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MEANING OF COST

COST represents a sacrifice of values, a foregoing or a release of something of value. It is the


price of economic resources used as a result of producing or doing the thing costed. It is the amount
of expenditure incurred on a given thing. Cost has been defined as the amount measured in money or
cash expended or other party transferred, capital stock issued, services performed or a liability
incurred in consideration of goods and serviced received or to be received. By cost, we mean the
actual cost i.e. historical cost. ICWA (UK) defines cost as the amount of expenditure (actual or
notional) incurred on, or attributable to a specified thing or activity.

CLASSIFICATION OF COST

Cost classification is the process of grouping costs according to their common features. Costs
are to be classified in such a manner that they are identified with cost center or cost unit.

ON THE BASIS OF BEHAVIOUR OF COST

Behavior means change in cost due to change in output. On the basis of behavior cost is
classified into the following categories:

FIXED COST

It is that portion of the total cost which remains constant irrespective of the output upto capacity
limit. It is called as a period cost as it is concerned with period. It depends upon the passage of time.
It is also referred to as non-variable cost or stand by cost, capacity cost or period cost. It tends to
be unaffected by variations in output. These costs provide conditions for production rather than costs
of production. They are created by contractual obligations and managerial decisions. Rent of
premises, taxes and insurance, staff salaries constitute fixed cost.

VARIABLE COST

This cost varies according to the output. In other words, it is a cost which changes according to
the changes in output. It tends to vary in direct proportion to output. If the output is decreased,
variable cost also will decrease. It is concerned with output or product. Therefore, it is called as a
product cost. If the output is doubled, variable cost will also be doubled. For example, direct
material, direct labour, direct expenses and variable overheads. It is shown in the diagram below.
SEMI-VARIABLE COST

This is also referred to as semi-fixed or partly variable cost. It remains constant up to a certain
level and registers change afterwards. These costs vary in some degree with volume but not in direct
or same proportion. Such costs are fixed only in relation to specified constant conditions. For
example, repairs and maintenance of machinery, telephone charges, supervision professional tax, etc.

ON THE BASIS OF ELEMENTS OF COST

Elements means nature of items. A cost is composed of three elements, material, labour and
expenses. Each of these elements can be direct and indirect.

DIRECT COST

It is the cost which is directly chargeable to the product manufactured. It is easily identifiable.
Direct cost consists of three elements which are as follows:

DIRECT MATERIAL

It is the cost of basic raw material used for manufacturing a product. It becomes a part of
the product. No finished product can be manufactured without basic raw materials. It is easily
identifiable and chargeable to the product. For example, leather in leatherwares, pulp in
paper, steel in steel furniture, sugarcane for sugarcane etc. what is raw material for one
manufacturer might be finished product for another. Direct material includes the following:
1. All materials specially purchased for production or the process.
2. All components purchased for production or the process.
3. Material transferred from one cost center to another or one process to another.
4. Primary packing materials, wrappings, cardboard boxes etc, necessary for
preservation or protection of product.
Some of the items like nails or thread in the store are a part of finished product. They are not
treated as direct materials in view of negligible cost.

DIRECT LABOUR OR DIRECT WAGES

It is the amount paid to those workers who are engaged in the manufacturing line for
conversion of raw materials into finished goods. The amount of wages can be easily
identified and directly charged to the product. These workers directly handle raw materials,
work in progress and finished goods on the production line. Wages paid to the workers
operating lathes, drilling, cutting machines etc are direct wages. Direct wages are also as
productive labour, process labour or prime cost labour.
Direct wages include the payment made to the following group of workers:
1. Labour engaged on the capital production of the product.
2. Labour engaged in aiding the operations viz. Supervisor, Foreman, Shop clerks and
Worker on internal transport.
3. Inspectors, Analysts needed for such production.

DIRECT EXPENSES OR CHARGEABLE EXPENSES

It is the amount of expenses which is directly chargeable to the product manufactured or


which may be allocated to product directly. It can be easily identified with the product. For
example, hire charges of a special machine used for manufacturing a product, cost of designing
the product, cost of patterns, architects fees/surveyors fees, or job cost of experimental work
carried out especially for a job etc. Cost of special drawings, cost of special layout designs,
patents, patterns, cost of models, surveyors fees, Excise duty, royalty on production, cost of
rectifying defective work. Utility of such expenses is exhausted on completion of job.

