Escolar Documentos
Profissional Documentos
Cultura Documentos
TABLE OF CONTENTS
1. Cost
2. Elements of cost
3. Components of total cost
4. Cost sheet
5. Classification of cost
6. Other costs
7. Cost centre and cost unit
8. Cost estimation and cost ascertainment
9. Cost allocation and cost apportionment
10.Cost reduction and cost control
11.Installation of cost system
12.Methods of costing
13.Techniques of costing
14.Methods of costing and their applicability
15.Costs of classification on the basis of relationships
16.Special costs for management decision making
17.
COST
• Cost refers to the expenditure incurred in producing a product
and rendering a service
• It is expressed from the producer or manufacturer’s view point
• Cost ascertainment is based on uniform principles and
techniques. Hence cost is objectively and ( not subjectively)
determined.
• Costs are the necessary expenditures that must be made in
order to run a business. Every factor of production has a cost
associated with it: labour, fixed assets, and capital, for
example. The cost of labour used in the production of goods
and services is measured in terms of wages. The cost of a
fixed asset used in production is measured in terms of
depreciation. The cost of capital used to purchase fixed assets
is measured in terms of the interest expense associated with
raising the capital.
• Businesses are vitally interested in measuring their costs.
Many types of costs are observable and easily quantifiable. In
such cases there is a direct relationship between cost of input
and quantity of output. Other types of costs must be
estimated or allocated. That is, the relationship between costs
of input and units of output may not be directly observable or
quantifiable. In the delivery of professional services, for
example, the quality of the output is usually more significant
that the quantity, and output cannot simply be measured in
terms of the number of patients treated or students taught. In
such instances where qualitative factors play an important
role in measuring output, there is no direct relationship
between costs incurred and output achieved.
• Cost represents the amount of expenditure (actual or
notional) incurred on or attributable to a given thing. It
represents the resources that have been or must be
sacrificed to attain a particular objective.
COST SHEET
Cost sheet is a document that provides for the assembly of an
estimated detailed cost in respect of cost centers and cost units. It
analyzes and classifies in a tabular form the expenses on different
items for a particular period. Additional columns may also be
provided to show the cost of a particular unit pertaining to each
item of expenditure and the total per unit cost.
Cost sheet may be prepared on the basis of actual data (historical
cost sheet) or on the basis of estimated data (estimated cost sheet),
depending on the technique employed and the purpose to be
achieved.
12.Classification of Cost
1. By Nature
2 .By Behaviour
3 .By Element
4 .By Function
5 .By Controllability
6 .By Normality
7 .By Time When Computed
5. Classification By Controllability :
Classification By Function :
Production, Administration and Selling and Distribution
Costs
A business organization performs a number of functions, e.g.,
production, illustration, selling and distribution, research and
development. Costs are to be curtained for each of these functions.
The Chartered Institute of Management accountants, London, have
defined each of the above costs as follows:
Production Cost
The cost of sequence of operations which begins with
supplying materials, labour and services and ends with the
primary packing of the product. Thus, it includes the cost of
direct material, direct labour, direct expenses and factory
overheads It is the cost of the entire process of production. In
other words it is nothing but the cost of manufacture which is
incurred up to the stage of primary packing of the product.
Administration Cost
The cost of formulating the policy, directing the organization
and controlling the operations of an undertaking which is not
related directly to a production, selling, distribution, research
or development activity or function. It is the indirect cost
pertaining to the administrative function which involves
formulation of policies, directing the organisation and
controlling the operations of an undertaking. This cost is not
related to any other functions like selling and distribution,
research and development etc.
Selling Cost
It is the cost of selling to create and stimulate demand
(sometimes termed as marketing) and of securing orders.
Selling cost represents the indirect cost which is incurred for
(a) seeking to create and stimulate demand and
(b) securing orders.
Distribution Cost
It is the cost of sequence of operations beginning with making
the packed product available for dispatch and ending with
making the reconditioned returned empty package, if any,
available for reuse. It is the cost of the sequence of operations
which begins with making the packed product available for
despatch and ends with making the reconditioned returned
empty package, if any available, for re-use.
