claassification of cost.

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Information about claassification of cost.

Published on March 5, 2014

Author: KvNajla



slide on cost accounting .classification of cost. methods of costing,techniques, elements and cost sheet.

Limitations of financial accounting Due to the following limitations of financial accounting ,the cost accounting got its origin:  only provides past data.  does not show profit or loss of each product, job, process etc..  Fails to exercise control over resources  Does not measure organizational efficiency.  Fail to provide adequate data for price fixation.  Does not provide data for comparison of cost  Fails to take into account the impact of price level changes

COST  Meaning: Simply it is the price paid for something  In cost accounting: It is the amount of resources consumed to produce a product or service.  Definition: The institute of management accountants , U.S.A, defines cost as “a measurement in monetory terms of the amount of resources used for some purposes.”

Objectives of Cost Accounting  Ascertainment of cost  Control of cost  Guide to business policy such as make or buy, introduction of new product etc  Determination of selling price

Cost Centre  Cost centre: is a location, person, or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control  It refers to a section of the business to which costs can be charged.  Types: Personal and Impersonal cost centre  Production and Service cost centre 

Cost Unit  Cost units are the things, that the business is set up to provide, of which cost is ascertained.  Unit of product, service or time in relation to which cost may be ascertained or expressed  Types:  Units of production :such as a ream of paper, a tonne of steel, a meter of cable etc.  Units of services: such as passenger miles, consulting hours, room per day, bed per day

Methods of costing  It refers to the techniques and processes employed in the ascertainment of costs  Choice of the method depends upon the type and nature of manufacturing activity  The methods of costing are:  JOB ORDER COSTING – Applies where work is undertaken to customers special requirements.

 CONTRACT COSTING or terminal costing: It is same as Job order costing; however, job is small and contract is big contract. Contract is of long duration and may continue for more than a financial year.  BATCH COSTING: Cost of a batch or group of identical products is ascertained; each batch of products is a cost unit for which costs are ascertained.

 PROCESS COSTING : Applies to a context where there is a continuous process. Costs are accumulated for each process. And then total cost of a process is divided by the number of units produced to arrive at cost per unit.  OPERATIONS COSTING: Involves cost ascertainment for each operation.  OPERATING OR SERVICES COSTING: It is applied to services; cost units are passenger – kilometer, room per day, bed per day.

 MULTIPLE OR COMPOSITE COSTING Application of more than one method of costing in respect of the same product. Used in industries where a number of components are separately manufactured and then assembled into a final product.  SINGLE, OUTPUT OR UNIT COSTING: Applied to a context where output produced are identical, the cost per unit is found by dividing the total cost by the number of units produced. E.g. Steel output is identical but differentiated by grades.

Techniques of costing – Types…..  STANDARD COSTING: Standard cost is predetermined as target of performance and actual performance is measured against the standard.  BUDGETARY CONTROL: By comparing actual with planned / budgeted performance

 MARGINAL COSTING: Only variable cost is allocated to individual cost centers or cost units  TOTAL ABSORPTION COSTING : Both fixed and variable costs are charged to products.  UNIFORM COSTING: It is not a technique but a situation wherein several undertakings use the same costing principle and practices.

 DIRECT COSTING: Process of charging all direct costs to products, services, job etc..  DIFFERENTIAL COSTING: Technique of comparing cost of two alternatives for the purpose of deciding which alternative is best.

Classification of cost  Classification can be done in the following ways:  According to the functions  According to the variability  According to the identifiability  According to time and period  According to managerial decisions

According to functions Manufacturing cost These are the costs associated with the production of goods. Administrative cost These are the costs associated with the firm’s general management Selling cost Costs of creating and stimulating demand and securing orders Distribution cost Costs incurred in moving the goods from the factory to the consumers Financing cost Costs incurred for raising and using capital

According to variability Those costs which do not change with changes in the level of activity. When production increases or decreases, fc will remain fixed. Eg,rent&rates, salaries, insurance, tax,etc Those costs which change in direct proportion to changes in the level of activity. When volume of output increases, total variable cost also increases proportionately. But the per unit remains fixed Eg;direct material, direct labour,etc These costs are Partly fixed and partly variable. eg:telephone charges, power charges, depreciation, etc Fixed cost Variable cost Semivariable cost

According to identifiability Direct cost All costs which can be conveniently identified with a particular cost centre or cost unit. These are directly chargeable to a product, activity or department. Eg:Direct material, direct labour,etc Indirect cost The costs which cannot conveniently be identified with a particular cost unit or cost centre. The total of indirect costs is called overhead. Eg:factory rent, depreciation, factory mgr’s salary, etc

According to time & period Historical cost Product cost These are the costs which are incurred after the event takes place .  They are nothing but actual costs. These are the costs which are directly associated with the product. These are the costs of making finished products. Eg: manufacturing costs

Period cost Pre-determined cost These are the costs charged as an expense in the profit and loss account of the period in which they are occurred. They are incurred on the basis of time. eg:deprciation, rent, salaries, etc It is the cost which is computed in advance of production

According to managerial decisions Sunk cost •Past costs, which have been incurred as a result of a decision made in the past. •Such cost cannot be reversed by future decision. •Eg: investment in fixed assets, as the amount invested in fixed assets is irreversible. Opportunity cost It is the value of a benefit sacrificed in favour of an alternative course of action. It is the cost of the best alternative foregone.

