MEANING OF COST‘COST’ represents a sacrifice of values, a foregoing or a release of something of value. It is t he price of economic resources used as a result of producing or doing the thing costed. It is the amount ofexpenditure incurred on a given thing. Cost has been defined as the amount measured in money or cash expended or other partytransferred, capital stock issued, services performed or a liabilityincurred in consideration of goods and serviced received or to be received. By cost, we mean the actual cost i.e. historical cost. ICWA(UK) defines cost as the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity. CLASSIFICATION OF COSTCost classification is the process of grouping costs according to their common features. Costs are to be classified in such a manner that they are identified with cost center or cost unit. ON THE BASIS OF BEHAVIOUR OF COSTBehavior means change in cost due to change in output. On the basis of behavior cost is classified into the following categories: FIXED COSTIt is that portion of the total cost which remains constant irrespective of the output upto capacity limit. It is called as a period cost as it is concerned with period. It depends upon the passage oftime. It is also referred to as non-variable cost or stand by cost, capacity cost or “period” cost. It tends to be unaffected by variations in output. These costs provide conditions for production rather than costs of production. They are created by contractual obligations and managerial decisions. Rent of premises, taxes and insurance, staffsalaries constitute fixed cost.
‘COST’ represents a sacrifice of values, a foregoing or a releaseof something of value. It is the price of economic resources used as aresult of producing or doing the thing costed. It is the amount of
expenditure incurred on a given thing. Cost has been defined as theamount measured in money or cash expended or other party transferred, capital stock issued, services performed or a liability incurred in consideration of goods and serviced received or to bereceived. By cost, we mean the actual cost i.e. historical cost. ICWA (UK) defines cost as the amount of expenditure (actual or notional)incurred on, or attributable to a specified thing or activity.
CLASSIFICATION OF COST
Cost classification is the process of grouping costs according totheir common features. Costs are to be classified in such a mannerthat they are identified with cost center or cost unit.
ON THE BASIS OF BEHAVIOUR OF COST
Behavior means change in cost due to change in output. On the basis of behavior cost is classified into the following categories:
FIXED COST
It is that portion of the total cost which remains constantirrespective of the output upto capacity limit. It is called as a periodcost as it is concerned with period. It depends upon the passage of time. It is also referred to as non-variable cost or stand by cost,capacity cost or “period” cost. It tends to be unaffected by variationsin output. These costs provide conditions for production rather thancosts of production. They are created by contractual obligations and
managerial decisions. Rent of premises, taxes and insurance, staff salaries constitute fixed cost.
This cost varies according to the output. In other words, it is acost which changes according to the changes in output. It tends to
vary in direct proportion to output. If the output is decreased,
variable cost also will decrease. It is concerned with output orproduct. Therefore, it is called as a “product” cost. If the output isdoubled, variable cost will also be doubled. For example, directmaterial, direct labour, direct expenses and variable overheads. It isshown in the diagram below.
SEMI-VARIABLE COST
This is also referred to as semi-fixed or partly variable cost. Itremains constant up to a certain level and registers changeafterwards. These costs vary in some degree with volume but not indirect or same proportion. Such costs are fixed only in relation tospecified constant conditions. For example, repairs and maintenance
of machinery, telephone charges, supervision professional tax, etc.
ON THE BASIS OF ELEMENTS OF COST
Elements means nature of items. A cost is composed of threeelements, material, labour and expenses. Each of these elements can
be direct and indirect.
DIRECT COST
It is the cost which is directly chargeable to the productmanufactured. It is easily identifiable. Direct cost consists of threeelements which are as follows:
• DIRECT MATERIAL
It is the cost of basic raw material used for manufacturing a
product. It becomes a part of the product. No finished productcan be manufactured without basic raw materials. It is easily identifiable and chargeable to the product. For example, leatherin leatherwares, pulp in paper, steel in steel furniture,sugarcane for sugarcane etc. what is raw material for onemanufacturer might be finished product for another. Directmaterial includes the following:
1. All materials specially purchased for production or theprocess.
2. All components purchased for production or the process.3. Material transferred from one cost center to another or
one process to another.
4. Primary packing materials, wrappings, cardboard boxesetc, necessary for preservation or protection of product.
Some of the items like nails or thread in the store are a part of finished product. They are not treated as direct materials in view of negligible cost.
• DIRECT LABOUR OR DIRECT WAGES
It is the amount paid to those workers who are engaged in themanufacturing line for conversion of raw materials into finishedgoods. The amount of wages can be easily identified and directly charged to the product. These workers directly handle raw materials, work in progress and finished goods on theproduction line. Wages paid to the workers operating lathes,drilling, cutting machines etc are direct wages. Direct wages arealso as productive labour, process labour or prime cost labour.Direct wages include the payment made to the following groupof workers:
1. Labour engaged on the capital production of the product.2. Labour engaged in aiding the operations viz. Supervisor,Foreman, Shop clerks and Worker on internal transport.
