COST ANAYSIS AND

COST ASCETAINMENT
Objectives
By the end of the lecture, you should be able
to;
1define the term cost and cost objective
2 explain the primary classification of costs
3 prepare cost sheet account
cost
Cost objective
Cost is the expenditure incurred on resources
that are used to achieve a particular objective.
Resources may be tangible (materials or
machinery).
A cost objective is the reason for which the
resource is exhausted. Cost represents the
amount incurred on, or attributable to, a
“cost objective”.
Cost Analysis
 Costs can be of various types and the same
set of costs may be analyzed in different
ways.
 Under the traditional system of costing, costs

are classified functionally as production and

non-production costs.
Prodution costs

Costs incurred in relation to the operation of a

manufacturing process.
Production costs are sub-classified as:
 Direct material
 Direct labour
 Direct expense
 Production overheads (factory overheads)
 Production or manufacturing costs incurred in

the manufacture of a product are also termed as

product cost
Non Production costs

 All the costs incurred from conceptualization

to sale of a product, other than those
attributable to production activity, inclusive
of administration costs, selling costs,
distribution costs, finance costs and research
and development costs.
 Non-production or non-manufacturing costs

are also known as period costs. These are

costs incurred in relation to a period and not
in relation to a product.
Manufacturing Costs

 The production costs discussed earlier can be

further split into prime costs consisting of
direct material, direct labour and direct
expenses and production overhead costs.
These form the major divisions of production
costs.
MATERIALS COSTS

 Materials that are used_ in producing the

finished product are termed direct materials.
The costs incurred on these can be
IDENTIFIED with the product.
 Material costs may include costs of:
 The ingredients from which the product is
manufactured
 The spares and parts used for completion of
the product
 Primary packing wherever essential in order to
sell the product
 Any material that can be visibly identified in
the final product is a direct material and hence
the cost associated with it is a direct cost.
LABOUR COSTS

 The remuneration paid to workers who are

directly involved in the production process or
the provision of a service is termed LABOUR
COST

 Direct labour costs are computed either on

the basis of the hours of work put in by the
workers or the number of units produced by
them.

DIRECT EXPENSES

 include all expenses other than direct

material or direct labour that are specifically
incurred for a particular product or process
 EXAMPLES INCLUDE
 Royalties and patterns
 Freight or carriage inwards
OVERHEADS

 Overheads are all the indirect costs (material,

labour and expenses) which are not directly
identifiable with a product. Indirect expenses
incurred in a factory and forming a part of
product costs are The production overheads
 Production overhead costs include:
 Indirect materials
 Indirect labour
 Indirect expenses
 Examples include
 Indirect materials - lubricants for machines,

fuel used in a factory

 Indirect labour – factory supervisor’s salary,

support technicians’ wages, material

handlers’ wages
 Indirect expenses - factory utilities, factory

depreciation, factory maintenance and

repairs.
Non Production costs
ADMINISTRATION COSTS
 Any cost incurred for the management or

administration of the business that includes

planning and controlling its operations
EXAMPLE INCLUDE
 Office rent
 Salary of office staff – cleaners, clerks
 Electricity and telephone costs of the office
 Legal fees, audit fees, insurance expense of

office
SELLING COSTS

 Costs incurred in relation to the sale of a

product or rendering of a service and allied
activities are known as SELLING COST
 EXAMPLE INCLUDE
 Sales promotion expenses, showroom

expenses
 Advertising costs such as catalogues,

banners, brochures
 Salaries of sales and marketing personnel,

commissions paid to salesmen

DISTRIBUTION COSTS

 Costs incurred for the transport of goods

from the factory or depot to the customer
and / or the costs incurred for maintaining
the channel of distribution are known as
DISTRIBUTION COSTS
EXAMPLES INCLUDE
 The transportation cost of goods between two

points, namely the receipt point of goods from

production and the delivery point to the customer
 The insurance cost of the goods between this period
 Depreciation on vehicles used for the distribution of

goods
 Fuel used by vehicles in the distribution department
 Repairs and maintenance cost of the above vehicles
 Any cost incurred for the secondary packing
The cost statement

 These various types of costs make up the

total cost of a product. A cost sheet is the
prime document for presenting the costs
according to their function. The
Manufacturing account is prepared using the
following format.
outline
Manufacturing account for the year ended

xxxxx
Direct material
Direct labour or direct wages xxxxx

Direct expenses xxxxx

Prime costs xxxxx

Production overheads xxxxx

PRODUCTION/FACTORY COST xxxxx

Administration cost xxxx

Selling and distribution cost xxxxx

TOTAL COST xxxxxx

Example 1
 The following information relating to a
manufacturing company is given. Calculate
TOTAL COST
Example 1

Stock of Raw Material on 1.1.16 1,12,500

Purchases of Raw Material 2,38,500

Direct labour Wages 80,000
Factory supervisors wages 4,000
Factory expenses 20,400
Canteen cost for factory workers 5,000
Royalties 720
Stock of Raw Material on 31.12.16 1,02,000
solution
Students to work out
Example 2
 The following data relates to Changamire
Limited, a manufacturing concern that sells
its products to regional markets:
Depreciation: Factory machinery 3800

Depreciation :Accounting and office machinery 2000

Canteen costs (2/3 work in production) 6000

Travelling expenses of sales staff 2900

Haulage cost on raw materials 4000

Wages and salaries: Factory (70% is directly in 220 000

manufacturing and 30% to factory supervisors)

Administration staff salaries 72 000

Royalties per unit of production 1 600

Example cont
Other factory indirect expenses 58 100
Raw materials:
Inventory at beginning of year 120 000

Purchases 400 000

Inventory at end of year 160 000

Other administration expenses 42 000

Other distribution expenses 65 000
Interest on loans and overdraft 3 800
 Required:
 PREPARE a cost sheet (statement of cost) of
Changamire Limited cleary showing
 Prime cost (7 Marks)
 Total factory overheads (6 Marks)
 Total production cost (2 Marks)
solution
Opening stock of raw material 112500
Add purchases of raw materials 238500
Less closing stock of raw materials (102500)
Cost of raw materials consumed 249000
Add direct labour 80000
royalties 720
Prime cost 329720
Factory expenses 20400
Canteen cost for factory workers 5000
Factory supervisors wages 4000
Total factory cost/production cost 359120