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Unit-I
Cost
Cost may be defined as a total of all expenses incurred in the manufacture and
sale of a product. Example- We say that the cost of a table is Rs.2,000,which
means we have spent an amount of Rs 2,000 in making the Table. We can say
that we spent Rs.2,000 towards the cost of materials, labour and other
expenses.
Costing
Cost Accounting
Cost Accounting is the process of accounting foe cost which begins with the
incurrence of cost and ends with the control of cost.
Definition
CIMA ,London defines cost accounting as the process of accounting from the
point at which expenditure is incurred or committed to the establishment of its
ultimate relationship with cost centres and cost units.
In its widest usage it embraces the preparation of statistical data, the application
of cost control methods and the ascertainment of the profitability of activities
carried out or planned.
The main objectives of cost accounting are cost ascertainment furnishing of cost
data for decision making and control of cost. The objectives are listed below
1.To find out the total cost and cost per unit of various products manufactured.
To disclose the proportion of different elements (such as material, labour and
overheads ) in the total cost.
4.To ascertain the profitability of each product and advise the management as to
how these profits can be maximised.
5.To supply estimates of cost data ,on the basis of historical data for the
preparation of tenders ,quotations etc.
6.To present important cost data to the management for decision making
planning and control.
9.To formulate incentive bonus plans and implement them to improve labour
productivity and reduce costs.
10.To exercise effective control on the idle times of men and machines.
12.To compare the actual cost with the standard cost and analyse the cause of
variance.
13.To supply useful data to the management to take vital decisions such as
introduction of new products, replacement of labour and machines.
14.To advise the management on future expansion policies and proposed capital
projects.
Scope of Cost Accounting
1.Costing
2.Cost Accounting
Cost Accounting is the process of accounting for cost which begins with the
incurrence of cost and ends with the control of cost.
3.Cost Control
4.Cost Reduction
Cost reduction is the achievement of real and permanent reduction in the unit
cost of products manufactured or services rendered without imparing their
suitability for the use intended or diminution in the quality of the product.
5.Cost Audit
Cost Audit is the verification of cost accounts and a check on the adherence to
the cost accounting plan. Thus it involves-
(ii) examining these records to ensure that they adhere to the cost accounting
principles, plans, procedure and objectives.
ADVANTAGES OF COST ACCOUNTING
Advantages:
1.Lack of Uniformity
There is no uniform system of costing applicable to all industries. Even for the
same firm, two different cost accountants may arrive at two different cost
figures.
3.Conventions
Several conventions are routinely applied or used in costing which may not be
appropriate in all situations. For example classifying overheads into variable
and fixed , recovery of overheads on machine hour or labour hour basis etc.
4.Uncertainty
Estimates are used in different contexts like Tenders and Quotations, Contracts
etc. Different methods of pricing of materials are available. Several methods of
absorption and apportionment of overheads can be used. All these factors lead
to uncertainty and fluidity in costing. It becomes difficult to derive correct costs.
Actual costs may differ from estimated costs, rendering quotations etc,
5.Costly
6.Applicability
7.Some items of costs and incomes are fully ignored in cost accounts where as
they are shown in financial accounts.
Elements of cost Accounting
Chart
Elements of Cost
Prime cost
Overheads
(a)Direct Materials
(b)Indirect Materials
2.It may or may not vary directly with the volume of output
3.Examples 1.Stores used for maintaining machines such as lubricant oil &
grease, cotton waste, consumable stores.
(a)Direct Labour
3.Expenses
All costs other than material costs and labour costs are termed as expenses. For
costing purpose, expenses may be classified into two broad categories;(a)Direct
Expenses and(b)Indirect Expenses.
1.Meaning All direct costs other than direct material costs and
direct labour costs are termed as direct expenses. These
can be readily identified with and thus can be directly
allocated to a particular product ,job or process.
Telephone Expenses
All material , labour, and expenses which cannot be readily identified with a
particular product ,job or process are termed as Indirect costs. The three
elements of indirect costs viz. Indirect materials, indirect labour and indirect
expenses are collectively known as overheads or on costs or Burden. Thus,
Production overheads represent all the indirect costs incurred in connection with
the production of product or services. These represent the aggregate of indirect
material cost ,indirect labour cost and indirect expenses incurred by production
department.
