BASIC CONCEPTS

I. COST:
In general sense, cost refers to the price paid for something. In management terminology, it refers to
the expenditure and not the price. In cost accounting, cost is the amount ofr resources given up in exchange
for goods.
The Institute of Cost and Management Accountants (ICMA), London, defines the term cost as “The
amount of expenditure incurred on or distributable to a specific thing or activity.”
According to W.H.Harper, “ Cost is the value of economic resources used as a result of producing or
doing the thing costed.”
From the above definitions, it is clear that, cost means total amount of expenditure, actual or
notional, paid and outstanding, incurred on a particular thing, say, on the production and sale of some goods
or on the provision of some services or on the completion of some work.
The term cost, expense and loss are often used interchangeably. These words should be used at the
right place. The expenses are the costs which have been applied against the revenue of particular period. But
the cost is not always chargeable against revenue whereas the expense is always chargeable against the
revenue. The cost may be expired or unexpired cost but an expense is always an expired cost.
Cost is different from the loss. Cost may be expired or unexpired but loss is always expired. The cost
may generate benefit to the firm but the losses always generate losses only.
Similarly, the cost differs from estimate the price. Cost refers to the actual cost or expenditure
incurred on the production and sale of a product whereas estimate is forecast of the probable cost at a future
date. Similarly price means a selling price of an article whereas the cost is a fact, estimate & it is related to
the price.
II. COSTING:
ICMA LONDON, defines costing as “ The technique and process of ascertaining the cost.” The scope of
costing covers cost finding or cost ascertainment. The techniques of ascertaining cost consists the body of
principle and rules which govern the entire procedure of cost data.
III. COST ACCOUNTING:
ICMA LONDON, defines cost accounting as “The application of accounting and costing principles,
methods and techniques in the ascertainment of cost and the analysis of savings and/or excesses as
compared with previous experience or with standards.”
Eric Kohler, in his Dictionary for Accountants defines Cost Accounting as “that branch of accounting
dealing with classification, recording, allocation, recording, allocation, summarization and reporting of
current and prospective costs.”
IV. COST ACCOUNTANCY
ICMA LONDON, defines Cost Accountancy as “ 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 presentation of information for the purpose of managerial decision making.”
FINANCIAL ACCOUTING:
It is of the nature of historical costing. Though it was developed as a function facilitating the decision making,
it does not provide adequate, comparative and analytical cost information regarding different activities of the
firm for managerial planning. The important limitations of financial accounting which have been responsible
for the emergence & development of cost accounting are as follows.
1. Unclassified information: it does not classify and report cost data according to jobs, products,
processes, operations, departments, services and sales territories.
2. Historical information: it supplies information at regular intervals regarding past financial events.
Future estimates and the anticipations are of greater importance. But such information are not
provided to the management by the financial accounting.
3. It discloses profit or loss as a whole: it does not show the profit or loss of individual product, process,
job, contract or department. Hence it does not help the management in taking important decisions
about dropping of a product line or a job.
4. Lack of effective material control: it records total purchases and stock of materials. It does not
record the cost of material consumed by different jobs or processes.
5. Absence of distinction based on normality: no differentiation is made between normal and abnormal
loss of production resources.
6. No scientific system of cost classification: even non-cost items are considered in calculating cost of
manufacture
7. No analysis of wages: there is no system of recording the time, wage and labour of individual job,
department, process or product. Therefore, cost analysis of different jobs becomes difficult.
8. Lack of developed system of evaluation: the performance of different dept. processes, and workers
cannot be compared with the standards to fix the responsibilities for sub standard performance.
9. Fails to help the price fixation: it provides unclassified and inadequate information through which it
is very difficult to fix the price.
10. No scope for comparison: It does not provide the data necessary for appraisal and comparison of
cost and profit, under different scales and methods of operation, processes, jobs, contracts, depts.,
etc. for decision making.
 11. Fails to help in cost reduction: due to lack of scientific system of cost classification, reporting,
evaluation and cost control, cost reduction is impossible.
12. No help in preparation of tenders and quotations: It does not help the management in preparing
the statement of future estimated costs.
13. No adequate system of internal reporting: it does not supply continuously complete cost data
regarding the working of the organization under different situation and conditions.
14. No aid to elimination of loss: it does not provide the current summary of losses at different fields of
activities.
15. Inadequate data for decision making: it fails to provide data to the management for taking
important and major decisions such as to make or buy, setting up of priorities between the products
or processes etc,
16. Possibility of manipulation of financial accounting: management sometimes manipulates financial
accounts to create better image in the eyes of public
17. Lack of cost control techniques: cost control techniques: cost control techniques such as standard
costing, budgetary control, marginal costing etc., are not used in financial accounting.

OBJECTIVES AND FUNCTIONS OF COST ACCOUNTING:

The primary objective of cost accounting as a branch of accounting is the ascertainment of cost of a unit,
process, department or job. In this process it supplies the diverse information for managerial decision
making. Objectives or purposes of cost accounting are the following.
1.Cost determination: determination of cost of the product is the main objective. It includes, collection,
classification recording and analysis of items of cost of every unit.
2.Price fixing: cost accounting provides a factual basis for price fixation. Cost data are the most reliable basis
for fixing the prices specially in case of quotations and tenders, new products and changes to be made in
the prices of existing products.
3.Cost control: it provides useful data and information fro control of different activities of business. A good
cost accounting system always is an integral and vital part of management control. It includes comparison
of actual BUSINESS PERFORMANCES WITH budget and estimates, analysis of variances and management
responsibility for variances.
4.Providing basis for decision making: cost accounting is increasingly used as tool of decision making. It
provides data to analyse the effects of various alternative courses of action.
5.Other specific objectives: cost accounting is useful in th following specific purposes.
Ascertaining profitability and efficiency of different products, jobs, operations in creation to the capital
investments.
Ascertaining optimum level of outputs, products or material mix.
Preparation of comparative cost schedules
Preparation of interim reports.
Providing base for formulation operating policies.

