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Objectives of costing
To regulate selling, wrt the condition of demand and
supply.
To take a decision whether to make or buy a product
by considering the cost in each case.
To establish standards against which actual costs can
be compared.
To estimate the costs as accurately as possible to
avoid loss from low quotations or loose business
from high quotations.
To ascertain which products pay and which do not
pay.
To provide definite check on the financial records.
Overheads
These are expenses other than direct expenses.
An overhead is the cost of indirect material and indirect
labour including services. These are further classified as
1. Factory or manufacturing or production overhead
2. Administration overhead
3. Selling overhead
4. Distribution expenses
5. R & D overhead
Administration overhead
It consists of expenses incurred in the direction, control and
administration of an enterprise. These overheads include
all the expenditure made on salaries of general office staff
and executive staff, telephone charges, depreciation
charges etc. These are called as Establishment on cost or
office expenses.
Ex. Office rent, salaries, wages of staff, insurance, legal costs,
taxes, postage and telephone, audit fees, bank charges. Etc.
Distribution overhead
It covers all expenses connected with transportation of
products to customers and storing them.
Ex. Warehouse charges
Cost of transporting goods
Loading and unloading charges
Maintenance of delivery vehicles.
Salaries of clerks and labourers
Depreciation, etc.
Components of cost
Causes of depreciation
Physical causes
Custom or usage
Abnormal occurrences
Technological development and charges
(a) physical causes
1. wear and tear due to friction, pull, impact, fatigue,
twisting, etc.
2. Lack of maintenance and timely repairs of fixed assets
3. Action of chemical elements on the component parts.
4. Passage of time
Denominator = 1+2+3+4+5 = 15
Numerators are 5, (5-1), (5-2),(5-3),(5-4)
Depreciation charge for
Year 1 = (5/15) of (190000-40000) = 50000
Year 2 = (4/15) of 1,50,000 = 40,000
Year 3 = (3/15) of 150000 = 30000
Year 4 = (2/15) of 150000 = 20000
Year 5 = (1/15) of 150000 = 10000
2lac 1 lac
Rate of dep =
10 x 50 x 46 x 8
2. Production hour method provides a means of fixed rate
per hour of production.
Value of asset
Rate of dep =
No of production hours
15000-5000
Rate of dep per hour of machine=
0.476
10 x 2100