ICAI Notes: Cost Accounting System | Cost and Management Accounting for CA Intermediate PDF Download

 Page 1


LEARNING OUTCOMES 
a
CHAPTER 
7 
 
    COST ACCOUNTING 
  SYSTEMS 
 
 
After studying this chapter, you would be able to- 
? Discuss the Cost Accounting System. 
? Differentiate between Integral and Non-Integral System of 
Accounting. 
? Identify the ledgers maintained under Integral and Non-
Integral Accounting System. 
? Analyse the reasons for differences in profit under Financial 
and Cost Accounting Systems. 
? Prepare reconciliation statement for profit under Financial 
and Cost Accounting Systems. 
? Discuss the Accounting for Management Information and 
Cost Control. 
  
© The Institute of Chartered Accountants of India
Page 2


LEARNING OUTCOMES 
a
CHAPTER 
7 
 
    COST ACCOUNTING 
  SYSTEMS 
 
 
After studying this chapter, you would be able to- 
? Discuss the Cost Accounting System. 
? Differentiate between Integral and Non-Integral System of 
Accounting. 
? Identify the ledgers maintained under Integral and Non-
Integral Accounting System. 
? Analyse the reasons for differences in profit under Financial 
and Cost Accounting Systems. 
? Prepare reconciliation statement for profit under Financial 
and Cost Accounting Systems. 
? Discuss the Accounting for Management Information and 
Cost Control. 
  
© The Institute of Chartered Accountants of India
a
 
 
COST AND MANAGEMENT ACCOUNTING 
7.2 
 
 
 1. INTRODUCTION 
To operate business operations efficiently and successfully, it is necessary to make 
use of an appropriate accounting system. Such a system should state in clear terms 
whether cost and financial transactions should be integrated or kept separately 
(Non-integrated). Where cost and financial accounting records are integrated, 
the system so evolved is known as integrated or integral accounting system. In 
case cost and financial transactions are kept separately, the system is called 
Non-Integrated Accounting system or Cost Control System. While non-
integrated system of accounting necessitates reconciliation between financial and 
cost accounts but no reconciliation is required under integrated accounting system. 
 2. NON-INTEGRATED ACCOUNTING SYSTEM 
It is a system of accounting under which separate ledgers are maintained for both 
cost and financial accounts. This system is also known as cost ledger accounting 
system. Under this system the cost accounts restrict itself to recording only those 
transactions which relate to the product or service being supplied. Items of 
expenses which are related to sales, production or other matters of factory 
management are the ones dealt with in such accounts. This leads to the exclusion 
of certain expenses like interest, bad debts and revenue/income from ‘other than 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


LEARNING OUTCOMES 
a
CHAPTER 
7 
 
    COST ACCOUNTING 
  SYSTEMS 
 
 
After studying this chapter, you would be able to- 
? Discuss the Cost Accounting System. 
? Differentiate between Integral and Non-Integral System of 
Accounting. 
? Identify the ledgers maintained under Integral and Non-
Integral Accounting System. 
? Analyse the reasons for differences in profit under Financial 
and Cost Accounting Systems. 
? Prepare reconciliation statement for profit under Financial 
and Cost Accounting Systems. 
? Discuss the Accounting for Management Information and 
Cost Control. 
  
© The Institute of Chartered Accountants of India
a
 
 
COST AND MANAGEMENT ACCOUNTING 
7.2 
 
 
 1. INTRODUCTION 
To operate business operations efficiently and successfully, it is necessary to make 
use of an appropriate accounting system. Such a system should state in clear terms 
whether cost and financial transactions should be integrated or kept separately 
(Non-integrated). Where cost and financial accounting records are integrated, 
the system so evolved is known as integrated or integral accounting system. In 
case cost and financial transactions are kept separately, the system is called 
Non-Integrated Accounting system or Cost Control System. While non-
integrated system of accounting necessitates reconciliation between financial and 
cost accounts but no reconciliation is required under integrated accounting system. 
 2. NON-INTEGRATED ACCOUNTING SYSTEM 
It is a system of accounting under which separate ledgers are maintained for both 
cost and financial accounts. This system is also known as cost ledger accounting 
system. Under this system the cost accounts restrict itself to recording only those 
transactions which relate to the product or service being supplied. Items of 
expenses which are related to sales, production or other matters of factory 
management are the ones dealt with in such accounts. This leads to the exclusion 
of certain expenses like interest, bad debts and revenue/income from ‘other than 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
a
7.3 
 
