING
1. Role of management:
The role of management is important in the implementation of integrated
accounting system. The management has to plan the level of integration and issue
guidelines for effective implementation of this system.
2. Classification of accounts:
Account heads should be duly identified and classified. The accounting data have
to be maintained in separate subsidiary ledgers as follows (i) sales ledger (ii)
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purchases ledger (iii) stores ledger is job ledger (iv) stock ledger (v) overheads
ledger and the like.
3. Coding of accounts:
To facilitate the task of relevant and speedy information, proper coding of
accounts must be done.
4. Accounts personnel:
Proper training should be provided to accounts department personnel to acquaint
with this accounting system.
5. Agreed routine
An agreed routine, with regard to the treatment of provision for accruals, prepaid
expenses and other adjustments necessary for preparation of interim accounts must
be specified.
2.6 ACCOUNTING TREATMENT
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Journal entries: The journal entries that have to be passed under both integral and non-
integral accounting systems are shown in the tabular form as follows:
Accounting entries in non-integrated accounting system (financial books and cost books)
and integrated accounting system.
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2.7 SOLVED PROBLEM
INTEGRATED SYSTEM
Bangalore petro-chemicals co. keep books on integral accounting system. The following
balances appear in the books company as on 1st January 2004.
Particular Dr. Rs. Cr. Rs.
Stores control A/C 18000
Work in progress A/C 17000
Finished goods A/C 13000
Bank A/C 10000
Creditor A/C 8000
Fixed assets A/C 55000
Debtors A/C 12000
Share capital A/C 80000
Depreciation provision A/C 5000
Profit and loss A/C 32000
TOTAL 125000 125000
Transactions for the year ended 31st December, 2004 were as under:
Particular Rs. Rs.
Wages – direct 87000
Indirect 5000 92000
Purchase of materials (on credit) 100000
Materials issues to production 110000
Materials for repairs 2000
Goods finished during the year (at cost) 215000
Sales (on credit) 300000
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Cost of goods sold 220000
Production overheads absorbed 48000
Production overheads incurred 40000
Administration overheads incurred 12000
Selling overhead incurred 14000
Payments to creditors 101000
Payments from debtors 290000
Depreciation of machinery 1300
Prepaid rent (included in factory overheads) 300
Write up accounts in the integrated ledger and prepare a trial balance.
Solution:
Dr. Stores control A/C Cr.
Particular Rs. particular Rs.
To balance b/d 18000 By WIP A/C 110000
To creditors A/C 100000 By production overheads 2000
By balance c/d 6000
118000 118000
Dr. wages control A/C Cr.
Particular Rs. Particular Rs.
To bank A/C 92000 By WIP A/C 87000
By production overhead A/C 5000
92000 92000
Dr. Work in progress A/C Cr.
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Particular Rs. Particular Rs.
To balance b/d 17000 By finished goods A/C 216000
To stores control A/C 110000 By balance c/d 47000
To wages control A/C 87000
To production A/C 48000
262000 262000
Dr. Production overhead A/C Cr.
Particular Rs. Particular Rs.
To wages control A/C 5000 By WIP A/C 48000
To stores control A/C 2000 By prepaid rent 300
To Bank A/C 40000
To deprecation provision 1300
48300 48300
Dr. finished goods A/C Cr.
Particular Rs. Particular Rs.
To balance b/d 13000 By cost of sales A/C 220000
To WIP A/C 215000 By balance c/d 20000
To administration overhead 12000
240000 240000
Dr. Administrative overhead A/C Cr.
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Particular Rs. Particular Rs.
To bank A/C 12000 By finished goods A/C 12000
12000 12000
Dr. cost of sales A/C Cr.
Particular Rs. Particular Rs.
To finished goods A/C 220000 By sales A/C 234000
To selling & distribution A/C 14000
234000 234000
Dr. Selling and distribution A/C Cr.
Particular Rs. Particular Rs.
To bank A/C 14000 By cost of sale A/C 14000
14000 14000
Dr. Sales A/C Cr.
Particular Rs. Particular Rs.
To cost of sales A/C 234000 By debtors A/C 300000
To P/L A/C (profit) 66000
300000 300000
Dr. prepaid A/C Cr.
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Particular Rs. Particular Rs.
