Cost Accounting

An Introduction

Introduction
Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. Cost is the amount of actual or notional expenditure relating to a product, job, service, process or activity. Cost is often used as a generic term to describe various types of costs. Costing is the technique and process of ascertaining costs.

Introduction
Cost Accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. It includes:
Collecting, classifying, recording, allocating and analyzing costs Preparation of periodical statements and reports for ascertaining and controlling costs Application of cost control methods Ascertainment of profitability of activities carried out or planned.

Cost Accounting is the processing and evaluation of monetary and non-monetary data to provide information for internal planning, control of business operations, managerial decisions and special analysis.

Introduction
Cost Accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making. Objectives of Cost Accounting
To ascertain cost To control cost To provide information for decision making To determine selling price To ascertain costing profit

Advantages of Cost Accounting

Helps in ascertainment of cost Helps in control of cost Helps in decision making (make or buy, retain or replace, continue or shut down, accept or reject orders, etc) Helps in fixing selling prices Helps in inventory control Helps in cost reduction Helps in measurement of efficiency Helps in preparation of budgets Helps in identifying unprofitable activities Helps in identifying material losses Helps in identifying idle time, idle capacity Helps in improving productivity Helps in cost comparison

Essentials of a Good System

Suitability to the nature of business Tailor made system to meet requirements of the business Simplicity easy to understand and simple to operate Economical to install and operate Flexibility to adapt to the changing business needs Accuracy must provide accurate information Promptness of information Support of staff must have staff co-operation and participation Cost control must ensure cost control in various fields Clearly defined Cost Centers least ambiguity Detail give relevant details but avoid unnecessary detail

Cost Concepts
Cost Unit Is a unit of product, service or time in terms of which costs are ascertained or expressed. It is a unit of measurement. Responsibility Centers is the unit or function of an organization under the control of a manager who has direct responsibility for its performance. E.g. Cost Center, Revenue Center, Profit Center, Contribution Center, Investment Center. Cost Center Is a location, person or item of equipment for which costs may be ascertained and used for the purposes of cost control. Types of Cost Centers:
Personal Cost Center person or group of persons Impersonal Cost Center location or equipment Production Cost Center where actual production takes place Service Cost Center departments which render service to other cost centers

Cost Object any product, service, process or activity for which a separate measurement of cost is required.

Financial & Cost Accounting

No. 1. 2. 3. 4. 5. 6. 7. Basis Objective Costs and profits Control / Report Decision making Responsibility Time frame Type of reports Financial Accounting Financial position performance and Cost Accounting Ascertain cost and cost control Shows details for each product, process, job, contract, etc Emphasis reporting on control and

Shows overall costs and profit / loss Emphasis on reporting Limited use Does not fix responsibility Focus on historical data General reports like P&L Account, Balance Sheet, Cash Flow Statement Statutory requirement Records external transactions Everybody Standard, as per law Everybody, except for some Monetary

Designed for decision making Can effectively fix responsibility Focus on present and future Can generate special reports and analysis Voluntary, cases except for some

8. 9. 10. 11. 12. 13.

Legal need Transactions Reader Formats Access Unit of value

Records internal and external transactions Internal management Tailor made Very limited access Monetary and physical

Methods of Costing
No. 1. Costing Method Job Costing Meaning A job, product, batch, contract, service or any specific order is treated as a cost unit. For specific orders, contract or service. Production is done in batches. Products subject to a process; output of one process becomes input for the next process. Type of operations performed is monitored. Single product, process involved or where product is uniform, continuous and identical. For service operations Application of two or more costing methods. Involves manufacturing and assembly operations. Application Engineering, Construction, Ship Building, Pharmaceuticals, etc Construction, Engineering, etc Garments, Pharmaceuticals, Components, Toys, Tyres, Tubes, etc Paper, Chemicals, Sugar, etc Textiles,

Contract Costing

Batch Costing

2.

Process Costing Operation Costing

Engineering, Textiles, etc

Unit Costing

Cement, Steel, etc

Service Costing Multiple Composite Costing or

Transport, Railways, Hospitals, etc.

