Costing Techniques

Special Points

Meaning of Cost
Cost does not have a definite meaning. Cost Accountants , economists and others develop the concept of cost according to their needs. Some definitions of cost.

Contd
Dictionary meaning price paid for something. Cost is the amount of expenditure (actual or notional) incurred or attributable to a given thing.(CIMA London) Cost is the measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering of services. Cost is a foregoing or sacrifice measured in monetary terms incurred or potentially to be incurred to achieve a specific purpose.

Cost vs Expense & Loss

Cost is often used interchangeably with expense. Cost should be distinguished from expense & loss. Expense is an expired cost resulting from a productive usage of an asset.

Certain Cost Terms

Cost Centre

Cost Unit

Cost Object

Tools of Costing
Methods of costing

Techniques of costing

Methods
Job order costing Contract costing or terminal costing Batch costing Process costing Operation costing Single output or unit costing Multiple or composite costing.

Techniques
Standard Costing Budgetary control Marginal costing Total absorption costing

Cost Sheet
Cost sheet is defined as a document which provides for the assembly of the detailed cost of a cost centre or cost unit. Cost sheet is a periodical statement of cost designed to show in detail the various elements of cost of goods produced like Prime cost,Factory cost,Cost of production and Total cost.

Procedure
In order to ascertain the cost of products, a cost sheet is prepared periodically. As the production is uniform and cost units are identical the cost/unit is the average cost. Ascertained by dividing the total cost by the number of units produced. Cost unit may be 1000 bricks, a barrel of beer, a gallon of milk, tonne of steel/cement/sugar etc. Cost sheet is designed to show the total costs as well as cost/unit of output for the given period.

Contd
It is prepared at regular intervals like weekly,monthly,quarterly,yearly etc. Comparitive figures of the previous period may also be shown in the cost sheet so that assessments can be made about the progress of the business.

Purposes
Cost sheet serves the following purpose: It reveals the total cost and cost per unit of goods produced. It discloses the break up of total cost into different elements of cost. It provides a comparative study of the cost of current period with that of the corresponding previous period. It acts as a guide to management in fixation of selling prices and quotation of tenders.

Exclusions
The following are not included in a Cost Sheet: Cash discount. Interest paid. Preliminary expenses w/o Goodwill w/o Provision for taxation Provision for bad debts.

Contd.
Transfer to reserves. Donations. Income tax paid. Dividend paid. Profit/loss on sale of fixed assets.

Specimen of a Simple Cost Sheet

Cost Sheet (or Statement of Cost) for the period.. PARTICULARS COST COST/UNIT Direct Material Direct Labour Direct (or chargeable expense) PRIME COST Works overhead WORKS COST Office & Administrative o/h COST OF PRODN Selling & Distribution o/h TOTAL COST /COST OF SALES PROFIT/LOSS SALES TOTAL

Treatment of Stock
Stocks types: Stocks Stocks Stocks may be of the following 3 of Raw Materials of Work in Progress. of Finished Goods.

Stocks of raw materials

Opening Stock of raw materials Add: Purchases Less closing stock of raw materials Cost of materials consumed

Stocks of Work in Progress

Prime Cost Add Factory overheads Current manufacturing cost Add opening stock of WIP Total goods processed during the period Less Closing stock of WIP Works or Factory cost

Stock of Finished Goods

Cost of Production Add: Opening stock of Finished goods Cost of Goods available for sale Less: Closing Stock of Finished Goods Cost of Goods Sold

Example
Refer Excel Sheet 1.