To production overhead A/C 300 By balance c/d 300
300 300
Dr. Depreciation provision A/C Cr.
Particular Rs. Particular Rs.
To balance c/d 6300 By balance b/d 5000
By production overhead A/C 1300
6300 6300
Dr. Profit and loss A/C Cr.
Particular Rs. Particular Rs.
To balance c/d 98000 By sales A/C 66000
By profit b/d 32000
98000 98000
Dr. Debtors A/C Cr.
Particular Rs. Particular Rs.
To balance b/d 12000 By bank A/C 290000
To sales 300000 By balance c/d 22000
312000 312000
Dr. creditors A/C Cr.
Particular Rs. Particular Rs.
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To bank 101000 By balance b/d 8000
To balancec/d 7000 By stores control A/C 100000
108000 108000
Dr. bank A/C Cr.
Particular Rs. Particular Rs.
To balance b/d 10000 By creditors 101000
To debtors 290000 By wages control A/C 92000
By production OH A/C 40000
By adiministration OH A/C 12000
By selling and distribution OH A/C 14000
By balance c/d 41000
300000 300000
Dr. fixed assets A/C Cr.
Particular Rs. Particular Rs.
To balance b/d 55000 By balance c/d 55000
55000 55000
Dr. share capital A/C Cr.
Particular Rs. Particular Rs.
To balance c/d 80000 By balance b/d 80000
80000 80000
Trial balance as on 31-12-2004
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Particular Dr. Rs. Cr. Rs.
stores control A/C 6000
WIP A/C 47000
Finished goods A/C 20000
Bank A/C 41000
Creditors A/C 7000
Fixed assets A/C 55000
Debtors A/C 22000
Share capital A/C 80000
Deprection provision A/C 6300
P and L A/C 98000
Prepaid rent A/C 3000
191300 191300
Problem no 2.
From the following information you are requested to pass journal entries and prepare
necessary accounts and trial balance under system of integrated account in the books of
XYZ Co. Ltd.
Particular Rs.
Matrial purchase on credit 29600
Wages paid 33600
Wages productive 29600
Wages unproductive 4000
Matrial issues to prodction 25600
Works expenses incurred 13000
Finished goods at cost 60000
Works expenses chareged to production 17200
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Adiministrion expenses 8800
Selling overhead paid & charged to sales 9000
Cash sales 78000
Adiministraion expenses charges to production 8700
Solution: IN THE BOOKS CO. LTD
JOURNAL
No. Particular Dr. Rs. Cr. Rs.
1. Stores control A/C Dr.
To creditors A/C
(Being material purchased on credit)
29600
29600
2. Wages control A/C Dr.
To bank A/C
(Being wages paid)
33600
33600
1. WIP legder control A/C Dr.
To wages control A/C
(Being the wages charged to factory overhead))
29600
29600
1. Factory overhead control A/C Dr.
To wages control A/C
(Being indirect wages charged to factory overhead))
4000
4000
1. WIP legder control A/C Dr.
To stores control A/C
(Being material issued to jobs)
25600
25600
1. Factory overhead control A/C Dr.
To bank A/C
(Being factory expenses incurred)
13000
13000
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7. WIP legder control A/C Dr.
To factory overhead control A/C
(Being factroy overhead chareged to production)
17200
17200
8. Adiministration Overhead control A/C Dr.
To Bank A/C
(Being indirect wages charged to factory overhead))
8800
8800
9. WIP control A/C Dr.
To Adiministration overhead control A/C
(Being adiministration overhead charged to production)
8700
8700
10. Selling and distribution overhead control A/C Dr.
To bank A/C
(Being selling expenses incurred)
9000
9000
11. Finished stock control A/C Dr.
To WIP control A/C
(Being Finished stock transferred at cost)
60000
60000
12. Cost of sales A/C Dr.
To finished stock control A/C
To stores control A/C
(Being the cost of production oof goods sold)
69000
60000
9000
13. Bank A/C Dr.
To sales A/C
(Being indirect wages charged to factory overhead))
78000
78000
LEDGER
Dr. Stores control A/C Cr.
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Particular Rs. Particular Rs.
To creditors A/C 29600 By WIP Ledger control A/C 25600
4000
29600 29600
Dr. wages control A/C Cr.
Particular Rs. Particular Rs.
