Cost concepts&cost sheet.ppt

8/14/2019 Cost concepts&cost sheet.ppt

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Concept of cost

the price paid for something

The amount of expenditure incurred or

attributable to a given thing (CIMA,UK)

A measurement in monetary terms of

the amount of resources used for thepurpose of production of goods


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Cost Accounting

Mr. Kohler:that branch of accountingdealing with the classification, recording,allocation, summarization and reporting

of current and prospective costs.Mr. Wheldon:the classifying,recording and appropriate allocation ofexpenditure for the determination of thecosts of products or services, the relationof these costs to sales values, and theascertainment of profitability.


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Cost Accountancy

Institute of Cost and ManagementAccountants(ICMA), London:theapplication of costing and cost accounting

principles, methods and techniques to thescience, art and practice of cost control andthe ascertainment of profitability.

It includes the presentation of information

derived there from for the managerialdecision-making.

Scope of cost accountancy is broader andincludes (1) Costing, (2) Cost Accounting, (3)

Cost Control Techniques, (4) Budgeting and5 Cost Audit.


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Cost centreCost ascertainment is made by cost centersand cost units or by both.

A cost centre is a production or service

location (department/sales area), a function,an activity, a person (salesman/machineoperator) or an item of equipment(machine/delivery van) or a group of these(two machines operated by one workman) forwhich costs are accumulated.

A cost center refers to a section of thebusiness to which costs can be charged.


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Types of cost centre

Personalperson/group of persons

Impersonal:

a) Production: where actual productiontakes place. Ex.melting shop/weldingdepartment.

b) Service: where services are rendered to

production cost centers (indirect costs). Ex.Power house, tool-room, stores department,canteen, etc.


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Cost unit & TypesIt is a unit of measurement of cost.

a unit of product or service in relationto which costs are ascertained.

Cost unit may be

a) unit of production - Ex. A kg ofchemical, a ream of paper, a tonne ofsteel, a meter of cable

b) unit of serviceEx.Room per day(hotel), hospital (bed per day),transport(passenger-km)


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Cost classification

CIMA Terminology defines classificationas the arrangement of items in

logical groups by nature, purpose orresponsibility.


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Cost classification Nature

Direct costscosts identified convenientlywith a particular cost unit/process/department. Ex. Wages paid to a tailor in areadymade garment shop for stitching a shirt.

Indirect costsgeneral and are incurredfor the benefit of a number of cost units.They cannot be identified conveniently with a

particular cost unit/process/ department.Ex.depreciation of machine for stitching aparticular shirt.


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Cost classification

Behaviour

Fixed costis a cost incurred for anaccounting period, that, within certain outputor turnover limits, tends to be

unaffected by fluctuations in the levels ofactivity (output or turnover). Ex. Rent,salaries of managers.

Variable costis a cost that varies with a

measure of activity or volume of output.Ex.Direct material/labour, commission tosalesmen.


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Contd..

Semi-variable cost: ,"A semi-variablecost is also referred to as a semi-fixed

or mixed cost. It is a cost containingboth fixed and variable components andthus partly affected by a change in the

level of activity. Ex. Telephoneexpenses, electricity charges,depreciation, etc.


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Cost classification Product Vs.Period

Product costsare those which arenecessary for production and which will notbe incurred if there is no production.Ex.

Direct material/labour.Period costsare those which are notnecessary for production and are written offas expenses in the period in which these are

incurred and are charged to P&L account.Ex.Rent, salary of executives, otheradministration & selling expenses.


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Cost classification Controllable vs.Uncontrollable

Controllablecosts are the costs which maybe directly regulated at a given level of

management authority. Ex. Variable costs.Uncontrollablecosts are the costs whichcannot be influenced by the action of aspecific member of an enterprise. Ex. Factory

rent, management salaries.However, all costs are controllable in the longrun.


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Cost classificationHistorical vs.Predetermined

Historical: These are the past costsascertained after these have been incurred.They are actual costs and are available only

after the completion of manufacturingoperations.

Predetermined: Future costs ascertained inadvance of production on the basis of a

specification of all the factors affecting cost.They are extensively used for planning andcontrol.


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Cost classification Normal vs.Abnormal

Normalcost is the cost normally incurred onexpected lines at a given level of output. It istreated as a part of production.

a)Abnormalcost is the cost not normallyincurred at a given level of output.

b) It is over and above the normal cost and is

treated as a part of production.c) It is charged to Profit & Loss account.


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Special costs for managementdecision-making

Sunkcostexpenditure made in the pastthat cannot be changed and managementhas no control.

DifferentialcostDifference in total costdue to change in the level of activity or themethod of production. If the change

increases (or decreases)the cost, it is calledincremental (or decremental)cost.


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Contd..Marginalcost is the additional cost ofproducing one additional unit. It is the totalof variable cost only and fixed costs areignored. This is useful in fixing the prices.

