Meaning & cost sheet

DR. Teena Shivnani

Cost The amount of Expenditure incurred on or

attributable to a given thing.

Cost represent resources that have been or must be sacrificed to attain particular objectives.

Cost is a measurement in monetary terms of the amount of Resources used for the purpose.

May 2, 2023 Cost Accounting / Dr. Teena 2

Costing “Costing is the technique and process of

calculating cost.”

“The proper allocation of expenditure and involves the collection of costs for every order, job process, service or unit.”

Thus costing simply means cost finding by any process or technique.

Cost of Manufacturing a Product + Cost of providing services.


Cost Accounting The method of accounting of material, labour

for manufacturing a product.

Cost accounting is a formal system of accounting for costs.

“Cost accounting is defined as a system of recording in accounts of the material used and labour employed in the manufacturing of a commodity.”


Cont…..“Cost accounting is the process of accounting

for cost which begins with the recording of income and expenditure and end with the preparation of statistical data.”

Cost accounting means a specialized application of the principal of accounting in order to ascertain the cost of producing and marketing any unit of manufacturing.”


Cost Accountancy


Costing Cost Accounting

Cost Control

Cost Audit

Cost AccountancyCost Accountancy ““The application of costing and cost accounting principal, methods and techniques of the science arts & practice of cost control.”

Cost Control Besides the ascertain the cost, the aim of cost

accounting is also to control the cost.

To achieve this aim, standard cost or budgeted cost is determined before starting the production.

During the process of production efforts are made that the actual cost of the items does not exceed the pre-determined standard or budgeted cost.


Cost Audit “Cost Audit is the verification of cost accounts

and a check on the principal to the cost accounting plan.”

Audit is described as the verification of accounts so as to calculate their accuracy.

Cost audit is the specific application of auditing principals and procedure in the field of cost accounting.

It is an audit of efficiency and details of expenditure.


Costing v/s Cost Accounting “Costing is the technique and process of

calculating cost.”The method of accounting of material, labour

for manufacturing a product. Cost accounting is a formal system of

accounting for costs.


Financial Accounting V/S Cost Accounting Both CA & FA are concern with systematic

recording & presentation of Financial Data.

FA is concern with the calculation of profit / loss earned by business. In CA detailed cost and profit data of various parts of business like departments, products etc. are calculate.

The main purpose of CA is to provide detailed cost information to management.


Nature of Cost a/c Cost accounting is the Science, Art, and

Practice of cost accountant. Science:- as science is based on rules,

principals similarly cost accounting is also based on rules, and principals.

Art:- it is art because it is based on specific techniques, methods which will be used according to the knowledge of accountant.

Practice:- CA is a practice because along with theoretical knowledge it requires practical training so that accountant can do his duties perfectly.


Objective 1. Calculation of cost 2. Cost control and cost reduction 3. Guide to business policy 4. Determination of selling price


Elements of CostsA cost is a combination of three elements:-

Material + Labour + Expenses


Direct Cost Indirect Cost

Total Cost

Indirect Material

Indirect Labour

Indirect Expenses

DEDL DM

Material Cost It is Cost of commodities supplied to an

undertaking for the production purpose.

MC = Cost of procedure (Pur.) + freight inward + Municipal Taxes + Material Insurance etc.


Types of Material Cost Direct Material cost:- DM cost is that which can be identify with and allocation to cost unit. It is become a part of finish product. E.g. cotton used in textile mill, steel in machines etc.

Indirect Material Cost:- the expenses incurred on those material which are not directly chargeable to production are known as IM. The amount of these exp. are small but they are important in production process. E.g. coal, oil, pins, nuts, thread.


Labour Cost For conversion of material into finished

goods human effort is needed, such human effort is called labour.

The cost of remuneration of the employees an industries.” (salary, wages, bonus etc.)

LC = it includes all provident fund, gratuity, Idle time, wages for holiday, salary etc.


Types of Labour Cost Direct Labour Cost :- DL cost means

the cost which is directly related to production activity.

E.g. wages, salary.

Indirect Labour Cost :- it is a general labour cost but it is not directly linked with production process. It is helpful in production process.

