Chapter4. CostAccountingCycle.

125

(d) recording various factory overhead costs.

.J, why it becomes necessary to segregate the accounts in general ledger and
factory ledger?
-+. What accounts are generally maintained at factory office?
_i. What is a Transfer Voucher? What function does it serve?

Exercises.

L1' Cost Accounting Cycle Entries. Al-Rahman Industries during the month of
:lr' 20 I 6 completed following transactions:

. Materials purchased during July 2016

Direct materials Rs. 400,000
Indirect materials Rs. 50,000

Materials issued for usEin production:

Indirect materials Rs. 50,000

Total Rs. 400,000
Defective materials refurned to supplier:
Direct materials R:.
-ildifi;;;6iar.
Rs. 1,000

Unused materials returned by factory to storeroom:

Direct materials Rs. 5,000
Indirect materials . Rs. 2,000
Total Rs. 7.000
Payroll data for the month are as follows:
Direct labour Rs. 550,000
Indirect labour Rs.
!gl_ql_"t gLlqqlkglng staff Rs. 300O00
_!_f"Lgtglgle*Ulistration staff Ri. 100,000
Total Rs. 1.000.000
_q.9{119t9lp.fg*t {"r, $na
ll.e: ag.eutpgg-- Rs. 950,000
Employer also contributes an equal amount towards provident fund.

,l
r:g :;-:-,,. System ofAccounting for Costs.

(t) Factory overhead cost incurred during the month:

Bills for utilities Rs. 220,000
Fuel for electricity generator Rs. 20,000
Factory rent Rs. 80,000
Depreciation of plant Rs. 60,000
Insurance_o_f.p!_11__qdfq4 Rs. 30,000
Total Rs. 410,000
(g) Factory overhead applied to production @ 80% of direct labour cost.
(h) Cost of finished goods produced during the month Rs.900,000.
(i)Finished goods costing Rs.850,000 were sold for Rs.1,450,000. Sales of
Rs.950,000 were for cash and of Rs.500,000 were on credit
Requlred: Pass entries in generaljournal form to record the above transactions.
(lllustration 4-l & 4-2 qre related to above exercise)
4-2. Cost Accounting Cycle EntrieS. Following transactions were completed by Al-
Raheem Industrial Co. Ltd. during the month of May 2016:
(a) Direct materials worth Rs.225,000 and indirect materials of Rs.15,000 were
purchased. But direct materials of Rs.4,000 and indirect materials of Rs,1,000
were not according to spccifications and returned to the supplier.
(b) Direct materials worth Rs.200,000 and indirect materials wo(h Rs.12,000 were
issued to fbctory for use in production; but direct materials of Rs,8,000 and
indirect materials of Rs.2,000 were not uscd in production and returned by the
factory to storeroom.
(c) Gross wages and salaries for the month were Rs.600,000; comprising
Rs.330,000 direct labour, Rs.70,000 indirect labour, Rs.150,000 sales salaries
and Rs.50,000 administrative salaries. After deducting provident fund of
employees @ l0% of gross earnings, Rs.540,000 were paid to employees. The
company also contributes an equal amount towards the provident fund.
(d) Actual factory overhead cost Rs.200,000, including Rs.40,000 for depreciation
of plant and Rs.10,000 for expired insurance of plant, were recorded.
(e) Factory overhead is applied to production at the rate of 75%o of direct labour
cost.
(0 Goods costing Rs.650,000 were completed during the month.
(g) Goods costing Rs.600.000 were sold for Rs.900,000. Sales of Rs.700,000 were
for cash.
Required: Pass entries in general journal form to record the above transactions.
(lllustration 4-l & 4-2 are related to above exercise
l

t
 Chapter 4' Cost Accounting Cycle' 127

rt-3..Cost Accounting Cycle Entries, Adjustment of FOH Variance. Al-Malik Mills

completed its first year of operations on June 30,2016. A summary of some of the
transactions for the year is given below:

(a) Purchases for the year:

Direct materials Rs. 750,000
Indirect materials Rs. 30,000
Rs. 20,000
-!-b.rpp!ng-.ry-pl["s Rs. 800,000
Total
(b) Materials issued form storeroom:
Direct materials Rs. 7
-ir[iiiii-"i,iiiili Rs. 25,000