INDIRECT COST

It is that portion of the total cost which cannot be identified and charged directly to the
product. It has to be allocated and apportioned and absorbed over the units manufactured on a
suitable basis. It consists of the following three elements:

INDIRECT MATERIAL

It is the cost of the material other than direct material which cannot be charged to the
product directly. It cannot be treated as a part of the product. It is also known as expenses materials.
It is the material which cannot be allocated to the product but which can be apportioned to the cost
units. Examples are as follows:
1. Lubricants, cotton waste, oil, grease, stationery etc
2. Small tools for general use
3. Some minor items such as thread in dress making, cost of nails in shoemaking etc

INDIRECT LABOUR
It is the amount of wages paid to those workers who are not engaged on the manufacturing
line, for example, wages of workers in administration department, watch n ward department, sales
department, general supervision.

INDIRECT EXPENSES

It is the amount of expenses which is not chargeable to the product directly. It is the cost of
giving service to the production department. It includes factory expenses, administrative expenses,
selling and distribution expenses etc.

OVERHEADS OR ON COST OR BURDEN OR SUPPLEMNTARY COST

Aggregate of indirect cost is referred to as overheads. It arises as a result of overall


operation of a business. According to Weldon overheads mean, the cost of indirect material,
indirect labour and such other expenses, including services as cannot conveniently be charged
direct to specific cost units. It includes all manufacturing and non-manufacturing supplies and
services.
These costs cannot be associated with a particular product. The principal feature of
overheads is the lack of direct traceability to individual product. It remains relatively constant
from period to period. The amount of overheads is not directly chargeable i.e. it has to be
properly allocated, apportioned and absorbed on some equitable basis.

CLASSIFICATION OF OVERHEADS

ON THE BASIS OF FUNCTIONS

FACTORY OVERHEADS

It is the aggregate of all the factory expenses incurred in connection with


manufacture of a product. These are incurred in connection with running of factory. It includes
the items of expenses viz, factory salary, work managers salary, factory repairs, rent of factory
premises, factory lighting, lubricants, factory power, drawing office salary, haulage (cost of
internal transport) depreciation of plant and machinery unproductive wages, estimation expenses,
royalties, loose tools w/ off, material handling charges, time office salaries, counting house
salaries etc.

ADMINISTRATIVE OR OFFICE OVERHEADS

It is the aggregate of all the expenses as regards administration. It is the cost of office
service or decision-making. It consists of the following expenses: Staff salaries, printing and
stationery, postage and telegram, telephone charges, rent of office premises, office conveyance,
printing and stationery and repairs and depreciation of office premises and furniture etc.
SELLING & DISTRIBUTION OVERHEADS

It is the aggregate of all the expenses incurred in connection with sales and distribution
of finished product and services. It is the cost of sales and distribution services.
Selling expenses are such expenses which are incurred acquiring and retaining customers.
It includes the following expenses:

(a) Advertisement (b) Show room expenses (c) Traveling expenses (d) Commission to agents
(e) Salaries of Sales office (f) Cost of catalogues (g) Discount allowed (h) Bad debts written off
(i) Commission on sales (j) Rent of Sales Room (k) Sample and Free gifts (L) After sales service
expenses (m) Expenses on demonstration and technical advice to prospective customers (n) Free
repairs and servicing expenses (o) Expenses on market research (p) Fancy packing and
demonstration.

Distribution expenses include all those expense which are incurred in connection with making
the goods available to customers these expense includes the following (a) Packing charges (b)
Loading charges (c) Carriages on sales (d) Rent on warehouse (e) Insurance and lighting of
warehouse (f) Insurance of delivery van (g) Expense on delivery van (h) Salaries of
Godownkeeper, drivers and packing staff.

COST SHEET
For determination of total cost of production a statement showing the various elements of cost
is prepared. This statement is called as a statement of cost or cost sheet. Cost sheet is a statement
which provides assembly of the detailed cost of a cost center or a cost unit. It is a statement showing
the details of a) total cost of job b) Cost of an operation or order. It brings out the composition of
total cost in a logical order under proper classifications & sub-divisions. The period is covered by the
cost sheet may be by a week a month or so. Separate columns are provided to show total cost, cost
per-unit etc. In case of different products there are different cost sheets for different products. A cost
sheet is prepared under output or unit costing method.

PURPOSE OF COST SHEET

1. It gives the break up of total cost under different elements.


2. It shows total cost as well as cost per unit.
3. It helps in comparison with previous years.
4. It facilities preparation of tenders or quotations.
5. It enables the management to fix up selling price.
6. It controls cost.

