Cost Accounting

An Ìntroduction
Ìntroduction
· Cost is a measurement, in monetary terms, of
the amount of resources used for the purpose of
production of goods or rendering services.
· Cost is the amount of actual or notional
expenditure relating to a product, job, service,
process or activity.
· Cost is often used as a generic term to describe
various types of costs.
· Costing is the technique and process of
ascertaining costs.
Ìntroduction
· Cost Accounting is the process of accounting from the
point at which expenditure is incurred or committed to
the establishment of its ultimate relationship with cost
centers and cost units. Ìt includes:
÷ Collecting, classifying, recording, allocating and analyzing costs
÷ Preparation of periodical statements and reports for ascertaining
and controlling costs
÷ Application of cost control methods
÷ Ascertainment of profitability of activities carried out or planned.
· Cost Accounting is the processing and evaluation of
monetary and non-monetary data to provide information
for internal planning, control of business operations,
managerial decisions and special analysis.
Ìntroduction
· Cost Accountancy is 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. Ìt includes the presentation
of information derived there from for the purpose of
managerial decision making.
· Objectives of Cost Accounting
÷ To ascertain cost
÷ To control cost
÷ To provide information for decision making
÷ To determine selling price
÷ To ascertain costing profit
Advantages of Cost Accounting
· Helps in ascertainment of cost
· Helps in control of cost
· Helps in decision making (make or buy, retain or replace, continue
or shut down, accept or reject orders, etc)
· Helps in fixing selling prices
· Helps in inventory control
· Helps in cost reduction
· Helps in measurement of efficiency
· Helps in preparation of budgets
· Helps in identifying unprofitable activities
· Helps in identifying material losses
· Helps in identifying idle time, idle capacity
· Helps in improving productivity
· Helps in cost comparison
ssentials of a Good System
· Suitability ÷ to the nature of business
· Tailor made system ÷ to meet requirements of the business
· Simplicity ÷ easy to understand and simple to operate
· conomical ÷ to install and operate
· Flexibility ÷ to adapt to the changing business needs
· Accuracy ÷ must provide accurate information
· Promptness ÷ of information
· Support of staff ÷ must have staff co-operation and participation
· Cost control ÷ must ensure cost control in various fields
· Clearly defined Cost Centers ÷ least ambiguity
· Detail ÷ give relevant details but avoid unnecessary detail
Cost Concepts
· Cost Unit ÷ Ìs a unit of product, service or time in terms of which
costs are ascertained or expressed. Ìt is a unit of measurement.
· Responsibility Centers ÷ is the unit or function of an organization
under the control of a manager who has direct responsibility for its
performance. .g. Cost Center, Revenue Center, Profit Center,
Contribution Center, Ìnvestment Center.
· Cost Center ÷ Ìs a location, person or item of equipment for which
costs may be ascertained and used for the purposes of cost control.
· Types of Cost Centers:
÷ Personal Cost Center ÷ person or group of persons
÷ Ìmpersonal Cost Center ÷ location or equipment
÷ Production Cost Center ÷ where actual production takes place
÷ Service Cost Center ÷ departments which render service to other cost
centers
· Cost Object ÷ any product, service, process or activity for which a
separate measurement of cost is required.
Financial & Cost Accounting
No. Basis FinanciaI Accounting Cost Accounting
1. Objective
Financial performance and
position
Ascertain cost and cost control
2. Costs and profits
Shows overall costs and profit /
loss
Shows details for each product,
process, job, contract, etc
3. Control / Report mphasis on reporting
mphasis on control and
reporting
4. Decision making Limited use Designed for decision making
5. Responsibility Does not fix responsibility Can effectively fix responsibility
6. Time frame Focus on historical data Focus on present and future
7. Type of reports
General reports like P&L
Account, Balance Sheet, Cash
Flow Statement
Can generate special reports
and analysis
8. Legal need Statutory requirement
Voluntary, except for some
cases
9. Transactions Records external transactions
Records internal and external
transactions
10. Reader verybody Ìnternal management
11. Formats Standard, as per law Tailor made
12. Access verybody, except for some Very limited access
13. Unit of value Monetary Monetary and physical