(c) Materials purchased and directly delivered to factory for use in production
Direct materials n-t
----3-1.0i-9--
-ila-iigi-Aairiillr:: -1,999
(d) Payroll data for the year:
Direct labour Rs.
:::: 625,000
Rs. 75,000
_.1tt{'_tg-._t_!e!_o_,lt
Salaries of marketin Rs. 140,000
Salaries of administrative Rs. 60.000
Total Rs. 900,000
oeauitlo,i'rd,-ifi-ovioent fund
--_--3L -1:'999
--*__ry_._i..3g9lui!3$_-----_- _-L..--s5s,000-
fmptoye.-contiiUutes an equal amount towards provident fund.
(e) Depreciation on assets Rs.45.0,000, 70o/o for factory, 20o/o for marketing

.: -- (0 lnsurance of the assets expired Rs,75,000, 70o/o fot factory, 20o/o for' marketing
- J
i,
department and l0% for administration department'
(g) Miscellaneous expenses of the factoryRs.l59,800.
(h) Other expenses of head office Rs.400,000. 75o/o formarketing department and
nistration department.
25o/o for admi
(r) Factory overhead applied to production @ l}}o/oofdirect labour cost'
U) Cost of finished output of the year Rs.1.955,000.
(k) All finished output except Rs.40,000 was sold for Rs'2,750,000'
i.equireO: (i) iass entries in general journal form to record the above

:--- . ., i f'I
128 Part-ll. System ofAccounting for Costs.

transactions.
(ii) Pass entries to close factory overhead applied account and to
adjust under or over-applied factory overhead to:
(a) cost ofgoods sold, and
(b) entire production ofthe year.
(Illustration 4-5 is related to above exercise)
44. Separate Books at Head Office and Factory Otfice. Assume that Al-Malik
Mills of Ex. No.4-3 maintains a separate set of books at factory office to record
transactions relating to manufacturing operations. Record the transaction of the
cornpany in both head office books and factory office books
(Illustration 4-5 & 4-7 are related to above exercise)
&5. Cost Accounting Cycle, General Ledger and Factory Ledger Entries.
Following are the transactions in summarized form of Al-Quddos Industries for the
month of June,20l6:
(a) Direct materials of Rs.370,000 and indirect materials of Rs.30,000 were
purchased during the month, out of which direct materials of Rs.6,000 were
retumed to suppliers.
(b) Materials Requisition Summary for the month showed following issues:
Direct materials Rs. 330,000
lndirect materials Rs. 25.000
__s_b.rppj!e_tJ.!_l'.g!. Rs. 10,000
However, direct materials of Rs.10,000 and indirect materials of Rs.2,500 were
returned back to storeroom as shown by Materials Returned Notes.
(c) A further purchase of direct materials of Rs.18,000 was made and on receipt of
the consignment it was directly delivered to factory for use in production.
(d) Gross salaries and wages for the month as shown by Payroll Register were
Rs.160,000. Deduction of Income Tax at source totaled Rs.8,000 and of
provident fund Rs.16,000. The company contributes an equal amount towards'
provident fund.
Payroll Analysis Sheet showed following distribution:
Direct labour Rs.
105,000
lndi.;Ai;'b"* Rs. 15,000
Salaries o.t"grg!_dlgqelgrtgent_ Rs. _?5,0q0
:-$elsriql:f-?gs,i!ErcI,-"r-
(e) Factory overhead costs of Rs.53,120 including depreciation of Rs.13,000 and
expired insurance of Rs.7,000 for factory machinery and building were
recorded.
(0 Depreciation of Rs. 16,000 on office building and fumiture was recorded, out of
which Rs.10,000 is chargeable to marketing department.

-1*-:--l:-:*-:- i
 Chapter 4. Cost Accounting Cycle. 129
(e) Vouchers totaling Rs.350,000 excluding payroll voucher were paid at a
discount of 2oh.
(h) Factory overhead is applied to production at the rate of g0% of direbt labour
cost.
(i) co,tornni,hedoutputforthemonthtotaledRs.507,500.
0) Finished goods costing Rs.457,500 were sord for Rs.732,000. Sales of
Rs.140,000 were on credit.
(k) One of the credit customers retumed goods costing Rs.8,750 for which he was
billed at Rs.14,000.
Required: Pass journal entries for the above transactions in head office books and
factory office books using two parallel columns.
(Illustrqtion 4.7 is related to above exercise)
4-6. cost Accounting cycle, Generar Ledger and Factory Ledger Entries.
Following is summary of transactions that take place at As-Salam Minufacturing
Company Limited during the month of April20l6:
(a) _vtet9Ipl;1.Ufq!a.s_g$_Le_ggly94jt{ Igcorded Rs. 265rg00
(b)_M4Sltel.t_f_e_qgi!tlr_9_qed_orl_.!_N_o-.-!01,t02and103 Rs. 235
(c) Indirect materials requisitioned
(d) Materials returned to the supplier
(e) Excess materials returned from the to storeroom
.-----.Gl,-ry.lstut_ix.pptise!_ts..tejg!_Ne_lqz Rs.
(0 .-lefUgtS-e{-y-lgSl-g"d salaries were made based on the following information:
._l.trry.tri3ei:_9_U9U'_I9@ffl1"p00T*.g
--_ Rs. 250,000 .