SCOPE OF COST ACCUNTING:

The scope of cost accounting centers around the following 4 important aspects.
1. Cost ascertainment
2. Ascertainment of profitability
3. Cost presentation
4. Cost control

ADVANTAGES OF COST ACCOUNTING:

Cost accounting is invaluable guide to the management. It is an essential tool of modern management. It is
difficult to separate the cost accounting and management accounting. The advantages of cost accounting are
as follows.
A. Advantages To The Management:
1. Efficient management of resources: It guides the management in applying the factors of production
to the best possible use.
2. Elimination of wastages: It classifies wastages as normal and abnormal. Normal loss is unavoidable.
Suggesting the management to focus on abnormal loss, cost accounting increases the efficiency of
management.
3. Effective material management: It develops suitable policies of purchasing, storing and issuing of
materials.
4. Efficient control of labour cost: It provides different methods of time booking, wage payment and
measurement of efficiency of employees.
5. Better control over overheads: It classifies overheads in terms of functions, variability and
controllability. This facilitates the process of allocation and apportionment of overheads.
6. Control through budgets: By means of budgets or standards and actual expenditure are compared.
This comparison helps in identifying the inefficiency of operations and in taking proper remedial
measures.
 7. Scientific fixation of price: Cost accounting helps the management in determination of cost of each
department, operations and processes. Thus it guides the management in fixing the prices
scientifically.
8. Cost based decision making: collection, classification and analysis of cost data provides facts and
information for decision making.
9. Increase in profit: it contributes to the maintenance of or increase in profit
10. Guide to policy making: Cost accounting produces statistics relating to different operations of
business enterprise. Proper analysis, interpretation and reporting of these information is a valuable
guide to the mgt in policymaking.

B. Advantages To The Workers:

1. Fare wage policy: cost data helps in development of wage policy based on productivity which is
acceptable to the workers and to the management.
2. Recognition of efficiency: cost accounting lays down standards of performance of employees.
3. Incentive system of payment: Payment by performance is the system rewarding workers of superior
efficiency. It can be adopted by every concern where the efficiency is measured
4. Higher share of profit: cost accounting aims at achieving higher rate of productivity, lower cost and
larger profit.
5. Cordial relation: Cost accounting sets standards of performance in easy language. Hence the workers
need not suspect the bonafides of management.

C. Advantages To Creditors:
Creditors are interested in short term solvency of the firm. Cost accounting provides data to measure the
present success and forecast the future prospects of the firm. On the basis of this respect the creditors,
debenture holders and short term lenders may assess the soundness f business before extending the
credit.

D. Advantages To The Society:

1. Low prices: cost reduction brings down the prices and increase efficiency
2. Continuous supply of goods: efficient management of resources, lower prices will continue the
existence of business.
3. Higher standard of living: Product at lower prices, new products and stable supply are boud to
improve the standard of living

E. Advantages To The Government:

1. Assessment of tax liability: Cost accounting facilitates the assessment of excise duty, income tax etc.
2. Policy framing: formulation of policies by the government makes use of cost information.
3. Planning and administration: many principles of cost accounting are used in general administration
by the government.

MANAGEMENT ACCOUNTING:
The inadequacies or limitations of financial accounting and cost accounting led to the emergence of
Management accounting. The ordinary or normal accounting has failed to communicate valuable information
to the management. Cost accounting emphasizes only on cost. Hence there has arisen the need for
development of management accounting. It is for this reason management accounting is considered as the
tool of management. This is a separate discipline which has come to be recognized very recently. The term
management accounting was first coined and used by the British team of accountatnts who visited USA in
1950.

Definition of Management accounting:

According to N.K. Bose, “Management accounting is accounting for effective management”.
ICMA, London defined management accounting as “ the application of professional knowledge and
skill in the preparation of accounting information in such a way as to assist the management in the
formulation of policies and in the planning and control of operations of an undertaking.”
According to J.Batty, “Management accounting comprises accounting methods, systems and
techniques which coupled with special knowledge and ability, assist management in its task of maximizing
profits or minimizing losses.”
According to these definitions the management accounting is the art or technique of analysis and
interpretation and presentation of facts, results and information revealed by Financial accounting, cost
accounting and other books and records kept by the business for the benefit of large body of persons who
are in charge of managing the business more efficiently.

RELATIONSHIP BETWEEN COST ACCOUNTING, FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING:

Management accounting confines its activities to provide necessary quantitative as well as qualitative
information to the management in the most useful way for the efficient discharge of various managerial
functions. For this purpose, management accounting draws out information from accounting as well as non
accounting sources. So the scope of management accounting is very vast. In fact the management accounting
includes within its fold all aspects of business operations. The relationship between these three concepts can
be studied under following heads
 Relationship between financial accounting and cost accounting
 Relationship between cost accounting and management accounting
 Relationship between financial accounting and management accounting

1. Relationship between financial accounting and cost accounting:

Similarities:
1. In both financial and cost books, business transactions are recorded in monetary terms
2. In both sets of books, transactions are recorded on the same double entry principle of debit and
credit
3. The source of information in both sets of books are same
4. Both the sets of accounts are concerned with recording of the same basic transactions like materials,
labour and expenses.
5. In both the sets of books, the transactions are collected, classified and tabulated. These tabulated
statements supply the information required to the persons who are interested in these transactions.
6. The data provided by both the sets of accounts serve the needs of management as well as outsiders
7. Both financial accounting and cost accounting lay emphasis on accuracy of accounting data.
Differences
FINANCIAL ACCOUNTING COST ACCOUNTING
1. It is regarded as the mother science as it covers 1. It is considered as the daughter science as
the accounts of whole concern it covers parts of financial accounting
2. It covers all the financial transactions of a 2. It covers only those transactions connected
concern with cost of production and sale of goods
and services
3. It is concerned with ascertainment of profit and 3. It is primarily concerned with
financial position determination of cost of production or
service
4. It deals with total expenditure 4. It allocates and apportion the total
expenditure to various products or services

5 In this concept, various items of cost are 5. In this concept, the items of cost are shown
expressed only in total not only in total but also per unit
6. A detailed classification of expenses is not 6. It contains the detailed classification of
found expenses according to functions, elements
of cost and variability
7. It does not provide a complete analysis of 7. It provides a detailed analysis of such losses
losses resulting from various reasons
8. Element wise control of expenditure is not 8. Element wise control of expenditure is
possible possible in this concept
9. It discloses the profit or loss of the business as a 9. It discloses the not only profit/loss of the
whole firm but also profit or loss of each activity
10. It provide information only about profit or loss 10 It provide information not only about the
. trading results of the firm but also no.of
other valuable data required for planning,
desion making and control
11. It do not provide sufficient data for inter-period 11 It provides adequate data for inter-period
comparison and inter-firm comparison . and inter-firm comparison
12. It is mainly intended to serve the external 12 It is intended to serve internal purposes
purposes, i.e., outside agencies like creditors,
insurance companies etc.
13. Annual reporting is rule of financial accounting. 13 Preparation of cost accounting is not
compulsory. It provide cost data at
frequent intervals
14 It can be adopted without assistance of cost 14 It cannot be adopted without the help of
accounting financial accounting

