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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.
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.
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.
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.
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.
CLASSIFICATION OF OVERHEADS
FACTORY 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.
DIVISIONS OF COST
PRIME COST
It comprises of all direct materials, direct labour and direct expenses. It is also known as
flat cost
WORKS COST
COST OF PRODUCTION
TOTAL COST
SELLING PRICE
It is the price which includes total cost plus margin of profit or minus loss, if any.
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.
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 sheets helps in identifying the total cost stage wise & any unwanted cost can be
curtailed.
PREPARE BUDGETS
PROFIT PLANNING
Costs such as prime cost, factory cost, cost of production, cost of goods sold, total cost
of sale etc.
This helps in determining cost per unit on which u can predict further 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
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
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
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.
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.
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
Cost of Production
Sales Overheads 930000 62 1032000 51.6
90000 06 120000 06