Hotels,

Vehicles, Consumer Goods, etc

Costing Techniques
No. 1. Costing Technique Marginal Costing Description Charging variable costs to operations, processes or products and writing off all fixed costs against profits in the period in which they arise. Charging all direct costs to operations, processes or products and writing off all indirect costs against profits in the period in which they arise. Charging all variable costs and fixed production overheads to operations, processes or products and writing off selling, distribution and administration overheads against profits in the period in which they arise. Using the same costing principles and / or practices by a number of firms in the same industry. Helps in inter-firm comparison, price fixation, cost control / reduction and seeking government tax relief / protection. System which involves fixation of cost standards, ascertain variances of actual cost with standard cost, variance analysis and presentation for corrective action and decision making. System which involves establishment of budgets, comparison of actual with budget, variance analysis and corrective action. Actual cost ascertained after it has been incurred.

2.

Direct Costing

3.

Absorption Costing

4.

Uniform Costing

5.

Standard Costing

6. 7.

Budgetary Control Historical Costing

Cost Treatment
Cost Ascertainment is the process of determining actual costs after they have been incurred. Cost Estimation is the process of determining future costs in advance before production starts, on the basis of actual past cost adjusted for anticipated future changes. Cost Allocation is the process of charging the full amount of an individual item or cost directly to the cost center for which the item of cost was incurred. Cost Apportionment is the process of charging the proportion of common items of cost to two or more cost centers on some equitable basis. Cost Absorption is charging cost from cost centers to products or services by means of a pre-determined absorption rate.

Cost Classification
Classification By Nature or Element Direct Material Cost Indirect Material Cost Direct Labour Cost Indirect Labour Cost Which can be directly allocated to a product, job or process Which cannot be directly allocated to a product, job or process Labour directly engaged for a specific job, contract or work order. Labour not directly engaged for a specific job, contract or work order. All direct costs other than materials and labour costs. All indirect costs other than indirect materials and indirect labour costs. Sum of indirect material, indirect labour and indirect expenses for the factory. Sum of indirect material, indirect labour and indirect expenses for the office. Sum of indirect material, indirect labour and indirect expenses for selling. Sum of indirect material, indirect labour and indirect expenses for distribution. Basic raw material, primary packing material Stores, consumables, some low value items Shop floor labour Staff departments Processing charges, machine hire charges, excise duty, etc Rent, repairs, telephones, electricity, utility costs, insurance, depreciation Meaning Example

Direct Expenses

Indirect Expenses

Factory Overheads Administration Overheads Selling Overheads Distribution Overheads

Cost Classification
Classification
By Function Production Cost Administrative Cost Selling Cost Sum of direct material, direct labour, direct expenses and factory overheads. Cost of the Admin Department for the management of the organization. Cost for seeking to create and stimulate demand and secure orders. Costs for making the packed product ready for dispatch to recovery of material for recycling, if any. Costs for developing new or improved product / application. Cost of trial run or production.

Meaning

Example

Distribution Cost

Research Cost Pre-Production Cost

By Relation to Cost Center Direct Cost Sum of direct material, direct labour and direct expenses of the Cost Center. Sum of indirect material, indirect labour This cost is apportioned and indirect expenses of the Cost to the Cost Center. Center. Also called as Overhead Cost.

Indirect Cost

Cost Classification
Classification Meaning Example
By Variability / Behaviour Fixed Cost Variable Cost Costs that do not vary with the volume Rent, insurance, salary of production. Costs that vary directly with the volume All direct costs, variable of production. overheads

Costs where one part remains fixed in Semi-Variable / Semia given range and the other part varies Telephones, electricity Fixed Cost with volume of production. By Controllability Controllable Cost Uncontrollable Cost By Normality Normal Cost Abnormal Cost Cost that is normally incurred at a level Cost as per standard of operation. Cost that is not normal at the level of Abnormal loss, abnormal operation. idle time Costs that can be influenced by a Direct costs decision maker at a particular level. Costs that cannot be influenced by a All costs can ultimately be decision maker at that particular level. controlled at the top.

Cost Classification
Classification
By Inventory Product Cost Period Cost Expired Cost Cost that is absorbed to value of stock Cost that are expensed out. Manufacturing costs Fixed costs

Meaning

Example

Costs incurred for generating revenue. COGS, admin expenses Expensed cost. Unexpired cost, capitalized cost, Fixed assets, prepaid deferred revenue expenditure would expenses, R&D expenses provide benefits in future periods.

Deferred Cost By Time Historical Cost Pre-determined Cost

Actual cost ascertained after it has been incurred. Future cost ascertained in advance could be standard or estimated cost What the cost should be - based on Standard material engineering specifications and efficient labour costs operating conditions and

Standard Cost

Estimated Cost

What the cost will be - estimated on the Projection for actual basis of past experience adjusted for material cost for next year anticipated changes.

