Professional Documents
Culture Documents
Session II
Income Statement
A financial statement that relates revenue (sales) to costs to determine profit.
It is also called profit and loss statement.
For Example
An increase in sales without an increase in COGS or OE May be attained by increase in price
A reduction in the COGS without a change in sales. COGS may be affected by changes in cost of materials, labor, and/or overhead
A reduction in in GOE would result in larger profits if income and COGS remains constant. May be attained by reduction in Admin. Salaries or Expenses of cleric & record keeping services.
But Remember..
Though
Income statement is useful in identifying the overall status of the firm but. Sources of profit or costs among the products of the firm cannot be ascertained Hence.. Each style needs to be evaluated separately on its contribution to profit
OBJECTIVE OF COSTING
Costing helps in periods of trade depression and trade competition Aids in Price Fixation Helps in estimate Helps in channelising production on right lines Wastages are eliminated Costing makes comparison possible Provides data for periodical profit and loss accounts Aids in determining and enhancing efficiency Helps in inventory control Helps in cost reduction Assists in increasing productivity
Classification of costs
Fixed, variable, semi variable and steps costs
Prime cost - Overheads Products costs and period costs Direct and Indirect Costs Shut Down and Sunk Costs Opportunity Costs Production, Administration, Selling & Distribution costs Relevant and irrelevant costs
The concept of fixed and variable costs holds good in short run and hence it is more of a theoretical concept. Hence those costs which tend to vary with output or have major relation with output should be termed as variable costs
If a cost varies more than proportionality, then also it is a semi variable cost
STEP Costs
Fixed cost can further be classified into: i) Committed fixed Costs ii) Discretionary Fixed costs Certain costs remain fixed over a range of activity and then jump to a new level as activity changes. Such costs are treated as Step Costs These cost may also be taken as type of semi variable costs
Methods of Differentiation
Methods of costing
Job Costing - Items of prime cost are traceable to specific orders Process Costing Where identity of prime cost is lost in operations
Techniques of Costing
Marginal Cost Allocation of expenditure on manufacturing is restricted to variable expenses Direct Costing Indirect costs are written of against profits Absorption Costing Charging all costs, variable or fixed Uniform Costing standardized principles and methods of costing are employed Activity Based Costing Apportionment of overheads are identified with each activity
Class exercise..
Record different costs which may be incurred in apparel manufacturing Unit