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WHAT IS COST ACCOUNTING

Cost sheet is a statement prepared to show the


different elements of cost
CHARACTERISTICS OF COST ACCOUNTS
Cost accounts are important part of financial
accounts
Cost accounts tell about per unit cost of production
or service
Main areas are material, labour and expenses
OBJECTIVE OF COST ACCOUNTS
To ascertain the cost
To control the cost against various variances
To provide reliable cost data for controlling
business activities
TECHNIQUES OF COSTING
1. Historical cost actual expenses incurred in the
production
2.Standard cost it is estimated before actual
production. Later it is compared with the actual
costs for the variances and changes are made in
standard costs for future purpose
3.Marginal costing only those expenses which are
directly related to production like variable costs and
no part of fixed costs are taken.
METHODS OF COSTING
Single costing also called output or unit costing. Used in
those industries where only one item is produced in large
quantites during the whole year.E.g. cement, flour, sugar,
coal.
Operating costing used in those industries where no
commodity is produced but public utility services are
provided. E.g. railways, bus transport, electricity supply
Process costing used in those industries where production is
completed through many processes or production may be
sold after the completion of one or more processes.E.g.
chemical, textile, oil
Departmental costing used in those factories where more
than one items are made and the cost of each item has to be
ascertained. Cost is divided amongst various departments and
per unit cost of every department is found. E.g. in a furniture
factory it has boxes, beds, tables etc.
ELEMENTS OF COST
Elements of cost
Material
Labour
Expenses
Direct
material
Indirect
material
Direct
labour
Indirect
labour
Direct
expenses
Indirect
expenses
Direct costs Indirect costs
Basic Cost Terms:
Direct and Indirect Costs

Direct Costs- Costs that can be traced to a given
cost object product, department, etc.in an
economically feasible way.
Indirect Costs- Costs that cannot be traced to a
given cost object in an economically feasible way.
These costs are also known as overhead.
Cost Assignment -Direct costs are traced to a cost
object. Indirect costs are allocated or assigned to a
cost object.


Direct cost A
Direct cost B
Indirect cost C
Object X
Object Y
Basic Cost Terms: Product and Period
Costs

Product Costs -Costs that attach to the units that
are produced i.e., manufacturing costs) and are
not reported expenses until the goods are sold.
Period costs- Costs that must be charged against
income in the period incurred and cannot be
inventoried e.g., selling and administrative
expenses
Unit Costs -Total cost of units divided by units
produced.


Product Costs
Direct cost Indirect cost
Product X
Inventory
Income statement
Period cost
Sale
Basic Cost Terms:
Direct and Indirect Costs
Variable Costs
Costs that change directly in proportion to changes in the related
cost driver

Fixed Costs
Costs that remain unchanged for a given time period regardless of
changes in the related cost driver.

Other Common Functions for Cost Behavior
Semi-variable costs (part variable and part fixed) Step costs (aka
semi-fixed costs)
Main Assumptions Needed to Define Fixed and Variable Costs
Cost object, Time span, Linear functional form
Relevant range-the band of cost driver activity in which a specific
relationship between a cost and a driver holds.
Basic Cost Terms:

Product costs can be Direct or Indirect (Overhead)
Not all Direct costs are variable . The depreciation
of a special piece of equipment bought to
manufacture a single product line.
Not all Overheads are fixed .
Processing of raw material purchase orders .
Electricity used in operating production equipment.
Direct material + Direct labour + Direct expenses =
Prime Cost
Indirect material + Indirect labour + Indirect
expenses = Factory overheads
Prime Cost + Factory Overheads = Factory Cost
Factory Cost + Selling & Distribution & Admin
Overheads = Total Cost
Indirect materials are threads, lubricants, glue etc.
Indirect labour are supervision, inspection, salary
of factory clerks, general helpers, cleaners,
employees in maintenance work
Indirect expenses are rent, insurance, taxes,
depreciation, maintenance & repair, power, light,
heat, small tools
Selling & Distribution Overhead are advertising,
samples, depreciation of sales equipment, rent of
branches, telephone, stationery , printing, freight,
carriage out, sales promotion, sales accounting

