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Cost & Management Accounting

presented by

CA Pradeep D. Kamthkar
M.Com., F.C.A., SET
CA P. Kamthekar 1
Terminology of Cost :
Cost classification by elements, variability, cash
flow etc.

By Elemensts :
 Material Cost
 Labour Cost
 Expenses

CA P. Kamthekar 2
Terminology of Cost :
Material Cost :
The substance from which the product is made is known as material.
The cost incurred for same is known as material cost.

Labour Cost :
For conversion of materials into finished goods, human effort is
needed, such human effort is called as labour. The cost incurred for
same is known as labour cost.

Expenses :
Any other cost besides material and labour is termed as expense.

CA P. Kamthekar 3
Terminology of Cost :
By Variability :
 Direct Cost
 Indirect Cost

CA P. Kamthekar 4
Terminology of Cost :
Direct Cost :
The cost which varies directly with the production activity is
called as direct cost.
Direct cost can be
 Direct Material Cost
 Direct Labour Cost
 Direct Expenses

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Terminology of Cost :
Direct Material Cost :
All materials which becomes an integral part of the finished product and which can be
conveniently assigned to specific physical units is termed as
“Direct Material”. Following are some of the examples of direct material :

 All materials or components specifically purchased, produced or


relinquished from stores.
 Primary packing material (e.g. carton, wrapping, cardboard boxes etc.
 Purchased or partly produced components.

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Terminology of Cost :
Direct Labour Cost :

Labour which takes an active and direct part in the production of a


particular commodity is called direct labour. Direct labour cost are
therefore, specifically and conveniently traceable to specific
products.

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Terminology of Cost :
Direct Expenses :

These are expenses which can be directly, conveniently and wholly


allocated to specific cost centres or cost units.
Examples of such expenses are : hire of some specific machinery
required for a particular contract, cost of defective work incurred in
connection with a particular job or contract etc.

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Terminology of Cost :
Indirect Cost :
The cost which does not vary directly with the production
activity is called as indirect cost.
Indirect cost can be
 Indirect Material Cost
 Indirect Labour Cost
 Indirect Expenses (Overheads)

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Terminology of Cost :
Indirect Material Cost :

All material which is used for purpose ancillary to the business and
which cannot be conveniently assigned to specific physical units is
termed as “Indirect material cost.”
Consumable stores, oil and waste, printing & stationery material
etc. are a few examples of indirect material cost.

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Terminology of Cost :
Indirect Labour Cost :

Labour employed for the purpose of carrying out tasks


incidental to goods, or services provided is indirect labour.
Such labour does not alter the construction, composition or
condition of the product. It cannot be practically traced to
specific units of output. Wages of store-keeper, foremen,
time-keeper, directors fees, salaries of salesman, etc., are
all examples of indirect labour costs.
Indirect labour may relate to the factory, the office or the
selling and distribution divisions.

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Terminology of Cost :
Indirect Expenses (Overheads):

These are expenses which cannot be directly, conveniently


and wholly allocated to cost centres or cost units.
The examples of indirect expenses are rent, rates,
insurance, salaries, lighting charges, etc.

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Terminology of Cost :
Indirect expenses (overheads) are further divided
into three divisions :
1. Factory or Works overheads
2. Office or Administration overheads
3. Selling & Distribution overheads

1. Factory Overheads : Includes,


a) Indirect material used in the factory such as lubricants, oil,
consumable stores etc.
b) Indirect labour such as gate keeper’s salary, time keeper’s
salary,
work manager’s salary, etc.
c) indirect expenses such as factory rent, factory insurance,
factory
lighting, etc.

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Terminology of Cost :
2. Office & Administration Overheads : Includes,
a) Indirect material used in the office such as printing and stationery
materials, brooms and dusters etc.
b) Indirect labour such as salaries of office manager, office accountant,
clerks etc.
c) Indirect expenses such as rent, insurance, lighting of the office, etc.

3. Selling & Distributions Overheads : Includes,


a) Indirect material used such as packing material, printing and
stationery material etc.
b) Indirect labour such as salaries of salesmen and sales manager etc.
c) Indirect expenses such as rent, insurance, advertising expenses etc.

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Terminology of Cost :
 Prime Cost :
It consist of cost of direct material, direct labour and direct
expenses. It is
also known as basic, first or flat cost.

Prime Cost = Direct Material + Direct Labour + Direct Expenses

Question : 1
Calculate the Prime Cost from the following particulars of an
optical manufacturer :
Rs.
Cost of lens purchases 10,000
Cost of frames purchased 2,000
Cost of screws 200
Wages paid for manufacturing opticals 4,000
Hire of a special machine 800

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Terminology of Cost :
 Direct Material Consumed :
The term “Direct Mateial” here refers to “cost of direct materials consumed”.
It is not necessary that all materials purchased during a period are consumed
during the same period. Some materials may remain in stock.
Hence. Cost of materials consumed will have to be ascertained by making
appropriate adjustments for opening and closing stock of materials.