E.g. storekeeper salary, watchmen, administration exp. etc.


Expenses All costs other than material & labour are

termed as expenses.

The cost of services provided to an undertaking and the cost of the use of owned assets is known as expenses.

E.g. Dep., any type of loss of material, Rent of business. Premises, office expenditure etc.


Types of Expenses Direct Expenses:- These are expenses which can be directly allocated to specific cost centers or cost units.

DE are something also described as “chargeable expenses.”

E.g. Hiring charges, Job Processing, Depreciation, Royalty etc.


Indirect Expenses Expenses which cannot be allocated to cost

unit but they are part of production process.

These expenses are necessary to run a production process.

E.g. lighting, Electricity, Insurance, Repair etc.


Overhead The term overhead includes Indirect material

, Indirect labour, Indirect expenses.

Thus all indirect costs are overheads.


Overheads

Factory O / H, Manuf. O/H , Production O/ H

Office & Adm.O / H Sales & Distribution O / H

Factory / Production O/ H Factory or works where production is done.

It includes all, which is indirectly linked with production process. (IM, IL, IE)

Example:- IM = oil, lubricants etc. IL = gate keeper salary, store keeper etc. IE = factory rent, factory insurance, factory

lighting etc.


Administrative O / H

Office & administration means it is place where routine as well as policy matters are decided.

This indirect expenses includes general administrative expenses.

These expenditure are require to run a office. It means all office expenses.


Selling & Distribution O / H Selling & distribution, where products are

sold and finally dispatched to the customer.

Selling overhead means which is incurred for promoting sales, increase sales, motivate customers.

Distribution overhead are those which start after production process. It is related for distribution of finish goods to customers.


Components of Total Cost


DM + DL + DE

Prime cost +

Works overhead

Works cost +

office overhead

Cost of production +

Selling overhead

Prime Cost / Direct cost

Works or Factory cost

Cost of Production

Cost of sale or Total cost

Types of costs Direct cost :- these are those costs which are

incurred for and conveniently identified with a particular cost unit, process, or department. The cost which is directly linked with production process. E.g. RM, wages, cost of steel etc.

Indirect cost:- it is a general cost and are incurred for the benefit of a number of cost unit. It is incurred for group of unit. It cannot be identified with a particular cost unit. E.g. Depreciation, Rent, Salary etc.


Cont……..Period cost :- It is a fixed cost item it is not

necessary for production and incurred even if there is no production. These are written off as expenses and are charged to P&.L. a/c of the period.

Opportunity cost:- it is a cost that measure the benefit that is lost or sacrificed when choice of one course of action require that other alternative course of action be given up.

E.g. company deposit 100000 in bank @ 10% interest p.a. now second proposal is to invest this amount in debentures (1000 17% deb. @ 100/-)

Solution :- if company invest 1Lakh in deb. then 17000 – 10000 = 7000/- will be opportunity cost.


Cont…….Replacement cost:- in simple words,

replacement cost is the current market cost of replacing an assets.

e.g. machinery purchase 1990 at rs. 10,000/- and sale in 1998 & new machinery purchase rs. 15,000/- so the replacement cost of Rs. 15,000/.

Marginal cost:- MC is the additional cost of producing one additional unit. MC or VC is the same thing. Marginal Costing is a technique of charging only variable costs to products. It helps in decision like make or buy, pricing of product etc…


Cont.……..Relevant cost :- whenever we use incident word,

that cost is known as relevant cost. The amount which is incurred for any specific objective.

It is not depend on situation. In one case a cost may be relevant but in another case the same cost may be not relevant.

Irrelevant cost:- the cost which was not effected by any decision. It means decision will not effect the cost.

E.g. Journey decision (by own car, bus, train etc.). In this example traveling exp. will not effect your decision.


Cont…….Sunk cost:- A sunk cost is an expenditure

made in the past that cannot be charged and over which decision will not effected.

These cost are not relevant decision making about the future. It is cost which is invested by firm in their fixed assets which will not effect the future decision.

E.g. if firm want to purchase new plant, than loss on sale of old plant is sunk cost which will not affect your decision of purchase.