Clock Cards and Time Tickets for all other indirect ta6our Rs. 60
!elg_r_f_l.gllq:_g_{__q_o_U1tr_Ul_ol____ Rs t00p00
-omgesLg_e_erg_Id_q_qnitrsgst-tst-!g[9]1"
Rs. 40,000
Rs. 450
Employees provident fund contribution: .3o/o of total wages, incomE-taf
withheld Rs.6,500.
-) The company contributes 370 as its contributions of provident fund.
(h) Factory overhead control account in Voucher Register was debited for
Rs.70,000. Month end adjusting entries charged for depreciation Rs.30,000 and
for insurance Rs. I 0,000.
1:i) Factory overhead is applied at the rate of 7o%o of direct labour cost.
{j) Goods costing Rs.625,000 were completed.
k) Goods costing Rs.590,000 were sold for Rs.950,000 (Rs.200,000 for cash).
130 Part-ll. System of Accounting for Costs.

You are required to pass journal entries in the factory office books and general
office books
(rilustation 4-7 is rerated to above exercise)
4-7. Three W,l.P. Accounts. Following information summarizes activity of Al-
Momin lndustry during the month of M4y:
(a) Raw materials purchased Rs. 410,000
(b) Direct materials of Rs.340,000 and indirect materials of Rs.50,000 wer€ used in
production.
(c) Factory overhead cost during January:
Utilities payable Rs. 12,000

lnsurance expired Rs. 4,000

Depreciation of plant Rs: 10,000
(d) Payroll data for the month are as follows:
--o-irqgt l?P-e-sr---- _-- -_
Rs. 230.000
Indirect labour Rs.
yroll Rs. 270,0J0
-_e_g.plqy_._g{p_fg_ggenl$nC_ggggrbgq_o3-_----_-_ _ Rr. 13,500
_.NS!-1gely1!.p._etg______ __s'.__2s0,s99_
Employer also contributes an equal amount towards provident fund.
(e) Factory overhead is applied to production @ 80% of direct labour cost.
(0 Cost of finished goods produced during the month Rs.730,000 comprising
direct materials Rs,325,000, direct labour Rs.225,000 and factory overhead
Rs.180,000.
(g) Finished goods costing Rs.670,000 were shipped to customers for
Rs.1,000,000. Customers paid Rs.800,000 in cash and balance of the sales
were on credit.
(h) One of the customers returned goods costing Rs.12,000 for which an invoice of
Rs. 18,000 was sent to him.

Required: Enter the above transactions in general joumal form in head office
books and in factory office books.
(Illustrations 4-7 & 4-10 are related to above exercise)
4-8. Beginning Balances, Three W.l.P. Accounts, Adjustment of
Under/Overapplied FOH. Al-Muhaymin Manufacturing Company operates a branch
factory located several hundred miles away from the general office. The general
office maintainS accounts for plant and equipment, creditors and customers, with all
 Chapter 4. Cost Accounting Cycle' 131

trial
:3cords of production being maintained at the factory office books. Following
: alance is extracted as on December 3 l, 2015:
Accounts Dr.
Cr.
Materials. ...:.... Rs.15,000
15,000
20,000
Work in process --- factory overhead. ' 15,000
20,00
450,000
308,000
machinery...:........'....: 100,000
Factory
Rs.445,000
35,000
Allowance for depreciation --- machine'
463,000
General ledger.
lA3rooo-
-:e following transactions took place during December 2015:
:) Direct materials purchased and received Rs' 100,000'
indirect labor
_l The factory payroll for the Rs.40,000 direct labor and Rs.l0'000
was mailei to the home office.l Th" home office payroll for
sales salaries
firnd deduction
Rs.15,000 and officer salaries Rs.10,000. Employees provident
gross payroll were recorded at the home office
50h andincome tax llYo of the
books.
;I lndirect materials and supplies amounting to Rs.25,000 were Purchased'
ri Analysis of the materials requisitions show:
Rs.50,000
Production order..
10,000
Maintenance and rePairs.... '..
ShipPing suPPlies.. ":" "' 5,000

Defective shipping supplies retumed to the supplier Rs'1,000'

paid'
t
: Vouchers totaling Rs' 130,000 including payroll voucher' were
Depreciation at an annual rate of l0% of the original cost was recorded on
;)
factory machinery.
:) Sundry factory overhead costs of Rs'7,000 were vouchered'
Factory overhead,was applied to production at the rate of 80%
of direct labor
-r
cost.
and overhead
I Goods completed costing materials Rs'40,000, labour Rs'40,000
Rs.32,000 were transferred to finished goods warehouse'
(t Sales for the month were Rs.125,000. The cost of goods
sold was Rs'80,000'
132 Part-ll. SystemofAccountingforCosts.