DIVISIONS OF COST

PRIME COST

It comprises of all direct materials, direct labour and direct expenses. It is also known as
flat cost

Prime cost = Direct Materials + Direct Labour + Direct Expenses

WORKS COST

It is also known as a factory cost or cost of manufacture. It is the cost of manufacturing an


article. It includes prime cost and factory expenses.

Works Cost = Prime Cost + Factory Overheads

COST OF PRODUCTION

It represents factory cost plus administrative expenses.

Cost of Production = Factory Cost + Administrative Expenses

TOTAL COST

It represents cost of production plus selling and distribution expenses.


Total Cost= Cost of Production + Selling & Distribution Expenses

SELLING PRICE

It is the price which includes total cost plus margin of profit or minus loss, if any.

Selling Price = Total Cost + Profit (-Loss)

NON COST ITEMS

Non-cost items are those items which do not form part of cost of a product. Such items should
not be considered while ascertaining the cost of a product. These are items included in the Profit &
Loss A/c.
These will not come in the cost sheet
a) Income tax
b) Interest on capital
c) Interest on loan
d) Profit on Sale of fixed assets
e) All the assets
f) Donations
g) Capital Expenditure
h) Discount on shares & Debentures
i) Commission to Partners, Managers etc
j) Brokerage
k) Preliminary Expenses Written off.
l) Wealth tax etc
m) Bonus to directors and employees if it is based on profit, expenses of raising capital, penalties
& fines.

UTILITY OF COST SHEET

DETERMINE THE TOTAL COST

A total cost sheet (statement) helps in determining aggregate cost of manufacturing a


product or providing a service.

DETERMINING PRODUCT PRICE

A cost sheet helps in identifying the total cost for a product or service which in turn helps
in properly pricing of products & services.

COST REDUCTION OR COST CONTROL

Cost sheets helps in identifying the total cost stage wise & any unwanted cost can be
curtailed.
PREPARE BUDGETS

A cost statement helps in preparing budget for each department

PROFIT PLANNING

It helps to minimize cost & increase profits.

1. STAGE WISE COST IDENTIFICATION

Costs such as prime cost, factory cost, cost of production, cost of goods sold, total cost
of sale etc.

2. DETERMINE THE COST PER UNIT

This helps in determining cost per unit on which u can predict further cost.

DETERMINATION OF TOTAL COST

Cost of product is determined as per cost attach concept. Total cost of a product consists of
various elements of cost which have the quality of coherence. All the elements of cost can be
grouped and regrouped. Grouping and regrouping of various elements of cost leads to significant
divisions of cost. The logical process of determination of cost by grouping and regrouping various
elements is illustrated as follows:
COST SHEET
PROFORMA OF COST SHEET

PARTICULARS TOTAL COST


Rs.

Opening Stock Raw Materials


Add: Purchase
Add: Carriage Inward XXX
Add: Octroi and Customs Duty
Less: Closing Stock of Raw Materials XXX
Cost of Direct Material Consumed
Direct Wages XXX
Direct or Chargeable Wages
XXX
PRIME COST
XXX
Add: Works of Factory Overheads:
Indirect Materials XXX
Indirect Wages
Leave Wages XXX
Bonus to Workers
Overtime Wages XXX
Fuel and Power
Rent and Taxes
Insurance XXX
Factory Lightings
Supervision
Works Stationary XXX
Canteen and Welfare Expenses
Repairs XXX
Works Salaries
Depreciation of Plant and Machinery XXX
Works Expenses
Gas and Water XXX
Technical Directors Fees
Laboratory Expenses XXX
Works Transport Expenses
Works Telephone Expenses XXX
Add: Opening Stock of Work-in-Progress
Less: Closing Stock of Work-in-Progress XXX
Less: Sale of Waste
XXX
WORKS COST
XXX

XXX
Add: Office and Administration Overheads:
Office Salaries XXX
Directors Fees
Office Rents And Rates XXX
Office Stationary and Printing
Sundry Office Expenses XXX
Depreciation on Office Furniture
Subscription to Trade Journals XXX
Office Lightings
Establishment Charges XXX
Directors Traveling Expenses
Consultants Fees XXX
Contribution to Provident Fund
Postage XXX
Legal Charges
Audit Fees XXX
Bank Charges
Depreciation And Repairs of Office XXX
Equipments
Bonus to Staff XXX

