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HM UMAR FAROOQ RANA

CERTIFIED CHARTERED ACCOUNTANT (UK), CA-ICAP (FINAL), MCOM.

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INTRODUCTION TO COSTS
Types of organisation
 Manufacturing organisations: and
 Service organisations.
An organisation needs to know:
 how much it costs to make the products that it produces, or
 how much it costs to provide its services to customers.
To make a profit it is important to
 control the entity;
 measure to what extent it is achieving its objectives; and
 plan expenditure for the future.

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Terminology
 Cost object: Any activity for which a separate measurement of costs is
needed
Examples of cost objects include:
 The cost of a product
 The cost of a service
 The cost of a department
 The cost of a project
 Cost unit: A unit of product or service for which costs are determined
 Unit cost includes all fixed costs and all variable costs involved in
production
 Cost objects and cost units should be selected so as to provide
management with the cost information they require

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OVERVIEW OF COST CATEGORIES FOR A
MANUFACTURING FIRM
 All costs incurred by the firm must be accounted for in its financial
statements
MANUFACTURING COSTS
Direct labour (DL)
Direct Materials (DM)
Overhead (OH)
Indirect Materials
Indirect labour
Other
NON-MANUFACTURING COSTS
Marketing or Selling Costs
Administrative Costs

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MANUFACTURING COSTS
1. Direct Materials (DM)
 Materials that are consumed in the manufacturing process and
physically incorporated in the finished product
 Materials whose cost is sufficiently large to justify the record
keeping expenses necessary to trace the costs to individual
products

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DIRECT AND INDIRECT COSTS
 Direct costs: Costs that can be traced in full to a cost unit.
For example, in a manufacturing company that produces
television sets, the direct cost of making a television consists
of direct materials and direct labour costs, and possibly some
direct expenses.
 Direct materials are all materials that can be attributed
directly in full to a cost unit.

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Direct materials
Cost unit Direct materials

Pair of shoes Leather, glue, nails, laces

Office chair Wheels, a stand, a seat (with seat cushion), back rest, arm rests and
fabric

Restaurant meal Ingredients

Car Steel, aluminium, windows, lights, gear box, engine, wheels etc.
etc.

House Bricks, wood, cement


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MANUFACTURING COSTS
2. Direct labour (DL)
 labour time that is physically traceable to the products being
manufactured
 labour time whose cost is sufficiently large to justify the record
keeping expenses necessary to trace the costs to individual
products
Example:
Direct labour for manufacturing Honda Accords
 Line workers, robot operators, painters, assembly workers
Any labour probably not included in direct labour?
 Factory supervisors, factory secretaries

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Key issues in determining direct labour

When an assembly line worker works overtime, he/she is paid a


regular wage plus an overtime premium. Would most companies
treat his/her regular wage as a direct labour cost?
 Yes, the amount of time an employee works can be traced to the
products.

What about the overtime premium?


 Treated as OH, cannot be traced to a specific product.

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Direct expenses
 Direct expenses are expenses that can be attributed directly
in full to a cost unit.
 Direct expenses are expenses that have been incurred in full
as a direct consequence of making a unit of product, or
providing a service, or running a department.
In construction of a house
 Hire of equipment (for example a cement mixer) is a direct
cost.

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Prime cost
Rs.

Direct material cost X


Direct labour cost X

Direct expenses X

PRIME COST X

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Indirect costs (overheads)
 Indirect costs (overheads) cannot be attributed directly and in
full to a cost unit.
 Indirect costs include production overheads and non-
production overheads. Each of these might include indirect
materials costs, indirect labour costs and indirect expenses
costs.

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Indirect materials
 cleaning materials and any materials used by production
departments or staff who are not engaged directly in making
a product.
 may also include some items of materials that are inexpensive
and whose cost or value is immaterial. These may include
nails, nuts and bolts, buttons and thread, and so on.