2. Relationship between cost accounting and management accounting

Similarities:
1. Both the accounting system involve collection and presentation of accounting information
2. The objective of both the accounting system are similar
3. Both the accounting system are concerned with units and segments of activities rather than the
business as a whole.
4. Both the system report not only the historical data but also estimates for the future
5. The techniques employed in both accounting systems are the same
 Differences:
COST ACCOUNTING
1. The emergence of cost accounting is mainly
due to the limitation of financial accounting
2. It is emerged in 14th century
3. It is concerned with cost and profitability
4. It is mainly concerned with monetary
transactions
5 It deals primarily with cost data.
6. It considers only cost factors
7. It makes use of techniques like standard
costing, budgetary control, marginal costing,
uniform costing, inter firm and inter period
comparisons
8. It reports the cost data only
9. It works out year’s cost operating statement
10 Both external and internal parties are
. interested in data of cost accounting
3. Relationship between financial accounting and management accounting
Differences:
FINANCIAL ACCOUNTING
1. It is several centuries old
2. It is concerned with recording, classifying and
summarizing the business transactions at the
end of particular period
3. It considers monetary events only
4. It deals with overall performance or positions
5 It focuses on all aspects of business operations
6. It is designed to provide information to both
internal and external parties
7. It is concerned with only historical data
8. Records are maintained in the form of internal
and external accounts, personnel accounts
and property accounts
9. Financial statements are prepared at the end
of every accounting year
10 It is governed by Generally Accepted
. Accounting Principles.
SYSTEMS, METHODS AND TECHNIQUES OF COST ACCOUNTING
SYSTEMS: costing system of an undertaking depends upon the volume of operations and the purpose. There
are two systems in practice. They are
 Historical costing
 Cost estimation
FINANCIAL ACCOUNTING
1. The emergence of management
accounting is mainly due to the limitation
of cost accounting
2. It is recent development of 20th century
3. It is concerned with data to the
management which will be used for
formulation of policies, improvement of
productivity, profitability etc.
4. It is mainly concerned with both
monetary and non-monetary transactions
5. It involves the consideration of both cost
and revenue
6. It considers cost and non cost factors
7. It uses techniques like ratio analysis,
statistical analysis, operations research
etc. together with the cost accounting
techniques
8. It not only reports financial and cost data
but also analysis and interprets such data
in lights of other relevant information
9. It proceeds further to plan and work out
future operating statement
10. Only internal parties are interested in
data provided by management
accounting
MANAGEMENT ACCOUNTING
1. It is just a few decades old
2. It is concerned with the presentation of
information to the management for the
efficient discharge of management
functions
3. It considers monetary as well as non
monetary events like personnel
management
4. It deals with details of various division,
departments, products etc.
5 It focus on internal details of any particular
aspects of the business operations
6. It is designed primarily to provide the
information to the insiders
7. It is concerned with past data and
estimates for the future
8. Cost and revenue are mostly reported by
the responsibility centres
9 It furnishes the information quickly and at
regular intervals
10. It is not governed by any accepted
accounting principles. But it is molded
according to the needs of particular
organization
Historical costing:
Under this system the process of accounting begins with the recording of cost as and when they occur and it
ends with preparation of statistical data for cost finding, cost control, ascertainment of profitability and
internal reporting.
Cost estimation:
Under this system, cost is estimated, budgets are prepared and in the process there is a continuous
comparison and measurement of actuals. Variation of actuals to the standards and the budgets will be
reported to the management for taking corrective steps. While adopting any system of costing either
historical or standardized following considerations are to be kept in mind.
1. Costing system should be introduced as a fashion
2. Costing system is for the business and not the business for any system of costing.
3. A system of cost accounting must be beneficial and not expensive
4. The elaborate costing system should not be introduced is haste
5. Care should be taken to see that existing organizational set up is not disturbed
6. The costing system should not be rigid
7. The costing system should be able to provide a complete and accurate information

METHODS OF COSTING
The important methods of costing are:
1. Job costing
2. Process costing
JOB COSTING:
This is a method of costing used where production is undertaken as per the order or specific requirements of
the customers. Each job may be different from other jobs. This method is suitable for industries like
construction, machinery production, ship building, printing, toys manufacturing etc. The important
subdivisions of job costing are as follows
a) Batch costing: This method is used to ascertain the cost of a group of similar products manufactured
together in a group. Cost of the group(batch) is determined and not of the individual in the group

b) Contract costing: Under this method, each contract is treated as independent work. All cost relating
to a contract are collected & presented in the form of any account. E.g. house building, roadways,
erection of machinery and plat etc.
PROCESS COSTING:
It is a method used in continuous and mass production industries. It is defined as a method of costing by
which cost for a process or department are accumulated by period of time. Each plant is divided into distinct
process centers. Processes are arranged in a sequence. Output has to pass through these processes. The
important sub divisions of process costing are as follows.
a) Unit costing (single output costing): This method is applied to determine the unit cost of production
where one or few identical products or services are produces. This method is applicable where
products or services are homogeneous or measurable by a common unit of measure.

total cost
Cost per unit =
No . of units of output
b) Operating costing: This method of costing is used when unit of a cost is a service. It aims at
ascertaining the cost of rendering service.

c) Operation costing: Under this method, cost of each operation or process of production is
ascertained. After costing different operations, the cost of the final output is determined

TECHNIQUES OF COSTING:
The word “technique” refers to the manner of ascertaining the cost. It may involve an idea skill, theories,
intelligence and logistics. There are different techniques of costing to analyse and interpret the cost data.
They are.
1. Historical costing

2. Standard costing: It is defined as a control technique which compares standard cost and revenue with
actual results. If any variances are found, then the causes are identified and used to stimulate the
improved performance.

3. Marginal costing: It is a technique of ascertaining the cost of each additional unit of output by
differentiating between the fixed cost and variable cost.

4. Direct costing: Under this method all direct cost are charged to cost unit and all indirect costs are
charged to profit and loss account.
5. Absorption costing: It is also known as full costing under which the cost is distributed to various cost
centers in such a way that no cost is left unabsorbed.

6. Uniform costing: It is defined as the method used by several undertakings of the same costing system.
That is, several undertakings adopt same costing methods, principles and techniques.

ELEMENTS OF COST
COST CENTRE:
In order to accumulate or collect cost for the purpose of cost ascertainment and cost control,
it is necessary to divide an organization into certain units. Generally the divisions or the
departments of organization serve the purpose of such units. However sometimes it is found useful
to subdivide the divisions. Each such division/ department or each such sub division/ such
department is considered as a cost centre.
ICMA LONDON deifnes cost centre as “A location, person or item of equipment (or a group
of these) for which costs may be ascertained and used for the purpose of cost control.”
Institute of Cost and Works Accountants of India (ICWAI) defines cost centre as “Any unit of
cost accounting selected with a view of accumulating all cost under that unit. The unit may be a
product, division, department, section, a group of plant and machinery, a group of employees or a
combination of several units. This may be budget centre.”
The no. of cost centres are set up in an undertaking depending upon the nature of operations. They
are classified as follows.
 Personal cost centre: It consists of a person or group of persons. E.g. purchase manager,
sales manager, works manager etc.
 Impersonal cost centre: It consists of a location or item of equipment, production
department, a machine or group of machines etc.
 Production cost centres: It includes the elements engaged in production activities like
machine shop, welding shop, assembly shop etc.
 Service cost centres: These are rendering service to the production cost centres. E.g. power
house, maintenance, stores, purchase office etc.