Cost Classification
Classification
By Decision Making Relevant Costs Irrelevant Costs Sunk Costs Shut-Down Costs Out of Pocket Costs Opportunity Costs Imputed Costs Cost that is relevant for making the underlying decision. Cost that is not relevant for making the underlying decision. Historical or past cost already incurred and cannot be changed. Fixed costs to be incurred even when the plant is shut down. Costs that involve cash outlay. The value of sacrifice made in accepting an alternate course of action. Notional costs that do not have a cash outlay, are similar to opportunity cost. Increase or decrease in cost due to change in activity level. Also called incremental cost. Total variable cost attributable to one unit of product. Incremental cost of making one unit of product. Current cost of an identical asset. Cost of converting raw material into a finished product. Costs that are committed and have to be incurred. Costs that can be avoided. Rent of own premises, interest on own capital

Meaning

Example

Differential Costs

Marginal Cost Replacement Cost Conversion Cost Committed Costs Discretionary Costs

Cost Audit
Cost Audit is the verification of cost accounts and a check on the adherence to the Cost Accounting plan. It comprises of verification of the cost records and ensuring that they adhere to the principles of cost accounting. Purpose of Cost Audit are protective (examine undue wastage / losses to reflect realistic cost of production) and constructive (provide information for management decision making). Items excluded from Cost Accounts items of financial nature like Other Income, Finance Costs, Financial Accounting adjustments and appropriations. These include profit on sale of fixed assets / investments, interest income / expense, dividend / rent income, preliminary expenses written off, tax, cash discount, provision for doubtful debts, etc.

Cost Components

No. 1.

Cost Component Prime Cost Works Cost or Factory

Description Direct Material Cost + Direct Labour Cost + Direct Expenses (Direct Material Cost = Opg. Stock of RM + Net Purchase Cost Clg. Stock of RM) Prime Cost + Factory Overheads + Opg. Stock of WIP Clg. Stock of WIP Factory Cost + Admin Overheads Cost of Production + Opg. Stock of FG Clg. Stock of FG Cost of Goods Sold + Selling & Distribution Overheads

2.

3. 4. 5.

Cost of Production or Cost of Goods Produced Cost of Goods Sold Cost of Sales

Costing P&L Account

No. Particulars Direct Material Cost = Opening Stock of Materials + Purchases + Expenses on Purchases - Purchase Returns - Closing Stock of Materials - Value of Normal Scrap of Direct Materials Direct Labour Cost = Direct Labour Cost Paid + Outstanding / Payable - Prepaid Direct Expenses Amount Per Unit

(on number of units produced)

(on number of units produced)

(on number of units produced)

Prime Cost = (A + B + C) Works / Factory Overheads = Factory Overheads Paid - Value of Normal Scrap of Indirect Materials + Opening Stock of WIP - Closing Stock of WIP Works or Factory Cost = (D + E)

(on number of units produced)

(on number of units produced)

(on number of units produced)

Costing P&L Account

No. Particulars Amount Per Unit

Office and Admin Expenses

(on number of units produced)

Cost of Goods Produced = (F + G) FG Stock Adjustment + Opening Stock of FG - Closing Stock of FG Cost of Goods Sold = (H + I)

(on number of units produced)

(on number of units sold)

Selling & Distribution Expenses

(on number of units sold)

Cost of Sales = (J + K)

(on number of units sold)

Profit

(on number of units sold)

Sales = (L + M)

(on number of units sold)

Material Cost Fundamentals

Material Cost
Material Cost can be Direct and Indirect Direct Materials are those which can be identified with and directly allocated to the product, job or process. Includes basic material and primary packing material Indirect Materials are those which cannot be easily identified with and directly allocated to the product, job or process. Includes stores, consumables, small value materials

Direct Material Cost

The total direct material cost includes:
Purchase price Customs Duty, Excise Duty, VAT, CST, Octroi Inward freight Insurance Directly attributable expenses like packing expenses, inspection, storage, delivery, etc (Less) Volume or Trade Discounts Rebates, Duty Drawback, MODVAT, Subsidies, etc (Less) Cost of containers recovered on return

Objectives of Material Control

Avoid under stocking or shortages Avoid over stocking and obsolescence Ensure proper quality from reliable sources Explore alternate sources and reduce cost

Reduce total cost of materials, ordering and carrying costs Maintain proper inventory records
Provide information for decision making

including

Avoid wastages and losses in storage and use

Requirements for Material Control

Proper co-ordination Proper purchase system Proper storage system Proper issue system Perpetual inventory system Continuous stock taking system Budgetary control system Proper documentation Proper accounting system Proper reporting system