To bank A/C 33600 By WIP ledger control A/C 29600
By factory overhead control A/C 4000
33600 33600
Dr. WIP Ledger control A/C Cr.
Particular Rs. Particular Rs.
To wages A/C 29600 By finished stock control
A/C
60000
To stores control A/C 25600 By balance c/d 4000
To factory overhead control
A/C
17200
To adiministration Overhead
controlA/C
8700
81100 81100
Dr. factory overhead control A/C Cr.
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Particular Rs. Particular Rs.
To wages control A/C 4000 By WIP Ledger control A/C 17200
To bank A/C 13000
To overhead suspenes A/C 200
17200 17200
Dr. adiministration overhead control A/C Cr.
Particular Rs. Particular Rs.
To bank A/C 8800 By WIP ledger control A/C 8000
By overhead suspenses A/C 100
8800 8800
Dr. selling & distribution overhead control A/C Cr.
Particular Rs. Particular Rs.
To bank A/C 9000 By cost of sales A/C 9000
9000 9000
Dr. finished stock ledger control A/C Cr.
Particular Rs. Particular Rs.
To WIP ledger control A/C 60000 By cost of sales A/C 60000
60000 60000
Dr. cost of sales A/C Cr.
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Particular Rs. Particular Rs.
To finished stock ledger
control A/C
60000 By sales A/C 78000
To selling and distribution
overhead control A/C
9000
To profit and loss A/C 9000
78000 78000
Dr. bank A/C Cr.
Particular Rs. particualar Rs.
To sales A/C 78000 By wages control A/C 33000
By factory overhead control
A/C
13000
By adiministraion overhead
control A/C
8800
By selling & distribution
overhead control A/C
9000
By balance c/d 13000
78000 78000
Dr. creditors A/C Cr.
Particulars Rs. Particular Rs.
To balance c/d 29600 By stores control A/C 29600
29600 29600
Dr. overhead suspenese A/C Cr.
30
Particular Rs. Particular Rs.
To Adiministration overhead
Control A/C
100 By factory overhead control
A/C
200
To balance c/d 100
200 200
Dr. sales A/C Cr.
Particular Rs. Particular Rs.
To cost of sales A/C 78000 By bank A/C 78000
78000 78000
Dr. profit and loss A/C Cr.
Particular Rs. Particular Rs.
By cost of sales A/C 9000
Trial balance as at …..
Particular Dr. Rs. Cr. Rs.
Stores control A/C 4000
WIP Ledger control A/C 21100
Bank A/C 13600
Creditors A/C 29600
Overhead suspenses A/C 100
Profit And loss A/C 9000
38700 38700
CHAPTER 3- NON INTEGRATED SYSTEM OF ACCOUNTS
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3.1 INTRODUCTION
Meaning of Non-Integrated Accounts CIMA, London defines it as,” a system in which
the cost accounts are distinct from the financial accounts, the two sets of accounts being
kept continuously in agreement or readily recognizable ”Also known as independent
system, separate books system, cost ledger system, interlocking accounting system or
traditional system”
3.2 FEATURES OF NON- INTEGRATED SYSTEM
Features of Non-Integrated System Separate set of books for costing and for financial
accounting for cost accounting, source of information is the same as financial accounting
Cost accounts records only coasts, which are a part of Nominal Accounts For other
accounts, cost control accounts or adjustment accounts are maintained
Books of Accounts Main Ledger: Cost Ledger: contains control accounts and nominal
accounts other than Stores Ledger, WIP Ledger and Finished Goods Ledger Subsidiary
Ledgers: Stores Ledger, WIP Leger and Finished Goods Ledger
Role of general Ledger Adjustment Account Also known as Cost Ledger Control
Account or Finance Ledger Control Account It is the counterbalancing account for the
stocks of material, work-in-progress, and finished goods
1. Separate books
In a non-integrated cost accounting system there are separate cost accounting cost
journals and cost ledgers.
2. Principal of double- entry
However, it too follows the fundamental principles of double entry book-keeping for this
purpose.
3. Cost manual
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As the number and types of transactions involved in accounting are numerous, a number
of individuals are employed in their recording and analysis. A cost manual is prepared for
guidance of the staff.
4. Voucher
As in the case of financial accounting system, transactions are recorded in the cost
journal voucher, which provides the details necessary to support an entry in the cost
accounts.
