Cost Concept And Classification

Chapter-2

Prof. Mamta Shah

BASIC COST CONCEPTS.

A sacrifice for the Sake of Something Gained.

GENERAL VIEW.
1 AN AMOUNT PAID OR REQUIRED IN PAYMENT FOR PURCHASE ; A PRICE. 2 THE EXPENDITURE OF SOMETHING, SUCH AS TIME OR LABOUR, NECESSARY FOR THE ATTAINMENT OF A GOAL.

ACOUNTING VIEW.
SACRIFICE, MEASURED BY THE PRICE PAID TO ACQUIRE,PRODUCE, OR MAINTAIN GOODS OR SERVICES PRICES PAID FOR MATERIALS, LABOR,AND , FACTORY OVERHEAD IN THE MANUFACTURE OF GOODS ARE COSTS.

THE DIFFERENCE BETWEEN COST, EXPENSE & LOSS.

Cost is an amount of Cost is an amount of expenditure expenditure attributable to a attributable to a specified thing or specified thing or activity activity

Expense is Expense is defined as the defined as the cost incurred cost incurred when an asset is when an asset is used up or sold used up or sold for the purpose for the purpose of generating of generating

Loss is defined as an Loss is defined as an expense incurred expense incurred which has no related which has no related benefits. benefits.

CLASSIFICATION OF COST.
BASIS

OF ELEMENTS. BASIS OF BEHAVIOUR. BASIS OF CONTROL. BASIS OF DECISION MAKING.

.ELEMENTS OF COST. .ELEMENTS OF COST.

WHAT ARE THE WHAT ARE THE ELEMENTS OF ELEMENTS OF COST????????? COST?????????

THERE ARE THERE ARE THREE THREE BROAD BROAD ELEMENT OF ELEMENT OF COST. COST.

ELEMENTS OF COST

MATERIAL

LABOUR LABOUR

EXPENSES

Direct and Indirect Costs

Direct costs
Costs

Indirect costs
Costs

that can be easily and conveniently traced to a product or department. cost of paint in the paint department of an automobile assembly plant.

that must be allocated in order to be assigned to a product or department. cost of national advertising for an airline is indirect to a particular flight.

Example:

Example:

Material

The substance from which a product is made is known as material. It may be in a raw or a manufactured

Materials are further divided into: Direct Indirect

Direct Materials
Those materials that become an integral part of the product and that can be conveniently traced to it.

Example: A radio installed in an automobile Example: A radio installed in an automobile

Indirect Materials
The material which is used for purposes ancillary to the business and which cannot be conveniently assigned to specific physical units.

Example: paper used in office work. Example: paper used in office work.

Labour

For conversion of materials into finished goods, human effort is needed and such human effort is called labor.

labour are further divided into: Direct Indirect

Direct labour
Labour

which takes an active and direct part in the production of a particular commodity. Direct labour described process labour, operating labour etc.

Indirect labour

Indirect labor does not alter the construction, composition or condition of the product. Wages of store-keeper, foremen, time-keepers, salaries of salesmen.

Expenses

Any other cost besides material and labour is termed as expense.

Expenses are further divided into: Direct Indirect

EXPENSES
Direct Expenses
These are the expenses that can be directly, conveniently and wholly allocated to specific cost centers or cost units. Hire of some special machinery required for a particular contract
Cost

of defective work

Indirect

Expenses

These are the expenses that cannot be directly, conveniently and wholly allocated to cost centers or cost units. Examples of such expenses are rent, lighting,

Overheads

All indirect costs are overheads. Indirect material +indirect labour+indirect expenses

The overheads can be Broadly divided into 3 divisions

OVERHEADS

OVERHEADS

FACTORY OVERHEADS

OFFICE & Adm. OVERHEADS

SELLING & DISTRIBUTION OVERHEADS

Factory Overheads
Indirect Materials Indirect material used in factory such as lubricants,oil,consumable stores etc.

Indirect Labor

Indirect labour such as gatekeepers salary,works managers Salary.

Indirect expenses

Indirect expenses such as rent, insurance,lighting of the office.

Office and Adm. Overhead

Indirect Materials Indirect material used in office such as printing and stationery material.

Indirect Labor

Salaries payable to office manager,office manager,office accountant.

Indirect expenses

Indirect expenses such as rent, insurance,lighting of the office.

Selling & Distribution Overheads

Indirect Materials Indirect material used in office such as printing and stationery material,packing material.

Indirect Labor

Salaries payable to salesmen and sales manager.

Indirect expenses

Indirect expenses such as rent,insurance,advertising expenses.

COST- to make and sell

PRIME COST= Direct materials +Direct labour +Direct expenses FACTORY OVERHEAD= Indirect material +Indirect labour +Indirect expenses FACTORY COST= Prime cost + factory overhead Cost of Product =Factory cost + Administrative overhead TOTAL COST=Cost of product + selling and distribution overheads

COST BEHAVIOUR
Fixed

Cost cost

Variable Mixed

Variable ( semi-variable and semi fixed cost)

CLASSIFICATION
OPPURTUNITY SUNK

COST.

