CLASSIFICATION OF COSTS

1 AND COST SHEETS

THEORY AND ILLUSTRATIONS

OUTLINE
No. Topic Page
Cost Classification 2
1.
1.1 Meaning
1.2 Methods of Costing
1.3 Different Methods for Different Industries

1.4 Job Costing

1.5 Process Costing
1.6 Other Methods
1.7 Exhibit 1 : Methods of Costing
3
Unit Costing
2. Output Costing&
2.1 Meaning and Applicability
Industries
2.2 Units Used in Different
2.3 Cost Per Unit
Finished Goods Stock
2.4 Adjusting Units of
Sheet
2.5 Items Excluded from Cost
2.6 Profit Centre
2.7 Investment Centre
2.8 Different Cost Sheets
2.9 Standards
Cost Accounting 11
3. llustrations
3.1 Element-wise Cost Sheet
3.2 Cost per Unit
3.3 Two Products
3.4 Estimated Cost Sheet
Semi-Variable Costs
3.5 Segregation of
3.6 Additional lllustrations
1.1 MEANING
CAS-1 by the 1CWA, costs are also class1fied on the basis oC
According to of production
or manutacturing process.
cOst related to a cost unit which consist ofa groun ofe.
Batch Cost is the aggregate
which maintain its identity throughout stages of production.
one or more

When the production process 1s such that goods are produced from a sequence of continuo
incurred during a period Is considered as Proces
repetitive operations or processes. the cost
Cost. The process cost per unit is derived by dividing the process cost by number ofunits produced
in the process during the period.
4 Operation Cost is the cost a specific operation involved in a production process or business
activity. When there are distinctly separate operations involved in a process, cost for each operation
is found out for effective control mechanism.
Operating Cost is the cost incurred in conducting a business activity. Operating costs refer to
the cost ofundertakings which do not manufacture any product but which provide services.
6. Contract Cost is the cost of contract with some terms and condition of adjustment agreed upon
beetween the contractee and the contractor.
7. Joint Costs are the common cost of facilities or services employed in the output oftwo or more
simultaneously produced or otherwise closely related operations, commodities or services.

1.2 METHODS OF COSTING

Costing means the process of ascertainment ofcosts. Methods of Costing therefore, mean the methods
used for ascertainment of costs. Methods of costing involve the methods and procedures used in
different industries in
(1) Collection of Costs from different sources such as Stores, Labour Department, Accounts
department;
(2) Classification of Costs into Material, Labour and Overheads; and
3) Ascertaining Cost Per Unit by
(a) Allocation of Direct Costs
(6) Apportionment of Costs to Cost Centres, and finally
(C) Absorption of Overheads by individual units.

1.3 DIFFERENT METHODS FOR DIFFERENT INDUSTRIES

Different methods of costing used in different industries. The method of
are
upon the nature of industry.
costing used depends
Thus, for example, the costing method employed by a construction
company building different types of bungalows will be different from the
by a chemical company manutacturing a standard drug. costing method employed

1.4 JOB COSTING

The construction company is interested in
determining the cost of each
costing method will treat each bungalow as a cost unit. The costs will be bungalow separately.
Its

determined bungalow-wise. The method of collected, classified and

costing used in such cases is called Job
Costing. JO
Costing Method is applicable where work consists of separate jobs or
orders,
of non-standard jobs undertaken against customer'sbatches
Job Costing is used to ascertain the cost contracts or

orders. It Is employed in industries where separate records can be kept in speclne

he heginning to the end. Ihe main object respect of each order Iro
of Job Costing is to ascertain the cost (and profit or loss
uiorial Note : You haready studied Cost Classification on different basis such as Reto
 Classification of Costs and Cost Sheets

chlob. Contract etc., and control its

costs
0Order Costing, Terminal Costing, Specific during its execution. Job
Costing is also
Order Costing, (2) Contract Costing etc. Following are the different known as
Costing:(1) Job Ord
Ar Costing as: that form oj Costing and (3) Batch Costing. ICMA has types of Job
Specijic order
mer's special requirements and each order costing which applies where work is define ned Job
is undertaken to
those to which contract costing applies). ICMA comparatively of short duration (compared to
has defined Batch
eific
spec order costing which consists of a group of similar articles Costing as: that form of
throughout one or more stages of production. which maintain its
identity
1.5 PROCESSCOSTING
The chemical company, on the other hand, is not interested in
anitof drug produced. Ihe Production of finding out the cost of each individual
Making, Mixing Packing in Capsules. The
and drugs may, however, involve three
processes say, Powder
company will be interested in ascertaining the
cOst of each proces rather than of each unit of separate
process as a cost unit. Ihe costs drug.
Its costing method will therefore treat each
will be collected,
method of costing used in such cases is known
classified and determined process-wise. The
as Process
Costing.
1.6 OTHER METHODS
Job Costing and Process Costing are the two basic
methods of
industry. Job Costing is used where the cost units arecosting
nature of employed depending upon the
different or distinct from one another
[Link] jobs, printing jobs, batches etc. Process Costing is used where the cost units
are identical and the
production involves two or more processes or operations, e.g. Chemical (products)
Service Industries etc. All other methods of Industries,
costing
methods. The Chart below shows the different methods of
are types of combination of these two
main
methods. costing falling under these two main