Methods of Costing
No. Costing Method Meaning AppIication
1. Job Costing
A job, product, batch, contract,
service or any specific order is
treated as a cost unit.
ngineering, Construction, Ship
Building, Pharmaceuticals, etc
Contract Costing
For specific orders, contract or
service.
Construction, ngineering, etc
Batch Costing Production is done in batches.
Garments, Pharmaceuticals,
Components, Toys, Tyres,
Tubes, etc
2. Process Costing
Products subject to a process;
output of one process becomes
input for the next process.
Paper, Chemicals, Textiles,
Sugar, etc

Operation
Costing
Type of operations performed is
monitored.
ngineering, Textiles, etc
Unit Costing
Single product, process
involved or where product is
uniform, continuous and
identical.
Cement, Steel, etc
Service Costing For service operations
Transport, Railways, Hotels,
Hospitals, etc.

Multiple or
Composite
Costing
Application of two or more
costing methods. Ìnvolves
manufacturing and assembly
operations.
Vehicles, Consumer Goods, etc

Costing Techniques
No. Costing Technique Description
1. Marginal Costing
Charging variable costs to operations, processes or products
and writing off all fixed costs against profits in the period in
which they arise.
2. Direct Costing
Charging all direct costs to operations, processes or products
and writing off all indirect costs against profits in the period in
which they arise.
3. Absorption Costing
Charging all variable costs and fixed production overheads to
operations, processes or products and writing off selling,
distribution and administration overheads against profits in the
period in which they arise.
4. Uniform Costing
Using the same costing principles and / or practices by a
number of firms in the same industry. Helps in inter-firm
comparison, price fixation, cost control / reduction and seeking
government tax relief / protection.
5. Standard Costing
System which involves fixation of cost standards, ascertain
variances of actual cost with standard cost, variance analysis
and presentation for corrective action and decision making.
6. Budgetary Control
System which involves establishment of budgets, comparison
of actual with budget, variance analysis and corrective action.
7. Historical Costing Actual cost ascertained after it has been incurred.

Cost Treatment
· Cost Ascertainment is the process of determining actual
costs after they have been incurred.
· Cost stimation is the process of determining future
costs in advance before production starts, on the basis
of actual past cost adjusted for anticipated future
changes.
· Cost Allocation is the process of charging the full amount
of an individual item or cost directly to the cost center for
which the item of cost was incurred.
· Cost Apportionment is the process of charging the
proportion of common items of cost to two or more cost
centers on some equitable basis.
· Cost Absorption is charging cost from cost centers to
products or services by means of a pre-determined
absorption rate.
Cost Classification
CIassification Meaning ExampIe
By Nature or EIement
Direct Material Cost
Which can be directly allocated to a
product, job or process
Basic raw material,
primary packing material
Ìndirect Material Cost
Which cannot be directly allocated to a
product, job or process
Stores, consumables,
some low value items
Direct Labour Cost
Labour directly engaged for a specific
job, contract or work order.
Shop floor labour
Ìndirect Labour Cost
Labour not directly engaged for a
specific job, contract or work order.
Staff departments
Direct xpenses
All direct costs other than materials
and labour costs.
Processing charges,
machine hire charges,
excise duty, etc
Ìndirect xpenses
All indirect costs other than indirect
materials and indirect labour costs.
Rent, repairs, telephones,
electricity, utility costs,
insurance, depreciation
Factory Overheads
Sum of indirect material, indirect labour
and indirect expenses for the factory.

Administration
Overheads
Sum of indirect material, indirect labour
and indirect expenses for the office.

Selling Overheads
Sum of indirect material, indirect labour
and indirect expenses for selling.