(l) At the end of financial year as on December 31, 2015, factory overhead
accounts are closed, over or under applied balance is distributed between work
in process, finished goods and cost of goods sold in a ratio of the rupee
amounts for each account balance,
Required: Journal entries to record the above transactions on the general office
books and factory office books.
(Illistrations 4-5, 4-7 & 4-10 are related to above exeriise)
4"9. Payroll Entries, Different Variations. Head office of Al-Aziz lndustry is in
Multan and their factory is located in Bahawalpur. Following are payroll data for one
pay period:
(a) -@$:etl-iu.s----.-- Rs. 600,000
Deductions:
Provident fund Rs, 30,000

(b) Voucher fbr the pay period is prepared.

(c) Voucher for the pay period is paid.
(d) Distribution of the gross eamings is as follows:
Direct labour Rs. 400,000
Indirect labour Rs. 70,000
Salaries of marketin Rs. 80,000
Salaries of 'al office Rs. 50,000

(e) At- ziz lndustry contributes an equal amount towards provident fund as

deducted.
Required: Passjournal entries in head office and factory office books under each
of the following assumPtions:
(i) payroll account is maintained at head office for all employees.
(ii) Factory maintains its own payroll for factory employees'
(iii) Payroll clearing account is not maintained at all'
(Illustration 4-8 is related to above exercise

4-10. Factory Payroll Maintained at Factory. Following are some of the

transactions of Al-Jabbar Industrry which maintains both a Factory Ledger and a
General Ledger.
(a) Materials nurchased and received at the Rs. 250,000
--------------r
(b) Requisitions received and materials were supplied from the store:
Direct materials Rs. 220.000
Manufacturing supplies Rs. 20,00c
 Chapter 4. Cost Accounting Cycle. f33

(c) Paid factory payroll for the week as follows:

Direct labour Rs. 225,000
-ila;;;i-'"6;- Rs. 15,000
Superintendence Rs. 10,000
A factory payroll book is maintained at the factory. At the end of each week
the factory payroll is reported to and paid by the general office. Provision for
employees' Social Security Tax in the amount of Rs.5,000 and 5o/o Income
Tax is made in general office books. The management also contributes
Rs.5,000 towards Social Security Tax from its side. The employer's
contribution is treated as factory overhead.
(d) Direct materials returned to storeroom Rs. 5,000
(e) A Transfer Voucher from general office showed following details:

;l (0
_P_"p_t-._glglig_qgft Bgbi"
Factory overhead is applied to production at the rate
cost.
(g) -Yef!--.9-rypl-e-t9-q gg.Iilg-the w.eek--___-----. .
of l40o/o of direct labour

Rs'--_qzry-g-i-
(h) Goods costingRs.600,000 were sold for Rs.1,00,000.
-.
Required: Joumal entries to record the above transactions in General Office
Books
^"0'i#:,1#,:27,7y;";*T|)' ,o are retated to above exercise)
4-11. Payrolt Clearing Account Not Used. Following transactions were completed
by Al-Mutakabbir Manufacturing Company, that maintains both a Factory Ledger
and a General Ledger.
(a).-$lgr",s.p-u[.8!.p-d-g.q.I9-cgy9g.al&gtg]J. Rs. 136,000

(b) Requisitions received and materials and supplies issued as follows

Direct materials Rs. 95,000
Manufacturing supplies Rs. 15,000
(c) Paid factory payroll for the week as follows:
,.P-ireg-t..1e!-p-ur--...
Indirect labour Rs. 15,000
peduc[-iiom th"-i;6i p"r;il 5"/-f-{;;6r'd"rt nrna fo,
"nd-Ri.s,ooo
At of
income tax. A factory payroll is maintained at the factory. the end each
week the factory payroll is reported to and paid by the general office. The only
payroll entry on the factory bool<s is one distributing the payroll to the
cippropriate qccounts. The company also contributes 5o/. of the payroll form
its side for provident fund
134 Part-ll. System of Accounting for Costs.