Administrative overhead office salaries, rent,
depreciation equipment, telephone, travel,
property taxes, auditing expenses, stationery,
printing, postage,
Classification of Costs
Natural classification of costs :
Direct material raw cotton, construction material,
crude oil to make diesel, steel for automobiles. Even
primary packing material like wrappings, cardboard
boxes passing from one stage to the other.
Import duties, dock charges, transport costs & storage
of materials for direct production, cost of purchasing &
receiving materials are all direct material cost
Direct labour operators & assemblers. They may be
direct labour for some hours of the day & indirect
labour for the remaining hours.
Direct Expenses other than direct material &
direct labour.
Cost of hiring special machinery, cost of special
designs & patterns, fees paid to architects,
surveyors, cost of transport & conveyance to the
site of job or operations, cost of patents & royalties,
cost of defective trials, licence fees, Hire charges for
plants, insurance on special material chargeable to
a job.
Factory Overhead is the result of all indirect
material, labour & expenses. They are indirect
because though they are needed for the completion
of a project but are either too small or so complex
that it may not be possible to treat them properly
Cost Associated with the product
Product cost it is full factory cost prior to sale & are
identified with the products
Period cost not identified with the product or job &
are deducted as expenses during the period in which
they are incurred like selling & admin expenses
RELATIONSHIP WITH ACCOUNTING PERIOD
Capital cost provides benefit to the future periods
& is classified as an asset. They flow into the cost
stream as an expense when the asset is used up or written
off.
Revenue expenditure benefits the current period & is
classified as an expense.


Cost for Decision making & Planning
Opportunity cost it is the cost of opportunity lost.
Machine used to make product A has the
opportunity cost if the machine can be sold or if it
can make product B. This is important in decision
making but not recorded in accounting.
Sunk Cost is that already incurred. They are
unavoidable cost & are all pat costs since these
amounts cannot be changed once the cost is
incurred. These costs happen due to decision in the
past e.g.B.V. of existing assets, plant & equipment,
inventory, investment in securities.
Costs for control
Controllable cost a cost which can be influenced
by the action of a specified member of an
undertaking.e.g. indirect labour, cutting tools,
power, lubricants.
Standard costs are planned or predetermined cost
estimates for a unit of output in order to provide a
basis for comparison with actual costs. They are
used to prepare budgets. It is a unit concept & is on
per unit of output, per labour hour etc. Budgetd
cost is a total cost of an item at some activity level
or output level.
Features of Cost control
Creation of responsibility centres with defined
authority & responsibility for cost
Formulation of standards & budgets that
incorporate objectives & goals to be achieved
Timely cost control reports (responsibility reporting)
describing the variances
Formulation of corrective measures to eliminate the
unfavourable variances
A systematic & fair plan of motivation to encourage
the workers
Follow-up to ensure the corrective measures are
being applied
Cost reduction Areas
Product improvement :
Quality of the product
Unnecessary weight, machine or labour operations
Wastes & losses to be eliminated
Proper product design
Production methods & layout :
Material & labour control
Standardisation of methods
Designing of tools, machinery & equipment
Modernisation of plant & equipment
Marketing areas :
Channels of distribution
Sales promotion schemes
Marketing research plan
Packaging methods & materials handling

Cost reduction Areas
Administrative areas :
Effective purchasing procedure
Fair personnel policy & schemes
Investment planning
Cash discount policy
Mechanised system of accounting
Labour welfare measure
Availability of servicing departments
Cost sheet
Prime cost has direct material, labour & expenses
Factory cost (work cost)- are factory overheads &
includes indirect materials, labour & expenses
Cost of production has office & admin Overheads
Cost of sales has selling & Distribution Overheads
Finally, deduct Cost of Sales from Sales to get Net
profit
Cost sheet format
Direct materials:
Opening stock
+ purchases
+ carriage inwards
- Closing stock
- Scrap
Direct wages
Direct expenses
+ Factory overheads :
Indirect materials
Loose tools
Indirect wages
Rent & rates (factory)
Lighting & heating (factory)
Power & fuel
Repairs & maintenance
Cleaning
Cost sheet format
Research & experiment cost
Factory plant depreciation
Works stationery
Welfare service expenses
Insurance : Fixed assets
Stock & finished goods
Work managers salary
Factory or Works Cost
Add: Office & Admin Overheads:
Rent (office)
Salaries (office)
Lighting & heating
Insurance of office building
Telephone & postage
Printing & stationery
Depreciation of office furniture & office equipments
Legal expenses
Audit fees
Bank charges Cost of Production