Cont……. Out of pocket costs (Explicit Cost):- there are

certain costs which require cash payment to be made. Out of pocket cost are those costs that involve cash

outlay or require the utilization of current resources.

Imputed Cost:- it is not actual cost but it is calculated for taking correct decision. This is specially computed outside the accounting system for the purpose of decision.

E.g. interest on capital is usually not include in cost. But while taking decision firm is calculating interest.


Cont……..Conversion Cost:- it means:-CC= Per unit cost – Direct material cost Or it means sum of direct labour & factory

overhead cost in the production. Or conversion cost is factory cost – direct

material cost.


DM

DL

DE

Factory O/h

Prime cost

Conversion Cost

PC = DM + DL + DE

CC = DL + DE + F o/h

Cont.……..Product Cost :- these are those cost which are

necessary for production and which will not be incurred if there is no production.

PC = DM + DL + some factory o/h

Normal cost :- Normal cost is a cost which is normally incurred on expected lines during the production.

E.g. manager commission is expected Rs. 5000/- (10% of SP) but it is 6000/- becoz the sale quantity is more.


Cont.…..Abnormal cost:-

It is cost which is incurred due to abnormal reasons.

It is over and above the normal cost and treated as a part of cost of production.

E.g. loss by fire, theft, strike of employees.


Cont.…….Fixed cost :- the cost which is remain constant in

“Total” for a certain time period or up to certain limit.

It is not increase or decrease as per production quantity. Or we can say opposite relationship between cost and production.

E.g. salary, taxes, insurance etc.

U FC F.C. per unit1 20000 200002 20000 1000020 20000 1000200 20000 1002000 20000 10May 2, 2023 Cost Accounting / Dr. Teena 35

Cont.…… It is expenses incurred on fixed factors

which does not change with the change in level of output over a given period of time. E.g. Rent, Interest, Telephone bill etc.

It has no effect with the change in the level of output.

It is also known as indirect cost.


FC

Output

Y

O X

Variable cost :- It is cost tend to vary in direct proportion to

the volume of output. In other words, direct relationship between

cost & production. E.g. Direct material, labour, commission etc…….

Total variable cost increase when quantity of production increase & visa versa.

BUT VARIABLE COST PER UNIT WILL FIXED IN EACH CONDITION.


Cont……………..

Cont……..It is the expenses incurred on variable factors

which change with the change in output over a given period of time. E.g. wages, power, fuel etc.

Initially VC increase at decreasing rate, then constant rate, and ultimately at increasing rate.

It is also known as direct cost.


VC

OutputO

Y

X

Semi variable cost :- The cost which include both fixed and variable components. Up to one limit it is fixed after that it increase as the quantity of production is increase. E.g. Supervisor salary, Telephone expenditure electricity expenses etc.

Shut Down Cost:- There are the costs which will still be incurred although a plant is shut down temporarily. E.g. Rent, rates, depreciation, Maintenance of plant etc.


Controllable & Uncontrollable CostControlled Cost:- costa are said to be controllable when

the amount of the cost incurred can be influenced by the action of a specified member (Manager or Supervisor) of an under taking.

E.g.:- Advertising, Bonuses, Direct materials, Donations

Uncontrollable Costs:- Cost which cannot be influenced by the action of a specified member of an undertaking are known as uncontrollable costs. All most all costs are controllable at some level of Management.

E.g.:- rent that a landlord charges for use of the company's premises.


Audio on Costs


Methods / Types of Costing 1. Job order costing:- This methods applies where work is

undertaken to customers special requirement. Cost unit in job order costing is taken to be a

job or work order for which cost are separately collected and computed.

A job (small or big) comprises a specific quantity of a product as per customer specification.

E.g. Painting, interior decoration etc.


Cont.….2. Single, output or Unit costing:- This method of cost calculation is used when production is uniform and consists of a single or two, three verities of the same product. The cost per unit is found by dividing the cost by no of unit produced. E.g. Brick, steel etc.


Cont……2. Contract Costing :- the difference between

job and contract is that job is small and contract is big. The cost unit here is a contract which is of a long duration and may continue over more than one financial year.

E.g. construction of building etc.