COST UNIT:
One of the main functions of cost accounting is the determination of cost per unit of output.
Cost ascertainment necessitates determination of a cost unit. ICMA LONDON, defined cost unit as,
“A unit of quantity of product, service or time (or a combination of these), in relation to which cost
may be ascertained or expressed.” As per this definition, a cost unit is the unit of quantity of
product, service or the time in terms of which cost may be conveniently computed. Thus cost unit is
a unit of measurement of cost, e.g. no. of automobiles, Kgs of rice, Batch of students, Kilowatt of
electricity, tons of rice, bottle of blood, meter of cloth, litre of milk etc.
Types of cost units:
1) Simple or single cost unit
2) Composite or compound cost unit

1) Simple or single cost unit: A simple cost unit is just a single unit of cost. E.g. tonne, a kilogram,
quintal, a litre, a metre etc.
2) Composite or compound cost unit: It is a combination of 2 simple cost units. It is adapted in
cases where the simple cost unit does not serve the desired purpose of cost ascertainment. E.g.
tonne-kilometre, kilowatt hour (kwh) etc.

CLASSIFICATION OF COST:
Classification is the process of grouping cost according to their common characteristics. The
important bases of cost classification are the following:
A. Nature or elements of costs
B. Traceability
C. Functions or operations
D. Variability behavior
E. Controllability
F. Normality
G. Management purposes
A. Classification of cost on the basis of elements:
On the basis of nature of elements, cost may be classified into 3 categories. Namely,
a) Material cost
b) Labour cost
c) Expenses

a) Material cost: It refers to the cost of various items of materials used by an undertaking. E.g.
the cost of raw materials, cost of components, cost of consumable stores.

b) Labour cost: It refers to the various items of remuneration such as wages, salaries, bonus,
commission etc. paid to the employees of an undertaking.

c) Expenses: It refers to the costs of services enjoyed by an undertaking. Expenses refer to all
costs except the material cost and labour cost incurred by an undertaking. Factory lighting
and heating, power, depreciation of plant and machinery etc. are the examples.

B. Classification on the basis of traceability:

On the basis of traceability or identifiability, costs are classified as
a) Direct costs
b) Indirect costs

a) Direct costs: Costs which are clearly conveniently and economically identifiable to the costing
centre or cost unit are called direct cost. E.g. direct material cost, direct labour cost, direct
expenses.

b) Indirect expenses: Indirect costs are either difficult to impossible to trace to a single product
because they are common to several products. E.g. Rent of the factory cannot be traced to a
single product since it is incurred for all products manufactured in the factory.

C. Classification of cost on the basis of their functions:

In any organization, generally there are 3 major functional divisions, namely, production,
administration and selling and distribution. So under this method, costs are classified
according to the functions operations or purposes for which they are incurred. According to
their functions, costs can be classified into 3 main categories. Namely-
a) Production cost or manufacturing cost or factoring cost or works costs
b) Administration cost
c) Selling or distribution cost
There are further 3 categories such as conversion cost, research cost, development cost and
preproduction cost.
a) Production cost: It refers to the costs of operations which begins with the acquisition of raw
materials and ends with the completion of the finished product. They include the cost of
various material, labour cost and factory expenses.

b) Administration cost: It refers to the cost incurred in formulating the policy directing the
organization and controlling the operation of an undertaking. Office rent, repairs of office
building, general manager’s salary, office staff salaries, printing and stationery charges,
postage are the e.g. of administration cost

c) Selling and distribution cost:

i. Selling cost: It refers to the cost incurred for creating and maintaining demand for the
goods. In other words, they are the cost incurred for securing and retaining customers for
goods. E.g. estimation expenses, showroom expenses, demonstration expenses,
exhibition expenses, advertisement, salaries etc.
ii. Distribution cost: It refers to the cost of sequence of operations which begins with making
packed products available for dispatch and ends with the conditioning of the returned
empty containers. They include packing expenses warehouse expenses, freight, carriage,
cartage, expenditure of reconditioning of the returned empty containers.
 d) Conversion cost: It refers to the total of direct labour cost, direct expenses and factory
overhead costs incurred for converting direct materials into fully finished products or partly
finished products.

e) Research cost: It refers to the cost of research activities undertaken for invention of new or
improved products or improved method of production.

f) Development cost: After research is completed if the management decides to make use of the
results of research. Certain costs have to be incurred for the implementation of the decision of
management to make use of results of research. Such costs are called development cost.

g) Pre-production cost: These are the part of development costs that are incurred for making a
prior production run primarily to final production.

D. Classification on the basis of their behavior or variability:

On this basis, costs are classified into the following categories.
a) Fixed costs or constant costs or standing costs
b) Variable costs
c) Semi-variable costs or mixed costs
d) Step costs

a) Fixed cost: These are costs which do not vary with the charge in the level of activity or volume
of output and remain fixed for any volume of production for a given period of time. e.g.
general manager’s salary, rent of a factory and office expenses etc.

b) Variable cost: These costs vary in the direct proportion to the change in volume of output.

c) Semi-variable cost: Semi variable costs are those costs which remain fixed up to a certain level
of production and tend to vary beyond that level. They are those costs which change in total
but not in direct proportion to the change in volume of output. E.g. Telephone charges, repair
and maintenance charges of plant and building, depreciation on plant etc.

d) Step costs: It is a cost which remains constant or fixed for a given level of output and then
increases at a fixed amount for a higher level of output. Salary of supervisor comes under step
cost.

E. Classification of cost on the basis of their controllability

On this basis cost can be classified into 2 categories as
a) Controllable costs
b) Non-controllable costs

a) Controllable cost: ICMA, London defines controllable cost as, “A costs which can be influenced
by the action of a specified member of undertaking.” These are defined as the costs that are
definitely influenced by a given manager within a time spam. It may be fully controllable or
partly controllable. They may be controlled either by one person or by the successive influence
of two or more persons.

b) Non-controllable costs: It is defined by ICMA, London as “A cost which cannot be influenced by

the action of a specified member of an undertaking.” It does not mean that cost cannot be
controlled at all. It indicates that the cost incurred in or assigned to a responsibility centre.
Further a cost which is considered as uncontrollable in the short-run may become controllable
cost on a long term basis. The controllability of the cost would depend on the level of
managerial responsibility and the time factor.