Distribution
Overheads
Sum of indirect material, indirect labour
and indirect expenses for distribution.


Cost Classification
By Function
Production Cost
Sum of direct material, direct labour,
direct expenses and factory overheads.

Administrative Cost
Cost of the Admin Department for the
management of the organization.

Selling Cost
Cost for seeking to create and
stimulate demand and secure orders.

Distribution Cost
Costs for making the packed product
ready for dispatch to recovery of
material for recycling, if any.

Research Cost
Costs for developing new or improved
product / application.

Pre-Production Cost Cost of trial run or production.
By ReIation to Cost Center
Direct Cost
Sum of direct material, direct labour
and direct expenses of the Cost
Center.

Ìndirect Cost
Sum of indirect material, indirect labour
and indirect expenses of the Cost
Center. Also called as Overhead Cost.
This cost is apportioned
to the Cost Center.

CIassification Meaning ExampIe

Cost Classification
By Variability / Behaviour
Fixed Cost
Costs that do not vary with the volume
of production.
Rent, insurance, salary
Variable Cost
Costs that vary directly with the volume
of production.
All direct costs, variable
overheads
Semi-Variable / Semi-
Fixed Cost
Costs where one part remains fixed in
a given range and the other part varies
with volume of production.
Telephones, electricity
By ControIIabiIity
Controllable Cost
Costs that can be influenced by a
decision maker at a particular level.
Direct costs
Uncontrollable Cost
Costs that cannot be influenced by a
decision maker at that particular level.
All costs can ultimately be
controlled at the top.
By NormaIity
Normal Cost
Cost that is normally incurred at a level
of operation.
Cost as per standard
Abnormal Cost
Cost that is not normal at the level of
operation.
Abnormal loss, abnormal
idle time

CIassification Meaning ExampIe

Cost Classification
By Ìnventory
Product Cost Cost that is absorbed to value of stock Manufacturing costs
Period Cost Cost that are expensed out. Fixed costs
xpired Cost
Costs incurred for generating revenue.
xpensed cost.
COGS, admin expenses
Deferred Cost
Unexpired cost, capitalized cost,
deferred revenue expenditure ÷ would
provide benefits in future periods.
Fixed assets, prepaid
expenses, R&D expenses
By Time
Historical Cost
Actual cost ascertained after it has
been incurred.

Pre-determined Cost
Future cost ascertained in advance ÷
could be standard or estimated cost

Standard Cost
What the cost should be - based on
engineering specifications and efficient
operating conditions
Standard material and
labour costs
stimated Cost
What the cost will be - estimated on the
basis of past experience adjusted for
anticipated changes.
Projection for actual
material cost for next year

CIassification Meaning ExampIe

Cost Classification
By Decision Making
Relevant Costs
Cost that is relevant for making the
underlying decision.

Ìrrelevant Costs
Cost that is not relevant for making the
underlying decision.

Sunk Costs
Historical or past cost already incurred
and cannot be changed.

Shut-Down Costs
Fixed costs to be incurred even when
the plant is shut down.

Out of Pocket Costs Costs that involve cash outlay.
Opportunity Costs
The value of sacrifice made in
accepting an alternate course of action.

Ìmputed Costs
Notional costs that do not have a cash
outlay, are similar to opportunity cost.
Rent of own premises,
interest on own capital
Differential Costs
Ìncrease or decrease in cost due to
change in activity level. Also called
incremental cost.

Marginal Cost
Total variable cost attributable to one
unit of product. Ìncremental cost of
making one unit of product.

Replacement Cost Current cost of an identical asset.
Conversion Cost
Cost of converting raw material into a
finished product.

Committed Costs
Costs that are committed and have to
be incurred.

Discretionary Costs Costs that can be avoided.