3. Batch Costing :- In this method, the cost of a batch or group of identical products is calculate and therefore each batch of product is a cost unit for which cost are calculate.

E.g. readymade garments, toys, shoes etc.


Cont……4. Process Costing :- Costs are accumulated for each process. Here raw material has to pass through a number

of process in a particular sequence to completion stage. The finished product of one process is passed on to the next process raw material.

In order to arrive at cost per unit, the total cost of process is divided by the no. of units produced.

E.g. textile mills, soap, sugar etc.


Cont…Operating or Service Costing :- it is used in undertaking which provides

services instead of manufacturing product. This method is used for providing social /

public services.

E.g. transport, electricity, hotel, hospital etc.


Cont……

Multiple / Composite Costing :- It is an application of more than one method

of cost calculation with respect of the same product.

This method is used in industries where no of components are separately manufacture and then assembled into a final product.

E.g. manufacturing air conditioner, refrigerator, scooter , car etc.


Techniques of Costing 1. Standard Costing :- This is very valuable techniques of

controlling cost.

In this method standard cost is pre-determined as target of performance and than actual performance measured against standard.

The difference between standard and actual cost are analyzed to know the reason for the difference so that corrective action taken.


Cont.……..Marginal Costing :- In this techniques, separation of cost into fixed cost + variable cost. This is so because marginal costing regards only variable costs. This techniques is used to study the effect on profit of changes in volume or type of output.

Total Absorption Costing :- it is a traditional method of costing whereby total costs are charged to products. This is in complete contrast to marginal costing where only variable cost are charged to product.


Cont.……..Uniform Costing :- It is not a separate technique or method of costing like standard costing. It simply denote a situation in which a number of firms adopt a uniform set of costing principal. This help to compare the performance of one firm with that of other firm. Budgetary Control :- A budget is a firm business plan in financial form and budgetary control is a technique to the control of total expenditure on material wages, and overhead as per business plan.


Class Test What do you mean by Cost, costing, cost

accounting, cost accountancy, cost audit, cost control ?

What are the elements of cost? Discuss in detail.Draw a format of Cost sheet/Total CostDefine the followings:-Opportunity costReplacement CostSunk CostConversion cost Fixed Cost & Variable Cost Job order costingContract costing Multiple Costing Process Costing

Installation of a costing system Steps :- 1. Primary investigation should be made relating

to the technical aspects of the business. 2. The methods of purchase, storage issue,

should be examine and modified as per requirement.

3. The method of honorium / wages of labour should be examine and modified if require as per new plans.

4. Accounting record should be design on minimum clerical labour and expenditure.

5. The size & output of the factory should be studied


Cont…..6. The system should be effective in cost

control and cost reduction. 7. System should be simple and easy to

operate. 8. The installation and operation of system

should be economical 9. The system should be introduced gradually.


Introduction of Unit Cost It is one of important method to calculate total

cost of production. Single or output costing is employed in case of

industries where the production is uniform and Continued affairs.

E.g. breweries; brick works quarries, dairies, cement works, sugar mills, paper mills, etc.

Definition: “Unit costing is a method of costing by the per

unit of production where manufacturing is continuous and the units are identical or can be made so by means of Ratio.”


Uses of Unit Costing When unit costing method is adopted,

statement of cost or cost sheet is prepared for determination of the total cost and the per unit cost of the units produced during a certain period.

Cost sheet is a statement showing total cost of various items under various heads.


Cost Sheet : MeaningCost sheet is a document which provides estimated

detailed cost in respect of a cost centre or a cost unit.

It analyses and classifies in a tabular form the expenses on different items for a particular period.

It may be prepared on the basis of actual data (Historical Cost sheet) or on the basis of estimated data (Estimated cost Sheet).

Ascertainment of future costs and making comparisons with past records helps the management in fixing up the selling price of the products.


Cost sheet Opening stock of RM …….+ Purchases, Carriage Inward ……..- Closing stock of RM …….Cost of raw material consumed ----------Direct labour ………..Direct Exp. ………..

Prime Cost -----------Add:- factory o/h, Production o/h, Manuf. o/h, works o/f Add:- opening stock of WIP ………..Less:- closing stock of WIP ………..