F. Classification of cost on the basis of normality:

a) Normal cost: Cost which is normally incurred at a given level of output under normal
conditions of operations is called normal cost. Under given conditions, costs occurred
normally
 b) Abnormal cost: These costs are the costs which are not incurred at a given level of
output. Therefore they arise because of abnormal conditions. Abnormal costs are not
charged to the cost of production but to the profit and loss account.
G. Classification of cost on the basis of managerial purposes:
Costs are classified differently for analytical and decision making purposes. Some of the
important costs are:

a) Opportunity cost: It is the cost of opportunity lost. It refers to the cost of selection of on
alternative course of action in terms of other alternatives given up to carry out that course
of action. It is the cost of next best alternative.

b) Relevant cost: It is defined as future costs which differ between alternatives. These costs
change depending upon managerial decisions. Each alternative has its own cost structure.
Such costs are called relevant costs. These costs are always future costs which are
expected to be incurred. These are additional as well as avoidable costs.

c) Incremental costs: It refers to an increase in cost from one alternative to another. They
are due to the additional alternatives added up to the existing alternative.

d) Differential cost: It refers to the difference in total cost between any two alternatives. The
change in cost may be due to
i. Change in quantity of units produced
ii. Change in method of production
iii. Addition or deletion of products
iv. Change in channel of production
There is a difference between incremental and differential cost. Incremental cost
always refers to an increase in the cost. But the differential cost includes both increase and
decrease in cost.
e) Average cost: It is the cost per unit. It is computed by dividing the total cost by related
units of output.

f) Sunk cost: It refers to the cost has no economic relevance to the present decision making
process. It is the cost that has already been incurred or yet to be incurred. E.g. book
values of existing fixed assets

g) Imputed cost: These are notional cost not involving any cash outlays but relevant in
decision making. E.g. rental value of property owned by the enterprise, interest on
internally generated funds etc.

h) Out of pocket costs: It refers to cash costs associated with an activity. Non cash cost such
as depreciation are not included in out of pocket costs.

*******************************************

MATERIAL CONTROL
Material control is the systematic control over the planning, purchase, storage, use and
accounting of materials to ensure that there is regular and adequate supply of requisite materials
and at the same time there is no excessive investments on stock of materials and wastage of
materials during storage and the use is reduced to the minimum. Thus the material control is
defined as a system which ensures the provision of required quantity at the required time with the
minimum amount of capital. It is a systematic control over the purchasing, storing and consumption
of materials so as to maintain a regular and timely supply of materials at the same time avoiding
overtaking.

Objectives of material control: The control of materials must meet two opposing needs
a) The maintenance of sufficient inventory for efficient operation
b) Maintenance of inventory at the lowest level of investment
 In order to meet these needs, the following particular objectives are specified.
1. To provide a supply of required materials for efficient and uninterrupted operations.
2. To maintain the investments in inventories at the lowest level consistent with the operating
requirements
3. Purchase of materials only when authoritative requests are received from the consumption
departments.
4. To make all purchases at minimum cost as per economic ordering quantity
5. To purchase at the most favourable places, prices and firms.
6. To minimize the wastage and reduce the wastage, damage, deterioration and toss of
materials during the storage.
7. To provide the management with prompt and up to date information about the receipt,
issue and stock of materials in the stores for the proper planning of production.
8. To fix up the responsibility for materials for some persons and positions
9. To ensure payment for purchases only on receiving and accepting the materials
10. Regular reports of purchases issue, stock etc., to the management

Elements of material control:

 Purchasing of material
 Receipt and inspection of material
 Storage of materials
 Issuing of materials
 Accounting of materials
 Keeping of physical and perpetual inventory records

Purchase of Materials
Material cost usually account for about 25%-40% of the total cost of production. The quality of
materials will have a considerable influence and the cost of production. At the same time the
quantity of materials purchased at the time of delivery also have their effect on the production. The
choice or the selection of the supplier also has a great effect on production. To reduce material cost,
the stocks held and the investments on stock should be reduced to the minimum. All these depend
upon efficient buying. Therefore, a planned industrial buying is considered as an important function
of management and a significant step in process of material control. A separate dept. is set up to
handle all the purchases. This dept. has to decide what to buy, when to buy, from where to buy and
at what price to buy the materials. The primary objectives of purchase has to be kept in mind by the
purchase manager.
Functions:
1. Ensure continuous supply of materials to encourage continuous production
2. Buy right type of materials in reqd. quantity, at right price, from right source
3. Maintain adequate stock at minimum investment and cost
4. Minimize the possibility of wastage, obsolescence, duplication and delay in supply of
materials
5. Select and develop suitable and alternate source of supply
6. Maintain the quality of materials bought

Types of purchasing:
a) Centralized purchasing
b) Decentralized purchasing

a) Centralized purchasing
It is a system under which one central department makes all the purchases for the whole
organization. One purchase dept. is responsible to buy on behalf of different department of the
firm. It is adopted by medium size and big companies
Advantages:
a. When there are bulk purchases, trade discount, quantity discount, credit facilities etc
can be obtained
b. Centralized and bulk purchasing results in economy in transport cost
c. It ensures regular supply of materials
d. It avoids duplication of purchasing work. Hence there will be economy in operating
expenses
e. It helps the management to exercise effective control over the purchasing function
 f. It facilitates to develop effective utilization of trade relations
Disadvantages:
a. Buying procedure is not flexible
b. It will lead to undue delay in supply of material
c. It is very difficult to maintain up to date record of different departments

