‘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 whose cost to be determined. 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 property transferred, capital stock issued, services
performed or a liability incurred in consideration of goods or services
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. The object for
which the cost is to be determined can be a product or service
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 behavior 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 output up to the 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 or 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 of 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.
Semi-variable Cost
• This is also referred to as semi-fixed or partly variable cost.
• It remains constant upto 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, maintenance of building, 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 three elements cab 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 leather wares, pulp in paper, steel in steel furniture, sugarcane for sugar etc
• What is raw material for one manufacturer might be finished product for another.
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 behavior 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 output up to the 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 or 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 of 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.
Semi-variable Cost
• This is also referred to as semi-fixed or partly variable cost.
• It remains constant upto 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, maintenance of building, 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 three elements cab 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 leather wares, pulp in paper, steel in steel furniture, sugarcane for sugar 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.
5. Some of the items like nails or thread in the store are 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 of wages paid to those workers who are engaged on the manufacturing line of 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 material, wip and finished goods on the production line
• Wages paid to workers operating lathers, drilling, cutting machines etc. are direct wages
• Direct wages are also known 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 actual production of the product.
2. Labour engaged in aiding the operations viz. supervisor, Foreman, Shop clerks and workers 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 the job.
Indirect Cost
It is that portion of the total cost, which cannot be identified and charged direct to the product
It has to be allocated, apportioned and absorbed over the units manufactured on a suitable basis.
Indirect Material
• It is the cost of material other than direct material which cannot be charged to the product directly.
• It cannot be treated as 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.
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.
5. Some of the items like nails or thread in the store are 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 of wages paid to those workers who are engaged on the manufacturing line of 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 material, wip and finished goods on the production line
• Wages paid to workers operating lathers, drilling, cutting machines etc. are direct wages
• Direct wages are also known 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 actual production of the product.
2. Labour engaged in aiding the operations viz. supervisor, Foreman, Shop clerks and workers 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 the job.
Indirect Cost
It is that portion of the total cost, which cannot be identified and charged direct to the product
It has to be allocated, apportioned and absorbed over the units manufactured on a suitable basis.
Indirect Material
• It is the cost of material other than direct material which cannot be charged to the product directly.
• It cannot be treated as 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, Grease, Oil, stationery etc.
2. Small tools for general use.
3. Some minor items which as thread in dress making, cost of nails in shoe making 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 and ward department, watch and 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 SUPPLEMENTARY COST
Aggregate of indirect cost is referred to as overheads. It arises as a result of overall operation of a business. According to Weldon over-head means ‘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.
This cost cannot be associated with a particular product. The principal feature of overheads is the lack of direct tractability to individual product. It remains relatively constant from period to period. The amount of overheads is not directly chargeable i.e. it had to be properly allocated, apportioned and absorbed on some equitable basis.
Classification of Overheads
1.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 manager’s 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.
2. Administrative Overheads 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, office premises, office conveyance, printing and stationery and repairs and depreciation of office premises and furniture etc.
3. Selling and Distribution Overheads: 1. Lubricants, cotton waste, Grease, Oil, stationery etc.
2. Small tools for general use.
3. Some minor items which as thread in dress making, cost of nails in shoe making 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 and ward department, watch and 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 SUPPLEMENTARY COST
Aggregate of indirect cost is referred to as overheads. It arises as a result of overall operation of a business. According to Weldon over-head means ‘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.
This cost cannot be associated with a particular product. The principal feature of overheads is the lack of direct tractability to individual product. It remains relatively constant from period to period. The amount of overheads is not directly chargeable i.e. it had to be properly allocated, apportioned and absorbed on some equitable basis.
Classification of Overheads
1.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 manager’s 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.
2. Administrative Overheads 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, office premises, office conveyance, printing and stationery and repairs and depreciation of office premises and furniture etc.
• 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 in acquiring and retaining customers. It includes the following expenses:
a) Advertisement b) Show room expenses c) Traveling expenses
d) Commission to agents) Salaries of Sales office f) Cost of catalogues
g) Discounts allowed h) Bad debts written off i) Commission on sales
j) Rent of Sales Room
4.Distribution expenses
It includes all those expenses, which are incurred in connection with making the goods available to customers. These expenses include the following:
a) Packing charges b) Loading charges c) Carriage on sales d) Rent of warehouse e) Insurance and lighting of warehouse f) Insurance of delivery van g) Expenses on delivery van h) Salaries of Godownkeeper, drivers and packing staff.
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 re-grouping of the various elements of costs leads to significant divisions of cost.
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 cost of a product. These are items included in profit and loss A/c as per principles of Financial Accountancy but not related to product. For example, Income-tax paid, provision for Income-tax, interest on capital, interest on loan, profit on sale of fixed assets, loss on sale of fixed assets, transfer fees received, transfer to reserves, any other appropriation of profit, commission to Managing Director or Partners, capital loss, donations, capital expenditure, discount on shares and debentures, Goodwill written off, Preliminary expenses written off, brokerage, pure financial expenses or losses and expenses not related to the business, wealth tax, bonus to directors and employees, if it is based on profit, expenses of raising capital, penalties and fines.
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