3. Inspectors, Analysts needed for such production.
• DIRECT EXPENSES OR CHARGEABLE EXPENSES
It is the amount of expenses which is directly chargeable tothe product manufactured or which may be allocated to productdirectly. It can be easily identified with the product. For example,hire charges of a special machine used for manufacturing aproduct, cost of designing the product, cost of patterns, architectsfees/surveyors fees, or job cost of experimental work carried outespecially for a job etc. Cost of special drawings, cost of special
layout designs, patents, patterns, cost of models, surveyors fees,Excise duty, royalty on production, cost of rectifying defective
work. Utility of such expenses is exhausted on completion of job.
• INDIRECT COST
It is that portion of the total cost which cannot be identifiedand charged directly to the product. It has to be allocated andapportioned and absorbed over the units manufactured on a suitable
basis. It consists of the following three elements:
• INDIRECT MATERIAL
It is the cost of the material other than direct material which
cannot be charged to the product directly. It cannot be treated as apart of the product. It is also known as expenses materials. It is thematerial which cannot be allocated to the product but which can beapportioned to the cost units. Examples are as follows:
1. Lubricants, cotton waste, oil, grease, stationery etc2. Small tools for general use3. Some minor items such as thread in dress making, cost of
nails in shoemaking etc
• INDIRECT LABOUR
It is the amount of wages paid to those workers who are notengaged on the manufacturing line, for example, wages of workers inadministration department, watch n ward department, salesdepartment, general supervision.
• INDIRECT EXPENSES
It is the amount of expenses which is not chargeable to theproduct directly. It is the cost of giving service to the productiondepartment. It includes factory expenses, administrative expenses,selling and distribution expenses etc.
Aggregate of indirect cost is referred to as overheads. Itarises as a result of overall operation of a business. According to
Weldon overheads mean, ”the cost of indirect material, indirectlabour and such other expenses, including services as cannotconveniently be charged direct to specific cost units”. It includes allmanufacturing and non-manufacturing supplies and services.
These costs cannot be associated with a particular product.The principal feature of overheads is the lack of direct traceability to individual product. It remains relatively constant from period toperiod. The amount of overheads is not directly chargeable i.e. ithas to be properly allocated, apportioned and absorbed on someequitable basis.
CLASSIFICATION OF OVERHEADS
• ON THE BASIS OF FUNCTIONS
• FACTORY OVERHEADS
It is the aggregate of all the factory expenses incurred
in connection with manufacture of a product. These are incurred inconnection with running of factory. It includes the items of expenses viz, factory salary, work managers salary, factory repairs,rent of factory premises, factory lighting, lubricants, factory power,drawing office salary, haulage (cost of internal transport)depreciation of plant and machinery unproductive wages,estimation expenses, royalties, loose tools w/ off, materialhandling charges, time office salaries, counting house salaries etc.
• ADMINISTRATIVE OR OFFICE OVERHEADS
It is the aggregate of all the expenses as regardsadministration. It is the cost of office service or decision-making. Itconsists of the following expenses: Staff salaries, printing andstationery, postage and telegram, telephone charges, rent of office
premises, office conveyance, printing and stationery and repairsand depreciation of office premises and furniture etc.
• SELLING & DISTRIBUTION OVERHEADS
It is the aggregate of all the expenses incurred inconnection with sales and distribution of finished product andservices. It is the cost of sales and distribution services.
Selling expenses are such expenses which are incurredacquiring and retaining customers. It includes the followingexpenses:
(a) Advertisement (b) Show room expenses (c) Travelingexpenses (d) Commission to agents (e) Salaries of Sales office (f)Cost of catalogues (g) Discount allowed (h) Bad debts written off (i) Commission on sales (j) Rent of Sales Room (k) Sample andFree gifts (L) After sales service expenses (m) Expenses ondemonstration and technical advice to prospective customers (n)Free repairs and servicing expenses (o) Expenses on marketresearch (p) Fancy packing and demonstration.
Distribution expenses include all those expense which are
incurred in connection with making the goods available tocustomers these expense includes the following (a) Packingcharges (b) Loading charges (c) Carriages on sales (d) Rent on
warehouse (e) Insurance and lighting of warehouse (f) Insuranceof delivery van (g) Expense on delivery van (h) Salaries of Godownkeeper, drivers and packing staff.
1. It gives the break up of total cost under different elements.2. It shows total cost as well as cost per unit.3. It helps in comparison with previous years.4. It facilities preparation of tenders or quotations.5. It enables the management to fix up selling price.
6. It controls cost.
DIVISIONS OF COST
• PRIME COST
It comprises of all direct materials, direct labour and directexpenses. It is also known as flat cost
Prime cost = Direct Materials + Direct Labour + DirectExpenses
• WORKS COST
It is also known as a factory cost or cost of manufacture. It isthe cost of manufacturing an article. It includes prime cost andfactory expenses.
Works Cost = Prime Cost + Factory Overheads
• COST OF PRODUCTION
It represents factory cost plus administrative expenses.
Cost of Production = Factory Cost + AdministrativeExpenses
It represents cost of production plus selling and distributionexpenses.