b) Decentralized purchasing:
Under this method, each department makes its own purchases. When different units of industry
situated far apart it is desirable to decentralize the purchasing function.
Merits:
 It brings benefits of local purchases
 Transportation cost is reduced
 Reduces the costly order processing procedures.
 Prompt settlement of complaints is possible
 It helps to cut down the lead time
Purchase procedure:
The following are the procedures followed by the medium sized and big concerns in purchasing
materials:
1. Receiving purchase requisition:
Purchase requisition is an internal instruction to a buying office to purchase goods or
services. It states their quantity and description and elicits a purchase order. It is prepared
and sent to the purchase department. It should be signed by the person who prepares it and
must be countersigned by the official who authorizes it. It is prepared in many copies as per
the requirement of the concern. The original is sent to the purchase department and
duplicate copy sent to the costing department for record purpose.
2. Selection of the source of supply:
The purchase department maintains the details of various suppliers. In order to select the
right source, the following steps are taken.
a) Inquiry for tenders and quotations: the purchase dept may invite tenders from various
suppliers. it must include the particulars of price, time of delivery, mode of transport,
terms of payment and other terms and conditions of sale.
b) Selecting the suitable source: after receiving the tenders, the department must prepare
statement of various terms quoted by the suppliers. The appropriate source is selected
after considering the price, terms of payment, time of delivery etc.
3. Placing the order:
After selecting the supplier, the department prepares the purchase order for the supply of
materials. The purchase order is the request by purchaser to the supplier to deliver the
goods stated therin. It is the evidence of contract between the supplier and the purchaser. It
is prepared in 5 copies. One copy to the supplier, one copy retained in purchase dept., one
copy sent to the department which initiate the purchase requisition, one copy to the
accounting dept and last copy to the receiving dept.
4. Receiving and inspection of materials.
The major functions of receiving and inspection dept are receiving, unloading, unpacking the
materials delivered by the supplier, checking quality and quantity of materials received and
reporting shortage or breakage.
 Material inspection note: when the materials are unloaded, the warehouse staff or
receiving dept checks the material unloaded. The inspection dept inspects the quality
and prepares the note called material inspection note.
 Goods received note: after the inspection, the inspection dept prepares a Goods
received note. One copy is sent to each dept:- purchase, accounts and the department
which initiate the purchase requisition.

Storage of materials:
After the purchase, the next important step in materials control system is the shortage of materials.
It refers to art of preserving the goods until required in production.

Functions of stored department:

1. Preparing the purchase requisitions
2. Receiving goods into stores
3. Providing security for goods by arranging them at appropriate places.
 4. Avoiding damage and deterioration
5. Classification and coding of materials
6. Issue of materials to production and service dept
7. Maintaining the stock records.
8. Maintaining the stock levels
9. Providing stock information when required
10. Verifying stock at regular intervals

Store keeper:
He is incharge of stores dept. he should have ability to organize the functions of the stores
efficiently.
Duties:
1. Checking and accepting the incoming materials
2. Keeping every item of store in its place
3. Issue materials only against authorized requisitions
4. Maintain the stock records up to date
5. Prepare purchase requisition
6. Maintain stock levels
7. Physical verification at regular intervals

Inventory control:
It is physical control of stock items and implementing the principle and policies relating thereto.
Some of the techniques of inventory control are:
a) Fixation of stock level
b) EOQ
c) ABC analysis
d) Perpetual inventory system
e) Establishment of systems of budget
f) Provisioning and procedures
g) Control ratios.

a) Fixation of stock level:

In order to facilitate the uninterrupted production process the store keeper must fix the stock
level. The levels are including maximum level, minimum level, re order level and danger level.
The factors determining the stock level are as follows.
 Lead time(i.e. time required to obtain stock from the suppliers)
 Consumption rate
 Storage facility and storage cost
 Capital outlay
 Risk of loss involved
 Fluctuations in market prices
 Supply conditions
 Change in demand, production and techniques.

1) Minimum level: is the lower limit of stock below which the actual stock of any item of material
should not normally be allowed to fall.

2) Maximum level: it is the upper limit in stock above which the stock is not allowed to rise under
normal circumstances without the prior sanction of the management.

3) Reorder level: it is the level at which purchase orders are to be placed for its replacement.

4) Danger level: it is the level below the minimum level where quick measures are to be taken for
getting fresh supplies. It indicates the danger of shortage of materials if emergency steps are not
taken to replenish the stock.

b) EOQ (Economic Order Quantity)

It is the optimum or most favorable quantity to be bought at each order. It sets equilibrium
between carrying cost and ordering costs. At this point cost of carrying and cost of ordering are
equal and total cost is the lowest.
c) ABC analysis: (Always Better Control technique)
It classifies the stock on the basis of value or importance into 3 groups. A, B and C.
A category represents 5% to 10% of the total items in the stores and 70% to 85% of the total inventory
value. B category constitutes 20-30% of the inventory items and 25-30% of the total inventory value. C
category constitutes 70%-80% of the inventory items and 5-10% of the total inventory values.
A category items are high priced and require very strict control. They are bought in small quantities. B
category items are stored in accordance with the levels of stock fixed. C category items value is negligible,
liberal stock policies are adopted.
Advantages:
 It ensures close and strict control over costly items
 Ensures sufficient stock at all times
 Lead to efficient inventory system
 Enable the management to save time, energy and stationery.

d) Perpetual inventory system:

It is a method of recording stores balances after each receipt and issue to facilitate regular checking.
Features:
 Stock records: it includes making adequate entries in appropriate records for every receipt and issue
of all material. Bin card is important record maintained at the stores dept to record receipts issues
and balances of materials
Bin Card: A bin is a place where the goods are stored in the store room. A bin may be a shelf, rack,
container etc. separate bin cards are maintained for each item and are attached to the bins where
the materials are stored in the godown. The quantity of receipts and issues are entered in bin card
and balance quantity is entered in balance column. The rates or the values of receipts, issue and
balances are not entered in the bin card.
Stores ledger: it is another record of stock maintained by costing dept. it contains both quantities and
vales of every receipt and issues of particular item of material
Difference between stores ledger and bin card:
Bin card Stores ledger
It is maintained by stores dept Maintained by cost accounting dept
It is attached to the bin It is kept in cost office
It records quantities only Records both quantities and values
Transactions are recorded continuously Sometimes periodically

Merits of stores record:

1) Any discrepancies and errors are easily discovered and remedial action can be taken quickly.
2) It facilitates uninterrupted production process
3) The disadvantages of excessive stocks are avoided.

 Stock verification or stock taking:

It is about verifying the quantity of stock with the bin card balances. It is to ensure that the
book balances agree with physical balances and also for the preparation of balance sheets
and stock reports etc. there are 2 methods of verification of stock.
A) Periodic stock verification and
B) Perpetual or continuous stock verification

A) Periodic stock verification: under this method physical stock checking is done at the end of
accounting period. Generally once in a year. A team of people taken from different
departments is formed for this purpose. This team counts every item of stock and prepares
stock verification sheet. This method helps to minimize the manipulation in stores
accounting. On the other hand as it is taking much time in verification, it disturbs the daily
activities of different departments.

B) Perpetual stock verification: under this method the verification is done throughout the year
by a group of regular staff, appointed for that purpose. Every item of stock is checked at least
few times a year.
Merits:
 Any discrepancies & errors are easily discovered & remedial action can be taken quickly.
 It facilitates uninterrupted production process
 The disadvantages of excessive stocks are avoided.
  It provides internal check on the activities of different departments connected with
inventory.
 It provides a system of internal check on the activities of different departments
connected with inventory.