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Indirect labour costs
 In a manufacturing environment, indirect labour employees
include staff in the stores and materials handling department
(for example, fork lift truck drivers), supervisors, and
repairs and maintenance engineers.
 All employees in administration departments and marketing
departments (sales and distribution staff) - including
management - are normally indirect employees.

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Indirect expenses
 indirect production costs (production overheads)
 the rental costs for a factory and the costs of gas and
electricity consumption for a factory.
 administration overheads
 sales and distribution overheads

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To develop UNDERSTANDING
 When making grocery bags, it is pretty easy to keep track of the
amount of paper being used for each bag, but it is very difficult to
know exactly how much glue is being used to hold the paper bag
together.
 Of course, if a person got a magnifying glass and really examined
the bags, maybe the amount of glue could be determined. But
would it be worth all of the time and effort?
 Compared to the paper, the glue is pretty inexpensive. Other
than holding the bag together, the glue is rather insignificant.
 Sooooo..... The glue is not tracked on a product or job basis. It
is just not worth the effort. Since the glue is not tracked on a
product or job basis, the glue is not considered a direct material
even though the glue is part of the product.

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MANUFACTURING COSTS
3. Manufacturing Overhead (OH)
All of costs of manufacturing excluding direct materials and
direct labour

a. Indirect Materials (IM) – Materials, used in the


manufacturing of products, which are difficult to trace to
particular products in an economical way
 Glue, nails, cleaning supplies

b. Indirect labour (IL) – labour, used in the manufacturing of


products, which is difficult to trace to particular products in
an economical way
 Wages for maintenance workers, factory supervisor’s salary.
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MANUFACTURING COSTS
C. All other types of manufacturing overhead
 Depreciation on machinery, depreciation on factory building,
factory insurance, utilities for factory.

Manufacturing overhead does not include the president's


salary, accountants, lawyers, interest expense, advertising,
marketing, secretarial staff, distribution costs, income taxes,
etc, and any other costs related to a company's
administration.

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NON-MANUFACTURING COSTS
1. Marketing or Selling Costs – Costs incurred in
securing orders from customers and providing
customers with the finished product
 Sales commissions, costs of shipping products to
customers, storage of finished goods, depreciation of
selling equipment (cash register)

2. Administrative Costs – Executive, organizational, and


clerical costs that are not related to manufacturing or
marketing
 CEO’s salary, cost of controller’s office, depreciation on
administrative building.
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Classification Exercise
Classify the following cost items
 Depreciation on factory building
 Depreciation on office equipment
 Property tax on finished goods warehouse
 Wages paid to forklift operator in finished goods
warehouse
 Wages paid to forklift operator in factory
 Wages paid to welders when welding equipment is
not working
 Paper used in textbook production
 Paper used in central office computer
 Wages paid to assembly line workers
 Maintenance cost for machines

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OTHER COST CONCEPTS
Product Costs or Inventoriable Costs – costs assigned to products that
were either purchased for resale (merchandising firm or retailer) or
manufactured for sale (manufacturing firm)
 When products are sold, product costs are recognized as an expense (cost
of goods sold or COGS). The costs of unsold products remain in
inventory and are not expensed (i.e. not deducted from revenue in
calculating net income)

Period Costs – costs that are not product costs and that are associated with
the period in which they are incurred
 Period costs such as selling and administrative costs are expensed (i.e.
deducted from revenue in calculating net income) in the period they are
incurred

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Product Costs Versus Period Costs
Product costs include Period costs are not
direct materials, direct included in product
labour, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold
Expense

Sale

Balance Income Income


Sheet Statement Statement
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Quick Check 
Which of the following costs would be considered a period
rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

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Quick Check 
Which of the following costs would be considered a period
rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

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Answer

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Calculate: Cost per unit.
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Example : Valuing inventory
DEF Plc manufactures mechanical parrots, which trade under the name ‘Parker’. In the year
ended 31 December 2012, 10,000 Parkers are manufactured and the related costs were:

Rs.
Materials 3,000
Labour 4,000
Depreciation of Machinery 2,000
Factory rates 1,000
Sundry factory expenses 2,000
Production storage costs 1,000
Selling expenses 2,000
Expenses at head office 4,000
19,000
Requirement
At 31 December 2012, there were 1,000 Parkers in inventory. Assuming that these have a resale
value of Rs.4 each, what value should be placed on the closing inventory?