COST OF PRODUCTION XXX


Add :Opening Stock of Finished Goods
Less: Closing Stock of Finished Goods XXX

COST OF GOODS SOLD XXX

Add: Selling and Distribution Overheads XXX


Advertising
Show Room Expenses XXX
Salesmans Salaries and Expenses
Packing Expenses
Carriage Outward XXX
Commission of Sales Agents XXX
Cost of Catalogues XXX
Expenses of Delivery Vans XXX
Collection Charges XXX
Traveling Expenses XXX
Cost Tenders XXX
Warehouse Expenses XXX
Cost of Mailing Literature XXX
Sales Managers Salaries XXX
Insurance of Showroom XXX
Sales Directors Fees XXX
Sales Office Expenses XXX
Rent of Sales Office XXX
Depreciation of Delivery Vans XXX
Expenses of Sales Branch XXX
Establishments XXX
Branch Office Expenses XXX
XXX
TOTAL COST/TOTAL OF SALES
Profit or Loss XXX

SALES XXX

XXX
ESTIMATION OF COST

Very often, the management desires to know, what will be the cost? even before the production
starts. The purpose to know the cost before it is incurred, might be different. It may be to keep the
cost within control or it may be used for profit planning. May times it is required to submit tenders,
to give quotations, to prepare price lists etc. For this purpose the estimations of probable cost of
production is essential. This requires the past cost data to be analysed, present circumstances are
taken into consideration and future is projected. The technique is known as estimation of cost. This
involves the study of each and every element of cost and their nature of behaviour . Keeping in view
the nature of behaviour of elements of cost, it can be classified into following three categories:

FIXED COST

Fixed cost is that cost which remains unaffected even though there is change in the level
of output. It remains constant at all levels of output for a given period of time. Examples of such
costs are rent, rated and taxes of factory premises, salary of general manager, foreman, watchman,
insurance, depreciation etc. These expenses incur according to the unit of time and not according to
level of production. Hence sometimes it is called as periodic cost.
For example such fixed cost is ascertained of a particular concern Rs. 12000 pm. The capacity of this
concern is to produce 1000 units pm. If they produce 100 units or 500 units or 700 units or 100 units
the fixed cost will remain constant at all these levels of output.
This fixed cost remains fixed at all levels of output, but the cost per unit changes if there is a change
in the level of output.

VARIABLE COST

It is the cost which tends to vary directly with the volume of output. If there is increase
in output this cost increases and vice versa. The change in the variable cost takes place in the same
direction in which the level of output changes. This cost consists of direct materials, direct wages,
direct expenses and some part of indirect expenses which varied according to the level of output. Say
for example if standard unit of final product requires the raw materials of Rs.20 per unit the expenses
on direct materials will change if level of output changes. However variable cost per unit will remain
unchanged provided the price level does not change.

SEMI-VARIABLE COST

This is the third category of nature of behavior of the expenses. These expenses are
neither fixed nor variable. These expenses change in the same direction in which the level of output
changes. Thus these expenses are partly fixed partly variable in nature. Examples of such expenses
are depreciation of plant and machinery, maintenance of factory building etc. These expenses will
increase if factory is run from single shift to double or triple shifts. Depreciation and maintenance
will increase but not in the same ratio, the output increases. Thus these expenses are neither fixed nor
variable cent percent. Hence they are called as semi variable expenses.
CERTIFICATE

The following project has been satisfactorily performed by


Nikhil Abhyankar 01
Mangala Borkar 11
Sunil Chadda 12
Bhagyesh Gandhi 21
Avinash Dhone 17
Snehal Dolas 19
Roshan Kambli 38
Ketki Khandagale 43
Priyank Mehta 53
Abhijeet Motto 58
studying in Bhavans College, Class F.Y. BMS Div A during the academic year 2008-2009

DECLARATION

We hereby declare that this project namely COST SHEET is done solely by our group,
which consists of TEN people whose names are given below
Nikhil Abhyankar 01
Mangala Borkar 11
Sunil Chadda 12
Bhagyesh Gandhi 21
Avinash Dhone 17
Snehal Dolas 19
Roshan Kambli 38
Ketki Khandagale 43
Priyank Mehta 53
Abhijeet Motto 58
under the expert guidance of our respected professor Mrs. Riddhi Sharma. We further
declare that the content of this project is true and to the best of our knowledge.