1.7 EXHIBIT 1:METHODSOF COSTING

METHODs OF COSTING

JOB COSTING PROCESS COSTING

1. Job Order Costing 1. Process Costing

2. Contract Costing 2. Unit Costing
3. Batch Costing 3. Operating Costing
COMBINATION

cOMPOSITE COSTING

2OUTPUT COSTING& UNIT COSTING

21 MEANING AND APPLICABILITY

When
hi COncern produces onlya single item the costing method is called single output costing
or

is employed when the manufacturing is

tid torm or type of Unit Costing. Unit Costing method ofcosting used to ascertain the cost
usand the units produced are identical. It is a industries where the output is expressed in
duced. Unit Costing is applicable to many
atar
units such as Numbers, Tonnes. Kilograms, Litres, Metres and so on. Thus Unit Costing
 " (S. [Link]-Il)
Methods are applicable to industries such as sleel, Mines, (Quarries, Colli
Cement Works. Flour Mills, Breweries, Paper Mills, Textiles 'ollieries,
Spinning Mills, Brick Making,assembly
Unit Costing is also applied when the concern produces different gradesotg a r Millsinand Kilns,
soon
tvpe production of automobiles, compuleTs, ofices equipmenis etc. Unit Costinpt isor
variant or type of Process Costing since in both methods an identical or standard also called
However, Process Costing is more complex in nature than Unit Costing, uced.

2.2 UNITS USEDIN DIFFERENT INDUSTRIES

As explained above, in Unit Costing the output is measured in 'natural units'.
the natural units used in various industries employing Unit Costing:
Following is a list ac

EXHIBIT 2: DIFFERENT UNITS

Unit Industries Product

Tonne Steel Steel Bars, Ingots
Collieries Coal
Quarries Stone
Mines Mineral ODre
Kilns Lime Stones
Sugar Mills Sugar
Cement Cement
K.G Paper Mill Paper
Spinning Mills Yarn
| Sacks Flour Mills Flour
Barrels Breweries Beer,Wines
1,000 No. Brick Making
Bricks
Metre/Yards Textile Mills Cloth

wORKSHEET 1: COST SHEET

The pro-forma Cost Sheet based on the latest, mandatory Cost Accounting Standards would appear
asfollows
COST SHEET

STEP ELEMENT OF COST

A. Direct Materials:
Opening Stock of Raw Materials XX
Add: Purchases of Raw Materials XX
Expenses on Freight etc. XX
Less: Closing Stock of Raw Materials
(xx)
Net Materials Consumed XX
B. Direct Wages XX
Direct Expenses XX
D. PRIME COST[A B+ C] XXX
E. Works Overheads Xx
F Less: Sale of Scrap / Waste/ Recoveries
(xx)
XX
G Work in Progress
Add: Opening Stock Xx
Less : Closing Stock XXX
WORKS COST [D+ E - F+ G]
(xx)
H. XXX
Quality Control Costs xXX
R& D Costs XXX
 K. Office/Administrative Overheads
L COST OF PRODUCTION [H +l+J+ K] XXX
XXX
M. Finished Goods:
Add: Opening Stock
XX
Less: Closing Stock
cOST OF GOODS SOLD xx)
N. [L+ M] XXX
0. Sales/Distribution Overheads XXX
P. COST OF SALES [N+ O]
XXX
a. (+) PROFIT/ (-) LoSS
XXX
R. SALES IP :Q] XXX

2.3 COST PER UNIT

The Cost Per Unit at each stage is obtained as follows:

PrimeCost Per Unit= Total Prime Cost

Total Units Produced
Total Works Cost
Works Cost Per Unit=
Total Units Produced
Total Cost of Production
Cost of Production Per Unit =

Total Units Produced

Thus, the costs upto the stage of production are divided by Total Units Produced to determine the
Cost Per Unit.

2.4 ADJUSTING UNITS OF FINISHED GOODS STOCK

The Total No. of Units produced are thereafter adjusted for the opening and closing stock of finished
oods to arrive at the Quantity of Units Sold. Thus,

WORKSHEET 2:ADJUSTINGFINISHED STOCK UNITS

Particularss Quantity
No. of Units Produced XXx
Add: No. of Units in Opening Stock XXX
xxx

|Less: No. of Units in Closing Stock xxx)

No. of Units Sold XXX

Total Cost of Goods Sold

Cost of Goods Sold Per Unit =
Total No. of Units Sold

Cost
Total Cost of Sales
of Sales Per Unit
=Total d
T No. of Units
Unit.
s , the costs pertaining to Sales are divided by Units Sold to arrive at the Cost Per
determined by the
CeIf the value of closing stock of finished goods is not given, it is to be
following formula
Units of Closing Stock x Cost of Production Per Unit
Thus,
1Osing Stock of Finished Goods has always to be valued at the cost of production.

2.5 EMS EXCLUDED FROM COST SHEET

Purely dnCial
finand items (incomes/ expenses /losses/appropriations) such asinterest, loss on sale of

dividends etc. are not shown in the cost sheet. (see Chapter 6, Para 3 for detailed
t paid
 ORUTCENTRE
GENTRE V-1ll)
Protit centres are
similar to cost centres
but
that a eost centre is
where costs are collected. accountable for costs and revenues. We
are
Some have seen
basis. Protit centre organisations,
managers should normally have control over how
however, work on a profi
centre
costs are incurred. revenue is raised and
Often, several cost centres will how
manager will be able to make decisions about both comprise one profit centre. The profit centre
both as profitably as purchasing selling will be expected to do
and and
possible. A profit centre manager will want information
and costs. He will be
judged on the profit margin achieved by his division. Inregarding both revenues
there are tixed costs which he cannot practice, it may be
that
control, so he should be judged on contribution,
revenue less variable costs. In
this case he will want information about which is
which products yield
highest contribution. the

2.7 INVESTMENT CENTRE

An investment centre is a
profit centre withadditional responsibilities for capital investment
possibly for financing, and whose and
performance is measured by its return on investment. An investment
centre manager will take the same
decisions as a profit centre but he also has additional
responsibility for investment. So he will be judged additionallymanager
on his handling of cash
and he will seek to make only those surpluses
investments which yield a higher percentage than the
notional cost of capital. So the investment centre companys
manager will want the same information as the
profit centre manager and in addition he will require quite detailed
and information appraisals of possible investments
regarding the results of investments already undertaken. He will have to make
decisions regarding the purchase or lease
of non-current assets and the investment of cash surpluses
Most of these decisions involve
large sums of money.
2.8 DIFFERENT COST SHEETS
A cost sheet prepared for a cost centre will show only the cost of sales. A cost sheet
preparedcentre for a
profit centre will also show the sales and the 'profit'. A cost sheet prepared for an investment
may show financial costs - actual as well as notional costs of funds.