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Solution

Rs.
Materials 3,000
Labour 4,000
Depreciation of machinery 2,000
Factory rates 1,000
Sundry factory expenses 2,000
Production storage costs 1,000
Total cost 13,000

Units manufactured 10,000


Unit cost Rs.1.30

Number of units on hand at year end 1,000


Value of closing inventory Rs.1,300

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Over-absorption Under-absorption
 Fixed production overheads must be absorbed based on normal
production capacity even if this is not achieved in a period.
 The amount of fixed overhead allocated to each unit of production is not
increased if actual production capacity falls short of the normal capacity
for any reason.
 Similarly, the amount of fixed overhead allocated to each unit of
production is not decreased if actual production capacity is higher than
the normal capacity for any reason.
 the actual fixed production overhead recognised as part of the inventory
cost differs from the actual fixed production overhead incurred. Any
difference is recognised as an expense or a reduction of an expense
(usually cost of sales).
 Under-absorption (fixed production overhead in inventory is less than
fixed production overhead incurred) is a debit to cost of sales.
 Over-absorption (fixed production overhead in inventory is greater than
fixed production overhead incurred) is a credit to cost of sales.
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Calculate:
1. Cost per unit
2. Cost of production
3. Cost of sales
4. Under or over absorbed production overheads

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Calculate:
1. Cost per unit
2. Cost of production
3. Cost of sales
4. Under or over absorbed production overheads

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Example: Valuing inventory 2

The following information related to Unipoly plc, a manufacturer of can


openers, for the year ended 31 December 2012.
There was no finished goods inventory at the start of the year and no work in
progress. There were 250,000 units in finished goods at the year end. The
normal annual level of production is 750,000 can openers. However, in the year
ended 31 December 2012, only 450,000 were produced because of a labour
dispute.
Requirement
Calculate the cost of finished goods at 31 December 2012 in accordance with
IAS 2 Inventories.
(See costs on next slide)

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Example : Valuing inventory (2) (Cont’d)

Rs.
Direct materials cost per unit 1
Direct labour costs per unit 1
Direct expenses per unit 1

Production overheads per year 600,000

Administration overheads per year 200,000

Selling overheads per year 300,000

Interest payments per year 100,000

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Example: Valuing inventory (2)

Solution
Cost per unit
Rs.
Direct material 1.00
Direct labour 1.00
Direct expenses 1.00
Production overhead (Rs.600,000 / 750,000 units) 0.80
3.80

Value of closing inventory:


250,000 units x Rs.3.80 Rs.950,000

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COST OF PRODUCTION/
Manufacturing Account Rs. Rs.

Raw materials

Opening inventory 25,000

Purchases 150,000

Raw material available for 175,000


consumption
Less: Closing inventory (20,000)

Raw materials consumed 155,000

Manufacturing wages 100,000

Prime cost 255,000

Overheads
Light and power 72,000
Depreciation of production
40,000
machinery
Depreciation of factory 50,000 162,000

Manufacturing costs 417,000

Opening work in progress 85,000

Closing work in progress (95,000)


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Cost of goods made 407,000
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Cost formulas
The historical cost of inventory is usually measured by one of
the following methods:
 First in, first out (FIFO)
 Weighted average cost (AVCO)

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First-In, First-Out (FIFO)

The FIFO method  The cost of the oldest


assumes that inventory items are
items are sold in charged to COGS
the chronological when goods are sold.
order of their  The cost of the
acquisition. newest inventory
items remain in
ending inventory.