Examples
2.Administration Overheads
Examples
2.Cost of dusters
3.Selling Overheads
Selling overheads represent the cost of seeking to create and stimulate demand
and of securing order.Thus this is the cost of promoting sales and retaining
customers.These represent the aggregate to materials cost ,labour cost and
expenses incurred by sales department for the sales management of an
organisation.
Examples
2.Indirect Labour cost 1.Salary of sales director, sales manager, sales officers,
salesmen and other staff working in sales department.
2.Commission to agents.
5.Advertising
6.Baddebts
4.Distribution Overheads
Examples
Methods of Costing
Types of Costing
Costing is the technique and process of ascertaining costs. The objective of cost
accounting is the determination of all cost. The cost may be allocated on the
basis of actual cost incurred or costs may be assigned on a standard cost basis.
A system of cost accounting implies that there is a planned and coordinated
arrangement of all matters relating to costing, i.e., a systematic and planned
procedure is to be followed. The following are the systems generally in use.
3.Uniform Costing It is not a distinctive form of costing, but the cost system
is designed by trade associations followed by several undertakings. This system
enables inter-firm comparisons.
4.Marginal Costing-This system of costing differentiates between fixed costs
and variable costs. Under this system, fixed costs are not treated as product
costs. |The cost is thus the aggregate of direct material, direct wages, direct
expenses and variable overhead. This type of costing is useful in taking
important policy decisions- price fixing during competition time, make or buy
decisions, product mix etc. It is also known as variable for direct costing.
The main differences between financial accounting and cost accounting are
given below :
A good costing system is one which effectively achieves the objectives of the
system. It should bring all advantages of costing to the business. The following
are the characteristics of a sound costing system.
6) Organisation of the cost office : The cost office is responsible for the
efficient operation of the costing system.. The cost office, with adequate
staff must be located as close as possible to the factory. The following are
the major functions of the cost office.
a) Stores accounts
b) Labour accounting
c) Recording of cost data and
d) Cost control
Further, the role and duties and responsibilities of the cost accountant
must be clearly defined. He must have the necessary authority to
discharge his duties effectively.
2) Service Cost Centre : A cost centre which renders service to production cost
centre is known as service cost centre. Eg. Power house, stores department,
maintenance department etc.
1. Cost centre is created by the cost accountant. On the other hand a profit
centre is created by the management
2. Cost centre is created for the purpose of cost ascertainment and control
but the profit centres created for the purpose of evaluation of
performance.
3. Cost centre is a small segment, whereas profit centre is a large segment
4. Cost centres do not enjoy autonomy. But, profit centres enjoy autonomy
5. Cost centre does not have a target of costs. But a profit centre has a target
of profit for performance evaluation.
Cost accounting plays a very important role in modern management. It helps the
management in the formulation of business policies, organising and control of
day to day function of the organisation. Cost accounting serves the management
in the following ways.
Cost sheet may be prepared weekly, monthly, quarterly, half yearly or yearly .
1.It gives the break up figures of the total cost under different elements.
1.Historical Cost Sheet- Cost sheet prepared is the basis of actual costs after
the actual costs have been incurred is called Historical Cost Sheet.
2.Estimated cost sheet - Cost sheet prepared on the basis of estimated costs
before the actual commencement of production is called Estimated Cost Sheet.
Cost Sheet of ----------------for the Month of July------
-------------
***
_______ _______
PRIME COST
*** ***
Add: Works Overheads
*** ***
_______ ______
WORKS OR FACTORY COST
*** ***
Add: General or Administration Overhead
*** ***
_______ ______
COST OF PRODUCTION
*** ***
Add: Selling and Distribution Overhead
*** ***
Total cost or Cost of Sales _______ ______
*** ***
*** ***
Prime Cost
Prime cost of any product comprises of all direct comprises of all direct
comprises of all direct costs, viz. direct material ,direct labour and direct
expenses, specially attributable to a job. Prime cost is also known as flat cost or
first cost or direct cost.
Work Cost
Work represents the total of all items of expenses incurred in the manufacturing
of an article, viz. ,direct material, direct labour, direct expenses and factory
expenses. In short, it is described as prime cist plus works on cost. It is also
known as Factory cost or cost of manufacture.
Cost of Production
Cost of production means and represents the factory cost plus administrative
expenses , i.e, prime cost plus works cost plus administrative expenses is cost
of production it is also known as office cost.