2.9 cOST ACcOUNTING STANDARDS

2.9.1 Cost of Production (CAS-4)/ Manufacturing Cost (CAS-22)

CAS-4 (Cost of Production)/CAS-22 (Manufacturing of Cost) issued by the ICWA, India contains
the following guidelines for
computing Total/ Per Unit Cost of Production
1. Cost of Production: Cost of production shall consist
of Material Consumed, Direct Wages an
Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research and Developmen
Cost, Packing cost, Administrative Overheads relating to production. To arrive at cost 0
production, adjustment for stock of work-in-process, finished goods, recoveries for sales ofscrap
wastage etc. shall be made. The term t The term 'Manufacturing Cost' and 'Cost of Productiont'i
To
sed interchangeably. determine the cost
components and adjustments are explained below:
of production, calculations of diferent cos

2. Material Consumed Material Consumed shall include materials

directly identified for productio
of goods such as

(1) Indigenous materials

(2) Imported Materials
(3) Bought out items
(4) Self manufactured items
(5) Process materials and other items.
Cost of materials consumed shall consist ofcost of material. duties and taxes, freight inwut
insurance and other expenditure directly attributable to procurement. Trade discount.
and other similar items will be deducted for determining the cost of materials. Cenvat ere
 r e ddut
nt for countervailing customs duty,
Sales Tax set off, VAT,
duty draw back and other similar
s subsequently reco ered
recoverable by the
enterprise shall also the deducted.
nireet Wages and Salaries : Direct Wages and salaries
shall include house rent
rtime and incentive payments made to employees allowance
JetN ties. directly
rect wages and salaries include fringe benefits suchengaged
in the manufacturing
as:
hContribution to provident fund and ESIS.
Bonus ex-gratia payment toemployees.
3 Provision for retirement benefils such as gratuity and superannuation.
(4) Mkdical benef+ts

)Subsidised food
() Leave with pay and holiday payment
(7) Leave encashment

)Other allowances as children's education allowance, conveyance allowance which are payable
to employees in the normal course of business etc.

Direct Expenses : Direct expenses are the expenses other than direct material cost and direct
employees costs which can be identified with the product. Direct expenses include:
(1) Cost of utilities such as fuel, power, water, steam etc.
2) Royalty based on production.
(3) Technical Assistance/know - how fees.

4) Amortized cost of moulds, patterns, patents etc.

5) Job charges.
(6) Hire charges for tools and equipment.
) Charges for a particular product designinge
. Works Overheads: Works overheads are the indirect costs incurred in theproduction process.
The terms Manufacturing Overheads, Factory Overheads, Work Overheads and Production
Overheads have the same meaning and are used interchangeably. Work overhead include the

following expenses:
(1) Consumable stores and spares.
(2) Depreciation ofplant and machinery, factory building etc.
(3) Lease rent ofproduction assets.
(4) Repair and maintenance of plant and machinery, factory building etc.
activities.
) Indirect employees cost connected with production
(6) Drawing and Designing department cost.
(7) Insurance of plant and machinery, factory building, stock ofraw material & WIP etc.
(8) Amortized cost of jigs, fixtures, tooling etc.
9) Service department cost such as Tool Room, Engineering & Maintenance, Pollution control etc.

incurred relating to quality

.Quality Control Cost: The Quality Control Cost is the expenses
control activities for adhering to quality standards.
Research and Development Cost incurred for
:
Kesearch and Development Cost The or the existing product shall be included in the cost
elopment and improvement of the process
of production.
to
1dministrative Overheads: Administrative overheadsoverheads needs to be divided in relation
Administrative in relation to production
POOuction activities and other activities. Administrative overheads in
relation to
Vities shall be included in the cost of production. management, corporate
icti other than manufacturing activities e.g. marketing, projects
from the cost of production.
expen ses etc. shall be excluded examination problem
instruction / details in an
Note I n absence of specific
A l and included in Cost ofProduction.]
production
Expenses are assumed torelate
to
strative
 Cos ounting - lI (S. Y.B.A.E: SEM-l
8
9. Absorption of Overheads: Overheads shall be analysed into variable overheads and fixce
the items which change with the change in volume
overheads. Variable Overheads a r e whose value do not chan
etc. Fixed Overheads are the items ange
production, such as cost ofutilities rent etc. The variable product
such as salaries,
with the change in volume
of production
actual capacity utilisation. The fixe
overheads shall be absorbed in production cost based on
as quality control cost, researck
other sim1lar item oflixed costs such
production overheads and shall be absor bed in
administrative overheads relating to manufacturing
and development costs,
bas1s normal capacity or actual capacity
ofthe
utilization ofthe plan
the production cost on the
whichever is higher.
and finished goods: Stock of work-in-progressshal
10. Valuation of Stock of work-in-progress
as per the cost accounting principles,
be valued at cost on the basis of stages of completion stock of work-in.
be valued at cost. Opening and closing
Similarly. stock of finished goods shall
progress shall be adjusted
for calculation of cost of goods produced and similarly opening and
for calculation of goods despatched. In case the
closing stock offinished goods shall be adjusted
cost of a shorter period is to be determined,
where the figures of opening and closing stock are

readily available,
not adjustment
the of figures of opening and closing stock may be ignored.
or waste. Realized
11. Treatment of Scrap or Waste: The production process may generate scrap
or realizable value of scrap or waste shall be credited to the cost of production. In case scrapor

and it is used for reprocessing, the scrap or waste value is

waste does not have ready market
taken at a rate of input cost depending upon the stage at which such scrap or waste is recycled.
The expenses incurred for making the scrap suitable for reprocessing shall be deducted from

value of scrap or waste.