CIassification Meaning ExampIe

Cost Audit
· Cost Audit is the verification of cost accounts and a check on the
adherence to the Cost Accounting plan. Ìt comprises of verification
of the cost records and ensuring that they adhere to the principles of
cost accounting.
· Purpose of Cost Audit are protective (examine undue wastage /
losses to reflect realistic cost of production) and constructive
(provide information for management decision making).
· Ìtems excluded from Cost Accounts ÷ items of financial nature like
Other Ìncome, Finance Costs, Financial Accounting adjustments
and appropriations. These include profit on sale of fixed assets /
investments, interest income / expense, dividend / rent income,
preliminary expenses written off, tax, cash discount, provision for
doubtful debts, etc.
Cost Components
No. Cost Component Description
1. Prime Cost
Direct Material Cost + Direct Labour Cost + Direct xpenses
(Direct Material Cost = Opg. Stock of RM + Net Purchase Cost
÷ Clg. Stock of RM)
2.
Works or Factory
Cost
Prime Cost + Factory Overheads + Opg. Stock of WÌP ÷ Clg.
Stock of WÌP
3.
Cost of Production
or Cost of Goods
Produced
Factory Cost + Admin Overheads
4. Cost of Goods Sold Cost of Production + Opg. Stock of FG ÷ Clg. Stock of FG
5. Cost of Sales Cost of Goods Sold + Selling & Distribution Overheads

Costing P&L Account
No. ParticuIars Amount Per Unit
A
Direct Material Cost
= Opening Stock of Materials
+ Purchases
+ xpenses on Purchases
- Purchase Returns
- Closing Stock of Materials
- Value of Normal Scrap of Direct Materials
(on number of units produced)
B
Direct Labour Cost
= Direct Labour Cost Paid
+ Outstanding / Payable
- Prepaid
(on number of units produced)
C Direct xpenses (on number of units produced)
D Prime Cost = (A + B + C) (on number of units produced)

