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Cost & Management Accounting

Introduction
Financial Accounting: It is “the art of recording,
classifying and summarizing in a significant manner
and in terms of money, transactions and events,
which are in part at least, of a financial character and
interpreting the results thereof”

The information supplied by financial accounting is


summarized in the following statements, generally at
the end of an year:
P & L Account
Balance Sheet
Cash Flow Statement
Limitations of Financial Accounting
1. Shows only overall performance
2. Historical in nature
3. No performance appraisal
4. No material control system
5. No labour cost control
6. No proper classification of costs
7. No analysis of losses
8. Inadequate information of price fixation
9. No cost comparison
10.Fails to provide useful data to management
Cost (Introduction)
• Cost is a measurement, in monetary terms, of the
amount of resources used for the purpose of
production of goods or rendering services.

• Cost is the amount of actual or notional


expenditure relating to a product, job, service,
process or activity.

• Cost is often used as a generic term to describe


various types of costs.
Cost Concepts
 Cost Unit –It is a unit of product, service or time in terms of
which costs are ascertained or expressed. It is a unit of
measurement.
 It is unit of measurement of cost
 Example for unit of production: a tonne of steel, a meter of
cloth, a ream of paper, a bale of cotton, a barrel of petrol etc.
 Example for unit of services: passenger miles, cinema seats,
consulting hours etc.

 Responsibility Centers – is the unit or function of an


organization under the control of a manager who has direct
responsibility for its performance. E.g. Cost Center, Revenue
Center, Profit Center, Investment Center.

 Cost Object – any product, service, process or activity for


which a separate measurement of cost is required. For e.g.
Car, Taxi service, weaving process, purchasing raw material
etc.
Cost Concepts
 Cost Center – Is a location, person or item of equipment for
which costs may be ascertained and used for the purposes of
cost control.

 Types of Cost Centers:


◦ Personal Cost Center – person or group of persons
◦ Impersonal Cost Center – location or equipment
◦ Production Cost Center – where actual production takes place
◦ Service Cost Center – departments which render service to other cost
centers
Cost Ascertainment and Cost Estimation
• Cost ascertainment: It is concerned with the computation of
actual costs incurred. It refers to the methods and processes
employed in ascertaining costs.
• Actual cost is useful to know unprofitable activities, losses
and inefficiencies occurring in the form of idle time, excessive
scrap etc.
• Cost estimation: It is pre-determination of cost of goods or
services. Estimated costs are definitely the future costs and
depends upon the past actual costs adjusted for anticipated
future.
• It is useful in making price quotations, bidding for contracts,
preparation of budgets, evaluating performance, preparing
projected financial statements and controlling etc.
Costing and Cost Accounting
• The CIMA, London has defined Costing as “the
techniques and processes of ascertaining costs”
• Wheldon has defined Costing as “the proper
allocation of expenditure and involves the collection
of costs for every order, job, process, service or unit”
• Thus it simply means cost finding by any process or
technique
• It consists of principles and rules which are used for
determining:
The cost of manufacturing a product or the cost of
providing a service
Introduction
• Cost Accounting is the process of accounting from the point
at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centers
and cost units. It includes:
– Collecting, classifying, recording, allocating and analyzing costs
– Preparation of periodical statements and reports for ascertaining and
controlling costs
– Application of cost control methods
– Ascertainment of profitability of activities carried out or planned.

• Cost Accounting is the processing and evaluation of monetary


and non-monetary data to provide information for internal
planning, control of business operations, managerial
decisions and special analysis.
Objectives and Functions of Cost Accounting
I. Ascertainment of cost: In cost accounting, cost of each unit of
production, job, process, or department etc. Is ascertained.
Costs are also predetermined for various purposes.

II. Cost control and cost reduction: It aims to improve profitability


by reducing and controlling costs. For this various specialized
techniques like standard costing, budgetary control, inventory
control etc. are used.

III. Guide to business policy: Cost data provide guidelines for


various managerial decisions like make or buy, selling below
cost, utilisation of idle plant capacity, introduction of a new
product etc.
Objectives and Functions of Cost Accounting
IV. Determination of selling price: It provides cost information on
the basis of which selling prices of products or services may
be fixed.

In order to realize these objectives, the data provided by cost


accounting may have to be re-classified, re-organized and
supplemented by other relevant business data from outside
the formal cost accounting system
Advantages of Cost Accounting
• Helps in ascertainment of cost
• Helps in control of cost
• Helps in decision making (make or buy, retain or replace, continue or shut
down, accept or reject orders, etc)
• Helps in fixing selling prices
• Helps in inventory control
• Helps in cost reduction
• Helps in measurement of efficiency
• Helps in preparation of budgets
• Helps in identifying unprofitable activities
• Helps in identifying material losses
• Helps in identifying idle time, idle capacity
• Helps in improving productivity
• Helps in cost comparison
Introduction
• Cost Accountancy is the application of costing
and cost accounting principles, methods and
techniques to the science, art and practice of
cost control and the ascertainment of
profitability. It includes the presentation of
information derived there from for the
purpose of managerial decision making.