Cost sheet format
Add:
Selling & Distribution Overheads :
Showroom rent & rates
Lighting & heating
Salesman salaries
Commission
Travelling expenses of salesmen
Sales printing & stationery
Advertising
Bad debts
Postage
Depreciation & expense of delivery van
Debt collection expenses
Carriage freight outwards
Samples & other free gifts Cost of Sales
Net profit or Loss
Sales

Cost sheet format
Items of expenses which are appropriated from profits
do not form part of the cost of a product
They are :
Income tax
Dividends to shareholders
Commission out of profit to MD or Partners
Capital loss( loss arising out of sales of assets)
Interest on loan
Donations
Capital expenditure
Discount on shares & debentures
Underwriting commission
Writing of goodwill
Q1) From the following particulars prepare a cost sheet for the
year ended 31/12/2010
Stock of finished good (1.1.10) 6000
Stock of raw material (1.1.10) 40000
Work-in-progress (1.1.10) 15000
Purchase of raw materials 475000
Carriage inwards 12500
Factory rent, taxes 7250
Other production expenses 43000
Stock of goods(31.12.10) 15000
Wages 175000
Work managers salary 30000
Factory employees salary 60000
Power expenses 9500
General expenses 32500
Sales for the year 860000
Stock of raw material 50000
Work-in-progress (31.12.10) 10000
Materials Control
Materials refers to the raw material used in production.
Sometimes stores are also referred to as materials
At times finished & partly finished goods are also
referred to as materials
It is the prime cost of production s it aims at efficient
purchasing of materials, storage & usage.
Material control is at two levels : 1) quantity controls
(2) financial controls (lesser investment in material)
So a balance has to be maintained between two
opposing needs i.e. (1) maintenance of sufficient
inventory for efficient production (2) maintenance of
investment in inventory at the lowest level
Objectives of Material Control
Desired quantity of material will be available when
needed for uninterrupted production
Material will be purchased as per needs & in economic
quantities
The investment in materials will be maintained at the
lowest levels in tune with the operational needs
Material will be purchased at the most favourable
prices
Protection under loss by fire theft, handling
Storage in such a way that minimum of handling time &
cost is there
Vouchers will be approved for payment only if the
materials have been received & is available for issue