Imputed/Hypothetical/Notional costsare those which do not involve anyexpenditure in the real sense. These areconsidered in cost accounts only. Ex. Rent ofowned building for evaluating the profitability

of a project.Opportunity costis the sacrifice involved inaccepting an alternative under consideration.


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Contd..Replacementcost is the cost at which therecould be purchased an asset identical to thatwhich is being replaced. It is the currentmarket cost of replacing an asset.

Out-of-pocketcosts are those costs thatinvolve cash outlays. Ex. Rent and wages.But, expenses like depreciation on plant &machinery are not out-of-pocket costs.

Conversioncost is the total cost ofconverting a raw material into finishedproduct. It includes direct labour, directexpenses and chargeable factory overheads.


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Elements of costDirect &Indirect

Direct costs

Direct material Direct labour Direct expenses

Direct costs

Indirect costs

Indirect material Indirect labour Indirect expenses

Indirect costs


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Material costDirect Vs. Indirect

Direct

Clay in bricks

Leather in shoesSteel in machines

Cloth in garments

Timber in furniture

Indirect

Lubricating oil

Sand paperNuts & bolts

Office stationery

Small tools


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Labour costDirect Vs. Indirect

Direct

Machine operator

Shoe-makerCarpenter

Weaver

Tailor

Indirect

Supervisor

InspectorCleaner

Clerk

PeonWatchman


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ExpensesDirect Vs. Indirect

Direct

Hire of special plantfor a particular job

Experimental costs

Carriage paid formaterials purchased

for a specific job.

IndirectAll indirect costs otherthan indirect materialsand indirect labour

costs. These cannot beconveniently identifiedwith a particular job butare common to costcenters/cost units.

Rent &Taxes,Depreciation,Advertising,Insuranceand repairs.


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Note:

Overheads = Indirect material +Indirect labour + Indirect expenses

Overheads = Production overheads +

Office & Administration overheads +Selling & Distribution overheads


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Production (or Factory/Manufacturing) overheads

Overheads concerned with theproduction function

Coal,oil, grease, stationery in factoryoffice, works managers salary, salary offactory office staff, factory rent,

depreciation & repairs and maintenanceof plant.


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Office & Administrationoverheads

Indirect expenditure incurred in generaladministrative function and no directconnection with production/sales activities.

Stationery used in general administrativeoffice, postage, salary of office staff, salary ofmanaging director, rent of office building,legal expenses, office lighting & power andtelephone expenses.


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Selling & Distribution overheads

Selling overhead is the cost of promotingsales and retaining customers. Distributioncost includes all expenditure from the time

the product is completed until it reaches itsdestination.

Packing material, stationery used in salesoffice, cost of samples, oil and grease fordelivery vans, advertising, travelling andshowroom expenses and insurance of goodsin transit.


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Components of total cost

Prime cost = Direct material + Directlabour + Direct expenses

Works/Factory cost = Prime cost +

Factory overheadsCost of production = Works/Factorycost + Administration overheads

Total cost or Cost of sales = Cost ofproduction + Selling & Distributionoverheads


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Cost sheet / Cost statement

A statement prepared periodically, say,a month, year or a week to provide

detailed cost of a cost center or costunit.

Both total cost and the components are

shown.

P f f C t h t


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Proforma of a Cost sheetCost sheet for the period..(production..units

Particulars Total cost Cost Per unit

Rs. Rs.

1. Direct materials:Opening stock of raw materials

Add: Purchases and carriage inwards

Less: Closing stock of raw materials

2. Direct labour

3. Direct expenses

A. Prime cost (1 + 2 + 3) xxxAdd: Works/Factory overheads

Add: Opening stock of Work-in-Progress (WIP)

Less: Closing stock of Work-in-Progress (WIP)

B. Works/Factory cost xxx

Add: Office/Administration overheads

C. Cost of production xxxAdd: Selling and distribution expenses

Add: Opening stock of finished goods

Less: Closing stock of finished goods

D. Total cost or Cost of sales xxx

It l d d f t


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Items excluded from costaccounts

Pure financial expenses:

Loss on investment

Capital losses, Penalties/fines

Interest on debentures/mortgage/bankloan

Discount on debentures/bondsDamages payable


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Contd..

Pure financial incomes

Dividend/Brokerage, Commission or

discount/ Rent receivedInterest on investment/bank depositsreceived

Capital profits


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Contd..

Appropriation of profit

Transfer to general/specific reserve

Taxes on income/profits

Dividends paid

Donations/charities

Amount written off like goodwill,preliminary expenses, underwritingcommission, discount on issues ofshares/debentures


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Contd..

Abnormal losses/expenses

Cost of abnormal wastage of material

Loss by fire/theft

Documents

Cost concepts&cost sheet.ppt