5. Account/code
Each entry is debited/credited to a cost accounts. CIMA has defined a cost accounts as
‘an account in the cost ledger. Each account may be given a cost code.
6. Journal
These vouchers are first entered into cost journals. There may be one general journal to
summaries all original entries or separate journals may be kept to record lab our, material
and overhead transactions.
7. Ledger
From the cost journals, entries are posted in the cost ledger. CIMA has defined a ‘cost
ledger’ as a ledger whose accounts record those transactions which are included in costs.
In financial accounting, ledger may be divided into general and subsidiary ledgers like
debtors ledger, creditors ledger etc.
Similarly, cost ledger may be divided into main and subsidiary ledger. There may be a
main ledger known as cost ledger and other subsidiary ledgers like stores ledger, work in
progress ledger and finished stock ledger.
3.3 CONTROL ACCOUNTS
The cost ledger contains two of accounts to complete the double entry :
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(a) Cost ledger control A/C
(b) Three cost control A/C
(A)Cost ledger control A/C :
CIMA has defined a cost ledger control account’ as ‘an account which is
maintained in the principal ledger which records the totals of the transactions
recorded in detail in the cost legder and provides a check on the accurancy of
the latter. Cost ladger control A/C helps to record all
Items of income and expenditure.
The function of this account which is also referred to as General ledger
Adjustment Account or nominal legder control A/C, is quite important in a
cost accounting system.
(b)cost control accounts :
The three cost control account – stores ledger control accounts, work-in-
progress control account and finished goods control A/C – help to exercise
control over the concerned subsidiary ledger. Transactions kept in details in
one or more A/C of the subsidiary ledger are posted in totals, at the end of a
period, to the control.
(1)stores ledger control A/C
(1)records material cost : The account records materials transactions.
(2)debit and credit : Receipts are posted from goods received notes from
materials requistions or materials issue analysis sheet. The account also
record issues of materials to outside parties, returns through return notes, and
stores adjustment through material transfer notes.
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(3)Balance : The balance of this account represents the total balance of stock
which should agree with the aggregate of the balance of indiviuals foilos in the
stores ledger.
(2)wages control A/C
(1)Records labour cost : this account records labour transaction.
(2)debits & credits : entries are made from wages analysis sheet. The account
is debited with the gross wages and is cleared by the transfer of direct labour
labour to WIP and indirect labour to factory, administration and selling and
distribution overhead control A/C or research and development A/C or capital
A/C as the case may be.
(3)factory overhead control A/C
(1)Records overhead costs : this account deals with manufacturing overhead
expenses.
(2)Debits & credits : To this account is debited the amount of indirect material,
indirect labour, and indirect expenses incurred. The figures are obtained from
materials issue analysis sheet. Where separate overhead applied account is
opened, credit is given to this account.
(4)work-in-progress control A/C
(1)Debits : This account is debited with the opening balance of work-in-
progress, and material, labour and factory overhead costs.
(2)credit : This account is credited with the cost of finished goods.
(3)balance : The balance of this account represents unfinished closing stock in
process carried over.
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(5)finished goods control A/C
(1)Debits : This A/C is debited with the opening balance of finished goods; the
cost of finished goods for the period transfred from the work in progress control A/C
And the amount of administration overhead recovered, if administration overhead is not
treated as period cost.
(2)Credits : It is credited with the cost of sales (by transfer to cost of sales
accounts)
(3)balance : The balance of the A/C after writing back the unrecovered
administration overheads, represents unsold stock carried over.
(6)Administration overhead A/C :
(1)Debits : administration overhead cost is debited to this A/C.
(2)Credit : the amount of overhead recovered in the finished goods sold is
credited. Another methods is to close the administration overhead A/C by transfer to
costing profit And loss A/C. In this case, no amount of administration cost is charged to
the finished goods A/C.
(7)Cost of sales A/C
(1)Debit : This A/C is debited with the cost of goods sold and selling and
distribution overhead recovered.
(2)Credit : It is closed by transfer to costing Profit And loss A/C.
(8)Selling and distribution overhead A/C :
(1)Debit : selling and distibution costs are debited to the selling and distribution
overhead A/C.
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(2)Credit : As the end of the period, the account is closed by transfer to cost of sales
A/C.