Economic Order Quantity (EOQ)
(Reorder Quantity)
The EOQ is the optimum or the most favourable
quantity which should be purchased each time the
purchases are to be made
EOQ is where the costs of carrying inventory is equal or
almost equal to the cost of not carrying inventory (cost
of placing orders). At EOQ level the total of these costs
is minimum
The cost of carrying the inventory is the out of pockets
cost associated with having inventory on hand e.g.
warehouse charges, insurance, heat, light, losses due to
breakage, spoilage
Another opportunity cost which is not the out-of-
pocket cost is cost incurred in purchasing the inventory.
If funds borrowed to purchase the inventory then
interest payments will be the direct cost.
Economic Order Quantity (EOQ)
The costs of not carrying the inventory arise
because of frequent placing of order at short
intervals. E.g. extra purchasing, handling,
transportation, higher price due to smaller
quantities etc.
The cost of placing the order decrease as the size of
order increases.
However the costs of carrying the inventory goes up
if purchases have been made in large quantities.
The point where there is lowest total cost per unit is
EOQ
EOQ or Re-Order Quantity
The point where there is lowest total costs and the
size of material is ideal is EOQ.
EOQ = 2 * U * O
I C
U = Annual usage in units
O= Cost of placing an order
I= Percent cost of carrying inventory
C= Cost per unit of material
E.g. If the annual usage in units is 4000, cost of
placing an order is Rs.20, carrying cost is 10% &
cost per unit is Rs.10 then what is the EOQ?
Re-order Level
The EOQ tells how much to buy at a particular time, but when
to buy is told by Re-Order level.
There is lead time involved , i.e. the time interval between
placing an order & receiving delivery.
The re-order level is the point or quantity level at which if
materials in stores reach, the order for supply of materials
must be placed. This point initiates a new order.
It is calculated with three factors :
1. The expected usage
2. The time interval between initiating an order & its receipt,
called lead time.
3. The minimum inventory or safety stock
Re-order level= Max. Usage per period * Max. Re-order
period.
Minimum Stock Level (Safety Stock)
The safety stock is kept to prevent stock out. It is to be
used only in abnormal cases.
If the usage pattern is known with certainty, & the lead
time is also known accurately then no safety stock is
needed.
However, either usage or lead time is varying then it is
necessary for a firm to maintain safety stock level equal
to the difference between expected usage over lead
time & the maximum usage over lead time that the
firm feels it is required for cost minimisation.
Min. Stock level= Re-order level-(Avg. rate of
consumption* Avg. Re-order period)
Maximum Stock Level
The max. stock level means that the stock will not
exceed this limit although there may be low
demand for materials or quick delivery from
suppliers.
Max. stock level = Re-order level + Re-order Qty
(Min. consumption * Min re-order period)

Danger Level
Generally the danger level of stock is below
the min. stock level.
Sometimes the danger level of stock is
between re-order level & max. level.
Danger level= Avg. consumption* lead time
for emergency
Practice questions
Q1) Max. usage (units) 500 per day
Min. usage (units) 200 per day
Normal usage (units) 300 per day
EOQ (units) 50000
Reorder period or lead time 20-30 days
Minimum level (units) 5000
(10 days at normal usage)
Find : Reorder level, Maximum level,
Q2) If a companys weekly minimum & maximum
consumption of material A are 25 & 75 units
respectively. The re-order quantity as fixed by the
company is 300 units, The material is received
within 4 to 6 weeks from issues of supply order.
Calculate minimum & maximum level of material A.
Q3) About 50 items are required every day for
a machine. A fixed cost of Rs.50 per order is
incurred for placing an order. The inventory
carrying cost per item amount to Rs. 0.02 per
day. The lead period is 32 days.
Compute: EOQ and Reorder level

Q4) The cost of placing an order is Rs.20. The number
of units to be purchased during the year is 5000 units.
Purchase price per unit inclusive of transportation cost
is Rs. 50. Annual cost of storage per unit is Rs.5. Details
of lead time are Average 10 days. Max. 15 days, Min. 6
days. For emergency purchases 4 days.
Rate of consumption is Average 15 units per day & max.
20 units.
Calculate :
Reordering level
Maximum level
Minimum level
Danger level
Material Costing
This is done when materials are purchased at
different times for different processes & jobs. So
different pricing has to be done for the materials
issued from the storeroom. This is based on the
different methods used. Only few of them are taken
here :
FIFO (First in First out)
LIFO (Last in First out)
HIFO (Highest in First out)
Simple Averages
Weighted Averages
Selection of a Material Pricing Method
The various methods which are in use have advantages &
disadvantages. The factors which should be taken into
consideration are as follows:
Customs & practices within the industry
Frequency of price fluctuations & frequency of material purchases.
Relative value of materials cost to total cost of products.
Relative rate of stock turnover.
Quantities of materials to be purchased at any one time.
The effect of different pricing methods on tax liability.
The accuracy with which material issues can be computed.
Cost of clerical work involved in making these records.
The relationship of selling prices to the costs that are matched
with those prices.
The probability of using different methods for various classes of
inventory.
FIFO
Here it is good for the stocks that deteriorate very fast. So the
oldest units should be sold or used first & the inventory will only
consist of the latest purchases.
Q1) Jan 1. Opening balance is 500 units @ Rs.25 per unit
Jan 3. Issued 70 units
Jan 4. Issued 100 units
Jan 8. Issued 80 units
Jan 13. Received from supplier 200 units @ Rs.24.5 per unit
Jan 14. Returned to store 15 units @ Rs.24 per unit
Jan 16. Issued 180 units
Jan 20. Received from supplier 240 units @ Rs.24.75 per unit
Jan 24. Issued 304 units
Jan 25. Received from supplier 320 units @ Rs.24.5 per unit
Jan 26. Issued 112 units
Jan 27. Returzned to store 12 units @ Rs.24.5 per unit
Jan 28. Received from supplier 100 units @ Rs.25 per unit
Calculate on the FIFO basis the valuation of Closing Stock.