Works / Factory Overheads
= Factory Overheads Paid
- Value of Normal Scrap of Ìndirect Materials
+ Opening Stock of WÌP
- Closing Stock of WÌP
(on number of units produced)
F Works or Factory Cost = (D + ) (on number of units produced)
Costing P&L Account
No. ParticuIars Amount Per Unit
G Office and Admin xpenses (on number of units produced)
H Cost of Goods Produced = (F + G) (on number of units produced)
Ì
FG Stock Adjustment
+ Opening Stock of FG
- Closing Stock of FG
J Cost of Goods Sold = (H + Ì) (on number of units sold)
K Selling & Distribution xpenses (on number of units sold)
L Cost of Sales = (J + K) (on number of units sold)
M Profit (on number of units sold)
N Sales = (L + M) (on number of units sold)
Material Cost
Fundamentals
Material Cost
· Material Cost can be Direct and Ìndirect
· Direct Materials are those which can be
identified with and directly allocated to the
product, job or process.
· Ìncludes basic material and primary packing
material
· Ìndirect Materials are those which cannot be
easily identified with and directly allocated to the
product, job or process.
· Ìncludes stores, consumables, small value
materials
Direct Material Cost
· The total direct material cost includes:
÷ Purchase price
÷ Customs Duty, xcise Duty, VAT, CST, Octroi
÷ Ìnward freight
÷ Ìnsurance
÷ Directly attributable expenses like packing expenses,
inspection, storage, delivery, etc
÷ (Less) Volume or Trade Discounts
÷ Rebates, Duty Drawback, MODVAT, Subsidies, etc
÷ (Less) Cost of containers recovered on return
Objectives of Material Control
· Avoid under stocking or shortages
· Avoid over stocking and obsolescence
· nsure proper quality from reliable sources
· xplore alternate sources and reduce cost
· Reduce total cost of materials, including
ordering and carrying costs
· Avoid wastages and losses in storage and use
· Maintain proper inventory records
· Provide information for decision making
Requirements for Material Control
· Proper co-ordination
· Proper purchase system
· Proper storage system
· Proper issue system
· Perpetual inventory system
· Continuous stock taking system
· Budgetary control system
· Proper documentation
· Proper accounting system
· Proper reporting system
Documents for Materials
· Purchase of Materials
÷ Bill of Materials (BoM)
÷ Purchase Requisition
÷ Supplier Selection
÷ Purchase Order
÷ Goods Received Note
÷ Ìnspection Note
÷ Return of Rejected Material
÷ Bill Passing
÷ Making Payment to Supplier
· Ìssue of Materials
÷ Bin Card
÷ Stores Ledger
÷ Material Requisition
÷ Material Return Note
÷ Material Transfer Note
Material Losses
· aste ÷ portion of raw material lost during processing or storage, having no
recovery value
· Arises due to shrinkage, evaporation, chemical reaction, etc
· Scrap ÷ incidental residue manufacturing operations usually of small
amount and low value recoverable without further processing
· Arises due to processing of material, defective or broken parts and
obsolescence / abortion of development projects
· Defective ork ÷ work that has some imperfections which can be rectified
by additional material or processing
· Arises due to improper product design, bad raw material, poor
workmanship, inadequate supervision, improper material handling, defective
machinery or improper training
· SpoiIed ork ÷ work that cannot be reconditioned or brought to standard
and must be sold as scrap or "seconds¨
· Arises due to improper product design, improper machinery or process
used, improper material quality or untrained operators
· NormaI Loss is charged to the particular job or as production overheads
· AbnormaI Loss is charged to Costing Profit & Loss Account
Controlling Material Loss
· Proper product design
· Proper selection of manufacturing process
· Proper selection of machinery & equipment
· Proper process control
· Proper storage and material handling
· Trained manpower
· Proper record keeping
· Proper control system having scientific standards
· Proper reporting system
· Defined accountability
· Corrective action
Materials Ìssue Pricing
· Cost Price Methods
÷ FÌFO (First Ìn First Out)
÷ LÌFO (Last Ìn First Out)
÷ HÌFO (Highest Ìn First Out)
÷ Base Stock Price
· Average Price Methods
÷ Simple Average
÷ Weighted Average
÷ Periodic Simple / Weighted Average
÷ Moving Simple / Weighted Average
· Notional Price Methods
÷ Standard Price
÷ Ìnflated Price
÷ Replacement or Market Price
· Weighted Average and FÌFO Methods are used in Accounting
