Goods in transit

What is meant by goods in transit? Definition Goods in transit are goods that have been purchased but have not yet been received by the purchaser. These goods can be easily overlooked when counting the ending inventory because they are not physically located at either the seller’s or the purchaser’s warehouse. Accounting Treatment of goods …

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Periodic Inventory System

What is a Periodic Inventory System? Periodic inventory system does not keep continuous track of ending inventories and cost of goods sold. Instead, these items are determined only periodically, at the end of each quarter, each year, or other accounting period. Although this method may be easier to use for record-keeping purposes, it results in …

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Factory Overhead Practical Problems and Solutions

Factory Overhead Application Methods Problem No. 1 The IQIZ Company estimated its factory overhead of the next period at $160,000. It is estimated that 40,000 units will be produced at a materials cost of $200,000. Production will require 40,000 man-hours at an estimated wage cost of $80,000. The machines will run about 25,000 hours. Required: …

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Important techniques of labour costing

In this article, we are trying to explain some important techniques and formulas to calculate labour cost, payroll and incentive wages. 1. Measurement of Labour Turnover (a). Separation method: Labour Turnover = (No. of separations in a period / Average No. of Workers) x 100 LT = (NS / ANW) x 100 (b). Replacement Method …

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Labour Costing Practical questions with answers

Question No. 1 Calculate total monthly remuneration of three workers: A, B and C. (a). Standard production per month per worker 1,000 units. (b). Actual production during the month: A: 850 units B: 750 units C: 950 units (c). Piece work rate is 10 cents per unit (actual production) (d). Additional production bonus is $10 …

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Predetermined Overhead Rate

What is predetermined overhead rate? – Definition: A predetermined overhead rate is an allocation rate that is given for indirect manufacturing costs that are involved in the production of a product or various products. It is used to estimate the manufacturing costs that will take place. The estimation takes place at the beginning of an …

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Incentive Plans

What are Incentive Plans? – definition Incentive Plans are the techniques in which an organization keeps its employees motivated to perform their specific tasks with more effort and efficiency and pay several incentives to complete those tasks. Advantages of Incentives Generally, the following advantages result from the introduction of incentive plans in a factory: Rate …

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Computation of Machine Hour Rate

What is Machine Hour Rate? Machine hour rate represents the hourly cost of factory overhead for operating a particular machine and is obtained by dividing the factory expenses connected with a machine for a given period by the number of hours worked by the machine during that period. The Institute of Cost and Management Accountants, …

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Methods of Factory Overhead Absorption

The common methods applied for absorbing factory overhead are as follows: (1) Units of Output Method: Under this method, absorption of factory overhead is made on the basis of the number of units manufactured. The overhead rate is obtained by dividing the amount of overhead expenses by the number of units of output. Thus: Formula …

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Under-absorption and Over-absorption of Overhead

What is Under-absorption and Over-absorption of Overhead? Where the absorption of overhead is made by a rate based on actual data, the overhead absorbed must be equal to the actual overhead incurred. But where a pre-determined rate is employed, there is generally a difference between the overhead absorbed and the overhead incurred. If the absorbed …

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Memorandum Reconciliation Account

What is a Memorandum Reconciliation Account? Reconciliation of Cost and Financial Accounts may also be presented in the form of an account prepared on memorandum basis. Such an account is known as “Memorandum Reconciliation Account“. The amount of profit as per cost accounts is shown on the credit side of this account. The various items …

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Reconciliation of Cost and Financial Accounts

Introduction of Reconciliation of Cost and Financial Accounts Cost accounts are maintained independent of financial accounts. These two accounts have different aims to fulfill. In the financial account, expenses are recorded in a subjective form, that is, according to their nature in a strict sense of the term. On the other hand, the cost accounts …

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Normal and Abnormal Wastage

Normal Wastage (Loss) This means the usual percentage of wastage arising in its natural course in a process or operation. Such wastage is not avoidable as it occurs in its natural course. The normal wastage and loss due to it should be charged to the good units arising out of the process. In this way, …

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Batch Costing

What is Batch Costing? – Definition Batch costing is nothing but a modified form of job costing in which cost is calculated of each batch of production. This method of costing is applicable in those manufacturing unit, where articles are manufactured in definite batches. This method is also known as ‘Lot Costing’ as products are …

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Output Costing

Output Costing – Definition Output costing is an analysis of the different elements of expenditure so as to find out the factory cost, office cost and total cost per unit. The per-unit cost is arrived at by dividing the total expenditure by the quantity produced. Output Costing – Explanation This costing system is employed in …

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How to calculate profit and loss on contracts?

The procedure for the determination of profit or loss on contracts under different circumstances may be given as follows: 1. Profit on Completed Contracts: In case of contracts completed during the accounting year, the full contract price, whether payable in lump sum on the completion of the contract or payable by installments, shall be debited …

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Cost Plus Contract

What is Cost Plus Contract? – Definition Sometimes contractors may accept a contract on the condition that the contractee would bear all costs incurred in executing a contract plus a fixed rate or percentage of profit calculated with reference to the total cost. Such contract is known as Cost Plus Contract and is generally adopted …

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Contract Costing

What is Contract Costing? – Definition Contract costing is the method of costing which is applied in a business where separate contracts of non-repetitive nature are undertaken. According to Sharie, “Contract or terminal cost accounts are applicable to a concern which makes specific contracts and requires to know the cost of each.” A contract is …

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Contract Account

What is Contract Account? – Definition When a contract has been accepted by the contractor, a separate account is opened for each contract in order to bring together all costs relating to a particular contract, and a serial number is given to each contract, which is called contract account. Explanation of Contract Account All expenses incurred …