12. Miscellaneous Income : Miscellaneous income relating to production shall be adjusted in the
calculation of cost of production for example, income from sale of empty containers used for

despatch of the goods produced under referen ce.

13. Interest and Financial Charges : Interest and financial charges being a financial charge shall
not be considered to be a part of cost of production.
14. Abnormal and Non-recurring Cost: Abnormal and non-recurring cost arising due to unusual
or unexpected occurrence of events, such as heavy break down of plants, accident, market condition
abnormal
restricting sales below normal level, abnormal idle capacity, abnormal process loss,
retrenchment compensation, lay-off wages etc. shall not
scrap and wastage, payments like VRS,
form the part of cost of production.

2.9.2 Material Cost[CAS-6]

The following rules are laid down in CAS-6 for measurement and presentation ofMaterial Cost in a
cost statement.
shall not be
Spares which are specific to an item ofequipment shall not be taken to inventory (i.e.
taken as material cost), but shall be capitalized with the cost ofthe specifie equipment
the factory shall be absorbed in the cost of
. Normal loss or spoilage of material prior to reaching
balance materials.
Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture
are
etc., before the material is received shall be absorbed in material cost to the extent they
normal, with corresponding adjustment in the quantity.
the
Thejoreign exchange component of imported material cost shall be converted at the rate
on
4. date of the transaction. Any subsequent change in the exchange rate till payment or other
shall not form part of the material cost.
5. Any demurrage or detention charges, or penalty levied by transport or other authorities shall no
1
form part of the cost of materials.
Subsich/Grant/Incentive and any such payment received/receivable with respect to any mater
shall be reduced from cost.
excluded from the material
Any abnormal cost shall be cost.
in t
The material cost of normatap derectives which are rejects shall be included
material cost of goods [Link].
 Classification of C oss and Cosr Shees

aterial cost ol actual

serap 9
material cost of good production /delcctives, not exceedng the normal
shall be adjusted in the
10. Material Costof abnormal serap
Lass after giving ereat /detectives should not be
to ine
realizable value included in material cost butut
Where a material is
of such serap / defectives. treated
processed or part
ecifications proviaea by ne buyer, the manulactured by a third
party according to
and party shall be treated as part of the
material eost. processing/manufacturing charges payable the to
wherever part of the manufacturing
operations activity is
harges related to materials shall be treated as direct subcontracted, the subcontract
The cost of materials like expenses.
catal ysts, dies, tools, moulds,
to Droduction over a period of time
to
shall be amortized patterns etc., which are relatable
over the
such cost.
production units benefited by
14 The cost of indirect malerial
with life
useful life ofthe material. exceeding one year shall be included in cost over the
[Link] Materials shall be classifiedin the cost
i) Components, (ii) Semi finished statement under suitable heads
e.g. (i) Raw materials,
goods and (iv) Sub-assemblies.
2.9.3 Employee Cost [CAS-7]
The following rules are laid down in CAS-7 for
measurement and presentation of
a cost statement. Employee Cost in
[Link] Cost shall be ascertained taking into account the
gross pay including all allowances
payable along with the cost to the employer of all the benefits.
2 Bonus whether payable as a Statutory Minimum or as a
in lieu of or in addition to Bonus shall sharing of surplus or as Ex-gratia payable
be treated as part of the
3. Remuneration
employee cost.
payable
Managerial Personnel including Executive Directors on the Board
to
and other officers of a corporate
body under a statute will be considered as part of the Employee
Cost of the year under reference whether the whole or
percentage of profits.
part of the remuneration is as a computed
4 Remuneration paid to non executive directors shall not form
part of Employee Cost but shall
form part of Administrative Overheads.
.
Separation costs related to voluntary retirement, retrenchment, termination etc. shall be amortized
over the period benefiting from such costs.
6. The amortized separation costs related to voluntary retirement, retrenchment, and termination
etc. for the
period shall be treated as indirect cost and assigned to the cost objects in an appropriate
manner.
FfOweverunamortized amount related to disconinuedoperations, shall not be treated as employee
cost.
0Employee cost shall not include imputed costs.
Where Employee cost is accounted at standardcost,variances due to normal reasons related t
Cmployee cost shall be treated as part of Employee cost. Variances due to abnormal reasons shall
De treated as
part of abnormal cost.
0.
y Subsidy, Grant, Incentive or any such payment received or receivable with respect to any
e
mployee cost shall be reduced for ascertainment of cost ofthe cost object to which such amounts
are related.
1.A abnormal cost
Any where it is material and quantifiable shall not form part ofthe Employee cost.
12. Penalties, damas shall not form part of the
mages paid to statutory authorities or other third parties
Employee
al [Link] cost cost.
to an employee
otfree housing, free conveyance and any other similar benefits provided
shallSt
Oc aetermined at the total cost of all resources consumed in providing such benefits. Any
shall be reduced from the
recovery
yIrom the employee towards any benefit provided e.g. housing
employee cost.
 Kecrulment cos/s, Irainingcost and other such
costs shall be treated as Overheads and dealt
accordingly to thecost object or
treated as Overheads depend..
.Overtime premium shall be assigned directlycircumstance overtime.
ding
requiring such
theofeconomic feasibility and the specific
6 on
Cost ldle time is ascertained by the idle hours multiplied by the hourly rate applicable tobjec
the
shall be assigned direct to the cost ohin
of employees. Idle time cost
idle employee or a group economic feasibility and
the specific circumstano
overheads depending on the
inces
or treated as
like normal lunchtime, holida
Cost of idle time for r e a s o n s anticipated
causing such idle time. cost while arriving at the
cost per hour otf an Emplov
loaded in the Employee
etc. is normally cost objects.
whose time is attributed direct to
a group of Employees

