Cost book-keeping refers to a system of recording various cost information in the books of accounts. There are two systems of cost book-keeping:
i. Integrated system
ii. Non-integrate system/interlocking system.
This is one in which cost accounts and financial accounts are combined in one set of books of accounts.
Non-integrate system/interlocking system
This is an alternative system where the cost and financial accounts are maintained independently. At the end of each period, two profits are calculated i.e. costing profits and the financial profit.
Cost book keeping is based on control accounts. A control account is a summary account where entries are made from totals of transactions for a period. For example total raw materials purchased are recorded in “Material Control Account” also known as “Stores Ledger Control Account”.
Cost book-keeping is based on the principle of double entry. The main control accounts for purposes of accumulating costs are:
i) Raw materials control account.
ii) Wages control account.
iii) Production overhead control account.
iv) Work in progress control account.
v) Administration overhead control account
vi) Finished goods control account.
vii) Selling and distribution overhead control account etc.
Double entry for integrated system
1. To record the purchase raw materials. Dr. Raw material control account. Cr. Creditors/Bank account.
2. To record materials returned to suppliers. Dr. Creditors control account.
Cr. Raw materials control account.
3. To record the issue of direct materials to production. Dr. Work in progress control account.
Cr. Raw materials control account.
4. To record the issue of indirect materials to production Dr. Production overhead control account.
Cr. Raw materials control account.
5. Recording of labour is done in two stages.
a) To record total wages incurred. Dr. Wages control account.
Cr. Bank/wages payable account
b) To allocate the wages between direct and indirect wages Dr. Work in progress control account (with direct wages).
Dr. Production overhead control account (with indirect wages). Cr. Wages control account.
6. To record other indirect expenses (other than indirect materials and indirect labour) Dr. Production overhead control account.
Cr. Bank/expenses payable account.
7. To transfer the absorbed overhead to production.
Dr. Work in progress account (with absorbed production overhead) Cr. Production overhead control account.
The balancing figure in the production overhead control account represents over or under absorbed overheads. This is transferred to the P & L account.
8. To record the cost of goods produced (fully complete goods) Dr. Finished goods control account.
Cr. Work in progress control account.
9. To record selling and distribution overheads incurred. Dr. selling and distribution expenses control account. Cr. Bank/expenses payable account.
NB: this is closed as an expense to the P&L account i.e.
Dr. Profit & Loss account.
Cr. Selling and distribution control account.
10. To record the cost of goods sold: Dr. Cost of sales account.
Cr. Finished goods control account
11. To record sales of goods:
Dr. Debtors or cash account Cr. Sales account.
Given the sales, cost of sales and selling and distribution expenses, the net profit can be determined preparing the profit and loss account.
Journalize the following transactions in the integrated books of account.
1. Credit purchases ksh. 1.2 m.
2. Wages incurred ksh. 700,000 (direct wages ksh. 550,000 and indirect wages ksh. 150,000
3. Direct materials issued to production ksh. 800,000.
4. Indirect materials issued ksh. 200,000
5. Work expenses charged to production ksh. 850,000.
6. Finished goods transferred from production ksh. 2,100,000.
7. Administration expenses incurred and charged to production ksh 150,000.
8. Work expenses outstanding ksh. 120,000
9. Work expenses paid ksh. 460,000
10. Cost of goods issued for sale ksh. 1,950,000
11. Sales (all on credit) ksh. 3,250,000
12. Selling and distribution expenses incurred ksh. 230,000
The above journals can be posted into ledger accounts as follows:
Double entry for Non-integrated system
An interlocking system is a system where the cost and financial accounts are maintained separately and independently of each other. In the accounts, no attempt is made to keep a separate record of the financial transactions. Examples of financial accounting transactions are those relating to;
To maintain double entry records, an account must be opened in the cost books to record the corresponding double entry which in the integrated system would normally be made in one of the financial accounts listed above. This account is known as Cost Ledger Control Account (CLC a/c) or General Ledger Adjustment account or Financial Ledger Adjustment account.
1. To record the purchases of materials either in cash or credit. Dr. Raw materials control
Cr. Cost ledger Control
2. To record materials returned to suppliers. Dr. CLC
Cr. Raw materials control.
3. To record the issue of materials to production. Dr. Work – in- progress (direct materials) Dr. Production overhead (indirect materials) Cr. Raw materials control account
4. To record wages incurred.
Dr. Wages control account Cr. CLC.
5. To allocate wages between direct and indirect: DR. Work –in-progress (direct wages)
Dr. Production overhead (indirect wages) Cr. Wages control account
6. To record other production overhead incurred Dr Productions overhead control.
Cr. Cost ledger control
7. To record the production overhead charged to production. Dr. Work in progress control (with absorbed overhead) Cr. Production overhead
NB the balancing figure in production overhead control account represents the under or over absorbed overhead which is transferred to the costing Profit and Loss account.
8. To record selling and distribution expenses.
Dr. Selling and distribution expenses control account Cr. Cost ledger control
NB: the selling and distribution expenses are then transferred to the P & L account or absorbed into the cost sales.
Dr. costing profit & Loss a/c Cr. Selling and distribution
13. To transfer the finished good from production Dr. finished goods control account
Cr. Work in progress control account
14. To record the sales of goods. Dr. Cost ledger control Cr. Sales
A trial balance under the non-integrated system is then extracted and will normally contain the following items;
The costing profit is normally determined as the balancing figure in the CLC account or it can be calculated preparing the costing Profit & Loss account.
The following are the cost ledger balances of the company as at 31st December 2008.
Operations during the year 2009 were as follows:
Purchases ksh. 40,000
Stock issued to production ksh. 38,000
Stock issued to work repairs ksh. 750
Stock issued not chargeable ksh. 250
Wages: – Productive ksh. 45,000
: – Repairs ksh. 800
: – Unproductive ksh. 4,500
Work overhead expenses (excluding wages and materials) – ksh. 15,000 Work overhead recovered (absorbed) ksh. 21,000 Administration expenses ksh. 4,500 Administration expenses absorbed ksh. 5,000
Sales ksh. 130,000
Finished goods as at 31 December. 2009 ksh. 5,000 Work in progress as at 31 December. 2009 ksh. 3,100
a) Write up the cost books.
b) Prepare the costing profit & loss account.
c) Extract a trial balance as at 31st December. 2009