LIFO
The cost of the last lot of materials received is used to price
materials issued until the cost is exhausted.
It is a better matching of current costs with current revenues.
It is good for tax saving.
Q2) Prepare a stores ledger account from the following
transactions under LIFO method.
Feb 1. Received 1000 units @ Re.1 per unit
Feb 10. Received 260 units @ Re.1.05 per unit
Feb 12. Issued 700 units
Feb 14. Received 400 units @ Rs.1.15 per unit
Feb 21. Received 300 units @ Rs.1.25 per unit
Mar 16. Issued 620 units
Apr 12. Issued 240 units
May 10. Received 500 units @ Rs.1.10 per unit
May 25. Issued 380 units

HIFO
Highest in First Out. Here the materials received at the
highest price in the stock are issued first. So here the
highest cost enters into the cost of goods sold & the
inventory valuation is done at the lowest possible price.
Simple Averages
The materials issued should be priced on an average
price & not on the exact cost price.
Weighted Average
Here the issued materials are priced at the average cost
price of the materials in hand, a new average being
computed whenever materials are received. It is
calculated each time the purchases are made.
Q3) Use Simple & Weighted Averages to calculate
the closing stock.
May 1. Received 500 units @ Rs. 20 per unit
May10. Received 300 units @ Rs.24 per unit
May 15. Issued 700 units
May 20. Received 400 units @ Rs.28 per unit
May 25. Issued 300 units
May 27. Received 500 units @ Rs.22 per unit
May 31. Issued 200 units

Labour Costs & Control
Cost accounting for labour has three primary objectives :
1. Determining labour costs in the cost of product or service.
2. Reporting labour costs for planning & control
3. Reporting labour costs for decision making
Direct labour
It consists of wages paid to the labour which convert raw
materials into finished output. It comprises of the wages
which can be identified & allocated to cost units. E.g.
assembly line workers, moulders, operators, samplers etc.
Indirect labour
Is which is not engaged in converting raw materials into
finished output. It is the cost which cannot be allocated but
which can be apportioned to or absorbed by the cost centres
or cost units. It includes foremen, inspectors, watchmen,
supervisors, storekeepers, timekeepers. After all the direct
labour is charged what is remaining is indirect labour.

Organisation for Labour Control
These departments contribute to the efficient utilisation of labour &
adequate control over labour costs.
1. Personnel Dept.
2. Engineering Dept.
3. Time-keeping Dept.
4. Payroll Dept.
5. Cost Accounting Dept.
Personnel Dept.- various dept. heads along with directors of personnel
dept. involve in employment, discharge, classification of employees, wage &
wage systems.
Engineering dept.- It is involved in the preparation of plans for every job.
Inspection of posts & jobs at stages of production. Initiation & supervision
of research work. Safety & efficient working conditions.
Time keeping dept.- The total no. of hours worked by each employee to
match his earnings.
Absence of time-keeping will frustrate the l loyal & punctual employees .
Pension, gratuity, leave with pay, P.F., salary, promotion are linked to
attendance records.
Overhead costs being indirect costs can be done on the basis of labour
hours.