Material losses:
Some losses of materials are bound to occur during different manufacturing operations in one way
or the other. The losses are broadly classified as waste, scrap, spoilage and defective.

a) Waste: it is the material loss during the production or storage due to various factors such as
evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage etc.

b) Scrap: it is the discarded material having some value in few cases and which is usually either disposed
of without further treatment or reintroduced into the production process in place of raw material.

c) Spoilage: it is the production that does not meet with dimensional or quality standards in such a way
that it cannot be rectified economically and it is sold for a disposable value.

d) Defectives: it is the end product or intermediate product units that do not meet the quality
standards. This may include reworks or rejects.

Issue of materials:
The third important part of material control, after purchases and storage, is issue of materials.
The essentials of effective control on issues are:
a) Material issue against authentic authorization
b) Proper & accurate accounting of issues and
c) Proper pricing of materials

Documents authorizing material issue:

1. Material requisition: It is the chief document authorizing the issue. It is prepared by
production dept. and control dept. and signed by the authorized person. It is prepared in
triplicate. 2 copies are sent to the stores dept and on copy retained by the department
preparing it. The store keeper sends the first copy to the cost office and retains the other for
his record. While issuing materials the store keeper must ensure that the material requisition
note is complete and correct in all respects.
2. Bill of material: It is the complete list of all the materials, supplies and parts required for a
particular job, work order, process or operation. It is also called as specification of materials.
It is prepared by production planning dept on receiving orders from customers. It is prepared
in 4 copies. One copy each is sent to the production dept, costing dept and stores dept and
the other copy retained for records.
Merits:
 It substitutes the material requisitions
 It gives advance information to the store keeper about future requirement of
materials
 It may be used as authorization for procurement of materials if they are not available
in stock.
3. Material Return Note: The material issued in excess of requirement of a job or materials of
unsuitable quality, can be disposed off either by the returning the excess to the stores or
transferring them to other job. It must be returned along with a form called Material Return
Note. It is prepared by the department which is returning the materials. It is sent to the store
keeper who makes necessary entry in bin card.

4. Material Transfer Note: if the materials are transferred from one dept to another or from
one job to the another within the organization, a transfer note is prepared . it is the record of
transfer of materials between stores, cost centres, jobs or deparments. Supervisor of the
receiving job signs the note sent with materials. The form will be sent to the cost dept for
pricing.
Pricing of materials:
There are number of methods in pricing of material issues. More important and popular method are
(a) FIFO, (b) LIFO, (c) Simple average and (4) weighted average.
 (a) FIFO: in this method issues are made in the order in which the lots are received(material
purchased) that is, first lot that has comes in should be issued first. Then the second lot and so
on.
Merits:
1) Simple and easy to operate
2) Materials are charged at actual cost
3) Reflects the current market price
4) Acceptable to income tax authorities
Demerits:
1) During the period of increase in material prices, it inflates the profits
2) Involves more clerical work and expensive
3) Comparison of 2 jobs requiring same materials for same periods is difficult

(b) LIFO: under this method issue are made out of the purchases made out of latest purchases. The
price of latest lot or the recent purchase is used to price the issues.
Merits:
1) Issue price reflects the market price
2) Cost of production is nearer market price which helps to fix the competitive prices
3) Reduces the chances of unrealized profit or loss
4) Its shows less profit when the material price increases and saves tax liability.
Demerits:
1) Clerical work is expensive
2) It is not preferred by the income tax authorities

(c) Simple average method: under this method issue price calculated by dividing total prices of
material by the number of prices used in that total
Merits:
1) Easy to operate
2) Where price fluctuations are negligible it averages the profit
Demerits:
1) Issue price is not related to the purchase price
2) Ignores the quality of purchases and it is unrealistic

(d) Weighted average method: under this method, issue price is calculated by dividing the total
value of stock & purchases by the quantity of stock in hand plus purchases.
Merits:
1) Considers the quantity of materials
2) Easy to calculate and acceptable to the tax authorities
Demerits:
1) Too many calculations are involved where there are frequent purchases made
2) Does not reflect the current market price.

LABOUR CONTROL
Labour refers to the human efforts and skill in production. It is the primary, dynamic and dominant factor of
production. It directly contributes to the productivity, cost and profitability of undertaking.
Employee cost:
It is the aggregate of all kinds of considerations paid, payable and provisions made for future payments for
the services rendered by employees of an enterprise. Considerations includes wages, salary contractual
payments and benefits.

Classification of labour:
a) Direct labour: it refers to human efforts which are applied directly to the production of the goods or
services or in a particular job or a production process. It is also known as the productive labour or
operative labour.
Direct labour cost: it is the cost of employees which can be attributed to the cost object in an
economically feasible way. It includes all fringe benefits like provident fund contribution, gratuity, ESI,
Overtime, Incentives, Bonus, Leave Encashment, Holiday Wages and idle time.

b) Indirect Labour: it is that labour which is not directly related to the production activities. The work of
indirect employees benefits all the products produced. It cannot be easily and conveniently allocated
to or identified with individual manufacturing operations.
 Indirect labour cost: it is the cost of employees which cannot directly be attributed to a cost object in
an economically feasible way.

Differences:
Direct labour
Directly concerned with production
It can be allocated to cost centres directly
It can be ascertained easily
It is variable cost
It can be easily controlled
It is a part of prime cost
Indirect labour
Indirectly concerned with production
It cannot be allocated but apportioned to the
cost centres
It cannot be ascertained easily
It is not variable always
It cannot be easily controlled
It is the part of overheads

Time keeping department:

Labour cost is essentially purchase of time from the employees at a price. Therefore recording of the arrival,
departure and utilization of the time in productive and other activities should be accurate. The primary
functions of the time keeping dept are time recording, and time reporting
Time recording: it means maintaining the accurate record of the time spent by each worker in the factory,
distinguish between regular time and overtime.
Time keeping: it means recording of employee’s entry time to the factory and exit time. It is also known as
gate time keeping. It provides a record of total time spent by each worker engaged in the factory.

The time keeper maintains 2 types of time records:

a) Attendance time record (for time keeping)
b) Job time record (time booking)

a) Attendance time record: it is the record of the total time spent be each worker in the factory
b) Job time record: it contains the information of the time spent by each worker on different jobs.