Documents for Materials

Purchase of Materials
Bill of Materials (BoM) Purchase Requisition Supplier Selection Purchase Order Goods Received Note Inspection Note Return of Rejected Material Bill Passing Making Payment to Supplier Bin Card Stores Ledger Material Requisition Material Return Note Material Transfer Note

Issue of Materials

Material Losses
Waste portion of raw material lost during processing or storage, having no recovery value Arises due to shrinkage, evaporation, chemical reaction, etc Scrap incidental residue manufacturing operations usually of small amount and low value recoverable without further processing Arises due to processing of material, defective or broken parts and obsolescence / abortion of development projects Defective Work work that has some imperfections which can be rectified by additional material or processing Arises due to improper product design, bad raw material, poor workmanship, inadequate supervision, improper material handling, defective machinery or improper training Spoiled Work work that cannot be reconditioned or brought to standard and must be sold as scrap or seconds Arises due to improper product design, improper machinery or process used, improper material quality or untrained operators Normal Loss is charged to the particular job or as production overheads Abnormal Loss is charged to Costing Profit & Loss Account

Controlling Material Loss

Proper product design Proper selection of manufacturing process Proper selection of machinery & equipment Proper process control Proper storage and material handling Trained manpower Proper record keeping Proper control system having scientific standards Proper reporting system Defined accountability Corrective action

Materials Issue Pricing

Cost Price Methods
FIFO (First In First Out) LIFO (Last In First Out) HIFO (Highest In First Out) Base Stock Price Simple Average Weighted Average Periodic Simple / Weighted Average Moving Simple / Weighted Average

Average Price Methods

Notional Price Methods

Standard Price Inflated Price Replacement or Market Price

Weighted Average and FIFO Methods are used in Accounting

Inventory Control
Inventory is tangible property or assets held
for sale in the ordinary course of business or in the process of production for sale or for consumption in the production of goods or services for sale including maintenance supplies and consumables other than machinery spares

Inventory comprises of raw materials, stores & spares, work-in-process and finished goods Inventory control includes planning, organizing and controlling purchase and storage to ensure availability in terms of quantity, quality, timeliness at least cost Monitoring level of inventory with respect to production and sales Releasing material in a systematic manner to ensure quality at least cost and reduce wastage / obsolescence Analyze inventory levels and suggest optimal and alternate uses of material including value engineering Ensure physical stock taking to avoid pilferage Provide information for inventory valuation

Techniques of Inventory Control

ABC Analysis Economic Order Quantity (EOQ) Stock Levels minimum, maximum, reorder level, reorder quantity Inventory Turnover Ratio Slow and Non-Moving Items Purchase, Storage and Issue Procedure Two Bin System Perpetual Inventory Records and Continuous Stock Verification Budgetary System

ABC Analysis
A: 70% value, 10% items B: 20% value, 20% items C: 10% value, 70% items Ensures control on high value items Saves time and cost of monitoring Reduces total investment in inventory Facilitates faster decision making Better utilization of resources Better physical control of stock

Economic Order Quantity (EOQ)

Level at which the ordering and carrying costs are minimum. At EOQ, the ordering and carrying costs are equal. Ordering Cost includes costs for placing an order, transportation, receiving goods and inspecting goods Ordering Cost reduces with order size Carrying Cost includes costs for storage space, handling materials, insurance, obsolescence and personnel. Carrying Cost increases with order size Dependent on periodicity and annual material consumption EOQ determines quantity to be ordered at a given time

EOQ Technique
Assumes prior knowledge of annual usage, constant usage rate, constant ordering cost, constant carrying cost and zero lead / delivery time EOQ can be determined by graphical, tabular or formula method Find the level at which total of ordering and carrying cost is least or ordering cost equals carrying cost EOQ = (2AO / C) where A = Annual Consumption, O = Ordering Cost per order and C = Carrying Cost per order EOQ = (2AO/IP) where I = Inventory or Stock Holding Cost (as % of average stock value) and P = Price per unit Economic Order Frequency (in days) = 365 / (Number of orders per year) Total annual ordering and carrying cost at EOQ = (2AOC)

Stock Levels
Maximum Stock Level is the maximum stock level that can be held in store. It avoids cost of over-stocking such as costs for storage, investment, insurance and risk of obsolescence Dependent on reorder level, reorder quantity, rate of consumption, reorder period, availability of funds and storage space, cost of storage, insurance, obsolescence, price fluctuation, etc Formula: Maximum Level = Reorder Level + Reorder Quantity (Minimum Consumption x Minimum Reorder Period)