COST ACCOUNTING SYSTEMS 
the sale of product or service’.  
Non-Integrated accounting systems contain fewer accounts as compared to 
financial accounting system due to the exclusion of purchases, expenses and also 
Balance Sheet items like fixed assets, debtors and creditors. Items of accounts 
which are excluded are represented by an account known as Cost ledger 
control account.  
The important ledgers to be maintained under non-integrated accounting 
system in the Cost Accounting are the followings: 
(a) Cost Ledger - This is the principle ledger of the cost department in which 
impersonal accounts are recorded. This ledger is made self-balancing by 
maintaining therein a Control Account for each subsidiary ledger. 
(b) Stores Ledger - It contains an account for each item of stores. The entries in 
each account maintained in this ledger are made from the invoice, goods 
received note, material requisitions, material received note etc. Accounts in 
respect of each item of stores show receipt, issue and balance in physical as well 
as in monetary terms. 
(c) Work-in-Process Ledger - This ledger is also known as job ledger, it 
contains accounts of unfinished jobs and processes. All material costs, 
wages and overheads for each job in process are posted to the respective 
job accounts in this ledger. The balance in a job account represents total 
balance of job/work-in-process, as shown by the job account. 
(d) Finished Goods Ledger - It contains an account for each item of finished 
product manufactured or the completed job. If the finished product is 
transferred to stock, a credit entry is made in the work-in-process ledger 
and a corresponding debit entry is made in this ledger. 
2.1 Principal Accounts 
The main accounts which are usually prepared when a separate Cost Ledger is 
maintained are as follows: 
(1) Cost Ledger Control Account - This account is also known as General 
Ledger Adjustment Account. This account is made to complete double 
entry. All items of expenditure are credited to this account. Sales are 
debited to this account and net profit/loss from Costing Profit & Loss 
© The Institute of Chartered Accountants of India
Page 4


LEARNING OUTCOMES 
a
CHAPTER 
7 
 
    COST ACCOUNTING 
  SYSTEMS 
 
 
After studying this chapter, you would be able to- 
? Discuss the Cost Accounting System. 
? Differentiate between Integral and Non-Integral System of 
Accounting. 
? Identify the ledgers maintained under Integral and Non-
Integral Accounting System. 
? Analyse the reasons for differences in profit under Financial 
and Cost Accounting Systems. 
? Prepare reconciliation statement for profit under Financial 
and Cost Accounting Systems. 
? Discuss the Accounting for Management Information and 
Cost Control. 
  
© The Institute of Chartered Accountants of India
a
 
 
COST AND MANAGEMENT ACCOUNTING 
7.2 
 
 
 1. INTRODUCTION 
To operate business operations efficiently and successfully, it is necessary to make 
use of an appropriate accounting system. Such a system should state in clear terms 
whether cost and financial transactions should be integrated or kept separately 
(Non-integrated). Where cost and financial accounting records are integrated, 
the system so evolved is known as integrated or integral accounting system. In 
case cost and financial transactions are kept separately, the system is called 
Non-Integrated Accounting system or Cost Control System. While non-
integrated system of accounting necessitates reconciliation between financial and 
cost accounts but no reconciliation is required under integrated accounting system. 
 2. NON-INTEGRATED ACCOUNTING SYSTEM 
It is a system of accounting under which separate ledgers are maintained for both 
cost and financial accounts. This system is also known as cost ledger accounting 
system. Under this system the cost accounts restrict itself to recording only those 
transactions which relate to the product or service being supplied. Items of 
expenses which are related to sales, production or other matters of factory 
management are the ones dealt with in such accounts. This leads to the exclusion 
of certain expenses like interest, bad debts and revenue/income from ‘other than 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
a
7.3 
 