Solved example of Cost Sheet

The accounts of Z ltd for the yr ended 31st Dec 2004, shows the following:
Rs.
Work office salaries 6500
Administrative office salaries 12600
Cash Discounts Allowed 2900
Carriage Outward 4300
Carriage Inward 7150
Bad Debts Written Off 6500
Repairs to Plant & Machinery 4450
Rents, Rates, Taxes, Insurance etc
Factory 8500
Office 2000
Sales 461000
Stock of Raw Materials
1st Jan, 04 48000
31st Jan, 04 62000
Materials Purchased 185000
Traveling Expenses 2100
Travelers Salaries and Commission 7700
Productive Wages 126000
Depreciation on Plant & Machinery 6500
Depreciation on Office Furniture 300
Directors Fees 6000
Gas & Water (Factory) 1200
Gas & Water (Office) 400
Managers salary (1/4 office & Factory) 10000
General Expenses 3400

You are required to prepare a cost statement for the year ended 31st Dec 04

Solution:
Z Ltd
Cost Statement for the yr ended 31st Dec 2004
Particulars Rs. Rs.

Raw Materials Consumed:


Stock of Raw materials as on 1st Jan 04 48,000
(+) Materials Purchased 1,85,000
(+) Carriage Inward 7,150
(-) Stock of Raw Materials as on 31st Dec 04 62,800
Raw Materials Consumed 1,77,350
Productive Wages 1,26,000
Prime Cost 3,03,350

Add: Works/Factory Overheads


Work Office Salaries 6,500
Repairs to P/M 4,450
Rents, Rates, Taxes & Insurance etc- Factory 8,500
Depreciation on P/M 6,500
Gas & Water (Factory) 1,200
Managers Salary (3/4) 7,500
Works or Factory Overheads 34,650
Works Cost 3,38,000
Add: Office & Administrative Overheads
Administrative Office Salaries 12,600
Rents, Rates, Taxes, Insurance etc- Office 2,000
Depreciation on Office furniture 300
Directors Fees 6,000
Gas & Water (office) 400
Managers salary (1/4) 2,500
General Expenses 3,400
Office & Administrative Overheads 27,200
Cost of Production/ Cost of Goods Sold 3,65,200
Add: Selling & Distribution Overheads
Carriage Outward 4,300
Traveling Expenses 2,100
Travelers Salary & Commission 7,700
Selling & distribution Overheads 14,100
Total Cost of Sales 3,79,300
Add: Profit (Balancing Figure) 81,700
Sales 4,61,000
PROFORMA OF ESTIMATED COST SHEET

Total Cost Per Unit Total Per Unit


Cost
Direct Material XXX XXX XXX XXX
Direct Labour XXX XXX XXX XXX
Direct Wages XXX XXX XXX XXX

Prime Cost XXX XXX XXX XXX


Factory Overheads
XXX XXX XXX XXX

Works Cost XXX XXX XXX XXX


Office &
Administration
Overheads XXX XXX XXX XXX
Cost of Production
Selling & XXX XXX XXX XXX
distribution
Overheads
XXX XXX XXX XXX

Cost of Sales XXX XXX XXX XXX


Profit XXX XXX XXX XXX
Sales XXX XXX XXX

SOLVED EXAMPLE OF ESTIMATED COST SHEET


Swadeshi Electronics Ltd. furnishes you the following information for the year ended 31st March 06

Production & sales 15000 units


Sales Rs. 1275000
Direct wages Rs. 270000
Direct materials Rs. 330000
Factory overheads Rs. 225000
Administrative overheads Rs.105000
Sales overheads Rs. 90000

On account of intense competition following changes are estimated in the subsequent year:
1. Production and sales activity will be increased by one third
2. Material rate will be lowered by 25%. However there will be increase in
consumption by 20%
3. Direct wages cost would be reduced by 20% due to automation
4. Out of the above factory overheads rs. 45000 are fixed in nature. The
remaining factory expenses are variable in proportion to the number of units produced
5. Total administrative expenses will be lowered by 40%
6. Sales overhead per unit would remain the same
7. Sales price per unit would be lowered by 20%
Prepare a statement of cost for both the yrs ending 31 st March 06 and 31st March 07 showing
maximum possible details of cost

Solution:
Swadeshi Electronics Ltd
Cost Sheet for the yr ended 31st Mar 06 & 31st March 07
15000 20000
Total Cost Per Unit Total Cost Per Unit

Direct Materials 330000 22 396000 19.8


Direct Wages 270000 18 288000 14.4

Prime Cost 600000 40 684000 34.2


Factory Overheads
225000 15 285000 14.25

Works Cost 825000 55 969000 48.45


Administrative
Overheads 105000 07 63000 3.15

Cost of Production
Sales Overheads 930000 62 1032000 51.6
90000 06 120000 06

Cost of Sales 1020000 68 1152000 57.6


Profit 255000 17 208000 10.4

Sales 1275000 85 1360000 68