Research Cost
It is the cost of searching for new or improved products, new
application of materials, or new or improved methods.
"Research Cost" and "Development cost" are two different
types of costs.
Research cost is the cost of researching for new products,
methods and applications. Development cost is the cost of the
process which begins with the implementation of the decision
to produce the new product or apply the new method and
ends with the commencement of formal production of that
product or by that method.
Development Cost
The cost of process which begins with the implementation of the
decision to produce a new or improved product or employ a new or
improved method and ends with the commencement of formal
production of that product or by the method.
Pre-Production Cost
The part of development cost incurred in making a trial
production as preliminary to formal production is called pre-
production cost. It is that part of the development cost which
is incurred for the purpose of a trial run, before the
commencement of formal production.
Conversion Cost
The cost of transforming direct materials into finished
products excluding direct material cost is known as conversion
cost. It is usually taken as an aggregate of total cost of direct
labour, direct expenses and factory overheads.
It is the cost incurred for converting the raw material into
finished product. It comprises of direct labour cost, direct
expenses and factory overheads.
Pre-determined cost
It is the cost which is computed in advance, before the
production starts, on the basis of specification of all the
factors affecting the cost.
It is a pre-determined cost which is arrived at, assuming a
particular level of efficiency in utilisation of material, labour
and other indirect services. It is the planned cost of a product
and is expected to be achieved under a particular production
process under normal conditions. It is often used as a basis for
price fixing and cost control.
Marginal cost
It is the amount at any given volume of output by which
aggregate cost changes if the volume of output changes
increases/decreases) by one unit.
Imputed costs are costs that are not actually incurred, but are
associated with internal transactions. When work in process is
transferred from one department to another within an organization,
a method of transfer pricing may be needed for budgetary reasons.
Although there is no actual purchase or sale of goods and materials,
the receiving department may be charged with imputed costs for
the work it has received. When a company rents itself a building
that is could have rented to an outside party, the rent may be
considered an imputed cost.
• Examples:
○ Clay in bricks
○ Leather in shoes
○ Steel in machines
○ Cloths in garments
○ Timber in future
• Direct labour
• Examples:
○ Machine operator
○ Shoe maker
○ Carpenter
○ Weaver
○ tailor
• Direct expenses
• Examples
○ Hire of special plant for a particular job
○ Travelling expenses in securing a particular contract
○ Cost of patent rights
○ Experimental costs
○ Cost of special drawings, designs and layouts
○ Job processing charges
○ Royalty paid in mining
○ Depreciation or hire of a plant used on a contact at site
• Indirect cost
• Indirect material
• Examples:
○ Lubricating oil
○ Sand paper
○ Nuts and bolts
○ Coals
○ Small tools
○ Gum
• Indirect labour
• Examples:
○ Supervisor
○ Inspector
○ Cleaner
○ Clerk
○ Peon
○ Watchman
• Indirect expenses
• Examples:
○ Rent and rates
○ Depreciation
○ Lighting and power
○ Advertising
○ Insurance
○ Repairs
• Prime cost
• This is the aggregate of direct material cost, direct labour cost
and direct expenses. Thus,
• Direct material+ direct labour+ direct expenses=prime cost
• Overhead
• This is the aggregate of indirect material cost, indirect labour
cost and indirect expenses. Thus,
• Indirect material + indirect labour + indirect
expenses=overheads
• Overheads are divided into three groups as follows:
○ Production overheads
• Indirect material –
Examples: packing
material: stationery used
in sales office, cost of
samples, price list:
catalogues, oil, grease
etc., for delivery vans, etc.
• Indirect labour –
Examples: salary of sales
manager, salary of sales
office staff, salary of
warehouse staff, salary of
driver’s delivery vans.etc.
• Indirect expenses –
Examples: advertising,
travelling expenses,
showroom expenses,
carriage outward, rent of
warehouse, bad debts,
insurance of goods in
transit, etc.
• Relevant Costs:
• Managerial costs:
• Opportunity cost
• Replacement cost
• Discretionary costs:
• Engineered costs:
• Irrelevant Costs:
• Sunk costs:
THUS,