Payroll Dept.- It is the intermediate function between the
timekeeping & the cost accounting dept. The functions are to :
To compute employee wages
To prepare departmental payroll summaries
To calculate payroll taxes, deductions etc.
Cost Accounting Dept.- On the basis of the labour summary or job
cards, the cost dept. records direct labour costs on the cost sheets
& indirect labour costs on the departmental expense sheets.
Wage System:
It is a part of labour cost control. The following objectives have to
be met with an efficient wage system:
1. Provision for flexibility
2. Acceptance by employees to avert slowdowns & work
stoppages
3. Stabilisation of labour turnover
4. Minimising of absenteeism
5. Provision for incentive plans
There are two wage systems to pay for labour:
1. Straight time which is by hour, day or week.
2. Piece work, which is by unit of product. So, the job
performed or no. of operations completed & the workers
wages depend upon his output & the not upon the time he
spends in the factory.
Straight time- is found in those industries where:
The speed of production cannot be influenced by the energy
or the dexterity of the worker.
The quality of work is of paramount importance
It is difficult to measure the work done by the employee.
Piece Work- are suitable in the following cases:
Managerial supervision is not needed much for production.
Higher production reduces overhead cost per unit of output.
Labour costs can be computed in advance of production.
Labour control is easier by isolating workers whose work is
inefficient & below the minimum standard requirements.
Time & Motion Study:
Time study means the time spent on each element of a job.
The total time taken by all the elements (stages) of a job is
called the standard time.
This standard time is the time which should be taken by an
average employee to complete a job under standard (normal)
working conditions.
Motion study means dividing the work into basic elements of
a job or a process for the purpose of eliminating unnecessary
(defective) elements in a job.
After investigating all movements in a job, process or
operation it finds out the most scientific & systematic method
of performing the operation.
The time study fixes the standard time for a job or process &
motion study eliminates the wasteful movements of a worker
on the job. Both are complementary to each other.
Objectives of Time & Motion Study
1. Eliminating unnecessary human efforts
2. Improving methods, techniques, processes
3. Utilising effectively the materials, machines, human
resources & other facilities.
4. Improving the workout environment, layout & design of
plant & equipment.
Labour Turnover
It is the rate at which employees leave employment at a
factory & is normally measured as the ratio of the no. of
persons leaving in a period to the average no. on the payroll.
Here all the persons who leave must be included, irrespective
of voluntarily leaving or getting replaced.
Labour Turnover=
Employees leaving/ Avg. no. employed * 100
The effects of high or low turnover rate should then be
analysed on training costs, production efficiency & employee
morale etc.
Some Labour Cost Related Items
Overtime- is the work done beyond the normal hours of
work. Factories Act of 1948 says more than 8 hours of work in
a day is O.T. So they should be paid generally at double rate
than of basic time.
Idle Time- Many times workers spend more time on the job
but are paid less than that. That difference is idle time, the
employer must pay though he obtains no direct benefit from
that. In this holidays & leave are not included.
Fringe Benefits- They are given in the form other than (basic
wages, DA, HRA, CCA) like vacation & holiday pay, pension
costs, group insurance, hospitalisation benefits, sick pay, night
shift premium etc.
These indirect benefits are treated as factory overhead like
Leave with Pay for leaves like CL, EL, Special Leave etc.
Employers Contribution to Insurance is treated as production
overhead.
Q1) In a factory Ram & Sham produce the same
product using the same input of same material & at
the same normal wage rate.
Bonus is paid to both of them in the form of normal
time wage rate adjusted by the proportion which time
saved bears to the standard time for the completion of
the product. The time allotted to the product is 50
hours. Ram takes 30 hours & Sham takes 40 hours to
produce the product. The factory Cost of the product
for Ram is Rs.3100 and for Sham Rs.3280. The factory
OH rate is Rs.12 per man hour.
Calculate 1) Normal Wage Rate 2) Cost of material used
for the product 3) the input of material if the unit
material cost is Rs.16.
Q2) An article passes through five hand operations as