COST. RELEVANT COST. IMPUTED COST. OUT- OF- POCKET COST. SHUT DOWN COST.

OPPURTUNITY COST:
THE

COST OF OPPURTUNITY LOST IS OPPURTUNITY COST !!! IT IS THE BENEFIT LOST BY REJECTING THE BEST COMPETITIVE ALTERNATIVE TO THE ONE CHOOSEN..

FOR EXAMPLE::

SELL YOUR SEMI FINISHED GOODS TO US..

SUNK COST :
A COST THAT HAS BEEN ALREADY INCURRED. EXAMPLES: BOOK VALUES OF EXISTING ASSETS.

SUCH AS: 1. PLANT AND EQUIPMENT 2. INVENTORY 3. INVESTMENT IN SECURITIES

RELEVANT COST:
THEY

ARE FUTURE COST. THOSE COST WHICH ARE AFFECTED AND CHANGED BY DECISION.

FOR EXAMPLE :

BOOK VALUE= 10,00,000 MODIFICATION COST= 60,000 SALES VALUE =1,50,000 INCREMENTAL BENEFITS=(I,50,000-60,000) =90,000

IMPUTED COST :
IMPUTED COST ARE COST NOT ACTUALLY INCURRED IN SOME TRANSACTION BUT WHICH ARE RELEVANT. TO DECISION.. EXAMPLES : 1. RENTAL VALUE 2. SALARIES

OUT OF POCKET COST:

Out

of pocket costs signify the cash cost incurred on an activity

SHUT DOWN COST:

COST

WHICH OCCUR IN CASE OF CLOSING OF A PLANT

COSTS FOR CONTROL

CONTROLLABLE

AND UNCONTROLLABLE COST

CONTROLLABLE COST
The cost which can be controlled or influenced by a specified person or a level of management of an undertaking. It is a cost over which manager has direct authority Two factors make a cost controllable or uncontrollable Timeperiod factor Decision making authority

UNCONTROLLABLE COST
Cost

which can not be so controlled or influenced by the action of a specified individual of an undertaking Variable cost may be taken as an uncontrollable cost. .

 Committed:-Cost

which primarily incurred to maintain the companys facilities and physical existence, and over which management has little or no discretion. They cannot be easily or quickly eliminated. Depreciation on fixed assets, rent and insurance of building are example of this.

 Discretionary

Cost:- Also called programmed costs. These costs are not related to current operation or activities and are subject to management discretion and control. These costs result from special policy decisions, management programmes, new researches etc. such costs can be avoided at management discretion in a relatively short period of time as compared to committed costs.

COST SHEET

ACCORDING

TO CIMA,LONDON

COST SHEET IS A DOCUMENT WHICH PROVIDES FOR THE ASSEMBLY OF THE ESTIMATED DETAILED COST IN RESPECT OF A COST CENTRE OR A COST UNIT.

TYPES OF COST SHEET

HISTORICAL COST SHEET
IT IS PREPARED PERIODICALLY AFTER THE COSTS HAVE BEEN INCURRED.

ESTIMATED COST SHEET

IT IS PREPARED BEFORE THE ACTUAL COMMENCEMENT OF PRODUCTION. THE ESTIMATING PROCESS IS REPEATED AT REGULAR INTERVALS AIM OF ADOPTION OF ESTIMATING COST TECHNIQUE IS EFFECTIVE COST CONTROL

IMPORTANCE
ASCERTAINMENT

OF COST CONTROLLING COSTS FIXATION OF SELLING PRICE SUBMITTING OF TENDERS

A COST SHEET DISCLOSES

PRIME

COST FACTORY COST COST OF PRODUCTION TOTAL COST (OR COST OF SALES)

Performa of cost sheet

Cost Per ton Direct Material Direct Wages Direct Expenses Prime cost Work overheads Work Cost Office overheads Cost of production Selling and distribution overheads Total Cost Profit Selling price --------------

Total Cost --------------

the following particulars of A Ltd ., Prepare cost sheet and also calculate sale price. Total Production 200000 tons Direct labour Rs. 200000 Cost of raw material Rs.250000 Indirect labour Rs. 50000 Expenses on storage Rs.10000 Office expenses Rs.25000 Direct office expenses Rs. 25000 Packing and forwarding exp Rs. 10000 Fees of directors Rs. 20000 Depreciation on plant and machinery Rs.15000 It should be noted that a profit of Rs,. 20% is kept on sales.

1- From

The following extract of costing information relates to commodity A for the year ending 31 Dec 1998. Purchase of raw material Rs. 60000 Direct Wages Rs. 50000 Rent rates and wage Rs. 20000 Carriage inward Rs. 1000 Stock Ist January, 1998 Raw Material Rs. 10000 Finished Product-2000 tons Rs.8000 Stock 31st December, 1998 Raw Material Rs. 11000 Finished product-4000 tons Work in progress Ist January, 1998 Rs. 2400 Work in progress- 31st December, 1998 Rs.8000 Cost of factory supervision Rs. 4000 Sale of finished product Rs. 150000 Advertising, discount allowed and selling costs Rs. 0.40 per ton sold. 32000 tons of the commodity were produced during the period. Prepare cost sheet.

End of Chapter

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