Ìnventory Control
· Ìnventory is tangible property or assets held
÷ for sale in the ordinary course of business or
÷ in the process of production for sale or
÷ for consumption in the production of goods or services for sale including
maintenance supplies and consumables other than machinery spares
· Ìnventory comprises of raw materials, stores & spares, work-in-process and
finished goods
· Ìnventory control includes planning, organizing and controlling purchase and
storage to ensure availability in terms of quantity, quality, timeliness at least
cost
· Monitoring level of inventory with respect to production and sales
· Releasing material in a systematic manner to ensure quality at least cost
and reduce wastage / obsolescence
· Analyze inventory levels and suggest optimal and alternate uses of material
including value engineering
· nsure physical stock taking to avoid pilferage
· Provide information for inventory valuation
Techniques of Ìnventory Control
· ABC Analysis
· conomic Order Quantity (OQ)
· Stock Levels ÷ minimum, maximum, reorder level,
reorder quantity
· Ìnventory Turnover Ratio
· Slow and Non-Moving Ìtems
· Purchase, Storage and Ìssue Procedure
· Two Bin System
· Perpetual Ìnventory Records and Continuous Stock
Verification
· Budgetary System
ABC Analysis
· A: 70% value, 10% items
· B: 20% value, 20% items
· C: 10% value, 70% items
· nsures control on high value items
· Saves time and cost of monitoring
· Reduces total investment in inventory
· Facilitates faster decision making
· Better utilization of resources
· Better physical control of stock
conomic Order Quantity (OQ)
· Level at which the ordering and carrying costs are
minimum. At OQ, the ordering and carrying costs are
equal.
· Ordering Cost includes costs for placing an order,
transportation, receiving goods and inspecting goods
· Ordering Cost reduces with order size
· Carrying Cost includes costs for storage space, handling
materials, insurance, obsolescence and personnel.
· Carrying Cost increases with order size
· Dependent on periodicity and annual material
consumption
· OQ determines quantity to be ordered at a given time
OQ Technique
· Assumes prior knowledge of annual usage, constant usage rate,
constant ordering cost, constant carrying cost and zero lead /
delivery time
· OQ can be determined by graphical, tabular or formula method
· Find the level at which total of ordering and carrying cost is least or
ordering cost equals carrying cost
· OQ = \(2AO / C) where A = Annual Consumption, O = Ordering
Cost per order and C = Carrying Cost per order
· OQ = \(2AO/ÌP) where Ì = Ìnventory or Stock Holding Cost (as %
of average stock value) and P = Price per unit
· conomic Order Frequency (in days) = 365 / (Number of orders per
year)
· Total annual ordering and carrying cost at OQ = \(2AOC)
Stock Levels
· Maximum Stock Level is the maximum stock
level that can be held in store.
· Ìt avoids cost of over-stocking such as costs for
storage, investment, insurance and risk of
obsolescence
· Dependent on reorder level, reorder quantity,
rate of consumption, reorder period, availability
of funds and storage space, cost of storage,
insurance, obsolescence, price fluctuation, etc
· Formula: Maximum Level = Reorder Level +
Reorder Quantity ÷ (Minimum Consumption x
Minimum Reorder Period)
Stock Levels
· Minimum Stock Level is the level below which the stock
should not be allowed to fall
· Dependent on reorder level, rate of consumption and
reorder period
· Formula: Minimum Level = Reorder Level ÷ (Normal
Consumption x Reorder Period)
· Reorder Level is the level of stock at which fresh
replenishment order should be placed
· Dependent on consumption rate, reorder period and
minimum level
· Formula: Reorder Level = Maximum Consumption x
Maximum Reorder Period OR Minimum Level + (Normal
Consumption x Reorder Period)
Stock Levels
· Average Stock Level = Minimum Level + ½ Reorder
Quantity OR (Minimum Level + Maximum Level) / 2
· Danger Level is the level at which only emergency
material issue is done (normal material issue is stopped)
· Ìt is a level at which urgent ordering action is required
· Ìf Danger Level is below Minimum Level, urgent
corrective action is required
· Ìf Danger Level is above Minimum Level, it calls for
preventive action
· Dependent on rate of consumption and reorder period
· Formula: Normal Consumption Rate x Maximum
Reorder Period for emergency purchases
