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Unit I
Prime cost of any product comprises of all direct comprises of all direct
comprises of all direct costs, viz. direct material ,direct labour and direct
expenses, specially attributable to a job. Prime cost is also known as flat cost or
first cost or direct cost
1.Costing
Costing is the technique and process of ascertaining costs.
2.Cost Accounting
Cost Accounting is the process of accounting for cost which begins with the
incurrence of cost and ends with the control of cost.
3.Cost Control
Cost reduction is the achievement of real and permanent reduction in the unit
cost of products manufactured or services rendered without imparing their
suitability for the use intended or diminution in the quality of the product.
5.Cost Audit
Cost Audit is the verification of cost accounts and a check on the adherence to
the cost accounting plan. Thus it involves-
(ii) examining these records to ensure that they adhere to the cost accounting
principles, plans, procedure and objectives.
The main objectives of cost accounting are cost ascertainment furnishing of cost
data for decision making and control of cost. The objectives are listed below
1.To find out the total cost and cost per unit of various products manufactured.
2. To disclose the proportion of different elements (such as material, labour and
overheads ) in the total cost.
4.To ascertain the profitability of each product and advise the management as to
how these profits can be maximised.
5.To supply estimates of cost data ,on the basis of historical data for the
preparation of tenders ,quotations etc.
6.To present important cost data to the management for decision making
planning and control.
9.To formulate incentive bonus plans and implement them to improve labour
productivity and reduce costs.
10.To exercise effective control on the idle times of men and machines.
11.To help in the preparation of budgets and implementation of budgetary
control.
12.To compare the actual cost with the standard cost and analyse the cause of
variance.
13.To supply useful data to the management to take vital decisions such as
introduction of new products, replacement of labour and machines.
14.To advise the management on future expansion policies and proposed capital
projects.
Cost Accounting
Cost Accounting is the process of accounting foe cost which begins with the
incurrence of cost and ends with the control of cost.
It is a formal system of accounting by means of which costs of products,
services or activities are ascertained and controlled.
CIMA ,London defines cost accounting as the process of accounting from the
point at which expenditure is incurred or committed to the establishment of its
ultimate relationship with cost centres and cost units.
Types of Costing
Costing is the technique and process of ascertaining costs. The objective of cost
accounting is the determination of all cost. The cost may be allocated on the
basis of actual cost incurred or costs may be assigned on a standard cost basis.
A system of cost accounting implies that there is a planned and coordinated
arrangement of all matters relating to costing, i.e., a systematic and planned
procedure is to be followed. The following are the systems generally in use.
3.Uniform Costing It is not a distinctive form of costing, but the cost system
is designed by trade associations followed by several undertakings. This system
enables inter-firm comparisons.
Problems
Unit II
Under this system stocks are verified only at the end of the accounting period,
usually a year.
5.Bin Card- Bin card is a card attached to each bin. Only quantities of materials
received, issued and the balance are recorded in the bin card. It is maintained by
the store keeper. It shows the stock of material at any time. It is very useful in
material control.
1.Periodical Inventory System Under this system stocks are verified only at
the end of the accounting period, usually a year.
Problems
Unit- III
Cost Apportionment
Cost Allocation
Cost Absorption
Indirect Labour
On the other hand, indirect labour cannot be conveniently identified with cost
unit or cost centre. ICMA defines wages as cost other than direct wages cost
.Therefore indirect labour cost is the amount of wages paid to workmen who are
not engaged in production of goods or services, but at the same time, indirectly
help the direct labour. In short wages paid to such workers cannot be identified
with any particular work. Examples of indirect labour cost are wages paid to
supervisors, inspectors, foreman, watchmen, timekeepers, repairers, cleaners
etc. If a worker is employed to perform a job a day, the remuneration is treated
as direct wages, when his job is identical to the job assigned. If not it is indirect
wages. One distinction is that direct labour cost , charged to a job, forms part of
prime cost, whereas indirect cost becomes a part of overhead.