Works cost -----------Add:- office overhead ………..

Cost of ProductionAdd :- opening stock of Finish Goods …………Less:- closing stock of Finish goods ..………..

Cost of Goods sold ----------Add:- Selling overhead ……………

Total Cost/ Cost of Sales ---------------



COST SHEET – FORMAT

Opening Stock of Raw MaterialAdd: Purchase of Raw materials Add: Purchase Expenses Less: Closing stock of Raw Materials

Raw Materials Consumed Direct Wages (Labour) Direct Charges

Prime cost (1) Add :- Factory Over Heads:

Factory Rent, Power Indirect Material Indirect Wages

Supervisor Salary Drawing Office Salary Factory Insurance, Factory Asset Depreciation

Works cost Incurred Add: Opening Stock of WIP Less: Closing Stock of WIP

Works cost (2)


Add:- Administration Over Heads:-Office Rent , Asset Depreciation General Charges, Audit Fees Bank Charges Counting house Salary Other Office Expenses

Cost of Production (3) Add: Opening stock of Finished Goods Less: Closing stock of Finished Goods

Cost of Goods SoldAdd:- Selling and Distribution OH:-

Sales man Commission Sales man salary Traveling Expenses Advertisement Delivery man expenses Sales Tax, Bad Debts

Cost of Sales (5) Profit (balancing figure)

Sales

Factory overhead 1. Cost of cotton waste 2. Machine oil, grease3. Lubricating oil4. Store consumed for repair & maintaince work5. Loss of store items6. Non productive wages, non manufacturing wages7. Salary of foreman8. Salary of store keeper, inspector, supervisor9. Wages of factory watchman10. Salary of works manager11. Fees to technical staff / director12. Cost of idle time of factory labour13. Workman compassion14. Other factory expenses 15. Depreciation on plant


Office overhead 1. Depreciation, repairs 2. Insurance of office furniture , building 3. Salaries of office staff4. Salary and fees of director 5. General manager salary6. Printing, stationary, postage, telephone exp.7. Rent, rates & taxes8. Office lighting, heating & cleaning expenses9. Audit fees 10. Legal expenses , general expenses 11. Establishment expenses 12. Bank charges13. Director traveling expenses14. All other office expenses


Selling overhead 1. Advertisement2. Salary to sales staff 3. Commission on sale4. Brokerage on sales 5. Sales office expenses 6. Salary and commission to sales manager7. Depreciation, maintenance of sales office 8. Decoration expenses of showroom 9. Cost of preparing tender 10. Free sample cost 11. Rent, rates of showroom 12. Stock shortage


Distribution Overhead

1. Rent of warehouse 2. Carriage outward & other transport expenses 3. Depreciation, repair of delivery vans 4. Petrol exp of delivery vans 5. Salary of warehouse staff 6. General packing expenses 7. Wastage of goods in transit 8. Other warehouse expenses


Items not included in Cost 1. Transfer to Reserve & funds 2. Donation & subscription 3. Dividend, income tax4. Underwriting commission5. Preliminary expenses, bonus 6. Interest on debenture7. Bank deposits 8. Gratuity or pension 9. Transfer fees10. Loss by theft, fire 11. Abnormal idle time wages


TREATMENT OF WIP IN COST SHEET While preparing the cost sheet, the amount of

opening & closing stock of WIP should be considered.

If WIP is valued at Prime Cost, these values should be adjusted in the statement in cost sheet after determining the Prime Cost.

The amount of opening stock should be added and the amount of closing stock should be subtracted.


ACCOUNTING OF FINISHED GOODSIn cost sheet, cost of goods produced during a

certain period is calculated. When all the direct expenses, factory overheads

& administrative overheads are added to this cost, it is known as the ‘Cost of Production’.

Cost of production is found for all the goods produced, whether they are sold or not, but in order to find the profit we required the cost of production of those goods only which have been sold.

Cost of Production + O/S of FG – C/S of FG = Cost of Good Sold


Scrap or Wastage In the process of production some units of the

whole production is obtained as wastage or scrap.