(9)Overhead adjustment A/C :
(1)Debits & Credits : The amount of under absorbed or over absorbed factroy,
administration, selling and distribution overhead may be debited or credited to this A/C.
(2)Balance : The balance at the end of a period, may be either
(i) carried over to the next accounting period,
(ii) or transferred to costing profit and loss A/C,
(iii) or prorated to cost of sales A/C, WIP A/C And finished stock A/C
(10)costing profit and loss A/C
(1)Debits and credits : The A/C records the transfer of the amounts of under-
absorbed and over-absorbed overhead, the sale value of goods sold, and the balance from
the cost of sales A/C. abnormal losses or gains to be kept out of costs are also debited or
credited to the A/C.
(2)Balance : The closing balance of this A/C represents the closing profit
and loss which should be reconciled with the financial profit and loss.
3.4 SOLVED PROBLEM
NON INTEGRATED SYSTEM
Problem no 1.
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Cost man Ltd. Maintain separate set of books for financial accounts and cost accounts.
The following information is furnished for the year 2003.
Particulars Rs.
Material control A/C 60000
W-I-P control A/C 90000
Finished good control A/C 140000
Cost ledger control A/C 290000
Transaction for the year are:
Materials purchased 660000
Materials issued as:
Direct materials 450000
Indirect materials 120000
Wages paid allocated as:
Direct materials 270000
Indirect materials 90000
Production expenses 240000
Value of finished goods produced 1080000
Closing stock of finished goods 120000
Administration expenses 240000
Selling expenses 180000
sales 1800000
Prepare the necessary control accounts in books of costing records.
Solution:Dr. Cost Ledger Control A/C Cr.
Particular Rs particular Rs
To costing P/L A/C (Sales) 1800000 By balance b/d 290000
To balance c/d 450000 By material control A/C 660000
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By wages control A/C
(Direct + indirect wages)
360000
By selling and admin expenses 420000
By costing P/L A/C 280000
By factory overheads control
A/C
240000
22.50000 22,50000
By balance b/d 450000
Dr. material control A/C Cr.
Particular Rs. particular Rs.
To balance b/d 60000 By WIP control A/C
Direct material 450000
To cost ledger control A/C 660000 Indirect material 120000 570000
By balance c/d 150000
720000 720000
Dr. WIP control A/C Cr.
particular Rs. particular Rs.
To balance b/d 90000 By finished goods A/c 1080000
To material control A/C 570000 By balance c/d 180000
To wages control A/C 270000
To factory overhead control
A/C
330000
1260000 1260000
Dr. Finished goods control A/C Cr.
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Particular Rs particular Rs.
To balance b/d 140000 By cost of sales (bal . fig.) 1100000
To WIP 1080000 By balance c/d 120000
1220000 1220000
Dr. Factory overhead control A/C Cr.
particular Rs particular Rs.
To wages control A/C
(Indirect cost)
90000 By WIP 330000
To cost ledger control A/C 240000
330000 330000
Dr. Cost P/L A/C Cr.
particular Rs. particular Rs.
To cost of sales (bal. fig.) 1100000 By cost ledger control A/C 1800000
To admin and selling exp. 420000
To cost ledger control A/C
(Costing profit)
280000
1800000 1800000
Dr. Trial balance
particular Dr. Cr.
Cost ledger control A/C 450000
Material control A/C 150000
WIP control A/C 180000
Finished goods control A/C 120000
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450000 450000
ILLUSTRATION 2
A COMPANY operates separate cost accounting and financial accounting system. The
following is the list of opening balances as on 1-4-2003 in the cost ledger:
Particular Dr. Rs. Cr. Rs.
Stores ledger control A/C 53375
WIP control A/C 104595
Finished goods control A/C 30780
General ledger control A/C 188750
Transactions for the quarter ended 30-06-2003 are as under:
particular Rs.
Materials purchased 26700
Materials issued to production 40000
Materials issued for factory repairs 900
Factory wages paid (including indirect wages Rs. 23000) 77500
Production overheads incurred 95200
Production overhead under- absorbed and written-off 3200
sales 256000
The company’s gross profit is 25% on factory cost. At the end of the quarter, WIP stock
increased by Rs. 7500.