Stock Levels
Minimum Stock Level is the level below which the stock should not be allowed to fall Dependent on reorder level, rate of consumption and reorder period Formula: Minimum Level = Reorder Level (Normal Consumption x Reorder Period) Reorder Level is the level of stock at which fresh replenishment order should be placed Dependent on consumption rate, reorder period and minimum level Formula: Reorder Level = Maximum Consumption x Maximum Reorder Period OR Minimum Level + (Normal Consumption x Reorder Period)

Stock Levels
Average Stock Level = Minimum Level + Reorder Quantity OR (Minimum Level + Maximum Level) / 2 Danger Level is the level at which only emergency material issue is done (normal material issue is stopped) It is a level at which urgent ordering action is required If Danger Level is below Minimum Level, urgent corrective action is required If Danger Level is above Minimum Level, it calls for preventive action Dependent on rate of consumption and reorder period Formula: Normal Consumption Rate x Maximum Reorder Period for emergency purchases

Inventory Turnover Ratio

Indicates the speed with which inventory is consumed A high ratio indicates fast moving stock, low ratio indicates slow moving stock Inventory Turnover Ratio = Materials Consumed / Average Stock Held expressed in times Materials Consumed = Opening Stock + Purchases Closing Stock Average Stock = (Opening Stock + Closing Stock) Days of Inventory = 365 / Inventory Turnover Ratio Can be computed for stock categories to determine fast moving, slow moving, dormant or obsolete stock Ideal level is determined with reference to level of other firms or the industry average

Other Techniques
Two Bin System Bin has two parts, the smaller one for reorder stock level and the other for the remaining material Issues are made from the larger bin, fresh order placed when it become empty, material used from smaller bin till replacement received and filled Periodic Inventory System Physical stock taking done periodically, requiring shut down Records then physically reconciled Perpetual Inventory System Records updated at every receipt and issue Done using bin cards and stores ledger Continuous stock taking done by random checks of the bin cards and stores ledger

Labour Cost Fundamentals

Meaning
Essential factor of production A human resource that participates in the process of production Two Categories Direct & Indirect Labour Labour Cost controlled by:
Personnel Department Engineering / Work Study Department Time Keeping Department Payroll Department Cost Accounting Department

Labour Cost Control

Manpower requirement assessment Time and Motion Study Job Evaluation and Merit Rating Labour Productivity Wage Systems Incentive Systems Time Keeping and Time Booking Labour Turnover Casual and contract workers

Time Keeping
Statutory attendance record Maintain discipline and punctuality Payroll preparation Ascertain Overtime Ascertain Idle Time Ascertain Labour Cost Provide basis for apportionment Control Labour Cost Maintained using Attendance Register / Muster, Token / Disc Method and Time Clocks / Clock Card

Time Booking
Records time spent by each worker on various jobs / orders / processes Methods: Daily Time Sheet

Weekly Time Sheet

Job Card or Job Ticket Time and Job Card

Labour Cost Card / Circulating Job Card

Piece Work Card

Labour Turnover
Rate of change in the composition of labour force due to retirement, resignation or retrenchment Defined as the number of workers left or replaced or both in relation to the average number of workers Turnover due to personal, avoidable and unavoidable causes Cost of Labour Turnover consists of Preventive Cost and Replacement Cost Preventive Cost personnel administration, medical & health care, welfare measures, wage & retirement benefits Replacement Cost personnel department expenses, training of new workers, initial inefficiency, initial breakages and defectives, time lag in recruitment,

Labour Turnover Measurement

Measurement by Separation Rate Method, Replacement Rate Method, Flux Method Separation Rate Method: Number of Separations / Average Number of Workers x 100 Replacement Rate Method: Number of Replacements (not normal additions) / Average Number of Workers x 100 Flux Method: (Number of Separations + Replacements) / Average Number of Workers x 100 OR (Number of Separations + Accessions i.e. all Recruitments) / Average Number of Workers x 100

Types of Labour Cost

Overtime Cost:
Customer requested, charged to specific job For increased production, charged to total production Abnormal overtime, charged to Costing P&L Account

Idle Time:
Normal Idle Time, charged to the product Abnormal Idle Time, charged to Costing P&L Account

Casual Workers, charged to specific job or as production overhead based on work done Out-Workers (who do the work in their premises) normally supply based on piece rate Outside Workers (outdoor duty) should be monitored to ensure adequate time booking

