CMA Inter Paper 8: Cost Accounting common mistakes
CMA Inter Paper 8: Cost Accounting · Understand the traps and how to avoid them.
When a purchase invoice shows trade discount, cash discount and GST separately, the candidate debits the stores ledger with the gross invoice value instead of netting trade discount and excluding cash discount and recoverable GST.
Candidates read the invoice top-to-bottom and treat every rupee on it as material cost; they confuse trade discount (a deduction from list price that never enters cost) with cash discount (a financing item written off to finance cost) and treat GST as a cost when it is a recoverable input credit.
What to do instead
Adopt a fixed sequence for every invoice: list price minus trade discount = purchase price; add freight, duty, insurance, octroi and handling to reach cost of acquisition; exclude cash discount entirely and exclude recoverable GST. Practise ten mixed invoices where all three items appear together and reconcile the stores ledger debit to the net figure before moving on.
In FIFO and weighted average problems, the candidate issues material at the wrong rate because opening stock was not merged into the first receipt, or because a return to stores was priced at the original issue price rather than the rate of the original receipt.
Candidates learn the mechanics of each method but not the boundary rules; the opening balance line sits above the first receipt and is silently skipped, and normal loss returns are treated as fresh receipts rather than reversals.
What to do instead
Before valuing any issue, write the opening balance as a distinct receipt line dated the first day of the period. For returns, reverse at the exact rate of the original issue lot under FIFO and at the original receipt rate under weighted average. Build a four-column table (date, receipt, issue, balance) and verify that the closing balance quantity equals opening plus receipts minus issues before computing any value.
The candidate calculates labour cost using only the time rate and ignores the treatment of idle time, overtime premium and shift allowance, or allocates the entire overtime premium to the department where the work was done.
These items appear as footnotes rather than in the main table, and candidates assume all wages paid for hours worked belong to the job; they do not know that normal idle time is a production overhead while abnormal idle time goes to costing profit and loss, and that an overtime premium is charged to the specific job only when the overtime was at the customer's request.
What to do instead
Classify every hour before costing it: productive hours at the time rate to the job; normal idle time spread as overhead; abnormal idle time to costing P&L; overtime premium to the job only when customer-driven, otherwise to overheads. Work through a two-shift example with a machine breakdown and a rush order so both exceptions appear in one problem.
Under the machine hour rate method, the candidate divides total factory overhead by total machine hours without first separating fixed and variable costs, or forgets to add the machine's own standing charges such as depreciation, insurance and power to the departmental overhead pool.
The formula is memorised as a single division, and candidates treat machine-related costs as already inside the departmental total when the problem lists them separately; they also use budgeted hours for actual absorption without checking the basis stated.
What to do instead
Build the rate in two layers: standing charges per machine (depreciation, insurance, rent of space, supervision) divided by normal working hours, plus variable running cost per hour (power, consumables, repairs). Add the two to get the comprehensive machine hour rate. Always state whether the rate is pre-determined on budgeted hours and compute under- or over-absorption separately.
When preparing a cost sheet, the candidate mixes up prime cost, factory cost and cost of production, or includes selling and distribution overhead in factory cost, producing a total cost that cannot be reconciled to profit.
The sequence of additions is recalled as a list rather than as a flow, and candidates do not adjust for opening and closing work-in-progress and finished goods stock, which is where the factory cost and cost of goods sold stages actually diverge.
What to do instead
Write the skeleton before touching the numbers: direct material consumed, direct labour, direct expenses = prime cost; add factory overhead and adjust WIP = factory or works cost; add administration overhead = cost of production; adjust finished goods = cost of goods sold; add selling and distribution = cost of sales; add profit = sales. Slot every figure into a named line and check that the final line equals the sales figure given in the question.
The candidate applies a single blanket overhead rate across departments and ignores re-apportionment of service department costs, or stops after the primary distribution and reports the service department balances as final.
Primary distribution is the visible part of the problem and candidates finish there, missing the reciprocal services between service departments that require repeated distribution, the simultaneous equation method or the step-ladder method.
What to do instead
After primary distribution, check whether service departments serve each other. If they do, choose one method and state it: repeated distribution until balances are negligible, simultaneous equations where the problem gives two service departments, or step-ladder where one department's cost is apportioned first and then ignored. Show the final total of each production department and confirm that the sum of all apportioned costs equals the overhead pool.
In process costing, the candidate values abnormal gain at the normal cost per unit but treats it as a credit to the process account without debiting the abnormal gain account, or ignores the scrap value of normal loss when computing the cost per good unit.
The normal loss line carries a scrap value that must be deducted from total cost before dividing by expected good output, and candidates compute cost per unit on total input instead; the double entry for abnormal gain is then applied inconsistently.
What to do instead
Compute cost per unit as (total process cost minus realisable value of normal loss) divided by (input units minus normal loss units). Value abnormal loss and abnormal gain at this rate. In the process account, credit abnormal gain and debit the abnormal gain account; the abnormal gain account is then credited with the scrap value of the gain units and the balance goes to costing P&L. Reconcile the total cost of good units transferred to the next process.
For a contract, the candidate recognises the full contract price as turnover or takes the entire profit to the P&L, instead of computing notional profit and applying the cash-received-to-work-certified ratio with the one-third or two-thirds rule.
Candidates confuse contract account (which accumulates cost) with contractee account (which records cash) and do not know the graduated profit recognition rules tied to the stage of completion.
What to do instead
Memorise the three-stage rule: below 25 per cent complete, no profit; between 25 and 50 per cent, transfer one-third of notional profit multiplied by cash received over work certified; above 50 per cent, transfer two-thirds on the same ratio. Always compute work certified, work uncertified, cash received and retention money as separate lines before touching profit, and keep the contractee account and retention reserve distinct in the balance sheet extract.
In marginal costing and CVP problems, the candidate treats a fixed cost as variable when it steps up at a capacity level, or uses the profit-volume ratio on sales value when the question asks for the effect of a change in units, producing a break-even point that does not reconcile to the stated profit.
Candidates apply a single formula mechanically and do not check whether the cost behaviour changes across the relevant range; they also forget that contribution per unit and P/V ratio give the same answer only when the selling price per unit is constant.
What to do instead
Before computing, tabulate each cost as fixed or variable and mark any step-up with the activity level at which it applies. Compute contribution per unit, then break-even units as fixed cost over contribution per unit and break-even sales as fixed cost over P/V ratio. Verify by inserting the answer back: at break-even, contribution must equal fixed cost exactly. For target profit, add the target to fixed cost before dividing.
When a make-or-buy or accept-or-reject decision includes a sunk cost or an apportioned fixed overhead, the candidate includes it in the relevant cost and rejects a profitable order; alternatively, the candidate ignores an opportunity cost of using scarce capacity.
Absorption costing habits carry over into decision problems, and candidates treat every cost in the cost sheet as relevant; they also overlook contribution foregone on the alternative use of a constrained resource.
What to do instead
Apply a relevance filter to every cost line: exclude sunk costs, committed fixed costs and apportioned overheads; include only future incremental cash flows and opportunity costs. For a scarce resource, rank products by contribution per unit of the limiting factor, not by contribution per unit. Show the incremental analysis as a two-column comparison of accept versus reject, with the opportunity cost of displaced sales explicitly deducted.