Prepare the relevant control A/C, Costing profit and loss A/C and general ledger
adjustment account to record the above transactions for the quarter ended 30-06-2003.
Solution:
Dr. General (cost) ledger adjustment A/C Cr.
particular Rs. particular Rs.
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To sales 256000 By balance b/d 188750
To balance c/d 180000 By stores ledger control A/C 26700
By wages control A/C 77500
By overhead control A/C 95200
By costing P/L A/C 48000
436150 436150
Dr. Stores ledger control A/C Cr.
particular Rs. particular Rs.
To balance b/d 53375 By WIP control A/C 40000
To general ledger adjustment
A/C
26700 By factory overhead control
A/C
900
By balance c/d 39175
80075 80075
Dr. WIP Control A/C Cr.
Particular Rs. particular Rs.
To balance b/d 104595 By finished goods control A/C 202900
To stores ledger control A/C 40000 By balance c/d 112095
To wages control A/C 54500
To factory O/H A/C 115900
314995 314995
Dr. finished goods control A/C Cr.
particular Rs. particular Rs.
To balance b/d 30780 By cost of sale A/C 204800
To WIP control A/C 202900 By balance c/d 28880
233680 233680
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Gross profit is 25% on factory cost or 20% on sales.
Hence cost of sales = 256000- 20% of Rs. 256000 =Rs. 204800.
Dr. wages control A/C Cr.
Particular Rs. Particular Rs.
To general ledger control
A/C
77500 By factory overhead control
A/C
23000
By WIP control A/C 54500
77500 77500
Dr. Factory overhead control A/C Cr.
particular Rs. particular Rs.
To stores ledger control A/C 900 By costing P/L A/C 3200
To wages control A/C 23000 By WIP control A/C 115900
To general ledger control
A/C
95200
119100 119100
Dr. costing P/L A/C Cr.
Particular Rs Particular Rs
To factory overhead control A/C 3200 By sales A/C 256000
To cost sales A/C 204800
To general ledger control A/C 48000
256000 256000
Dr sales A/C Cr.
Particular Rs. Particular Rs.
To costing P/L A/C 256000 To general ledger adjustment A/C 256000
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256000 256000
Dr. cost of sales A/C Cr.
Particular Rs. particular Rs.
To finished goods control
A/C
204800 By costing P/L A/C 204800
204800 204800
Trial balance (as on 30-6-2003)
Particular Dr. Rs. Cr. Rs.
Stores ledger control A/C 39175
WIP control A/C 112095
Finished goods control A/C 28880
General ledger adjustment A/C 180150
180150 180150
CHAPTER 4 - CONCLUSION
CONCLUSION
Integrating existing databases is a very difficult task. Still, it is something that enterprises
face today and cannot avoid if they want to launch new applications or to reorganize the
existing information system for better profitability. We have discussed basic issues and
solutions. We focused on the fundamental concepts and techniques, insisting on the
alternatives and on Criteria for choice. More Details are easily found in an over-abundant
literature. To the best of our knowledge, no integration tool has yet been developed as a
commercial product. Some research
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Most enterprises’ worldview of globalization is mismatched with the reality of
globalization today; they bring a proliferation of localized standards when, more than
ever, governance, transparency and information integrity need to be maintained
consistently throughout the enterprise. By mandating common standards, implementing a
standard Chart of Accounts, building common data definitions and deploying common
processes across the Finance function, enterprises can transform into IFOs. This will
position them to be more responsive, more flexible, and to outperform their peers. To get
there, CFOs should take ownership of their Finance processes enterprise wide, simplify
their technology and delivery models, and provide a new, single version of the truth to
their enterprises. They must formally define their risk programs and take an active role in
risk management. For the enterprise to live up to this vision, change and integration will
need to come from all areas of the business, not just Finance. With this in mind, the CFO
can be a leader in this charge, armed with the facts and trusted with the reins of the
enterprise in confident hands.
APPENDICES
BIBLIOGRAPHY
www.wikipedia.com
www.google.com
REFERENCS
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1. crownyou.hubpages.com › ... › Homework Help
2. www.letslearnfinance.com › Accounting
3. www.stamfordonline.com.my/ ..
4. www.cpaireland.ie/UserFiles/
5. www.tutorsonnet.com › Accounting › Cost Accounting
6. crownyou.hubpages.com › ... › Homework Help
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