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First-In, First-Out (FIFO)

Even though the periodic and


the perpetual approaches
differ in the timing of
adjustments to inventory . . .
. . . COGS and Ending
Inventory Cost are the
same under both
approaches.

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First-In, First-Out (FIFO)
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 $ 22.00 $ 17,600.00
3-9 300 24.00 7,200.00
15-9 250 25.00 6,250.00
21-9 200 27.00 5,400.00
29-9 400 28.00 11,200.00
Goods Available for
Sale 1,950 $ 47,650.00
Ending Inventory 600 These are the 600
most recently
Cost of Goods Sold 1,350 acquired units.
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First-In, First-Out (FIFO)

Yore Frame, Inc.


Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 $ 22.00 $ 17,600.00
9/3
3-9 300 24.00 7,200.00
15-9
9/15 250 25.00 6,250.00
21-9
9/21 200 27.00 5,400.00
29-9
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 $ 47,650.00
Ending Inventory 600 16,600.00
Cost of Goods Sold 1,350
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First-In, First-Out (FIFO)

Yore Frame, Inc.


Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 $ 22.00 $ 17,600.00
3-9 300 24.00 7,200.00
15-9 250 25.00 6,250.00
21-9 200 27.00 5,400.00
29-9 400 28.00 11,200.00
Goods Available for These are the
Sale 1,950 first 1,350 $ 47,650.00
Ending Inventory 600 units 16,600.00
Cost of Goods Sold 1,350 acquired.
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First-In, First-Out (FIFO)

Yore Frame, Inc.


Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 $ 22.00 $ 17,600.00
9/3
3-9 300 24.00 7,200.00
15-9
9/15 250 25.00 6,250.00
21-9
9/21 200 27.00 5,400.00
29-9
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 $ 47,650.00
Ending Inventory 600 16,600.00
Cost of Goods Sold 1,350 $ 31,050.00
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Value of inventory under FIFO

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Perpetual Average Cost
The following schedule shows the Frame inventory
for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows
600 frames in ending inventory.
Use the perpetual average cost method to determine:
(1) Ending inventory cost
(2) Cost of goods sold

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Perpetual Average Cost
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 $ 22.00 $ 17,600.00
3-9 300 24.00 7,200.00
15-9 250 25.00 6,250.00
21-9 200 27.00 5,400.00
29-9 400 28.00 11,200.00
Goods Available for Date Sales Units
9/1 600
Sale 1,950 9/10 300
$ 47,650.00
Ending Inventory 600 9/30 450
Cost of Goods Sold 1,350

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Perpetual Average Cost
Date Purchased Sold Balance
Beg. Inv. 800 x 22.00 = 17,600 $ 17,600.00
1-Sep 600 x 22.000 = 13,200.00 4,400.00

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Perpetual Average Cost
Date Purchased Sold Balance
Beg. Inv. 800 x 22.00 = 17,600 $ 17,600.00
1-Sep 600 x 22.000 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep 300 x 23.200 = 6,960.00 4,640.00

$11,600.00 ÷ (800-600+300) = $23.200

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Perpetual Average Cost
Date Purchased Sold Balance
Beg. Inv. 800 x 22.00 = 17,600 $ 17,600.00
1-Sep 600 x 22.000 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep 300 x 23.200 = 6,960.00 4,640.00
15-Sep 250 x 25.00 = 6,250 10,890.00
21-Sep 200 x 27.00 = 5,400 16,290.00
29-Sep 400 x 28.00 = 11,200 27,490.00
30-Sep 450 x 26.181 = 11,781.45 15,708.55

$27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181

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Perpetual Average Cost
Date Purchased Sold Balance
Beg. Inv. 800 x 22.00 = 17,600 $ 17,600.00
1-Sep 600 x 22.000 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep 300 x 23.200 = 6,960.00 4,640.00
15-Sep 250 x 25.00 = 6,250 10,890.00
21-Sep 200 x 27.00 = 5,400 16,290.00
29-Sep 400 x 28.00 = 11,200 27,490.00
30-Sep 450 x 26.181 = 11,781.45 15,708.55
Cost of Goods Sold in September
Sale Date Units Cost/Unit Total