Total Cost
Total cost means the sum of all items of expenditure incurred in producing,
manufacturing and selling distribution. It comprises of cost of production plus
selling and distribution expenses. Prime cost and works cost and administrative
cost +selling and distribution expenses = Total Cost(final cost).
Selling Price
Selling price is the price which includes cost of sales plus a margin of profit or
minus loss if any.
SPECIMEN OF COST SHEET
Cost Sheet for the period_________________
Production --------------
Unit
PRIME COST
Add: Works/ Factory Overheads
Indirect Materials
Indirect Wages
Factory Rent and Rates
Factory Lighting and Heating
Power and Fuel
Repairs and Maintenance
Drawing Office Expenses
Research and Experiment cost
Depreciation of Factory Plant
Works Stationery
Insurance of Factory Works Managers Salary
Works Managers Salary
WORKS COST /FACTORY COST/MANUFACTURING
COST
Add: Office and Administration Overheads
Office salaries
Office Rent and Rates
Cleaning
Light and Heating
Telephone and Postages
Printing and Stationery
Depreciation of Office Furniture
Depreciation of office Equipment
Insurance
Legal Expenses
COST OF PRODUCTION
Add: Selling and Distribution Overheads
Advertising Salesmen Salaries
Samples and Free gifts
Sales Office rent
Sales Promotion Expenses
Packing and Demonstration
Showroom Rent and Rates
Commission
Travelling Expenses
Warehouse Rent and Rates
Repair of Delivery vans
Carriage freight Outwards etc.
COST OF SALES
Add: Profit
Problems
Sales Rs.20,000
2.During the year 2008, X Ltd, produced 50,000 units of a product. The
following were the expenses.
Purchases Rs.1,60,000
3.You are required to compile a statement showing cost and profit from the
information given, showing clearly 1.Material consumed 2.Prime cost
3.Works cost 4.Cost of Production 5.Cost of Sales 6.Profit 7.Sales.
Wages- Rs.1,00,000
Indirect Materials:
---------- 30,000
Indirect Labour:
In factory 15,000
In office 20,000
In selling 18,000
In Distribution 12,000
--------- 65,000
Indirect Expenses:
---------- 10,000
5.Calculate Prime cost, Factory cost, Cost of Production, Cost of
Sales and Profit from the following particulars
Direct Materials-Rs.1,00,000 Depreciation:
Advertising 4,900
8.In a factory two types of fans are produced namely, Popular and Orient.
Ascertain the cost and profit per unit sold from the following particulars
Popular Orient
Rs. Rs.
30.6.2010 31.12.2010
Rent:
Repairs:
Frequently the manufacturers of consumer durables and capital goods are asked
to quote the price at which they can supply their output. The price at which the
items of output are offered for sale is known as Tender or Quotation price. The
tender has to be prepared carefully since it may be accepted and goods have to
be supplied in future at the quoted rate.
1. Raw Materials
2. Direct Labour
3. Chargeable Expenses
4. Works Overheads
5. Selling Overheads
6. Office overheads
7. Estimated Profit
Estimation of different elements of cost has to be made. The following are the
accepted norms :
(or)
Sometimes profit is given as percentage of cost. In that case profit for the
tenders is ascertained as given below.
Problem No -1
Prepare cost sheet for the half year and calculate the price which the company
should quote for the manufacture of a machine requiring materials valued at
Rs.1,250 and expenditure in productive wages Rs. 750 ,so that the price might
yield a profit of 20% on the selling price.
Problem No -2
BPL Television Company find that in 2008, the cost to manufacture 200 T.V.
Sets was Rs.6,16,000 which it sold at Rs.4,000 each cost was made up of:
Materials Rs.2,00,000
1. Each Television will require materials of the value of Rs.1,000 and wages
Rs.1,500.
Prepare a statement showing the profit it should make per unit if it enhances the
price of television by Rs.80
Problem No-3
A Company has received an enquiry for the supply of 5000 steel pipes. The
costs are estimated as follows:
Prepare a statement showing the price to be quoted which will result in a profit
of 20% on selling price.
Problem No-4
The following particulars relate to the manufacture of Electric Fans for a period
of 3 months ending 31.3.2008.
Sales 1,12,500
Note:
The Solutions for the problems in this document has been worked out in the
Class. Refer Class notes for Solutions.