Ìnventory Turnover Ratio
· Ìndicates the speed with which inventory is consumed
· A high ratio indicates fast moving stock, low ratio
indicates slow moving stock
· Ìnventory Turnover Ratio = Materials Consumed /
Average Stock Held expressed in "times¨
· Materials Consumed = Opening Stock + Purchases ÷
Closing Stock
· Average Stock = ½ (Opening Stock + Closing Stock)
· Days of Ìnventory = 365 / Ìnventory Turnover Ratio
· Can be computed for stock categories to determine fast
moving, slow moving, dormant or obsolete stock
· Ìdeal level is determined with reference to level of other
firms or the industry average
Other Techniques
· Two Bin System ÷ Bin has two parts, the smaller one for
reorder stock level and the other for the remaining
material
· Ìssues are made from the larger bin, fresh order placed
when it become empty, material used from smaller bin till
replacement received and filled
· Periodic Ìnventory System ÷ Physical stock taking done
periodically, requiring shut down
· Records then physically reconciled
· Perpetual Ìnventory System ÷ Records updated at every
receipt and issue
· Done using bin cards and stores ledger
· Continuous stock taking done by random checks of the
bin cards and stores ledger
Labour Cost
Fundamentals
Meaning
· ssential factor of production
· A human resource that participates in the
process of production
· Two Categories ÷ Direct & Ìndirect Labour
· Labour Cost controlled by:
÷ Personnel Department
÷ ngineering / Work Study Department
÷ Time Keeping Department
÷ Payroll Department
÷ Cost Accounting Department
Labour Cost Control
· Manpower requirement assessment
· Time and Motion Study
· Job valuation and Merit Rating
· Labour Productivity
· Wage Systems
· Ìncentive Systems
· Time Keeping and Time Booking
· Labour Turnover
· Casual and contract workers
Time Keeping
· Statutory attendance record
· Maintain discipline and punctuality
· Payroll preparation
· Ascertain Overtime
· Ascertain Ìdle Time
· Ascertain Labour Cost
· Provide basis for apportionment
· Control Labour Cost
· Maintained using Attendance Register / Muster,
Token / Disc Method and Time Clocks / Clock
Card
Time Booking
· Records time spent by each worker on various
jobs / orders / processes
· Methods:
· Daily Time Sheet
· Weekly Time Sheet
· Job Card or Job Ticket
· Time and Job Card
· Labour Cost Card / Circulating Job Card
· Piece Work Card
Labour Turnover
· Rate of change in the composition of labour force due to
retirement, resignation or retrenchment
· Defined as the number of workers left or replaced or
both in relation to the average number of workers
· Turnover due to personal, avoidable and unavoidable
causes
· Cost of Labour Turnover consists of Preventive Cost and
Replacement Cost
· Preventive Cost ÷ personnel administration, medical &
health care, welfare measures, wage & retirement
benefits
· Replacement Cost ÷ personnel department expenses,
training of new workers, initial inefficiency, initial
breakages and defectives, time lag in recruitment,
Labour Turnover Measurement
· Measurement by Separation Rate Method, Replacement
Rate Method, Flux Method
· Separation Rate Method: Number of Separations /
Average Number of Workers x 100
· RepIacement Rate Method: Number of Replacements
(not normal additions) / Average Number of Workers x
100
· FIux Method: (Number of Separations + Replacements)
/ Average Number of Workers x 100
OR
(Number of Separations + Accessions i.e. all
Recruitments) / Average Number of Workers x 100
Types of Labour Cost
· Overtime Cost:
÷ Customer requested, charged to specific job
÷ For increased production, charged to total production
÷ Abnormal overtime, charged to Costing P&L Account
· Ìdle Time:
÷ Normal Ìdle Time, charged to the product
÷ Abnormal Ìdle Time, charged to Costing P&L Account
· Casual Workers, charged to specific job or as production
overhead based on work done
· Out-Workers (who do the work in their premises)
normally supply based on piece rate
· Outside Workers (outdoor duty) should be monitored to
ensure adequate time booking
Types of Labour Cost
· Attendance Bonus are part of wages and treated
accordingly
· Shift Premium, charged same as Overtime Cost
· Fringe Benefits are part of wages and treated
accordingly
· Apprentice Wages, charged as production overhead
· Holiday / Vacation Pay, charged as overhead or
accounted in an inflated rate
· Leave with pay, accounted in an inflated rate
