Unit-4

Costing Systems
Dr. Shailendra Gangrade
 Costing Systems

• Costing Systems: Elements of Cost, Cost Behaviour, Cost Allocation, OH

Allocation, Unit Costing, Process Costing, Job Costing, Absorption Costing,
Marginal Costing, Cost Volume Profit Analysis, Budgets, ABC Analysis
Technique. Class Discussion: Application of costing concepts in the Service
Secto
 Elements of Cost, Cost Behavior, Cost Allocation, OH Allocation, Unit Costing

• Elements of Cost:
• The elements of cost are those elements which constitute the cost of
manufacture of a product.
• We can broadly divide these elements of cost into three categories. In a
manufacturing organization, we convert raw materials into a finished product
with the help of labor and other services.
• These services are Material, Labor and Expenses.
• Again, we can bifurcate these elements of cost into two categories such as 
• Direct Material and Indirect Material, 
• Direct Labor and Indirect Labor,
• Direct Expenses and Indirect Expenses.
• So
• Direct Material + Direct Labor + Direct Expenses = Prime Cost.
• Likewise
• In-Direct Material + In-Direct Labor + In-Direct Expenses = Overhead cost.
• Again, we can bifurcate the overheads into four categories. They are
• FACTORY OVERHEAD,
• ADMINISTRATIVE OVERHEAD,
• SELLING OVERHEAD AND
• DISTRIBUTION OVERHEAD.
• Direct Material + Direct Labor + Direct Expenses = Prime Cost.
• Prime Cost+ Works or Factory Expenses ( Overhead) = Works or Factory
Cost
• Works or Factory Cost + Administration Overhead = Cost of Production
• Cost of Production + Selling and Distribution Expenses = Total Cost OR
Cost of Sales
 Cost Behavior, Cost Allocation
• Cost Behavior
• Cost behavior refers to the way a company's expenses vary based on changes to the
business.
• If you're interested in a career in the financial industry, it's beneficial to understand
more about cost behavior and how it's managed.
• Why is cost behavior important?
• For financial professionals or project managers who work within a budget, cost behavior
is an important and useful tool. Here are a few reasons cost behavior is important:
• Budget creation: If someone is creating a budget, understanding the types of behavior
certain costs have can help them make budgetary predictions.
• Analysis of cost-volume-profit: Cost behavior also helps calculate cost-volume-profit
(CVP), which is the analysis of how costs and volume impact profit.
• Cost control: Understanding how changes in costs can impact the company can help
managers control costs by making strategic financial decisions from the beginning
 Cost Allocation, OH Allocation, Unit Costing,
• Cost allocation involves
• Cost allocation is the process of identifying, accumulating, and assigning
costs to costs objects such as departments, products, programs, or a branch of
a company.
• When costs are allocated in the right way, the business is able to trace
the specific cost objects that are making profits or losses for the
company.
• If costs are allocated to the wrong cost objects, the company may be
assigning resources to cost objects that do not yield as much profits as
expected.
• Types of Costs
• 1. Direct costs
• 2. Indirect costs
• 3. Overhead costs
• Benefits of Cost Allocation :
• 1. Assists in the decision-making process
• 2. Helps evaluate and motivate staff

• 1. Assists in the decision-making process

• Cost allocation provides the management with important data about cost utilization that they can use in making decisions. It
shows the cost objects that take up most of the costs and helps determine if the departments or products are profitable enough
to justify the costs allocated.
• For unprofitable cost objects, the company’s management can cut the costs allocated and divert the money to other more
profitable cost objects.
• 2. Helps evaluate and motivate staff
• Cost allocation helps determine if specific departments are profitable or not. If the cost object is not profitable, the company can
evaluate the performance of the staff members to determine if a decline in productivity is the cause of the non-profitability of
the cost objects.
• On the other hand, if the company recognizes and rewards a specific department for achieving the highest profitability in the
company, the employees assigned to that department will be motivated to work hard and continue with their good
performance
• A unit cost is a total expenditure incurred by a company to produce, store, and
sell one unit of a particular product or service. Unit costs are synonymous with
cost of goods sold (COGS). This accounting measure includes all of the fixed
and variable costs associated with the production of a good or service.
• Unit costing is a method of costing where identical / same /
homogenous products are made on a large scale through
continuous manufacturing. Unit cost is the total expenditure incurred
by the company to produce, store & sell one unit of a company's product.