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8/2/2019 Introduction With Cost Terms
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Introduction With Cost Terms
TASMAC
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Introduction
Types of Cost
o Direct Cost and Indirect Cost
o Period and Product Cost
o Relevant and Irrelevant cost
o Sunk Cost
o Opportunity Cost
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Direct Cost
o Direct Materials
o Direct Labour============
Prime Cost (Sum of Direct labour & Materials)
===========
Manufacturing Overhead============
Total Cost (Sum of Prime & Mnf. Overhead)
Direct & Indirect Cost
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What Is M
anuf
acturing Over
hea
d?
Manufacturing Overhead means itcannot bedirectly associated with the
products/production. So its not variable costFor example:
Rent
Telephone Bills
SecurityStationary
Advertisementand Selling expenses etc
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Product &
Period Cost
Productcostare those whichare associatedwith the goods purchased (formerchandising firms) or produced forresale.
For manufacturing firms these costs arecalculated forinventory valuation. Thesecosts variableinnature.
Periodcosts are those cost thatare not
directly includedininventory valuation.These are not variable innature with the
amount of production.
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R
elevant and Irrelevant CostFordecision makingcosts andrevenues are classifiedasrelevantandirrelevant
Relevantcosts andrevenues are those items which will
change withadecision takenand vice versaEx: Do Not Accept Order Accepted
Materials 100 100
Conversion Cost --- 200
Revenue --- 250------------------------------------------------------------------
Net Cost 100 50
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Sunk CostSunk Costare cost whichare alreadyincurredirrespective of the result ofincurring the cost
ForExample Costinvolvedin Research &Development , Market Research, Pilot Studyfornatural gas & Oil exploration etc
Irrespective of the success or failure of theprojects in R&D, Market Researchandmineral extraction these costs are incurred.Thus these costs are neverrelevantcost for
choosing betweenalternatives
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Opportunity CostThere are some cost thatare notcapturedin the Income Statement. Like
the cost of the opportunity lostdue totakingadecision.
Like a with Rs.3 one canEconomicTimes (ET) or Business Standard (BS).
IfET is purchased , BS cannot bepurchased so the opportunity cost ofpurchasing BS is ET and vice-versa.
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Summary
Income Statement of XYZ as On Sales
- Direct material (Variable innature)
- Direct Labour
- Manf. overhead Period Cost-------------------
COGS (Prime Cost)
- General Expense Period Cost
---------------------Gross Profit (PBDIT)
- Depreciation
------------------------
PBIT
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What Are Not Me
asured/
Stated
Directlyin Reports
Opportunity Cost
Since this cost does not impact the profit ofthe organization thus it is not taken in toaccount while calculating profit
Relevant / Irrelevant Cost
In the Income statement both irrelevant andrelevant cost are mixed. One has to decidewhich one is relevant or not
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Cost
Manufacturing Cost Non-Manufacturing Cost
Material Labour Overhead
Work in ProgressFinished
Goods
P&L
Accounts
One Way of Looking At costing /
Absorption Costing
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Cost
Manufacturing Cost Non-Manufacturing Cost
Material Labour Overhead
Fixed
Overhead
Variable
Overhead
Work in ProgressFinished
Goods
P&L
Accounts
Another Way of Looking
At Cost / Variable Costing
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