2.9.4 Direct Expenses [CAS-10]

laid down in CAS-10 for
measurement and presentation of Direct Expenses
The following rules are

cost statement.
in a determined at invoice or
Direct expenses incurred for the of bought out r e s o u r c e s shall be
use
and other expenditure directly attributable theretone
agreed price including duties and taxes, refundable or to be credited.
of trade discounts, rebates, taxes and duties tr
dies and tools will include direct h=
. In case of dies and tools produced internally, the cost of such
material cost, direct employee cost, direct expenses, factory overheads including share of 1
2-
administrative overheads to production comprising factory management and
relating
3-
administration.
the cost object for 4-
In the of research and development cost, the amount traceable to
case
shall be included n5
development and improvement of the process for the existing product
Direct Expenses.
Direct Expenses paid or incurred in lump-sum or which are in the nature of'one - time' payment.

shall be amortized on the basis of the estimated output or benefit to be derived from such direct
expenses. Example: Royalty or Technical know-howfees, or drawing or designingfees, are paid
for which the benefit will arise in the future period. In such case, the production / service volumes
shall be estimated for the effective period and based on volume achieved during the Cosl

Accounting period, the charge for amortization shall be determined.

If an item of Direct Expenses is not material, it can be treated as part of overheads. .

Finance costs incurred in connection with the self generated or procured resources shall n0 6
form part of Direct Expenses.
Direct Expenses shall not include imputed costs.
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect t0 an
Direct Expenses shall be reduced.
Any abnormal portion ofthe direct expenses where it is material and quantifiable shall notfor"
part of the Direct Expenses. F
0. Penalties, damages paid to statutory authorities or other third parties shall not form part@fo
the Direct Expenses.

9.5 Packing Material Costs [CAS-9]

he following rules are laid down in CAS-9 for measurement and presentation of Packing Costm
st statement.

Packing Materials are materials used to hold, identify, describe, store, protect, display, transporb
promote and make the product marketable and communicate with the consumer.
Packing Materials are classified into primary and secondary packing materials.
Primary Packing Material is the packing material which is essential tohold the produet
bring it to a condition in which it be used
can
by or sold to a customer. For example
Pharmaceutical industry: Foils for strips of tablets/capsules, vials.
Industrial gases: Cylinders / bottles used for
filling the gaseous products.
. Con fectionary Industry: Butter paper and
wrappers.
Classification of Costs and Cost Sheets
Cost of primary packing materials shall form part of the cost ofproduction.
Secondarr Packing Material is the packing material that enables to store, transport, in form the
customer. promote and otherwise make the product marketable. For example:
.Pharmaceutical industry: Cartons used for holding strips oftablets and card board boxes used
for holding cartons.
Textile industry: Card board boxes used for holdingcones on which yarn is woven.

. Confectionary Industry: Jars for holding wrapped chocolates, Cartons containing packs of
biscuits.
Cost of secondary packing materials shall form part of distribution overheads.
the
Reusable Packing Material is the packing materials that are used more than once to pack
to the cost object taking
product. The packing material cost of reusable packing shall be assigned
into account the number of times or the period over which it is expected
to be reused.

lustration 1 in each
is produced in a in half liter sachets. 100 sachets are packed
factory and packed
ilk milk depots in airconditioned
netallic reusable container and the containers are transported to
which the factory
ucks, refrigerated in the depots and sold in retail. State the element of cost under

as to classify the following items as per Cost Accountancy Standards.

Cost of the Sachets
Cost of the Containers
Transportation Costs
Refrigeration Costs
of staff, etc.
Depot's Expenses like rent, salary
-

(ICWA Inter, Dec. 15, adapted)

Cost of advertising for the milk
olution:
B C
A
Primary Packing Material Production Overhead
Cost of the Sachets and Distribution Overhead
Secondary Packing Material Selling
Cost of the Containers Distribution Overhead
Relates to Finished Goods
.Transportation Costs Distribution Overhead
Refrigeration Costs Storage of Finished Goods Overhead
Selling and Distribution
Marketing Cost
Depot's Expenses
. Advertisement Cost Selling Expense Selling and Distribution Overhead

3 ILLUSTRATIONS

ELEMENT-WISE CoST SHEET

3.1
: (Stock of Materials)
 Wages in Sharada ? 50 per unit
=

Wages in Viveka= 7 20 per unit

(40% of ? 50)
(3) Direct expenses per unit of production remain the same
75,000 7,500 units = 10 per unit for both
pens
3.4 ESTIMATED COST SHEET
Illustration 24
(Rectification of Defective Work)
Super Vision Company furnishes you with the following information about its 1000 TV sets
manufactured and sold during the year

Particulars Particulars
Materials 18,00.000 Office and Administration Expenses6 80 000
Direct Wages 10,00,000| Selling& Distribution Expenses 1.20000
Power and Stores 2.40,000 Sale of Scrap 40 000
 Cost Accounting-11D. . SEM-|
Indirect Wages 3,00,000| Sale of 1000 TV sets of
62 00
Factory Lighting 1,20,000| Repairs and depreciation
Cost of rectifying defective work 60,000 Machinery | 2.00.
Prepare the cost sheet for the above year, showing the elements of cost per unit. Prepare also
estimated cost sheetfor the next year assuming that
(1) Materials cost and direct wages cost will increase by 10% and 15% respectively.
(2) Factory overheads will be recovered as a percentage of direct wages, as last year
(3) Office overheads and selling overheads will be recovered as percentage of works cost, as

year, and
(4) 1500 TV sets will be produced and sold at 6,600 each in the next year.