Imputed costs Differential cost The difference between total costs between two alternatives is called differential cost. It is the increase or decrease in total cost that result from an alternative course of action. Increase in cost incremental cost Decrease in cost decremental cost These costs are not actually incurred. These are expenses which an entrepreneur pays himself Costs considered at time of decision making. Eg: rent of owned building, salary of owner, etc

Shut down cost Out-ofpocket cost Those costs that involve cash outflow immediately or in the future. Eg: material costs, labour costs, repairs, rents, etc, These are the costs which will be incurred even if the plant is closed down temporarily due to raw material shortage, labour problem,etc. Eg: rent, depreciation, maintenance of plant ,etc

Marginal cost It is the additional cost of producing an additional unit It is the cost of converting raw materials into finished goods. It is the total of direct labour, direct expenses, and factory overheads. relevant cost Conversion cost Costs which have direct influence on the decision making are called relevant costs. These are future costs that will change due to managerial decision.

Elements of costs In order to interpret the term cost correctly and to ascertain the cost with respect to the cost centers, the cost attached with the manufacturing process may be subdivided, known as Elements of Costs. (A) Material (B) Labour (C)Expenses

Elements of Cost Material Direct Indirect Labour Direct Factory / Works Overheads Expenses Indirect Direct Administration Overheads Indirect Selling & Distribution Overheads

Material Cost The cost of commodities and materials used by the organization. Direct Material Cost – all raw materials, either purchased from outside or manufactured in house. Indirect Material Cost – material which cannot be identified with the individual cost centre, assist the manufacturing process and does not become an integral part of finished goods. Consumable stores, Cotton waste, oils and lubricants, stationary material etc.

Labour Cost The cost of remuneration paid to the employees of the organization. Direct Labour Cost – identified with the individual cost centre and is incurred for those employees who are engaged in the manufacturing process. Indirect Labour Cost – cost which cannot be identified with the individual cost centre and is incurred for those employees who are not engaged in the manufacturing process but only assist. wages paid to foreman/storekeeper, salary of works manager, Accountant/Personnel dept. salaries etc.

Expenses Cost This is the cost of services provided to the organization and the notional cost of assets owned. Direct Expenses Cost – Expenses identified by individual cost centers. Hire charges of machinery/equipment for particular job, cost of defective work etc. Indirect Expenses Cost – Expenses which cannot be identified by individual cost centers. Rent , Telephone expenses, Insurance, Lightening etc.

Direct Material Cost + Direct Labour Cost + Direct Expenses Cost Overheads Prime Cost Indirect Material Cost + Indirect Labour Cost + Indirect Expenses Cost

Overheads- Classification Factory / Works Overheads Consist of all overhead costs incurred from the stage of procurement of material till the production of finished goods.  Indirect material such as Consumable stores, Cotton waste, oils and lubricants, stationary material etc.  Indirect labour such as wages paid to foreman/storekeeper, salary of works manager, Accountant/Personnel dept. salaries etc.  Indirect Expenses such as Carriage inward cost, Factory lightening/power expenses, rent/ Insurance /repairs for factory building/machinery, depreciation on factory building or machinery etc.

Office and Administrative Overheads These overheads consists of all overheads costs incurred for the overall administration of the organisation. They include :  Indirect material such as stationary items, office supplies etc.  Indirect labour such as salaries paid to account and administrative staff, Directors’ remuneration etc.  Indirect expenses such as postage/telephone, depreciation on office building, legal/audit charges, Bank charges . Rent/insurance / repairs in offices etc.

Selling and Distribution Overheads These overhead consist of all overhead costs incurred from the stage of final manufacturing of finished goods till the stage of sale of goods in the market and collection of dues from customers.  Indirect material such as packaging material, samples etc. Indirect labour like salaries paid to sales personnel, commission paid to sales manager. Indirect expenses like carriage outward, warehouse charges, advertisement, bad debts, repairs and running of distribution van, discount offered to customers etc.

COST SHEET A. Direct Material Direct Labour Direct Expenses B. Works Expenses, Indirect Materials Indirect Labour Rent & taxes of factory premises, Depreciation, Repairs, Fuel & power etc. C. Office Expenses Office Rent, Rates, Stationary Directors fees etc. Prime Cost Works or Factory cost i.e. A + B (Also often Production Cost) Office Cost i.e. A + B + C Or Cost of Production

D. Selling Expenses, such as Sales staff salaries Show room expenses Advertising Carriage outwards Packing Bad Debts E. Plus Profit Or Minus Loss E Cost of Sales, i.e. A + B + C + D Selling price i.e. A + B + C + D +

Expenses excluded from Costs Item of expenses which are apportionment of profit should not form a part of the costs. These are Income tax  Dividend to share holders  Commission to partners, managing agents etc.  Capital Loss  Interest on Capital  Interest paid on debentures  Capital expenses etc.

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