Types of Labour Cost

Attendance Bonus are part of wages and treated accordingly Shift Premium, charged same as Overtime Cost Fringe Benefits are part of wages and treated accordingly Apprentice Wages, charged as production overhead Holiday / Vacation Pay, charged as overhead or accounted in an inflated rate Leave with pay, accounted in an inflated rate Employers contribution to employee insurance, charged as production overhead

Incentive Wage Plans

Premium Bonus Plan - Halsey Plan, Halsey Weir Plan, Rowan Plan, Barth Plan Differential Piece Work - Taylor System, Merrick System Combination of Time and Piece Work - Emersons Efficiency Plan, Gantt Task and Bonus Plan, Points Scheme (Bedeaux Plan, Haynes Plan), Accelerated Premium Plan Group Incentive Plans Priestmans Production Bonus, Rucker Plan, Scalon Plan, Towne Gain Sharing Plan, Budgeted Expenses Bonus Incentives for Indirect Workers Profit Sharing Co-Partnership

Premium Bonus Plans

Halsey Plan: standard time fixed for each work, guarantees hourly wages for actual time taken, bonus of 50% paid if time saved Earnings = Time Rate Wages + Bonus = Actual Time Taken x Time Rate + 50% (Time Saved x Time Rate) Halsey Weir Plan: same as Halsey Plan except bonus is 33% compared to 50% in Halsey Plan Rowan Plan: same as Halsey Plan except bonus is a proportion (Time Saved / Time Allowed) x Actual Time Taken x Time Rate Barth Plan: Designed for trainees, beginners and slow workers. Earnings = Time Rate x (Standard Hours x Time Taken)

Differential Piece Rate System

Lower and higher production rates are defined Taylors System:
Production < standard output: Earnings are 80% of normal Production = or > standard output: Earnings are 120% of normal

Merricks System:
Production < 83% of standard output: Earnings are 100% of normal rate Production > 83% and < 100% of standard output: Earnings are 110% of normal rate Production > 100% of standard output: Earnings are 120% of normal rate

Combination Plans
Emersons Efficiency System:
Up to 66% efficiency, nil bonus More than 66% and < 100% efficiency, bonus on step basis (32 bonus steps defined) More than 100% efficiency, bonus @ 20% of basic wages + additional bonus @ 1% for each 1% increase in efficiency

Gantt Task and Bonus System:

Less than standard output, no bonus At standard output, 120% of time rate More than standard output, 120% of piece rate

Combination Plans
Bedeaux System or Points Scheme:
Points awarded for each unit of production Up to standard time, no bonus If time saved, bonus of time saved is given 75% to worker and 25% to foreman

Haynes System
Job expressed in standard man-minutes For repetitive work, time saved is shared between worker and foreman in 5:1 ratio For non-repetitive work, time saved is shared between worker, employer and foreman in 5:4:1 ratio

Accelerated Premium System

Bonus rate increases with output

Group Incentive Plans

Priestmans Production Bonus:
Bonus paid in proportion to production in excess of standard output per week

Rucker Plan
Also known as Cost Saving Sharing Plan Bonus = fixed proportion of value added (sales purchased materials & services) of the monthly bonus is paid out, balance transferred to reserve fund

Scalon Plan
Similar to Rucker Plan except that bonus is linked to ratio of direct labour cost to sales value

Group Incentive Plans Towne Gain Sharing Plan

Bonus calculated as 50% of direct labour hours saved

Budgeted Expenses Bonus

Bonus determined as a fixed percentage of savings in actual expenses over the budgeted expenses

Incentives for Indirect Workers

For expense and service cost centers Creates goodwill, increases efficiency fosters teamwork and

Measuring or relating indirect work to production is difficult Establish standards repetitive activities for measurable and

Generally clubbed under group incentive plans

Two Types: Monetary & Non-Monetary

Profit Sharing Based on overall business prosperity and is over and above other benefits Types: Cash Plan, Deferred Credit Plan, Combined Plan Minimum bonus for eligible workers determined under Payment of Bonus Act Discretionary bonus for all determined by the management Paid on a flat percentage or on slab rates

Direct Expenses Basics

Examples
Cost of designs, drawings, technology, royalty, patent fees, tools, jigs, fixtures for the job Special services for layout, machining, testing related to the job Fees paid to architect, consultant, surveyor, insurance, freight, hire charges for special tools or equipment related to the job, sub-contracting charges Generally considered as direct overhead and then allocated to the job or product