Cost Accounting Systems and Cost Control
Domain 6 examines how cost accounts are organised and how cost is controlled. It covers integrated and non-integrated systems, reconciliation of cost and financial profit, standard costing variances and budgetary control.
Cost accounting systems
Integrated accounting keeps cost and financial transactions in one ledger; non-integrated accounting uses separate ledgers and requires a reconciliation statement. Reconciliation starts with one profit figure and adjusts items recorded in only one set of books: notional expenses, interest income, depreciation differences, abnormal losses and stock valuation differences.
Standard costing
A standard is a predetermined cost. Variances: material price = (standard price − actual price) × actual quantity purchased; material usage = (standard quantity − actual quantity) × standard price; labour rate and efficiency variances follow the same pattern; fixed overhead expenditure and volume variances complete the picture.
Worked example: costing profit is Rs. 50,000. Notional rent of Rs. 3,000 appears only in cost books; interest income of Rs. 2,000 appears only in financial books; depreciation in cost books is Rs. 4,000 higher than in financial books. Financial profit = 50,000 + 3,000 − 2,000 + 4,000 = Rs. 55,000. Notional rent reduced costing profit only; interest income raised financial profit only; extra depreciation reduced costing profit only.
Traps: reversing variance signs; computing material price variance on quantity used when the question gives quantity purchased; treating a budget as a forecast; reconciling when integrated accounts already agree; confusing fixed overhead volume variance with expenditure variance.