· mployer's contribution to employee insurance, charged
as production overhead
Ìncentive Wage Plans
· Premium Bonus Plan - Halsey Plan, Halsey Weir Plan,
Rowan Plan, Barth Plan
· Differential Piece Work - Taylor System, Merrick System
· Combination of Time and Piece Work - merson's
fficiency Plan, Gantt Task and Bonus Plan, Points
Scheme (Bedeaux Plan, Haynes Plan), Accelerated
Premium Plan
· Group Ìncentive Plans ÷ Priestman's Production Bonus,
Rucker Plan, Scalon Plan, Towne Gain Sharing Plan,
Budgeted xpenses Bonus
· Ìncentives for Ìndirect Workers
· Profit Sharing
· Co-Partnership
Premium Bonus Plans
· Halsey Plan: standard time fixed for each work,
guarantees hourly wages for actual time taken, bonus of
50% paid if time saved
arnings = Time Rate Wages + Bonus
= Actual Time Taken x Time Rate + 50% (Time Saved x
Time Rate)
· Halsey ÷ Weir Plan: same as Halsey Plan except bonus
is 33½% compared to 50% in Halsey Plan
· Rowan Plan: same as Halsey Plan except bonus is a
proportion ÷ (Time Saved / Time Allowed) x Actual Time
Taken x Time Rate
· Barth Plan: Designed for trainees, beginners and slow
workers. arnings = Time Rate x \(Standard Hours x
Time Taken)
Differential Piece Rate System
· Lower and higher production rates are defined
· Taylor's System:
÷ Production < standard output: arnings are 80% of
normal
÷ Production = or > standard output: arnings are
120% of normal
· Merrick's System:
÷ Production < 83% of standard output: arnings are
100% of normal rate
÷ Production > 83% and < 100% of standard output:
arnings are 110% of normal rate
÷ Production > 100% of standard output: arnings are
120% of normal rate
Combination Plans
· merson's fficiency System:
÷ Up to 66Ǡ% efficiency, nil bonus
÷ More than 66Ǡ% and < 100% efficiency, bonus on
step basis (32 bonus steps defined)
÷ More than 100% efficiency, bonus @ 20% of basic
wages + additional bonus @ 1% for each 1%
increase in efficiency
Gantt Task and Bonus System:
÷ Less than standard output, no bonus
÷ At standard output, 120% of time rate
÷ More than standard output, 120% of piece rate
Combination Plans
· Bedeaux System or Points Scheme:
÷ Points awarded for each unit of production
÷ Up to standard time, no bonus
÷ Ìf time saved, bonus of time saved is given 75% to worker and
25% to foreman
· Haynes System
÷ Job expressed in standard man-minutes
÷ For repetitive work, time saved is shared between worker and
foreman in 5:1 ratio
÷ For non-repetitive work, time saved is shared between worker,
employer and foreman in 5:4:1 ratio
· Accelerated Premium System
÷ Bonus rate increases with output
Group Ìncentive Plans
· Priestman's Production Bonus:
÷ Bonus paid in proportion to production in excess of
standard output per week
· Rucker Plan
÷ Also known as Cost Saving Sharing Plan
÷ Bonus = fixed proportion of value added (sales ÷
purchased materials & services)
÷ Ǡ of the monthly bonus is paid out, balance
transferred to reserve fund
· Scalon Plan
÷ Similar to Rucker Plan except that bonus is linked to
ratio of direct labour cost to sales value
Group Ìncentive Plans
· Towne Gain Sharing Plan
÷ Bonus calculated as 50% of direct labour
hours saved
· Budgeted xpenses Bonus
÷ Bonus determined as a fixed percentage of
savings in actual expenses over the budgeted
expenses
Ìncentives for Ìndirect Workers
· For expense and service cost centers
· Creates goodwill, fosters teamwork and
increases efficiency
· Measuring or relating indirect work to production
is difficult
· stablish standards for measurable and
repetitive activities
· Generally clubbed under group incentive plans
· Two Types: Monetary & Non-Monetary
Profit Sharing
· Based on overall business prosperity and
is over and above other benefits
· Types: Cash Plan, Deferred Credit Plan,
Combined Plan
· Minimum bonus for eligible workers
determined under Payment of Bonus Act
· Discretionary bonus for all determined by
the management
· Paid on a flat percentage or on slab rates
Direct xpenses
Basics
xamples
· Cost of designs, drawings, technology, royalty,
patent fees, tools, jigs, fixtures for the job
· Special services for layout, machining, testing
related to the job
· Fees paid to architect, consultant, surveyor,
insurance, freight, hire charges for special tools
or equipment related to the job, sub-contracting
charges
· Generally considered as direct overhead and
then allocated to the job or product

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