COST ACCOUNTING SYSTEMS 
the sale of product or service’.  
Non-Integrated accounting systems contain fewer accounts as compared to 
financial accounting system due to the exclusion of purchases, expenses and also 
Balance Sheet items like fixed assets, debtors and creditors. Items of accounts 
which are excluded are represented by an account known as Cost ledger 
control account.  
The important ledgers to be maintained under non-integrated accounting 
system in the Cost Accounting are the followings: 
(a) Cost Ledger - This is the principle ledger of the cost department in which 
impersonal accounts are recorded. This ledger is made self-balancing by 
maintaining therein a Control Account for each subsidiary ledger. 
(b) Stores Ledger - It contains an account for each item of stores. The entries in 
each account maintained in this ledger are made from the invoice, goods 
received note, material requisitions, material received note etc. Accounts in 
respect of each item of stores show receipt, issue and balance in physical as well 
as in monetary terms. 
(c) Work-in-Process Ledger - This ledger is also known as job ledger, it 
contains accounts of unfinished jobs and processes. All material costs, 
wages and overheads for each job in process are posted to the respective 
job accounts in this ledger. The balance in a job account represents total 
balance of job/work-in-process, as shown by the job account. 
(d) Finished Goods Ledger - It contains an account for each item of finished 
product manufactured or the completed job. If the finished product is 
transferred to stock, a credit entry is made in the work-in-process ledger 
and a corresponding debit entry is made in this ledger. 
2.1 Principal Accounts 
The main accounts which are usually prepared when a separate Cost Ledger is 
maintained are as follows: 
(1) Cost Ledger Control Account - This account is also known as General 
Ledger Adjustment Account. This account is made to complete double 
entry. All items of expenditure are credited to this account. Sales are 
debited to this account and net profit/loss from Costing Profit & Loss 
© The Institute of Chartered Accountants of India
a
 
 
COST AND MANAGEMENT ACCOUNTING 
7.4 
Account is transferred to this account. The balance in this account at the 
end of the particular period represents the net total of all the balances of 
the impersonal accounts. 
(2) Stores Ledger Control Account – This account is debited for the purchase 
of material and credited for issue of materials from the stores. The 
balance in this account indicates the total balance of all the individual stores 
accounts. Abnormal losses or gains if any in this account are transferred to 
Costing Profit & Loss Account. Entries are made on the basis of goods 
received notes and stores requisitions etc. 
(3) Wages Control Account - This account is debited with total wages paid 
(direct and indirect). Direct wages are further transferred to Work-in-
Process Control Account and indirect wages to Production Overhead; 
Administration Overhead or Selling & Distribution Overhead Control 
Accounts, as the case may be. Wages paid for abnormal idle time are 
transferred to Costing Profit & Loss Account either directly or through 
Abnormal Loss Account. 
(4) Manufacturing/Production/Works/ Factory Overhead Control Account - 
This account is debited with indirect costs of production such as indirect 
material, indirect employee, indirect expenses (carriage inward etc.). 
Overhead recovered (absorbed) is credited to this Account. The 
difference between overhead incurred and overhead recovered (i.e. Under 
Absorption or Over Absorption of Overheads) is transferred to Overheads 
Adjustment Account. 
(5) Work-in-Process Control Account - This account is debited with the total 
cost of production, which includes—direct materials, direct employee, 
direct expenses, production overhead recovered, and is credited with the 
amount of finished goods completed and transferred. The balance in this 
account represents total balances of jobs/works-in-process, as shown by 
several job accounts. 
(6) Administrative Overhead Control Account - This account is debited with 
overheads incurred and credited with overhead recovered. The overhead 
recovered are debited to Finished Goods Control Account, if administrative 
overhead is related with production activities otherwise to Cost of Sales A/c. 
© The Institute of Chartered Accountants of India
Page 5