Direct Material Consumed = Opening Stock + Purchases – Closing Stock

Question : 2
From the following compute the value of raw materials consumed.
Rs.
Raw Materials purchased 50,000
Opening Stock of materials 10,000
Closing Stock of materials 10,500

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Terminology of Cost :
 Factory (Works) Cost :
It comprises of prime cost plus works or factory overheads. This cost
is also known as Works Cost, Production or Manufacturing Cost.
Works Cost = Prime Cost + Factory Overheads
Question : 3
Calculate the Factory Cost from the following particulars of an optical
manufacturer :
Rs.
Material consumed 50,000
Productive wages 30,000
Unproductive wages 13,000
Salary of factory manager 12,000
Consumable spares 6,000
Rent of factory premises 9,000
Machine depreciation and repairs 7,500
Oil, grease etc. 4,500
Salary of factory clerks 5,000

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Terminology of Cost :
 Adjustment for Scrap :
Scrap is the incidental residue from certain types of manufacturing
operations usually of small amount and low value, recoverable without
further processing. The amount realised from sale of scrap should be
deducted either from works overheads or gross works cost.

In case of certain materials (before being used) are found to be


defective and, therefore sold, the value of materials used should be
reduced by the cost of such materials. Any loss on the same should be
charged to costing profit and loss account.

 Adjustment for Work-in-progress :


Work-in-progress means units which are not yet complete but on which
some work has been done. Thus, it represents goods which are in the
process of manufacturing. Generally such goods bear a proportionate
part of factory overheads besides prime cost and, therefore, opening
and closing stock of work-in-progress are taken into consideration in
the cost sheet while computing the works cost of goods manufactured
during the year.

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Terminology of Cost :
Question : 4
From the following calculate the Works Cost :
Rs.
Materials Purchased 60,000
Materials : Opening Stock 13,000
: Closing Stock 11,000
Productive Labour 40,000
Unproductive Labour 25,000
Direct Expenses 10,000
Factory Managers Salary 50,000
Factory Machinery : Depreciation 18,000
Oil & Grease 6,000
Work-in-progress : Opening Stock 10,000
: Closing Stock 8,000
Sale of scrap 3,000

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Terminology of Cost :
 Office Cost (Cost of goods produced) :
If office and administrative overheads are added to factory cost, office cost is
arrived at. This is also termed as administrative cost or cost of production.
The inclusion of office and administration overheads in the cost of production is
based on the presumption that such overheads solely relate to production.
Office Cost = Factory Cost + Office & Administration overheads

Question : 5
From the following particulars compute the Cost of Production of the
product :
Rs.
Material consumed 12,400
Labour employed 9,700
Salary of inspector engaged on this product 4,500
Proportionate lighting and heating (factory & office 3:2) 3,000
Proportionate depreciation, repairs and rent (50% factory) 2,400
Municipal taxes and insurance of building (40% office) 1,800

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Terminology of Cost :
 Adjustment for Finished Goods Stocks to ascertain Cost of
goods produced & sold :
In the cost of production relating to a particular commodity or unit of
production, the opening stock of finished goods is added and closing stock
is substracted to find out the cost of goods sold.
Stock of finished goods is generally valued at the total cost of production.

Question : 6
From the following calculate the Cost of Production of goods sold.
Rs.
Cost of Production 1,00,000
Opening Stock of Finished Goods 17,500
Closing Stock of Finished Goods 15,000

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Terminology of Cost :
 Total Cost or Cost of Sales :
Total cost is ascertained by adding selling and distribution overheads to Cost of
Production of goods sold.
Total Cost (Cost of Sales) = Cost of Production of goods sold + Selling &
Distribution overheads
Question : 7
From the following calculate the Cost of Sales of goods sold.
Rs.
Cost of goods produced & sold 1,15,000
Salesman’s Salary 16,000
Sales Department Stationery 2,500
Depreciation on Delivery Van 14,000
Salesman’s Commission 3,600

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Terminology of Cost :
 Computation of Profit :
While preparing a cost sheet may have to be calculated either as a percentage of cost
or as a percentage of selling price. This can be given in different ways as given
below :
Example (1)
Cost price is Rs. 20,000
Profit is 10% on cost
Solution :
First take cost price as Rs. 100. Then the profit will be 10% on Rs. 100, i.e.
Rs.10. Therefore, the profit on a cost of Rs. 20,000 will be :
20,000 x 10/100 = 2,000

Example (2)
Cost price is Rs. 27,000
Profit is 10% on Selling Price
Solution :
First take selling price as Rs. 100. Then the profit will be 10% on Rs. 100, i.e.
Rs.10. So the cost will become (100 – 10) Rs. 90.
Therefore, the profit on a cost of Rs. 27,000 will be :
27,000 x 10/90 = 3,000

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Terminology of Cost :
 Computation of Profit :
Example (3)
Selling price is Rs. 44,000
Profit is 10% on cost
Solution :
First take cost price as Rs. 100. Then the profit will be 10% on Rs. 100, i.e.
Rs.10. So the selling price will become (100 + 10) Rs. 110.
Therefore, the profit on a selling price of Rs. 44,000 will be :
44,000 x 10/110 = 4,000

Example (4)
Selling price is Rs. 50,000
Profit is 10% on Selling Price
Solution :
First take selling price as Rs. 100. Then the profit will be 10% on Rs. 100, i.e.
Rs.10.
Therefore, the profit on a selling price of Rs. 50,000 will be :
50,000 x 10/100 = 5,000

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