Sum
1-Sep 600 22.000 $ 13,200.00
10-Sep 300 23.200 6,960.00
30-Sep 450 26.181 11,781.45
Total 1,350 31,941.45

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Weighted-Average Periodic System
Let’s use the same information to assign costs to ending
inventory and cost of goods sold using the periodic
system.
Ending Inventory
(600 units)
Beginning Inventory
Available
(800 units) for Sale
(1,950 units)
Goods Sold
(1,350)

$47,650 ÷ 1,950 = $24.4359 weighted-average per


unit cost
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Weighted-Average Periodic System
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 $ 22.00 $ 17,600.00
3-9 300 24.00 7,200.00
15-9 250 25.00 6,250.00
21-9 200 27.00 5,400.00
29-9 400 28.00 11,200.00
Goods Available for
Sale 1,950 $ 47,650.00
Ending Inventory 600 24.4359 14,661.54
Cost of Goods Sold 1,350 24.4359 $ 32,988.46

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Value of inventory under AVCO

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Important point
 In the time of rising prices, value of closing inventory is
always higher than value calculated under AVCO and in the
time of falling prices vice versa.
 If closing inventory is higher then it will reduce cost of goods
sold and ultimately profit will be higher.

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Cost behaviour
• the way in which costs change as the volume of
activity changes.
• Management might want information about
estimated costs, or about what costs should have
been.
An understanding of cost behaviour is necessary
in order to:
• forecast or plan what costs ought to be; and
• compare actual costs that were incurred with
what the costs should have been.

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Fixed costs
• Fixed costs are items of cost that remain the
same in total during a time period, no matter
how many units are produced, and regardless of
the volume or scale of activity.
Examples
• The rental cost of a building is Rs.40,000 per
month. The rental cost is fixed for a given period:
Rs.40,000 per month, or Rs.480,000 per year.
• The salary costs of a worker who is paid Rs.
11,000 per month. The fixed cost is Rs.11,000 per
month or Rs.132,000 per year.
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Variable costs
• are costs that increase, usually by the same amount,
for each additional unit of product that is made or each
additional unit of service that is provided.
• The variable cost of a cost unit is also called the
marginal cost of the unit.
• The variable cost per unit is often the same amount for
each additional unit of output or unit of activity.
• This means that total variable costs increase in direct
proportion to the total volume of output or activity.

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Total Variable and Fixed Costs

Total Variable Cost Total Fixed Cost

Number of units Number of


units

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Variable and Fixed Costs Per Unit

Per Unit Variable Cost Per Unit Fixed Cost

Number of units Number of units

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Total Costs
To get total costs you need to add variable
costs and fixed costs
Total Cost

Fixed costs
The Slope is the
variable cost per
unit

Number of units

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Examples of variable cost items.
The cost of buying raw material is Rs.500 per litre
regardless of purchase quantity. The variable cost is
Rs.500 per litre:
• the total cost of buying 1,000 litres is Rs.500,000
• the total cost of buying 2,000 litres would be Rs.
1,000,000.

The time needed to produce an item of product is 4


minutes and labour is paid Rs.150 per hour.
• direct labour is a variable cost and the direct labour
cost per unit produced is Rs.10 (= Rs.150 x 4/60).

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Semi-variable cost
• is a cost that is partly fixed and partly variable.
• A company uses a photocopier machine under a rental
agreement. The photocopier rental cost is Rs.4,000 per
month plus Rs.2 per copy produced.
The Total cost for making15,000 copies during a month?

• The management has estimated that production costs of


Product Y are fixed costs of Rs.250,000 per month plus
variable costs of Rs.30 per unit of Product Y output.
• The expected output next month is 120,000 units of
Product Y. What will be the total cost?