Solution: (SYBAF,Oct. 08, Feb. 09, [Link]., April 2002, adaptet,.

Cost Sheet Forthe Year Ended.
Units Produced/Sold: 1,000]

STEP ELEMENT OF COST Note Total Cost Per Un

No.
A. Direct Materials 18,00,000| 1,800.t(5
3. Direct Wages * ** *** '' ** ** 10.00.000 1.000.
C. PRIME CoST [A + B] 28,00,000 2,800.0
D. Works Overheads 1 8.80.000 880.0
S. WORKS coST [C + D] *** *** **" *" *" 36,80,000 3,680.0
Office and Administration Expenses 6.80.000 6800
G. COST OF PRODUCTION [E +F] 43,60,000| 4,360.0
H. Selling and Distribution Expenses
COST OF SALES
120.000120.06)
44,80,000| 4,480.0
J. Profit (K I] 17.20.0001.720.0
K. SALES *****
62,00,000| 6,200.0
Estimated Cost Sheet Forthe Year Ended...
ll
[Units Produced Sold 1,500]]
n
STEP ELEMENT OF COST Note Total cost Per Unt
No. Co=
A. Direct Materials * * * ' **° *** **" 2 29,70,000 1,980.0ac
B. Direct Wages 3 17.25.000 1.150.0e
C. PRIME CoST [A + B]1 ****' *** *** ***

46,95,00o 3,130.0Dis
D. Factory/ Works Overheads 4
15.18.0001,012.0ire
E. WORKS coST [C+ D] 62,13,000 4,142.04dr
F. Office Overheads 5 11.48.054 765.3ra
G. coST OF PRODUCTION [E + F] ***

73,61,054 4,907.
H. Selling Overheads
coST OF SALES [G +H]
***

2.02.598 135.a
J. Profit
***

75,63,652| 5,[Link]
23.36.348| 1.55a
K. SALES [K-_ 99,00,000| 6,600. vhE
Working Notes :01
(1) Works Overheads $OS
Power and Stores
2,40,003o
Indirect Wages
3,00,00
Factory Lighting
Repairs and Depreciation
of Machinery 1,20.00sTE
Cost of Rectifying
Defective Work 2,00.00A
60.0 B
9,20,00 C
Less Sale of Scrap 40.00 D.

8.80.00
G.
 Classification of Costs and Cost Sheets 39

(2) Direct Materials

Cost per unit will rise by 10%
Cost per unit previous year 1,800
Rise by 10% 180
Increased Cost 1.980
(3) Direct Wages
Cost per unit will rise by 15%
Cost per unit previous year 1,000
Rise by 15% 150
Increased Cost 1,150
(4) Works Overheads
Taken as a percentage of Direct Wages
Total cost of work overheads previous year
Total cost of Direct
Wages previous yearx
Total cost of Direct Wages current year
8,80,000 x 17,25,000 =
15,18,000
10,00,000
(5) Office Overheadds
Taken as a percentage of Works Cost
Total cost of office overheads
= previous year Total Works Cost current year
Total Works Cost previous year
6,80,000
36,80,000
x 62,13,000 =11,48,054
(6) Selling Overheads
Taken as a percentage of Works Cost
1,20,000
36,80,000
x 62,13,000 2,02,598
 5. OBJECTIVE QUESTIONS

5.1 MULTIPLE CHOICE QUESTIONNS

A Conceptual
1, Fom ofspecific order costing where work is undertaken to customer's special requirements and
each order is comparatively of short duration.
(a) Job Order Costing (b) Batch Costing
(c) Contract Costing (d) Process Costing
2. Form of specitic order costing which consists of a group of similar articles which maintain its
identity throughout one or more stages of productioon.
(a) Job Order Costing (b) Batch Costing
(c) Contract Costing (d) Process Costing
8. Which of the following items is not included in preparation of a cost sheet?
(a) Carriage inward (b) Purchase returns
(c) Sales commission (d) Interest paid
. Which of the following items is not excluded while preparing a cost sheet?
(a) Goodwill written off (b) Provision for taxation
(c) Property tax on Factory Building (d) Transfer to reserves
. Which of the following are direct expenses?
(0) The cost of special designs, drawing or layouts
(i) The hire of tools or equipment for a paticular job
(in) Salesman's wages
(iv) Rent, rates and insurance of a factory
(a) (i) and (i) (b) (i) and (ii)
(c) (0) and (iv) (d) (in) and (iv)
A company has to payR 10,000 per unit royalty to the designerof a product which it manufactures
and sells. The royalty charge would be classified as a
(a) Direct expense (b) Production overhead
(c) Administrative overhead (d) Selling overhead
Wherever part of the manufacturing operation is subcontracted, the subcontract charges related
to materials shall be
(a) ignored (b) treated as cost of materials
(c) treated as works overheads (d) treated as direct expenses
Hesearch and development cost relating to an existing product
(a) shall be treated as Capital Expenditure
shall be treated as deferred revenue expenditure
c) shall be treated as Direct Expenses
(d) shall be ignored
Which of the following are prime costs?
(0) Direct materials (i) Direct labour

(i) Indirect labour (iv) Indirect expenses

(a) ) and (i) (b) (i) and (ii)

