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Traditional Vs.

Contemporary Classification

By- Arvinder Kaur

However. thread used in stitching garments are indirect material. nails used in furniture.  Material Cost: This is the cost of inputs supplied to an undertaking.A cost is composed of three elements – Materials. . yet it is not considered direct material. For example. Each of these can be direct or indirect. The value of these materials is so small that it is difficult and futile to count or measure them. cotton used in a cotton mill is a direct material. For example. Labour and Expenses. though material forms part of the finished product. in many cases.

 Labour Cost: This is the cost of remuneration (wages. These wages can be identified with a particular product. indirect labour is not. conveniently. identified with a particular cost unit. directly. engaged in converting raw materials into finished products. Labour engaged in cleaning the workshop is an example of indirect labour. Wages paid to a machine operator is an example of direct wages. . bonus etc). Direct labour consists of wages paid to workers. directly. salaries. Indirect wages is of a general character and cannot be. engaged in the production operation. commission. but to assist or help in production operation. In other words.

Direct expenses are those. directly. The chart below summarises the elements of cost. Expenses: All costs other than materials and labour are termed as expenses. which are specifically incurred in connection with a particular job or cost unit. identified with a particular job. which can be identified with and allocated to cost centers or units. Direct expenses are also known as chargeable expenses. 1. Cost of Production + Selling and Distribution Overheads = Total Cost or Cost of Sale . Indirect expenses are also known as Overheads. Prime Cost + Production overhead = Factory Cost or Works Cost 3. other than indirect materials and indirect labour costs. Direct Material + Direct Labour + Direct Expenses = Prime Cost 2. Indirect expenses are indirect costs. process or work order and are common to cost units and cost centres. Direct expenses352 Accounting for Managers are those expenses. Works Cost + Administration Overheads = Cost of Production 4. These cannot be.


(g) To prepare cost schedules to assist management in making decisions and in formulating policies. (h) To design suitable forms for organizing an effective system of reporting which ensures provision of adequate cost data to all levels of management. (f) To implement cost control techniques such as budgetary control and standard costing. loss of labor time. . (d) To provide necessary data to enable management in fixing the price. Such functions are as follows : (a) To establish various cost centers in the organization. (c) To design suitable system for defining responsibilities and controlling cost. (e) To prepare reports on wastages of material. idle capacity of machines so as to improve profitability of business. (b) To ascertain the cost of every product. (i) To assist management in the valuation of closing stock of raw materials and workin-progress so that too much of capital is not locked up in unnecessary inventories.The traditional functions comprise of the routine functions of cost accountant. (j) To prepare periodical cost statements and profit and loss account. job or process both in terms of total and per unit of product.

. (iii) To work in close co-ordination with various departmental managers so as to implement cost reduction programmes and methods of improvement.The modern functions are as follows : (i) Supervising the functions of mechanised accounting. (ii) Organisation of internal audit in the field of accounting. (iv) To undertake cost audit programmes as per the directives issued by the government and the provisions of the Indian Companies Act of 1956.

Short Product cycle Global . high Inventory Level Assembly Line Automation Customer satisfaction Short Production Runs.Manufacturing Traditional Environment Contemporary Environment Basis of Competition Manufacturing Process Technology Standardization Long Production Runs. long product Cycle Domestic Large Variations. Low Inventory Level Flexible Manufacturing System Labor Skills Quality Marketing Products Marketing Low Level Skills Usual Wastage High Level Skills Zero defects Few Variations.

Management Organization Management Organizational Hierarchical structure Type of information recorded Management Focus Exclusive Financial data Teamwork Financial and operating Data. the firms‘ strategic Success Long term performance Short term Performance .

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