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Stepped cost
• has a fixed cost behaviour pattern within a limited range of
activity, and
• goes up or down in steps when the volume of activity rises
above or falls below certain levels.
• Example
A company might pay its supervisors a salary of Rs. 20,000
each month.
• When production is less than 2,000 hours each month, only
one supervisor is needed:
• When production is between 2,001 and 4,000 hours each
month, two supervisors are needed.
• When output is over 4,000 hours each month, three
supervisors are needed.
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COST ESTIMATION
analysing fixed and variable costs
• y = a + bx
Where:
• y = total costs in a period
• x = the number of units of output or the volume of activity in the
period
• a = the fixed costs in the period
• b = the variable cost per unit of output or unit of activity.

There are two methods of constructing the total cost function equation:
• high/low analysis
• linear regression analysis.

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High/low analysis
Month Production (units) Total cost (Rs.)

January 5,800 40,300

February 7,700 47,100

March 8,200 48,700

April 6,100 40,600

May 6,500 44,500

June 7,500 47,100

Calculate expected total cost of producing 9000 units in July.


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There are figures available for total costs at
different levels of output or activity
High/low analysis uses two historical figures for cost:
• Step 1: Identify the highest and lowest activity levels
and note the costs associated with each level.
• Step 2: Compare the different activity levels and
associated costs and calculate the variable cost= 48,700-
40,300/ 8,200-5,800= Rs. 3.5 per unit
• Step 3: Substitute the variable cost into one of the
cost functions (either high or low).
Total cost of 8,200 units:
• Fixed cost + Variable cost = Rs. 48,700
• Fixed cost + 8,200 x Rs. 3.5 = Rs. 48,700
• Fixed cost = Rs. 48,700 - Rs. 28,700 = Rs. 20,000

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• Step 4: Construct total cost function
Total cost = a +bx = 20,000 + 3.5x
• Step 5: Calculate the expected cost .
Total cost for producing 9000 units in July
= 20,000 + 3.5 x 9,000
=51,500
High/low method with step in fixed costs
A company has identified that total fixed costs increase by 20% when
activity level equals or exceeds 7,500 units. The variable cost per unit is
constant over this range of activity.

PERIOD UNIITS AMOUNT

QUARTER 1 11,000 276,000


QUARTER 2 8,000 240,000
QUARTER 3 5,000 180,000

CALCULATE THE TOTAL COST OF PRODUCING 12000 UNITS


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• Step 1: Choose the pair which is on the same side as the
step. .
• Step 2: Compare the different activity levels and
associated costs and calculate the
variable cost= 276,000-240,000/11,000- 8,000 = Rs. 12 per unit
• Step 3: Substitute the variable cost into one of the cost functions
Fixed cost + 11,000 x Rs. 12 = Rs. 276,000

• cost function above 7,500 units


Total cost = a +bx = 144,000 + 12x

• cost function below 7,500 units


Total cost = a +bx
= (144,000 x 100/120) + 12x

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High/low method with step in variable
costs
• A company has identified that total fixed costs are constant over all levels of
activity but there is a 10% reduction in the variable cost per unit above 24,000
units of activity. This reduction applies to all units of activity, not just the
additional units above 24,000.
PERIOD
UNIITS AMOUNT

QUARTER 1 30,000 356,000


QUARTER 2 25,000 320,000
QUARTER 3 20,000 300,000

Calculate expected cost of production in Quarter 4 for


• 22,000 units
• 26,000 units

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• Step 1: Choose the pair which is on the same side as the
.
change.
• Step 2: Compare the different activity levels and associated
costs and calculate the
variable cost=356,000-320,000/30,000-25,000
=Rs. 7.2 per unit

