-
8/2/2019 Introduction With Cost Terms
1/12
2/27/2012 1
Introduction With Cost Terms
TASMAC
-
8/2/2019 Introduction With Cost Terms
2/12
2/27/2012 2
Introduction
Types of Cost
o Direct Cost and Indirect Cost
o Period and Product Cost
o Relevant and Irrelevant cost
o Sunk Cost
o Opportunity Cost
-
8/2/2019 Introduction With Cost Terms
3/12
2/27/2012 3
Direct Cost
o Direct Materials
o Direct Labour============
Prime Cost (Sum of Direct labour & Materials)
===========
Manufacturing Overhead============
Total Cost (Sum of Prime & Mnf. Overhead)
Direct & Indirect Cost
-
8/2/2019 Introduction With Cost Terms
4/12
2/27/2012 4
What Is M
anuf
acturing Over
hea
d?
Manufacturing Overhead means itcannot bedirectly associated with
the
products/production. So its not variable costFor example:
Rent
Telephone Bills
SecurityStationary
Advertisementand Selling expenses etc
-
8/2/2019 Introduction With Cost Terms
5/12
2/27/2012 5
Product &
Period Cost
Productcostare those whichare associatedwith the goods purchased
(formerchandising firms) or produced forresale.
For manufacturing firms these costs arecalculated forinventory
valuation. Thesecosts variableinnature.
Periodcosts are those cost thatare not
directly includedininventory valuation.These are not variable
innature with the
amount of production.
-
8/2/2019 Introduction With Cost Terms
6/12
2/27/2012 6
R
elevant and Irrelevant CostFordecision makingcosts andrevenues
are classifiedasrelevantandirrelevant
Relevantcosts andrevenues are those items which will
change withadecision takenand vice versaEx: Do Not Accept Order
Accepted
Materials 100 100
Conversion Cost --- 200
Revenue ---
250------------------------------------------------------------------
Net Cost 100 50
-
8/2/2019 Introduction With Cost Terms
7/12
2/27/2012 7
Sunk CostSunk Costare cost whichare alreadyincurredirrespective
of the result ofincurring the cost
ForExample Costinvolvedin Research &Development , Market
Research, Pilot Studyfornatural gas & Oil exploration etc
Irrespective of the success or failure of theprojects in
R&D, Market Researchandmineral extraction these costs are
incurred.Thus these costs are neverrelevantcost for
choosing betweenalternatives
-
8/2/2019 Introduction With Cost Terms
8/12
2/27/2012 8
Opportunity CostThere are some cost thatare notcapturedin the
Income Statement. Like
the cost of the opportunity lostdue totakingadecision.
Like a with Rs.3 one canEconomicTimes (ET) or Business Standard
(BS).
IfET is purchased , BS cannot bepurchased so the opportunity
cost ofpurchasing BS is ET and vice-versa.
-
8/2/2019 Introduction With Cost Terms
9/12
2/27/2012 9
Summary
Income Statement of XYZ as On Sales
- Direct material (Variable innature)
- Direct Labour
- Manf. overhead Period Cost-------------------
COGS (Prime Cost)
- General Expense Period Cost
---------------------Gross Profit (PBDIT)
- Depreciation
------------------------
PBIT
-
8/2/2019 Introduction With Cost Terms
10/12
2/27/2012 10
What Are Not Me
asured/
Stated
Directlyin Reports
Opportunity Cost
Since this cost does not impact the profit ofthe organization
thus it is not taken in toaccount while calculating profit
Relevant / Irrelevant Cost
In the Income statement both irrelevant andrelevant cost are
mixed. One has to decidewhich one is relevant or not
-
8/2/2019 Introduction With Cost Terms
11/12
2/27/2012 11
Cost
Manufacturing Cost Non-Manufacturing Cost
Material Labour Overhead
Work in ProgressFinished
Goods
P&L
Accounts
One Way of Looking At costing /
Absorption Costing
-
8/2/2019 Introduction With Cost Terms
12/12
2/27/2012 12
Cost
Manufacturing Cost Non-Manufacturing Cost
Material Labour Overhead
Fixed
Overhead
Variable
Overhead
Work in ProgressFinished
Goods
P&L
Accounts
Another Way of Looking
At Cost / Variable Costing
