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Module 9. Cost Accumulation 12.11.2012
Module 9. Cost Accumulation 12.11.2012
Cost Accumulation
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Cost Accumulation
Direct /Indirect Cost
Cost Allocation
Cost Apportionment
Cost Driver
Cost Absorbtion
Treatment of Over/Under
absorbed overheads
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Elements of Cost
Direct Indirect
Cost Cost 3
Direct Costs
A cost that can be directly
traced to a particular department
or other subunit of an
organization is called a direct
cost.
e.g.: The cost of materials
required for a particular product
is a direct cost because it can be
directly traced to the product.
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Direct Material Cost Direct Labour Cost
• Includes the cost of • Consists the cost of
materials and the labour that is
reasonable used in the actual
allowances for scrap manufacture of the
and defective units. product or that is
• The cost considered used to provide the
for material include service.
freight and related • It also includes the
charges but exclude cost associated
purchase discounts. with the
nonproductive time
that is considered
unavoidable and
normal.
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Direct Expenses
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Indirect Labour cost
• Includes the costs associated with
quality control, supervision, support cost
associated with manufacturing,
inspection, purchase and receiving costs.
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Indirect Expenses
Other Indirect Expenses include
depreciation on machines and
plant, property taxes, utilities,
carriage outward, etc.
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Cost Centres
• Enable a
business to
identify where
costs are arising
• To manage those
costs more
effectively.
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Cost Centres
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Cost Centres
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Manufacturing
Overheads
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Manufactu
ring
Overheads
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MANUFACTURING COST FLOW
Direct Material
Finished Goods
Manufactu Sold
ring Goods
Overhead Inventory
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Cost Allocation
Cost allocation is the process of assigning
direct costs to a cost centre.
All direct costs are traced to cost centres
through allocation.
Indirect costs (overheads) have to be
assigned to cost centers through cost
apportionment.
The basis on which costs are apportioned
to cost centers is called cost driver.
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Cost
Apportionment
• At this stage, those items of
estimated overheads which
cannot be directly allocated to
various cost centers or
departments are apportioned.
• Apportionment implies the
allotment of proportions of items
of cost to cost centers or
departments. It implies that
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unallocable expenses are to be
spread over the cost centers or
departments on an equitable
basis.
• After this stage, all the overhead
costs would have been either
allocated to or apportioned over
various departments.
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COST DRIVER
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Pre-determined overhead rate
Pre-determined Overhead rate
is a rate, based on budgeted
factory overhead cost and
budgeted activity, which is
calculated before a period begins.
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Treatment of over/under
absorbed overheads in cost
accounting
Application of supplementary
rate: The supplementary rate is
calculated by dividing the under
or over application amount by
the actual base.
In case of under application, by
applying the supplementary rate 32
the uncovered amount will be
adjusted and vice versa.
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Carry forward to subsequent
year: By treating the under or
over absorbed as seasonal
fluctuations, we can carry
forward it to subsequent
accounting year.
This may be transferred to
Overhead Suspense A/c or
Overhead Reserve A/c.
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