(c) (i) and (d) (ii) and (iv)
(ii)
 [Link] is prime cost ?
indirect cosis only
(a) Total direct costs only (b) Total 26.T
costs
(d) Total production
(c) Total non-production costs
for a manutacturing coipany
11. Which of the foliowing costs are part of the prime cost
premi5e5
(a) Cost of transporting raw materials from the suppier's B.
(b) Wages factory
of workers engaged in machine maintenanc 27.F
to custormers
(c) Depreciation of lorries used for deliveries
(d) Cost of indirect production materials
[Link] cost is
(a) all costs incurred in manufacturing a product
(b) the total of direct costs 28.1
departrrient
(d) the cost of operating
a
(c) the material cost of a product
cost 7
13. Which of the following is not a component of prime
(b) Direct labour
(a) Direct materials
(d) Overhead 29.
(c) Direct expenses
14. The term "prime cost" refers to
units of output
(a) all manufacturing costs incurred to produce
and raw material costs
(b) all manufacturing costs other than direct labor
(c) raw material purchased and direct labor costs
(d) the raw material used and direct labor costs
15. Overheads consist of all the following except 30.F
(a) Indirect materials (b) Factory utilities

(c) Direct labour (d) Indirect labour

16. Recruitment costs
(a) shall form part of Prime Cost (b) shall form part of Works cost
(c) shall form part of Overheads (d) shall be ignored 31.
17. Cost of goods manufactured will include opening and closing stock for
(a) raw materials and work in progress only
(b) work in progress only (c) raw materials only
(d) raw materials, work in progress, and finished goods
18. In the cost sheet, Income from sale of empty containers used for despatch of the goods pro:4
shall be
(a) added to cost of production (b) deducted from cost of production
(c) added to sales (d) ignored
19. In the cost sheet, abnormal costs e.g. due to accident shall be
(a) added to cost of production (b) deducted from cost of production
(c) deducted from sales (d) ignored
[Link] materials + Direct labour + Direct expenses = .
(a) Works cost (b) Cost of production
33
(c) Cost of sales (d) Prime cost
[Link] cost+ Factory Overhead =

(a) Fixed Cost (b) Works cost

(c) Cost of production (d) Cost of goods sold
22. Prime cost+ Factory overhead +Administration overhead 34.
(a) Works cost (b) Cost of production
(c) Prime Cost (d) Cost of sales
23. Total cost Selling
-
and distribution overheads =

(a) Cost of goods sold (b) Closing stock

Cost of production (d) Net profit 35
(c)
24. Cost of production - Administration overheads =

(a) Prime Cost (b) Cost of sales

(c) Works cost (d) Work-in-progress
Overheads =

25. Prime cost +

(a) Works cost (b) Total cost

(ci Gost of sales (d) Cost of production
1-11 Classification of Costs and Cost Shees 59

26. Total cost + Profit

(a) Selling price (b) Cost of goods sold
(c) Seling and distribution overheads (d) Gross Profit

B. Numerical (Internal Tests)

27. From the following details, compute cost of goods manufactured: Cost of goods sold72,00,000;
Opening stock of finished goods 7 50,000; Closing stock offinished goods 1,00,000 and Closing
stock of work-in-progress 10,00o.
(a) 2,00,000 (b) 2,50,000
(c)2,40,000 (d) 3,00,000
[Link] opening stock of finished goods is 7 50,000; closing stock of finished goods is 1,00,000
and the cost of goods manufactured is 2,00,000. What is cost of goods sold ?
(a) 2,00,000 (b) 2,50,000
(c) 1,00,000 (d) 1,50,000
[Link] td. furnishes the following information for a period, pertaining to its product "T"
Cost of production (for 11,000 units) 44,000
Selling expenses (per unit) 0.40
Sales (for 9,000 units) 54,000
The profit per unit of the product was
(a) 1.15 (b) 1.20
(c) 2.60 (d) 1.60
30. For product A of Shilpa Ltd., the prime cost is 20 per unit, factory overheads are 20% of prime
cost and administration overheads are 25% of Works cost. If the company desires to earn a
profit of 25% on seling price, the seling price per unit of product A would be
(a) 7 40 (b) 33
(c) R90 (d) 3 0
31.M & Co. used in a particular year 3,00,000 of direct materials. The year-end direct material
inventory was 7 50,000 more than it was at the beginning of the year. Calculate direct material
purchases.
(a) 7 3,00,000 (b) 2,50,000
(c) 3,50,000 (d) 7 4,00,000
32. Consider the following:
Raw material used K 1,40,000
Direct labour 5,00,000
Total manufacturing overhead 6,00,000
Beginning work-in-progress 15,000
Cost of goods sold 12,05,000
What is the value of the closing work-in-progress?
(a) 65,000 (b) 35,000
(c) 50,000 (d) 7 70,000
33.R Company manufactures desks. The beginning balance of Raw Material Inventory was 4,500;
raw material purchases of 7 29,600 were made during the month. At month end, F 7,700 of raw
material was on hand. Raw material used during the month was

(a) 26,400 (b) 7 34,1000

(c) 7 37,300 (d) 29,600
34. M Company manufactures tables. If raw material used was F80,000 and Raw Material Inventory
at the beginning and end ofthe period, respectively, was 17,000 and 721,000, what was the
amount of raw material purchased?
(a) 7 76,000 (b) F 1,18,000
(c)84,000 (d) 1,01,000
35. T Company manufactures computer stands. What is the opening stock of Finished Goods if
is 20,000;
Cost of Goods Sold is 1,07,000; the ending balance of Finished Goods Inventory
and Cost of Goods Manufactured is 7 50,000 less than Cost of Goods Sold?