(d) Direct materials returned to storeroom Rs. 2,500

(e) A Transfer Voucher from general office showed following expenses to be

recorded:
lnsurance of factory building and equipment
id account in I office books Rs. 7.500
on buildin Rs. 1,s00
Taxes
Rs. 12,504
Rs. 4.500
-.P--epi-.-ql-qt-i..-l--o-f . Rs. 4,000
Depreciation of bui
Rs. 000
-Iqlt---.--.
(0 Manufacturing overhead is applied to production at the rate of
70o/o of direct
labour cost.
(g) Works completed during !!-9 rY$-!
Rs. 300,000

(h) Goods costing Rs.250,000 were sold for Rs'400,000

Prepare journal entries to record the above transactions on
the general
Required: work in
office uoots and on the factory office books. Use only one
Process account.
(lllustrations 4'5, 4-8 & 4-10 are related to above exercise)
to Al-
4-12. Dual contribution by Employer. Following tiansactions are related
ffrJiq fufur.;f*,"ring Company, Rawalpindi. Factory is situated at Jehlum' Total
Tax withheld Rs'24,000,
payroli cost for the rionth i.r.ti0O,00O, imployees Income
ieiuction for provident fund at the rate of 5'/o of gross payroll, voucher for
net
revealed the
earnirrgs of employees was prepared and paid. Payroll Analysis
Sheet
following information :
Direct labor Rs. 500,000
Rs. 60,000
lndirect labor
Sales salaries
Rs. 140,000

Office salaries Rs. 100,000

N ot.I=E*pi;F;;-P ffi, dAt F* ffi I, lh: "Tq

-i',(SSFC) :.: 11 i: Jl:
same rate as the ratqof deduction, rate of Social Security Fund Contribution
by employer is 3%o ofgross PaY.
Required: Prepare journal entries to record- the above transactiotls in
general

office books and factory office books'

' (Iltustration 4'9 is related to above exercise)
of Al-
4-13. Opening Factory Ledger. Following balances appeared on the books
Baari Corporation on December 31, 2015:
 Chapter 4' Cost Accounting Cycle' 135

Cash Rs. 37,500

--:---!--------

Tiorei 28,000
}eo*nOry-C.;rreleiisr-'--:_--_-:-:::-J'z-s - --*.

-[-qrK.tgpry-gs:-t..:::I*1.9rv-qv'gr!9?g-- - --- --, 1-2199

:k!.9.&-!-y-tt4-,.!s*-...----*.--r ------P19,099-- - --r': ::=-

ggryngs__.,-_____-_ --------. -lz-gfui-
.-\t"i&gs--.--
._R.!ltngd

_- j__-_--_- --_--*
,=,.=
Rs. 1,176,500 Rs'
#---:T.."..-
,?:9'999
1,tr76,500

Considering the difficulties faced by the accountant

- during the preceding year, the
-rnug.-"rt has decided to establish a Factory Ledger at the beginning of the year
that is from January 1.2016.
you are required to pass necessaryjournal entries both in general office books and

4-14. Flow of Cost. Al-Musawwir Manufacturing Company had the following

inventories otr l" June:

-Bey--rye1.-"cF--..-.-.-- .--_ -- ll'{*} Rs

_tLq.I! nplg_99!!_::_t!.nt_eg?E --ES.I4'VYY

j-eiLfiiieesi!....Egl-e-ry .---]L'z1999
"iele"d ------_- ----&',31.qqq*
During the rnonth of October the cost of raw materiiils purchased was Rs.160,000;
directlabor cost'incurred was Rs..I75,000 and factory overhead applied to production
was Rs. 157,500.
lnventories on 3l'' June were:
Raw materials Rs.47,500

Rs. 22,500
-U-erBl1p-rg-g-e!-s..:::-&9-t!Iy.9y-9rh9d Rs.40,000
-I!t[sbs9-g-q-e4..- -
Required: Prepare the necessary journal entries for the month of June to show
flow of costs through proper summary/control accounts'
(Illustration 4-3 is related to above exercise)
136 Part-ll. System of Accounting for Costs.

4-15. Flow of Cost. Al-Ghaffaar Industries had following inventories at the

beginning and end of the month:

-I&rss?r-,-
Work in --- lll4lgll,
__--_-_-d6t--_#iln-
Rs. Rs.
Work in --- labour Rs.40
Work in Rs. 50,000 000
Finished goods Rs.25,000 Rs.28,000

During the month of September the cost of raw materials purchased was Rs. 125,000;
direct labour cost incurred was Rs.80,000 and factory overhead applied to production
was Rs.100,000.
Required: Prepare the necessary.journal entries for July to transfer the cost
goods manufactured and sold to proper summary accounts.
(Illustration 4-3 is related to above exercise)