LEARNING OUTCOMES 
a
CHAPTER 
7 
 
    COST ACCOUNTING 
  SYSTEMS 
 
 
After studying this chapter, you would be able to- 
? Discuss the Cost Accounting System. 
? Differentiate between Integral and Non-Integral System of 
Accounting. 
? Identify the ledgers maintained under Integral and Non-
Integral Accounting System. 
? Analyse the reasons for differences in profit under Financial 
and Cost Accounting Systems. 
? Prepare reconciliation statement for profit under Financial 
and Cost Accounting Systems. 
? Discuss the Accounting for Management Information and 
Cost Control. 
  
© The Institute of Chartered Accountants of India
a
 
 
COST AND MANAGEMENT ACCOUNTING 
7.2 
 
 
 1. INTRODUCTION 
To operate business operations efficiently and successfully, it is necessary to make 
use of an appropriate accounting system. Such a system should state in clear terms 
whether cost and financial transactions should be integrated or kept separately 
(Non-integrated). Where cost and financial accounting records are integrated, 
the system so evolved is known as integrated or integral accounting system. In 
case cost and financial transactions are kept separately, the system is called 
Non-Integrated Accounting system or Cost Control System. While non-
integrated system of accounting necessitates reconciliation between financial and 
cost accounts but no reconciliation is required under integrated accounting system. 
 2. NON-INTEGRATED ACCOUNTING SYSTEM 
It is a system of accounting under which separate ledgers are maintained for both 
cost and financial accounts. This system is also known as cost ledger accounting 
system. Under this system the cost accounts restrict itself to recording only those 
transactions which relate to the product or service being supplied. Items of 
expenses which are related to sales, production or other matters of factory 
management are the ones dealt with in such accounts. This leads to the exclusion 
of certain expenses like interest, bad debts and revenue/income from ‘other than 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
a
7.3 
 
COST ACCOUNTING SYSTEMS 
the sale of product or service’.  
Non-Integrated accounting systems contain fewer accounts as compared to 
financial accounting system due to the exclusion of purchases, expenses and also 
Balance Sheet items like fixed assets, debtors and creditors. Items of accounts 
which are excluded are represented by an account known as Cost ledger 
control account.  
The important ledgers to be maintained under non-integrated accounting 
system in the Cost Accounting are the followings: 
(a) Cost Ledger - This is the principle ledger of the cost department in which 
impersonal accounts are recorded. This ledger is made self-balancing by 
maintaining therein a Control Account for each subsidiary ledger. 
(b) Stores Ledger - It contains an account for each item of stores. The entries in 
each account maintained in this ledger are made from the invoice, goods 
received note, material requisitions, material received note etc. Accounts in 
respect of each item of stores show receipt, issue and balance in physical as well 
as in monetary terms. 
(c) Work-in-Process Ledger - This ledger is also known as job ledger, it 
contains accounts of unfinished jobs and processes. All material costs, 
wages and overheads for each job in process are posted to the respective 
job accounts in this ledger. The balance in a job account represents total 
balance of job/work-in-process, as shown by the job account. 
(d) Finished Goods Ledger - It contains an account for each item of finished 
product manufactured or the completed job. If the finished product is 
transferred to stock, a credit entry is made in the work-in-process ledger 
and a corresponding debit entry is made in this ledger. 
2.1 Principal Accounts 
The main accounts which are usually prepared when a separate Cost Ledger is 
maintained are as follows: 
(1) Cost Ledger Control Account - This account is also known as General 
Ledger Adjustment Account. This account is made to complete double 
entry. All items of expenditure are credited to this account. Sales are 
debited to this account and net profit/loss from Costing Profit & Loss 
© The Institute of Chartered Accountants of India
a
 