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Cost Price Method

Explanation of Cost Price Method Under cost price method, materials issued to production, are charged out on the basis of actual cost i.e., the cost at which these have been purchased. As we already know, the actual cost of materials consists of purchase price or invoice price (less trade discount and quantity discount), import duty, …

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Pricing of materials returned to vendors

Materials returned to vendors may be recorded at invoice price or in accordance with the method adopted for pricing out material issues. Recording of materials returned at invoice price is not realistic as the price per unit granted by vendor on return of materials cannot be the same as the original invoice cost. Necessary adjustments …

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Pricing Methods of Material Issued

Different methods can be used for the purpose of valuing or pricing of materials issued for production in a manufacturing concern. The actual method to be adopted in a manufacturing concern shall depend upon the nature of materials and the nature of the business itself. It is important to note that whichever method of pricing …

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Valuation of materials purchased/received

Valuation of materials – Meaning One of the main objects of cost accounting is the ascertainment of accurate costs and the accuracy of costs depends upon the ascertainment of the accurate cost of materials consumed and labour used in the production of a particular product. Material is the most important element of cost and it …

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A.B.C analysis of material control

Definition A.B.C. Analysis (or Proportional Parts Value Analysis) is a technique followed for the purpose of exercising control over materials according to their importance or value. Explanation Under this system, all the items of material are classified into three categories A, B and C according to their value. Category ‘A’ consist of materials which constitute …

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Material Costing Practical Problems and Solution

Problem No. 1 How to calculate raw materials to produce finished product/goods? A factory uses a particular raw material. There are three processes A, B and C. The data relating to inputs, outputs and rejections during the month of April are given below: Inputs (in pieces) (Including opening W.I.P) Rejections (in Pieces) Output (in pieces) …

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Inventory Turnover Ratio

What is Inventory Turnover? Inventory turnover is the rate at which a company sells its inventory. Inventory Turnover refers to the movement of material into and out of an organization. It is in the best interest of the organization to compare the turnover of different types of and grades of material as a measure of …

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Material Abstract

Definition and Meaning In order to ascertain the cost of materials used on a particular work-order or job, an analysis of Material Requisitions, Material Returned Notes and Material Transfer Notes is made on sheets specially meant for this purpose which are known as Materials Abstract or Materials Issue Analysis sheet. Specimen/Format of Material Abstract The …

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Transfer of Materials

What is the materials transfer? Direct transfer of surplus materials from one job or work-order to another is, as a rule, undesirable and should be discouraged as far as possible. It is, however, justified when an urgent job has to be completed and it is necessary to appropriate the surplus materials in order to avoid …

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What is Material Return Note?

Usually, materials obtained for a particular job are not consumed fully or are drawn in excess of requirements. The excess quantity is returned to the stores together with a Material Return Note. The materials should kept by the store-keeper in appropriate Bin and entered in the ‘In’ or ‘Received’ column of the Bin Card. Format of …

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What is Material Requisition?

Whenever certain materials are required in a production department, it has to prepare a Materials Requisition. Materials Requisition or ‘Requisition Slip‘ or ‘Materials Requisition Note‘ can be defined as “a document which authorizes and records the issue of material for use “. In other words, Materials Requisition is a document which is used for drawing …

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Maximum Stock Level

Maximum Stock Level is the upper limit of stock above which the stock should not be allowed to exceed under normal circumstances without the prior sanction of the management. The main object for fixing up the maximum stock level is to avoid undue investment of capital leading to loss of interest, obsolescence of materials and …

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Reorder Level of Stock

Definition of Re-order Level of Stock or Ordering Level The reorder level of stock is the stock level fixed between maximum and minimum stock levels, at which an order for the replenishment of stock should be placed. In other words, it is that level of inventory at which purchase order should be placed. The reorder …

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Methods and Principles of Codification of Materials

Methods of Codification Some of the common methods of codification of materials may be enumerated as follows: 1. Alphabetical Codification of Materials As the name indicates, this method involves the use of letters of alphabets as codes to facilitate easy and quick identification of materials. For example: Symbole Description A Raw Materials B Tools and …

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Stores management in manufacturing concerns

In manufacturing concerns, stores may be managed as: (a) Centralized Stores, (b) Decentralized Stores, and (c) Centralized Stores with sub-stores. Centralized Stores Management Centralized storing refers to the setting up of a single store-house for the whole organization. It caters to the needs of all the departments working in the organization. Such stores are advocated …

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Store Keeping

After materials purchased have been received and checked, the next step in the process of material control is the storing of materials or store keeping. ‘Store keeping’ refers to the safe custody of all items of raw materials, supplies, finished parts, purchased parts etc., in the store-room for which the store-keeper acts as a trustee. …

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Receiving and Inspection of the materials

Receiving of Materials In small and medium-sized manufacturing concerns, functions of receipt and inspection of materials are to be performed by the stores department or the store-keeper. But in case of large manufacturing concerns, generally, a separate Receiving Department is set up. The Receiving Department has the following functions to perform: (i) To receive, unload …

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Material Cost

Definition Material is the most important element of cost. In most of the manufacturing concerns, 50% to 70% of the total cost of a product is represented by the cost of the material. The material cost has been defined by the Institute of Cost and Management Accountants, U.K., as “the cost of commodities supplied to …

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Classification of Cost

Cost accounting involves collecting, classifying, recording and appropriate allocation of expenditure for determining the costs of products or services. After costs have been collected, these are properly classified for their identification with cost centers or cost units. Costs have different features or characteristics. Costs are grouped or classified according to their common characteristics. The process …

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Items Excluded from Cost Accounts

The following items which are included in the financial accounts of a manufacturing concern, shall not be included in cost accounts since they are not related to cost of production: 1. Items of Appropriation of Profit (a) Income tax paid and legal expenses incurred in connection with the assessment of income tax. (b) Transfer to …

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