(a) 70,000 (b) F 77,000

(c) 1,57,000 (d) 1,27,000
 Cost Accounting -I/ (S. Y. B.A. E: SEM

5.2 PILL IN THE BLANKS B

The variable production overheads shall be absorbed in production cost based on.
-(actu
normal) capacity.
by transport (shall/shall not) form part of the cos
Any demurrage charges levied
materials.
(added to/ reduced from) cos
Subsidy receivable with respect to any material shall be.
materials.
Cost of primary packing materialsS- (shall/ shall not) form part of the cost of productic
Cost of secondary packing materials shall form part of . (works/ distribution) overhe
Material cost.
(includes/ excludes) cost of procurement, freight inwards, taxes & dut
insurance etc. directly attributable to the acquisition. C
Trade discounts, rebates, duty drawbacks, refunds on account of modvat, cenvat, sales tax
other similar items are deducted) in determining the costs of material.
(added/
Labour cost (includes/excludes) salaries and wages paid to temporary employe

Labourcost. (includes /excludes) salaries and wages paid to employees of the contrac
0. Production 15,000 units, Closing Stock of finished Goods 8,000 units. Opening Stock 3
units, Cost of Sales 7 15 perunit, Profit 25% on sales. Sales amount to -
1.SalesT2,40,000,Opening Stock 200 units, and Closing Stock 2,200 units, Selling Price 30;
unit. The number of units produced
[Link] Cost 4,77,000, Direct Labour Cost 2,90,000, Direct Expenses 7,000; Cost of Ri
materials consumed is
13. Prime Cost 72,000, Direct Material Cost 45,000, Direct Expenses 7 12,000. Direct Lab
Cost is.
[Link] Cost 80,000, Factory Overheads 8,000. Prime Cost is -
15. Direct Labour Cost * 17,500 being 175% of works overheads. Factory overheads are
[Link] of Goods produced R 2,00,000, Ofice & Administrative Overheads 25% of Works C
Works cost is .
[Link] Cost 1,00,000, Office & Adm. Overheads 25% of Work Cost. Cost of goods produce

[Link] & Adm. Overheads 1,00,000 being 25% of Work Cost. Cost of goods produced
.
[Link] 7 1,20,000, Profit 20% on Sales. Cost of Sales are
[Link] 7 1,20,000, Profit 20% on cost. Cost of Sales are .
[Link] of Sales 1,20,000, Profit 20% on Sales. Profit is_
on Cost. Profit is
[Link] 1,20,000, Profit 20%
[Link] of Sales 1,20,000, Profit 20% on Sales. Sales amount to .
[Link]@ 20% on Cost amounted to R 20,000. Sales amount to

53 MATCH THE FOLLOWING

 5.4 AEwileiER IROE OR FALSE
Factory Cost =Prime Cost +Office overheads
2. Prime Cost
= Direct Cost
3 Total Cost = Prime Cost+ AIl Indirect Costs
Cost of Production Factory Cost + Selling & Distribution
=

Overheads
5Costof Sales Factory Cost+Selling & Distribution Overheads
=

Closing stock of work-in-progress should be valued on the basis

of prime cost.
7, Closing stock of finished goods should be valued on
the basis of cost of sales.
8 Selling and distribution overheads are
incurred on the cost of production of
9. Selling and distribution overheads are recovered on the basis of goods produced.
[Link] cost is the total of direct materials, direct
percentage to costof production.
wages and production overheads.
11. Production cost includes only direct costs related to the
production.
[Link] packaging cost is included in distribution cost.
13. Secondary packaging cost is not production
but distribution cost.
14. The combined total of labor and overhead is called prime cost.
15. Administration cost is not included in the cost of
work-in-progresss.
16. Raw material inventory consists of products partially
completed at the end of a period.
[Link] include only fixed cost.
18. Cost of production is equal to prime cost plus works cost.
[Link] Loss of Material is treated as part of material cost.
20. In Cost Sheet, net realizable value of normal scrap of direct materials is deducted from factory
Overheads.
[Link] a Cost Sheet, Stocks of Work- in-progress are adjusted with Works Cost to arrive at Office
Cost.
22. In a Cost Sheet, Stocks of Finished Goods are adjusted with Gross Works Cost to arrive at net
Works Cost.
23. In a Cost Sheet, Seling & Distribution Overheads are added to Factory Cost to arrivé at Cost of
Sales.
24 In a Cost Sheet total Selling & Distribution Overheads are divided by the total number of units
produced to arrive at Selling & Distribution Overheads per unit.
25. Interest is shown in the cost sheet
 Clo
5.5 CHECK YOUR ANSWERS
Clo
5.1 Con
16. (c) 21. (b) 26. (a) 31. ((1)
1 (a) 6. (a) 11. (a)
17. (a) 22 (b) 27. (b) 32. (C(2)
(6) (d) 12 (b)
18. (b) 23. (c) 28. (d) 33. (a
(o . (C) 13 (d)
19 (d) 24 (c) 29 (d) 34. C
( C )

9. (a) 14 (d)
5 (a) 10. (a) 15. (c) 20. (d) 25. (b) 30. (a) 35. (a
-Q.3
Hints Ope
29.[6 - (4.00 0.40)] Opem
Purc
30.[(20 4 6)10]
15.000 12.05,000] Direc
32.[1.40.000 5.00.000 6.00,000+ Factc
33.[4500 29.600 7.700]
Closi
34.[80.000 -17.000 + 21.000]
Closi
35.[1.07.000 57.000 20.000]
5.2 (5) distribution (6) includes (7) deduomp
(1) actual (2) shali not (3) reduced from (4) shall
8) includes (9) includes (10) 2,00.000 (11) 10.000 (12) 1.80,000 (13) 15,000 (14) 72
(15) 10.000 (16) 1.60.000 (17) 1.25.000 (18) 5.00.000(19) 96,000 (20) 1,00,000 (21)30
(22) 20.000 (23) 1.50.000 (24) 1.20,000 Q.4
he ve
 L:(0-(G), (2) -(n), (3) (e), (4)(a), t)U17 a
4 True 2, 3, 13, 15
False 1, 4, 5, 6, 7, 8, 9, 10, 11, 12, 14, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25

. PRACTICAL PROBLEMS