Total Cost= Cost of Production + Selling & DistributionExpenses
• SELLING PRICE
It is the price which includes total cost plus margin of profit orminus loss, if any.
Selling Price = Total Cost + Profit (-Loss)
NON COST ITEMS
Non-cost items are those items which do not form part of cost of
a product. Such items should not be considered while ascertaining thecost of a product. These are items included in the Profit & Loss A/c.These will not come in the cost sheet
a) Income tax b) Interest on capitalc) Interest on loand) Profit on Sale of fixed assetse) All the assetsf) Donationsg) Capital Expenditureh) Discount on shares & Debenturesi) Commission to Partners, Managers etc
j) Brokeragek) Preliminary Expenses Written off.l) Wealth tax etc
This helps in determining cost per unit on which u canpredict further cost.
DETERMINATION OF TOTAL COST
Cost of product is determined as per cost attach concept. Total
cost of a product consists of various elements of cost which have thequality of coherence. All the elements of cost can be grouped andregrouped. Grouping and regrouping of various elements of cost leadsto significant divisions of cost. The logical process of determination of cost by grouping and regrouping various elements is illustrated asfollows:
Very often, the management desires to know, ‘what will be thecost?’ even before the production starts. The purpose to know the cost
before it is incurred, might be different. It may be to keep the cost
within control or it may be used for profit planning. May times it isrequired to submit tenders, to give quotations, to prepare price listsetc. For this purpose the estimations of “probable cost” of productionis essential. This requires the past cost data to be analysed, presentcircumstances are taken into consideration and future is projected.The technique is known as estimation of cost. This involves the study of each and every element of cost and their nature of behaviour .Keeping in view the nature of behaviour of elements of cost, it can beclassified into following three categories:
• FIXED COST
Fixed cost is that cost which remains unaffected eventhough there is change in the level of output. It remains constant atall levels of output for a given period of time. Examples of such costsare rent, rated and taxes of factory premises, salary of generalmanager, foreman, watchman, insurance, depreciation etc. Theseexpenses incur according to the unit of time and not according tolevel of production. Hence sometimes it is called as periodic cost.
For example such fixed cost is ascertained of a particular concern Rs.12000 pm. The capacity of this concern is to produce 1000 units pm.If they produce 100 units or 500 units or 700 units or 100 units thefixed cost will remain constant at all these levels of output.This fixed cost remains fixed at all levels of output, but the cost perunit changes if there is a change in the level of output.
• VARIABLE COST
It is the cost which tends to vary directly with the volumeof output. If there is increase in output this cost increases and vice
versa. The change in the variable cost takes place in the samedirection in which the level of output changes. This cost consists of direct materials, direct wages, direct expenses and some part of indirect expenses which varied according to the level of output. Say for example if standard unit of final product requires the raw materials of Rs.20 per unit the expenses on direct materials will
change if level of output changes. However variable cost per unit willremain unchanged provided the price level does not change.
• SEMI-VARIABLE COST
This is the third category of nature of behavior of theexpenses. These expenses are neither fixed nor variable. Theseexpenses change in the same direction in which the level of outputchanges. Thus these expenses are partly fixed partly variable innature. Examples of such expenses are depreciation of plant andmachinery, maintenance of factory building etc. These expenses willincrease if factory is run from single shift to double or triple shifts.Depreciation and maintenance will increase but not in the same ratio,the output increases. Thus these expenses are neither fixed nor
variable cent percent. Hence they are called as semi variableexpenses.
The following project has been satisfactorily performed by Nikhil Abhyankar 01Mangala Borkar 11Sunil Chadda 12Bhagyesh Gandhi 21Avinash Dhone 17Snehal Dolas 19Roshan Kambli 38Ketki Khandagale 43Priyank Mehta 53Abhijeet Motto 58
studying in Bhavans College, Class F.Y. BMS Div A during theacademic year 2008-2009
Raw Materials Consumed:Stock of Raw materials as on 1st Jan 04(+) Materials Purchased(+) Carriage Inward(-) Stock of Raw Materials as on 31st Dec 04Raw Materials ConsumedProductive Wages
Prime Cost
Add: Works/Factory Overheads Work Office SalariesRepairs to P/MRents, Rates, Taxes & Insurance etc- Factory Depreciation on P/MGas & Water (Factory)Manager’s Salary (3/4)
Cost of Production/ Cost of Goods Sold Add: Selling & Distribution OverheadsCarriage OutwardTraveling ExpensesTravelers Salary & CommissionSelling & distribution Overheads
On account of intense competition following changes are estimated inthe subsequent year:
1. Production and sales activity will be increased by one third2. Material rate will be lowered by 25%. However there will be
increase in consumption by 20%3. Direct wages cost would be reduced by 20% due to automation4. Out of the above factory overheads rs. 45000 are fixed in nature.
The remaining factory expenses are variable in proportion to the
number of units produced5. Total administrative expenses will be lowered by 40%6. Sales overhead per unit would remain the same7. Sales price per unit would be lowered by 20%
Prepare a statement of cost for both the yrs ending 31st March 06and 31st March 07 showing maximum possible details of cost
