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 Cost

 Indirect

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

CA P. Kamthekar

5

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.

CA P. Kamthekar

6

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.

CA P. Kamthekar

7

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.

CA P. Kamthekar

8

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)

CA P. Kamthekar

9

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.

CA P. Kamthekar 13

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 Rs. Raw Materials purchased Opening Stock of materials Closing Stock of materials

the value of raw materials consumed. 50,000 10,000 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

CA P. Kamthekar 19

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

CA P. Kamthekar 24

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