In the statement of cost sheet this scrap value should be subtracted from the factory o/h or from factory cost.

If the loss due to scrap or defective units is abnormal then the amount of this abnormal loss is not subtract from factory o/h. but it is transferred directly to the P.&.L a/c.


SPOILAGE & DEFECTIVESSpoilage consists of goods that do not meet

production standards. Such goods are either sold for their salvage value or discarded without further processing.

The cost of normal spoilage will be borne by good units. The cost of abnormal spoilage is transferred to costing P.&.L. a/c.

Goods that do not meet production standards and must be processed further in order to be saleable as goods units are known as defectives.

The entire cost of abnormal defectives is charged to costing P.&.L. a/c.


Q:- 1 Direct Material 57000Direct labour 28500

Factory rent 2500Office rent 500Plant repair 1000Plant depreciation 1250Factory lighting 400Factory manager salary 2000Office salary 1600Director remuneration 1500Telephone & postage 200Printing 100Legal charges 150Advertisement 1500Salesman salary 2500Showroom rent 500Sales 116000


Example 2Opening stock of material on 1st April 2004 47000/-Closing stock of material on 31st March 2005 45000/-Material Purchase 208000Drawing office salary 9600Counting sales salary 14000Carriage inward 8200Carriage outward 5100Sales 487000Bad debts written off (part of selling o/h) 4700Repairs of plant & machinery 8600Factory rent, rates, taxes 3000Office rent, rates, taxes 1000Traveling expenses 3700Traveling salary & commission 7800Production wages 1,45,000Dep. Written off on plant 9100Dep. Written off on office furniture 600Director fees 6000Gas & water charges (factory) 1000Gas & water charges (office) 300General charges 5000Manager salary (factory) 11250Manager salary (office ) 6750


Example 3 The following information for 2003-04:-Cost of material 1,50,000/-Direct wages = 1,25,000/-Factory o/h = 75,000/-Administrative o/h = 84,000/-Selling o/h = 56,000/-Distribution o/h = 35,000/-

Profit = 1,05,000/-A work under has to be executed in 2004 -05 which will need raw material worth rs. 4000/- and wages rs. 2,500/-. It is expected that rate of factory o/h would go up by 20% and that of selling o/h by 12.5% while the rate of distribution o/h is expected to go down by 10%. Administrative o/h will remain constant. At what price the product to be sold so as to earn profit of 15% on selling price. Factory o/h is based on direct wages and the remaining o/h on factory cost.


Example 4 Direct material = 500 tones @ Rs. 50/- per tone

= 100 tones @ 30/- per tone.Direct Labour = 80 skilled men @ 8/- per day for 25 days

and 40 unskilled men @ 3/- per day for 25 days Direct Expenses = 3000/- , special dyes = 1000/-Works o/h = variable @ 100% on direct wages

= fixed @ 60% on direct wagesAdministrative o/h = 10% of works cost Selling o/h = 15% on works cost Profit = 10% on total costFinished product = 400 tones Sale of waste = 800/-

There is no WIP at the beginning or at the end of the month. The scrap value of the special equipment after utilization in manufacturing is nil. Selling rate should be worked out to the nearest rupee.


Example 5 Opening stock of raw material = 35,000Purchases of material = 2,50,000Closing stock of raw material = 25,000Direct wages = 50,000Works overhead 50% of direct wages Store overhead 10% of the cost of raw material10% of the material were rejected and rs.

2000/- realized from the sale as scrap. 10% of the finished goods were found to be defective and were rectified by additional works overhead charges to the extent to the 20% on the direct wages. The gross output was 1000 kg. find out the manufacturing cost of the saleable per kg.


Ex. 6 Proportionate expenditure Material used 64000/-Wages paid 56,000/-Factory overhead 60% of wages Out of the material issued rs. 800/- worth of

material have been returned to the store and rs. 400/- transferred to other jobs.

10% of the production has been scrapped as bad a further 20% has been brought up to the specification by increasing the factory overhead to 20% of the wages.

If the scrapped production fetches only rs. 470/- find out manufacturing or factory cost per unit of the finished product. The total production is 100 units.


Business

Meaning & cost sheet