WBCHSE Costing & Taxation common mistakes
WBCHSE Costing & Taxation · Understand the traps and how to avoid them.
In process accounts, treating normal loss as a cost by valuing normal-loss units at full production cost and carrying that value into the process account, instead of crediting normal loss at its scrap/realisable value and letting the cost of good units absorb the loss.
Candidates memorize 'normal loss is unavoidable' but not the accounting entry, so they confuse physical loss with cost absorption and double-count cost across processes.
What to do instead
For each process, compute normal loss units = input units × normal loss %. Value them only at scrap value per unit, credit the process account, and divide net cost (total process cost minus scrap value of normal loss) by expected good output (input − normal loss) to get the per-unit cost of good output. Practise one two-process example where abnormal loss and abnormal gain both appear.
In contract costing, transferring the full notional profit to the profit and loss account instead of applying the degree-of-completion rules, and omitting the work-certified versus work-uncertified distinction.
The formula table (1/3, 1/2, 2/3 of notional profit × cash received/work certified) is memorized without understanding why retention and uncertified work reduce recognised profit.
What to do instead
Write the three-step decision explicitly before computing: (1) is the contract less than 25% complete - transfer nothing; (2) between 25% and 50% - transfer 1/3 × notional profit × cash received/work certified; (3) above 50% - transfer 2/3 × notional profit × cash received/work certified. Show notional profit as certified value minus cost to date, and keep WIP (work uncertified plus retention) as an asset.
Preparing the cost sheet with the profit added inside the cost of sales, or mixing cost of goods sold with cost of production, so the sales figure and profit do not reconcile.
Candidates treat the cost sheet as a list of expenses rather than a vertical statement, and do not track opening and closing stock of finished goods separately from work in progress.
What to do instead
Use a fixed skeleton every time: direct material consumed → prime cost → add factory overhead → add opening WIP, less closing WIP → cost of production → add opening finished goods, less closing finished goods → cost of goods sold → add administration and selling overhead → cost of sales → add profit → sales. Check that the final line equals the given sales figure; if not, the error is in a stock adjustment.
Apportioning overheads to departments without distinguishing allocation, apportionment and absorption, and then using a single blanket absorption rate across departments with different cost drivers.
The three terms look like synonyms to a first-time reader, and the absorption rate is often computed before the secondary distribution is finished, so service department costs never reach production departments.
What to do instead
Classify first: allocation is direct charging where a cost is identifiable to one department; apportionment is spreading a common cost on a stated basis (floor area, machine hours, light points); absorption is charging department overhead to output using a predetermined rate (machine hour rate or labour hour rate). Complete primary then secondary distribution (repeated distribution or simultaneous equations) before computing any absorption rate, and compute the rate as budgeted overhead ÷ budgeted base, not actuals.
Under- or over-absorbing overheads is ignored, or the difference is treated as a cost of the current year rather than adjusted, so cost accounts and financial accounts diverge.
Candidates compute the absorption rate and stop, forgetting that actual overhead rarely equals absorbed overhead, and they do not know that the balance must be disposed of.
What to do instead
After absorption, compute under/over-absorption = actual overhead − absorbed overhead. State the treatment: transfer to costing profit and loss account, or supplementary rate, or carry forward if the amount is due to abnormal circumstances. Show the adjustment as a separate line in the cost sheet and note its effect in the reconciliation statement.
In reconciliation of cost and financial accounts, listing differences without a sign convention, so the statement does not tie to the financial profit and the direction of each adjustment is guessed.
Candidates memorize reasons (notional items, purely financial items, stock valuation differences, under/over-absorption) but never practise the arithmetic direction, so they add where they should subtract.
What to do instead
Build a two-column statement starting from financial profit or costing profit and label every line 'add' or 'less' with the reason. Fix the direction rule by asking whether the item raises or lowers costing profit relative to financial profit. Reconcile both ways for one example to prove the statement is symmetric.
In labour costing, computing gross wages only and ignoring the treatment of idle time, overtime premium, and the split between direct and indirect labour cost.
Candidates learn the incentive formula but not which portion of wages is chargeable to the job, so overtime premium is charged to production instead of overhead.
What to do instead
For each wage element decide the charge: normal time worked on a job is direct; idle time is indirect (overhead); overtime premium is indirect unless the overtime was worked at the customer's specific request. Separately, split overtime into normal rate (direct) and premium (overhead) before posting to the job account.
Applying the Halsey and Rowan bonus formulas interchangeably, or computing bonus on total time instead of time saved, and failing to check that the guaranteed day rate is respected.
The two formulas look similar (both use time saved), and candidates do not derive the difference: Halsey gives a fixed share of time saved, Rowan scales the share down as time saved grows.
What to do instead
Write both formulas side by side: Halsey bonus = time saved × rate × 50% (or stated share); Rowan bonus = time saved × rate × (time taken ÷ standard time). Compute total earnings under both for one job and verify the Rowan bonus never exceeds the time saved value and that earnings never fall below hours worked × rate.
In material control, computing the economic order quantity and reorder level with the wrong units or ignoring stock levels, so the answer is arithmetically plausible but dimensionally wrong.
Candidates plug into EOQ = √(2AO/C) without checking that annual demand and holding cost per unit per year are in the same time base, and they confuse reorder level with reorder quantity.
What to do instead
Before computing, write down units for each input: annual demand in units per year, ordering cost per order, holding cost per unit per year. Then compute EOQ, reorder level = maximum usage × maximum lead time, minimum level = reorder level − (normal usage × normal lead time), and maximum level = reorder level + EOQ − (minimum usage × minimum lead time). Check that minimum ≤ reorder ≤ maximum.
Determining residential status for an individual by counting days in the current year only, or by applying the 182-day test without checking the additional conditions and the 60/365-day rule.
The basic condition and the additional conditions are learned as separate lists, and candidates do not sequence them, so a person who satisfies 182 days is wrongly treated as resident and ordinarily resident without checking the two additional conditions.
What to do instead
Use a decision tree: first test basic conditions (182 days in the previous year, or 60 days in the previous year plus 365 days in the preceding four years); if resident, test the two additional conditions (resident in at least 2 of the 10 preceding years, and 730 days in the 7 preceding years) to decide resident and ordinarily resident versus resident but not ordinarily resident; if neither basic condition is met, the person is non-resident. Keep the previous-year basis explicit, since the assessment year is one year later.