• Step 3: Substitute the variable cost into one of the cost


functions
Total cost of 30,000 units:
Fixed cost + 30,000 x Rs. 7.2 = Rs. 356,000
Fixed cost = Rs. 356,000 - Rs. 216,000 = Rs. 140,000
• Step 4: Construct total cost function above 24,000 units
Total cost = a +bx = 140,000 + 7.2x
• Step 5: Construct total cost function below 24,000 units
Total cost = a +bx = 140,000 + 8x

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COST ESTIMATION:
LINEAR REGRESSION ANALYSIS
• Linear regression analysis is a statistical technique
for calculating a line of best fit from a set of data:
Y = a + bx
• It is an alternative to the high-low method.
• High-low analysis uses just two sets of data.
Regression analysis uses as many sets of data for
x and y as are available.
• Regression analysis provide a more reliable
estimate than high-low analysis for the values of
a and b.
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A company has recorded the following output levels
and associated costs in the last six months
Month Output “000” Total cost “million”
January 5.8 40.3
February 7.7 47.1
March 8.2 48.7
April 6.1 40.6
May 6.5 44.5
June 7.5 47.1

Required:
Construct the equation of a line of best fit for this data.
Calculate the cost of producing 90,000 units.

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• .

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Hammad Limited (HL) imports and supplies three products, Alpha, Gamma
and Beta. The opening balances and transactions for the month of June 2014
are as follows:

Units purchased during the


Opening balance Units Sold during the month
month
Items

Qty- Value (Rs.) Qty. Invoice value (Rs.) Qty. Value (Rs.)

Alpha 20 60,000 360 920,000 350 1,820,000

The following information is also available:


a) HL’s bank charges a commission of 0.5% of invoice value for opening the letter of
credit.
b) Import taxes and duties were 23% of the invoice value out of which 40% are
refundable/adjustable.
c) The transportation charges are Rs. 1,500 per trip. 20 units of Alpha can be transported
in each trip.
d) HL values its stock on first-in, first-out basis.
e) Average selling costs per unit are Rs. 700.
Required:
Compute the value of stock of each product as at 30 June 2014 in accordance with IAS-2

93
Hammad Limited (HL) imports and supplies three products, Alpha, Gamma
and Beta. The opening balances and transactions for the month of June 2014
are as follows:
Units purchased during the
Opening balance Units Sold during the month
month
Items

Qty- Value (Rs.) Qty. Invoice value (Rs.) Qty. Value (Rs.)

Gamma 100 4.800,000 50 2,375,000 70 4,060,000

The following information is also available:


a) HL’s bank charges a commission of 0.5% of invoice value for opening the letter of
credit.
b) Import taxes and duties were 23% of the invoice value out of which 40% are
refundable/adjustable.
c) The transportation charges are Rs. 1,500 per trip.2 units of Gamma can be
transported in each trip.
d) All goods are repacked after import. The cost of packing per unit was Rs. 1,500.
e) HL values its stock on first-in, first-out basis.
f) Average selling costs per unit is Rs. 1,500.
Required:
Compute the value of stock of each product as at 30 June 2014 in accordance with IAS-2

94
Hammad Limited (HL) imports and supplies three products, Alpha, Gamma
and Beta. The opening balances and transactions for the month of June 2014
are as follows:
Units purchased during the
Opening balance Units Sold during the month
month
Items

Qty- Value (Rs.) Qty. Invoice value (Rs.) Qty. Value (Rs.)

Beta 30 120,000 490 1,820,000 400 1,640,000

The following information is also available:


a) HL’s bank charges a commission of 0.5% of invoice value for opening the letter of
credit.
b) Import taxes and duties were 23% of the invoice value out of which 40% are
refundable/adjustable.
c) The transportation charges are Rs. 1,500 per trip. 15 units of Beta can be transported
in each trip.
d) All goods are repacked after import. The cost of packing per unit was Rs. 700.
e) HL values its stock on first-in, first-out basis.
f) Average selling costs per unit is Rs. 400.
Required:
Compute the value of stock of each product as at 30 June 2014 in accordance with IAS-2

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