follows:
Operation Time per Grade of Wage rate
No. article worker per hour
1 15 min. A Re 0.65
2 25 min. B Re 0.50
3 10 min. C Re 0.40
4 30 min. D Re.0.35
5 20 min. E Re 0.30
The factory works 40 hours a week and the production
target is 600 dozens per week. Prepare a statement
showing for each operation and in total the number of
operations required, the labour cost per dozen and the
total labour cost per week to produce the total targeted
output.
Factory Overheads
FOHS cannot be directly traced to a particular unit of output
i.e. product or jobs. It is the aggregate of indirect materials,
indirect wages & indirect expenses.
FOHS are Fixed, Semi-Variable & Variable.
Fixed FOHS do not vary in total amount with increase or
decrease in production activity. They are like management
salaries, depreciation, rent, property taxes & amortisation of
leaseholds.
Semi-variable or semi-fixed are that remain fixed in total
amount over a relatively short range of variation in output &
then are abruptly changed to a new level where they remain
fixed for another range of output. So if a third shift is added
without increasing the plant facilities, i.e. the Fixed Costs such
as Supervisor salaries may be increased because of night
supervision, insurance premium may be raised due to
additional fires, theft risk.
Variable Costs are like repairs, power, workmens
compensation, indirect labour which varies with
changes in production. Though the proportion of
increase or decrease of variable costs may not
correlate to the increase or decrease in production of
items.
Accounting of FOHS
1) Collection & Codification
2) Allocation & Apportionment
3) Absorption
1) Collection & Codification- The Factory OHS are
collected & coded under different Cost Accounting
numbers like factory supplies-O1, Indirect labour-O2,
Insurance-O3 etc.
2) Allocation & apportionment- Here the costs are allocated to
various departments or cost centres like production & service
departments. Some expenses do not originate in a specific
department. They are incurred for all & must be apportioned or
appropriated to any or all departments using such items, e.g.
power, light, rent, dep. on factory building etc.
Cost apportionment is the process of charging expenses in an
equitable proportion to the various cost centres or department.
They are like:
Floor area occupied- for OHS like lighting & heating, depreciation
on building, caretaking, rent & rates etc.
Capital values- Dep. On plant, insurance on building, maintenance
of plant etc.
Direct Labour hours or machine hours- repairs & maintenance
costs, insurance on tools & fixtures etc.
No. of workers employed- accident insurance, dental, medical first
aid.
Technical estimate- usage of oil & grease etc.
Absorption of Factory OHS
After all the service dept. OHS have been apportioned to
production dept. the next step is to spread factory OHS to
different products or jobs produced. This is called OHS
absorption.
It is the allotment of OHS to cost units. So, the expenses of a
particular cost centre is finally charged to or absorbed in the
cost of products, jobs etc passing through it.
Methods of Absorption
Percentage on Direct Materials- It is by dividing total
estimated factory OHS by total direct materials cost. If factory
OHS is Rs.300000 & Mat.cost is Rs.250000 then the
absorption rate is (300000/250000)* 100= 120%
Each job or product would be charged on the basis of 120%
absorption rate.
So if the mat.cost is Rs.50000 then by % on direct materials
the factory OHS would be (50000)*120/100= Rs.60000.
Percentage on Direct Wages:
(Factory OHS/ Direct labour Cost)* 100
If FOHS is Rs.200000 & the direct labour cost is
rs.200000 then the absorption rate is
(200000/200000)*100 = 100%
So, a product with direct labour cost of Rs.30000 would
be charged with Rs.30000 for factory OHS.
Unit of Production basis :
It is the simplest method of charging factory OHS.
FOHS per unit= (FOHS/Units of production)*100
Labour Hour rate- One of the most popular methods.
The absorption of FOHS on this basis= (FOHS/Direct
labour hours)*100. this is generally where lots of direct
labour is involved in the process.
Machine Hours rate- here the work is primarily on
machines = (FOHS/Machine hours)*100
Admin., Selling & Distribution OHS:
In this the following items are there:
Indirect material- Printing & stationery used in the
office
Indirect labour- Salaries, allowances, fees of BOD,
legal advisor etc
Indirect expenses- office rent, rates, lighting,
heating & cleaning, legal charges, bank charges,
repairs of office equipments.
Selling & distribution OHS are apportioned in the
same way as FOHS & is apportioned to the