 
COST AND MANAGEMENT ACCOUNTING 
7.4 
Account is transferred to this account. The balance in this account at the 
end of the particular period represents the net total of all the balances of 
the impersonal accounts. 
(2) Stores Ledger Control Account – This account is debited for the purchase 
of material and credited for issue of materials from the stores. The 
balance in this account indicates the total balance of all the individual stores 
accounts. Abnormal losses or gains if any in this account are transferred to 
Costing Profit & Loss Account. Entries are made on the basis of goods 
received notes and stores requisitions etc. 
(3) Wages Control Account - This account is debited with total wages paid 
(direct and indirect). Direct wages are further transferred to Work-in-
Process Control Account and indirect wages to Production Overhead; 
Administration Overhead or Selling & Distribution Overhead Control 
Accounts, as the case may be. Wages paid for abnormal idle time are 
transferred to Costing Profit & Loss Account either directly or through 
Abnormal Loss Account. 
(4) Manufacturing/Production/Works/ Factory Overhead Control Account - 
This account is debited with indirect costs of production such as indirect 
material, indirect employee, indirect expenses (carriage inward etc.). 
Overhead recovered (absorbed) is credited to this Account. The 
difference between overhead incurred and overhead recovered (i.e. Under 
Absorption or Over Absorption of Overheads) is transferred to Overheads 
Adjustment Account. 
(5) Work-in-Process Control Account - This account is debited with the total 
cost of production, which includes—direct materials, direct employee, 
direct expenses, production overhead recovered, and is credited with the 
amount of finished goods completed and transferred. The balance in this 
account represents total balances of jobs/works-in-process, as shown by 
several job accounts. 
(6) Administrative Overhead Control Account - This account is debited with 
overheads incurred and credited with overhead recovered. The overhead 
recovered are debited to Finished Goods Control Account, if administrative 
overhead is related with production activities otherwise to Cost of Sales A/c. 
© The Institute of Chartered Accountants of India
 
 
a
7.5 
 
COST ACCOUNTING SYSTEMS 
The difference between administrative overheads incurred and recovered is 
transferred to Overhead Adjustment Account. 
(7) Finished Goods Control Accounts - This account is debited with the value 
of goods transferred from Work-in-process Control Account and 
administration costs recovered (if relates to production activities). This 
account is credited with Cost of Sales Account. The balance of this account 
represents the value of goods unsold at the end of the period. 
(8) Selling and Distribution Overhead Control Account - This account is debited 
with selling and distribution overheads incurred and credited with the selling and 
distribution overheads recovered. The difference between overheads incurred and 
recovered is transferred usually to Overhead Adjustment Account. 
(9) Cost of Sales Account - This account is debited with the cost of finished 
goods transferred from Finished Goods Control Account for sale, 
General Administrative overhead recovered, Selling and distribution 
overhead recovered. The balance of this account is ultimately transferred to 
Sales Account or Costing Profit & Loss Account. 
(10)  Costing Profit & Loss Account – This account is debited with cost of sales, 
under-absorbed overheads and abnormal losses and is credited with sales 
value, over-absorbed overhead and abnormal gains. The net profit or loss in 
this account is transferred to Cost Ledger Control Account. 
(11)  Overhead Adjustment Account - This account is to be debited for under-
recovery of overhead and credited with over-recovery of overhead 
amount. The net balance in this account is transferred to Costing Profit & 
Loss Account. 
Note: Sometimes, Overhead Adjustment Account is dispensed with and 
under/over absorbed overheads is directly transferred to Costing Profit & Loss 
Account from the respective overhead accounts. 
2.2 Scheme of Accounting Entries 
The manner in which the Cost Ledger, when maintained on a double entry basis, 
would operate is illustrated by the following statements of various journal entries 
as would appear in the cost books. 
© The Institute of Chartered Accountants of India