Methods of recording attendance time or Time keeping methods:

1. Manual methods
a. Attendance register
b. Disc system
2. Mechanical methods
a. Time recording clock
b. Dial time recorder/ key time recorder
c. Electronic time keeping

a. Attendance register: under this method, an attendance register is maintained. The arrival and departure
time of each worker is noted down by himself or by an employee appointed for this purpose. Later it is
entered in individual attendance records of the workmen. The merits of this method is that it is simple,
cheaper and easy to understand. But the demerit is that it is suitable only for the small organization.
b. Disc/Token or check method: under this method each employee is given token number. 2 boards are kept
at the factory gate or at the entrance of the dept. One board is “IN” board and the other is “OUT” board.
Metal disc bearing the number of each employee is placed on hooks of OUT board. While entering the
dept. the worker must take out the disc from OUT board and place it on IN board. The IN board is locked
as soon as the normal reporting time is over. A worker coming late will pick up the disc and put it in
“LATE” box. After the normal arrival time, the time keeper makes note of discs hanging in the IN board
and marks those workers present in register. The limitation is there is scope for fraud as the worker may
take fellow workers token in the box and the time of arrival is not recorded.
c. Time recording clock (card time recorder): every worker is given clock card containing the name and
identification number of worker. They are arranged at the entry gate of the dept. While entering the
factory the worker picks up his card from OUT tray and insert it Time Recording Clock which prints the
exact time of arrival at the space provided on the card against the particular day. The worker takes out
the card and places in IN tray. While going out of the dept., he takes the card from IN tray and after
punching it he puts it in OUT tray. After the scheduled time of arrival, the cards lefts on the OUT tray
indicate the absent workers, late arrival marked in different ink. Merits of this method are: it provides the
correct recording time of the arrival and departure and chances of fraud is less. But the limitations are:
heavy capital investment is required to install time recording clock and mechanical defect ,ay adversely
affect the working of the clock.
d. Dial time recorder: it is a machine with dial around the clock with a number of holes. These holes are
allotted to different numbers corresponding to the number of the worker. There is a radial arm fixed at
the centre of the clock. The worker entering the gate of factory has to swing the arm and press it in to
the hole bearing his ticket number. Clock records the time and print it on the roll of paper placed inside
the clock. It records the time against the ticket number of the worker.
e. Key recorder: there are number of keys, each key bearing the ticket number of the worker. When the
worker enters factory he inserts the key into the keyhole and gives a turn. The ticket number and the
time are recorded on the sheet of paper.
f. Electronic time keeping: it is the computerized attendance system. Using time recording ID card, the
worker record his clock in and clock out times electronically at time recording terminals. This method
requires a device for data collection and worker verification. It is connected to the computer. The time
records of all the workers are collected by the day or week and then uploaded on the main system. They
are considered while payment of salary. The entire process occurs electronically without papaerwork.

Requirement of good time keeping system:

 The system should not allow proxy to another worker.
 A responsible officer must be present at the factory gate to supervise the time recording
 Time of arrival and departure must be recorded
 Late comers must not be given any relaxation
 The system should be simple, smooth and quick to avoid unnecessary queue at the gate.

Time booking: it s the recording of time spent by each worker on each work order, job, process, operation or
other indirect work as well as idle time.

Objectives:
 To ascertain labour time spent on each job
 To control the idle time
 To determine the overhead absorption based on direct labour
 To evaluate the workers performance
 To determine the earnings of the worker

Difference between time keeping and time booking:

Time keeping Time booking

Recording of attendance at the factory gate Recording of time spent at each job
Records arrival and departure time at factory Recorded at the shop or the floor where
gate worker has to work
It is the responsibility of the time keeper It is done by shop clerk or job supervisor
Objective is to prepare pay roll of worker Aims at the ascertainment of the time spent
on individual job
Time recording for special group of workers:
a) Casual worker: they are not regular employs of the firm. They are employed casually when there is
extra job or urgent work in the factory or some of the regular workers on leave. These workers are
paid on daily or weekly basis. They are untrained, inexperienced and less perfect in work. So there
must be vigilant supervision and strict control over work.
b) Out workers: Outworkers are those who work outside the factory premises. They may be regular
worker of the firm or those who are not in the regular employment of the firm. These workers are
sent to the customer’s site to perform special work. They are generally engaged in construction work.
Strict control must be exercised on recording of the attendance of these workers. Mechanical devices
may be used if the numbers of workers are more.
c) Workers paid on piece rate basis: where the worker is paid on the basis of units produced by him, a
record of time is maintained on a card called Piece Work Card. The element of time spent is not
considered but time saved is considered to calculate the bonus.

Idle time: the difference between the time for which workers are paid and the time which they actually spend
on production. It is the time during which workers do not work but wages are paid.
Causes of idle time:
 Unavoidable cause:
1) Moving from one job to another
2) Time to pick up the jobs e.g setting the tools, machines etc.
3) Waiting for materials or instructions
4) Time taken for moving from factory gate to department
5) Tea breaks, minor accidents, personal needs
6) Seasonal nature of the industry

 Avoidable causes:
a) Breakdown of machinery
b) Failure of power supply
c) Delay in material supply
d) Under utilization of plant capacity
e) Strike, lockout, fire, flood etc.
Overtime:
It means work beyond the normal working hours. The causes for overtime are:
a) To complete the urgent work or rush order
b) To increase the production to meet the increase in general demand
c) To complete the delayed work
d) To make up loss of production hours due to factors beyond the management control. E.g. fire,
flood etc
As per the Act, any worker working more than 8 hours in a day or 48 hours in a week is entitled to
overtime payment. It is fixed at high rate as it comes after the completion of the normal working hours.
Overtime payment is treated differently depends upon the causes for the overtime. It must be discouraged or
controlled as the wage rate for overtime is higher than that of the normal hours.

Labour Turnover:
It is the rate at which employees of a factory leave employment. It refers to the change in labour
force. The change may be due to the voluntary acts of the workers or compulsory actions of the
management.
Causes for labour turnover:
 Avoidable causes:
a) Low wage
b) Unsatisfactory working conditions
c) Bad relation between the worker and the employer
d) Inter firm- trade union rivalry
e) Lack of job satisfaction
f) Lack of proper training
g) Inconvenient hours of work
h) Lack of incentives
i) Lack of job security
j) Unfair method of promotion
k) Unsympathetic attitude of supervisory staff
 Unavoidable causes
a) Death or retirement of worker
b) Marriage and pregnancy in the case of women workers
c) Change for better jobs
d) Termination due to lack of sufficient work
e) Change for better working environment
f) Domestic responsibilities

Measure to reduce the labour turnover:

a) A clear and definite promotion policy
b) A good system of wage payment
c) Better working condition
d) Provision for labour facilities like education, housing etc
e) A proper recruitment and training policy
f) Provision of labour welfare measures
g) Measure to increase awareness of the management to take appropriate actions to reduce turnover cost
h) Training in “human Relations” to the managers
i) Full scope for employees to increase their skill, initiative and innovative ability.
j) Effective communication of the company’s policies within the firm.