particular product or the cost centre.
It can be as % OF Sales, % of Factory Cost, % of GP
etc.
Q1) A factory is having 3 production departments A, B & C
and 2 service departments - Boiler House & Pump room. The
boiler house has to depend upon the pump room for supply
of water & pump room in its turn is dependent on the boiler
house for supply of driving the pump.
The expenses incurred by the production departments during
a period are A Rs.800000, B Rs.700000 & C Rs.500000. The
expenses for boiler house are Rs. 234000 & the pump room
are Rs.300000.
The expenses of the boiler house & pump room are
apportioned to the production departments on the following
basis:
A B C BH PR
Expenses of BH 30% 30% 30% 10%
Expenses of PR 40% 20% 20% 20%
Show clearly as to how the expenses of boiler house & pump
room would be apportioned to A,B & C departments.
Job, Contract, batch, project Costing
It is applied to determine the cost of specific jobs or batches of production
generally made as per the customers specifications.
The main feature is that no two job orders are necessarily alike & all the
orders do not pass through the same manufacturing process.
Eg. Building, contracting, furniture, printing, machine tool manufacturing
etc.
A job may be a product, project, service, batch etc.
The main components of a job cost sheet are material costs, labour costs
& manufacturing OHS.
When a job is finished, its cost is determined by totalling prime costs &
absorbed OHS.
Here the cost is determined after the job is finished by totalling the prime
costs & OHS absorbed.
A finished goods account is made. When no unit on a job order is
completed , the total cost incurred on the job order so far becomes W-I-P.
The Questions here require to calculate the Net Profit derived after the
direct costs& OHS have been charged in the particular job.
The following information is obtained from the
books of a factory:
Cost of completed jobs
Raw material supplied from stores Rs.88000
Wages Rs.100000
Chargeable expenses Rs.10000
Material returned to stores Rs.1000
Factory OHS are 80% of wages. Office OHS are 25%
of factory cost & selling & distribution OHS are 10%
of cost of production.
The completed jobs realised Rs.410000.Prepare a
completed Job Account to find the net profit on the
completed jobs.
Process Costing
This is that form of costing applied to standardised
goods produced in large volume with continuous
production flow.
It is used in industries like chemicals, textiles, steel,
petroleum, cement, plastic etc.
Nature of Process Costing:
They are accumulated for each production dept. or
process.
Each process or dept. has its own account & records
the processing costs incurred by the dept.
The product costing under process costing is an
averaging process. The unit cost is obtained by
accumulating all manufacturing costs & dividing it by
units produced
Differences between Process & Job Costing
Job costing is applicable for specific products or jobs. Process
costing is in the case of mass production of similar units having
different processes.
In job costing, manufacturing costs are calculated for particular
jobs. In process the manufacturing costs are for the entire
processes & the cost of particular jobs or products cannot be
determined.
In job costing time is not a major issue & can take more than one
accounting period. In process costing the production is measured
for specific processes for given time period like a month.
Job costing is dependent on customers orders for a product. While
process costing has production of units done for future sale.
In job costing unit cost is got by dividing the cost of jobs by units
produced. In process costing unit cost are process costs divided by
process production.
In job only one W-I-P a/c is maintained. In process individual W-I-P
a/c is maintained for each process.

Method of Process Costing:
In this all the materials, labour & direct expenses &
factory OHS are taken for each process. A separate
process a/c is made & the balance is carried forward
to the next process.
Process Cost a/c in different situations:
When there is no process loss & no opening &
closing W-I-P
When there are process losses or gains (normal loss
or gain, abnormal loss or gain)
When there are opening & closing W-I-P at various
stages of completion
Inter process profits
Q) Prepare process cost accounts for the following
data:
Items Total Process
I II III
Dir.mat. 4,40,000 3,60,000 60,000 20,000
Dir.wages 80,000 20,000 40,000 20,000
Dir. Expen. 1,00,000 60,000 40,000
Production OHS incurred is Rs.1,60,000 & is
recovered on 200% of direct wages. Production
during the period was 20,000 units. There was no
opening or closing W-I-P.