Costing

 Cost is the amount of expenditure (Actual or Notional) incurred on or

attributable to, a given thing.

 Costing is the operation of calculating the cost of an article as a basis to

fix its selling price.
Use of Cost Accounting

 To determine the cost and income of a business enterprise

 To fix the price of products/services

 To decide on the following:

– Make or Buy
– To introduce a new product or drop an existing one
– To sell products in new territories or drop some present territories

 Budgeting

 Salary and Wage Decisions

Elements of Cost

 Material
– Direct Material Cost – Raw Material, HSS tool Bit etc.,
– Indirect Material Cost – Nails, Glue, cotton etc.,
 Labour
– Direct Labour Cost – Wages of machine operators
– Indirect Labour Cost – Wages/salary of Supervisors, Maintenance crew etc.,
 Expense
– Direct Expenses – Design and Fabrication cost
– Indirect Expenses – Rent, Insurance etc.,
Nature of Cost

 Fixed Cost

 Variable Cost

 Semi variable Cost

Cost Calculation
 Prime Cost = Direct Material Cost + direct Labour Cost+ Direct Expenses

 Factory Cost = Prime Cost + Production overhead

 Total Cost = Factory Cost + Selling overhead + Distribution overhead +

Administration overhead

 Selling Price = Total Cost + Profit

 A product is cast first and then machined to give it desired size and finish. The
yearly output is 10000 units. The various costs associated are given below:

Cost of Raw material – Rs.14000/-

Wages to labour – Rs. 30000/-
Wages to technicians – Rs. 5000/-
Expenditure on Advertisment – Rs.10000/-
Expenses on office and administrative staff -Rs.5000/-
Cost of tools and fixtures – Rs.1000/-

Calculate 1. Prime Cost 2. Manufacturing Cost 3. Total Cost 4.Selling price if 15%
profit is desired.
 Prime Cost = Cost of Raw material + Cost of labour + Cost of tool and fixtures
= 14000+30000+1000 = 45000/-

 Manufacturing Cost = Prime Cost + production overhead

= 45000+ 5000 = 50000/-

 Total Cost = Manufacturing Cost+ all other overheads

= 50000 + 10000 + 5000 = 65000

 Selling price/Unit = Total Cost + 15% profit/Total number of units

= 74750/ 10000 = Rs. 7.475/-