Direct Labour
According to ICMA, Direct Labour cost is that cost which can be identified
with and allocated to cost centres or cost units. The labour spent in altering the
construction, composition or condition of product i.e, converting raw material
into finished product, is known as Direct Labour. The direct labour cost can
easily be identified and allocated to cost units. It varies directly with production,
thus creating a closeness to production
Labour turnover may be defined as change in labour force i.e., percentage
change in the labour force during a specific period. High labour turnover
indicates that labour is not stabilised and there are frequent changes by way of
workers leaving the organisation. High labour turnover is to be avoided. At the
same time very low labour turnover indicates inefficient workers are being
retained in the organisation
Based on causes or reasons for its occurrence, idle time can be divided into two
categories i.e
(a) Normal Idle Time- This is inherent in all kinds of employment and cannot
be avoided. The cost of this time is borne by the respective jobs or products or
departments. Examples of normal idle time are given below:
1.Time consumed by the workers to walk from gate to department.
2.Time taken to pick up tools, change of dress and picking up instructions for
work.
3. Time consumed for changing from one job to another.
4.Time taken for personal needs and tea break.
5.Waiting time when the machine is made ready for production work, called
Setting up Time.
Treatment of Normal Idle Time: Normal idle time is unavoidable and its cost
is charged to production. There are two ways of charging normal idle time to
production.
(1)Normal idle time cost is taken as factory expensed and recovered as indirect
charge.
(2) The normal idle time cost is directly charged to production as direct wages.
(b)Abnormal Idle Time: The abnormal idle time is avoidable idle time which
occurs due to conditions which can be prevented. The reasons for abnormal idle
time are as follows:
1.Time lost due to machine break down
The abnormal idle time can be controlled by effective planning. The reasons for
idle time are to be analysed and steps are to be taken to provide for all
contingencies like preventive maintenance of machinery, proper arrangement
for providing sufficient materials, preparation of job instructions in advance,
avoidance of strikes etc. Even normal idle time can be controlled by efficient
administrative planning and supervision.
6.The wage system should be as per the labour policy of the government and
follow the legislation applicable.
Classification of overheads
Indirect Materials: Indirect materials are those materials which do not form a
part of the finished product. Cost of indirect materials cannot be identified with
and allocated but can be apportioned to a particular product, process or jobs.
E.g. Cotton waste, Lubricant , Grease, Small tools etc.
Indirect Labour: Indirect labour is that labour which is not directly engaged in
production of goods or services. It indirectly helps the direct labour engaged in
production. The wages paid for indirect labour is known as indirect wages.
Indirect wages are those which cannot be identified with and allocated but can
be apportioned to a particular product, process or job. E.g. Wages of mechanics,
supervisors, watchman, sweepers, time keeper etc.
Indirect Expenses : Expenses (other than indirect material and indirect labour)
that are not directly charged to production are indirect expenses. E.g. Office
expenses ,selling and distribution expenses.
2.Classification according to Function:
Selling overheads : These are expenses incurred for actual sales and
promotion of sales. E.g. Salaries of sales manager, commission , travelling
expenses of salesman and promotion expenses like advertisement and publicity,
after sales service etc.
Fixed overheads: Expenses that do not vary with volume of production are
known as fixed overheads. E.g Salary, rent , insurance etc.
Variable overheads: Expenses that vary with the volume of production are
known an variable overheads. These are direct costs. E.g. material , wages ,
selling commission, electricity charges etc.
Semi- variable overheads : Expenses that are partly fixed and partly variable
are called semi- variable overheads. These expenses do not vary in the same
ratio in which the output changes.
Distribution of Overhead
2.Secondary Distribution
Bases of Apportionment
In order to ascertain the correct cost of cost centre and cost units, suitable bases
have to be adopted for allocation and apportionment of manufacturing
overheads.
2.Secondary Distribution of overheads
Secondary distribution is the process of redistribution of service department
costs to production departments.
This is done as output or jobs pass through one or more production cost centres
only. This kind of distribution is called secondary apportionment. Suitable bases
have to be adopted for redistribution of service department cost to production
department.
Problems
4.Calculation of Premium Wages under Rowan plan and Halsey Plan, Merricks
Multiple System, Taylors Differentials piece rate system.