• Cost Accountancy includes costing, cost


accounting, cost control and cost audit
Financial & Cost Accounting
No. Basis Financial Accounting Cost Accounting
Financial performance and
1. Objective Ascertain cost and cost control
position
Shows overall costs and profit / Shows details for each product,
2. Costs and profits
loss process, job, contract, etc
Emphasis on control and
3. Control / Report Emphasis on reporting
reporting
4. Decision making Limited use Designed for decision making
5. Responsibility Does not fix responsibility Can effectively fix responsibility
6. Time frame Focus on historical data Focus on present and future
General reports like P&L
Can generate special reports
7. Type of reports Account, Balance Sheet, Cash
and analysis
Flow Statement
Voluntary, except for some
8. Legal need Statutory requirement
cases
Records internal and external
9. Transactions Records external transactions
transactions
10. Reader Everybody Internal management
11. Formats Standard, as per law Tailor made
12. Access Everybody, except for some Very limited access
13. Unit of value Monetary Monetary and physical
Management Accounting (Introduction)
According to CIMA, “management accounting is an
integral part of management concerned with
identifying, presenting and interpreting information
used for-
i) Formulating strategy
ii) Planning and controlling activities
iii)Decision making
iv)Optimizing the use of resources
v) Disclosure to shareholders and others external to the
entity
vi)Disclosure to employees
vii)Safeguarding assets”
Management Accounting (Introduction)

The ICWAI has defined management accounting as “a


system of collection and presentation of relevant
economic information relating to an enterprise for
planning, controlling and decision-making

The management accountant is called “Controller or


Financial Controller” and generally is a part of top
management team
Characteristics/ Nature of Management Accounting

• Useful in decision making


• Derived from Financial and Cost Accounting
information
• Exclusively for internal use
• Purely optional
• Concerned with future
• Flexibility in presentation of information
Functions/ Objectives of
Management Accounting
• Planning
• Coordinating
• Controlling
• Communication
• Financial analysis and interpretation
• Qualitative information
• Tax policies
• Decision making
Financial Accounting vs Management Accounting
Basis Financial Accounting Management Accounting
External and internal Mainly for external users Mainly meant for internal
users user i.e. management
Accounting method Double entry system Not based on Double entry
system
Statutory As per company law and tax It is optional
requirement laws
Analysis of cost and It shows loss/profit of business It provides detailed
profit as a whole. It does not show the information about individual
cost and profit for individual product, plant, process or
product, process or deptt. deptt.
Past and future data It represents past/historical It uses past data for future
records projections
Periodic and Usually on an year to year basis These are prepared
Continuous reporting frequently
Accounting standards As per accounting standards It is not bound by accounting
issued by ICAI standards
Financial Accounting vs Management Accounting
Basis Financial Accounting Management Accounting

Types of P & L Account and Balance Special purpose reports like


statements Sheet performance report of a
prepared manager, department,
product etc.

Publication and Financial statements are These statements are for


audit published for general public internal use and thus neither
use and also sent to published nor are required to
shareholders. These are be audited by the Chartered
required to be audited by the accountants
Chartered accountants
Monetary and It provides information in May apply monetary or non-
Non – monetary terms of money only monetary units of
measurement measurement. For e.g.
quantity, machine hour,
labour hour etc.
Cost Accounting vs Management Accounting
Basis Cost Accounting Management Accounting
Scope Limited to providing cost Broader scope as it provides all types of
information for managerial uses information
Emphasis Mainly on cost ascertainment and Mainly on planning, controlling and
cost control to ensure maximum decision making to maximize profit
profit
Techniques Standard costing and variance All the techniques of cost accounting
employed analysis, marginal costing and cost but in addition it also uses ratio
volume profit analysis, budgetary analysis, fund flow statement,
control, uniform costing etc. statistical analysis, operation research,
mathematics, economics etc.,
whatsoever help management in tasks
Evolution Its evolution is mainly due to the Its evolution is due to the limitations of
limitations of financial accounting cost accounting

Statutory Maintenance of cost records has It is purely voluntary and its use
requirement been made compulsory in selected depends upon the utility of
industries as notified by the govt. management
from time to time
Cost Accounting vs Management Accounting
Basis Cost Accounting Management Accounting
Data base It is based on data derived It is based on data derived from
from financial accounts financial accounting, cost accounting
and other sources

Status in In an organisational setup, cost In an organisational setup,


organisation accountant is placed at a lower management accountant is placed at a
level in hierarchy than the higher level in hierarchy than the cost
management accountant accountant

Installation Cost accounting can be Management accounting cannot be


installed without management installed without a proper system of
accounting cost accounting
Elements of costs
In order to interpret the term cost correctly and to
ascertain the cost with respect to the cost centers,
the cost attached with the manufacturing process
may be subdivided, known as Elements of Costs.

(A) Material

(B) Labour

(C)Expenses
Elements of Cost

Material Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

Selling
Factory / Works Administration & Distribution
Overheads Overheads Overheads
Material Cost
The cost of commodities and materials used by the
organization. It includes cost of procurement, freight inwards,
taxes, insurance etc.
Direct Material Cost –
all raw materials, either purchased from outside or
manufactured in house, that can be conveniently identified
with and allocated to cost units.
It generally becomes part of the finished product. However in
many cases a material becomes part of finished product but
not considered as direct material because the value of such
material is so small that it is quite difficult and futile to
measure it. e.g. nails in furniture, thread in garments etc.
e.g. Cotton used in a textile firm, Clay in bricks, leather in shoes
Cloth in garments, Timber in furniture etc.
Indirect Material Cost –
material which cannot be identified with the
individual cost centre, assist the manufacturing
process and does not become an integral part
of finished goods.
These are minor in importance i.e. small and
relatively inexpensive items which may become
the part of finished product. E.g.
Consumable stores, pins, screws, nuts and
bolts, thread etc.,
also those items which do not become part of
finished product e.g. coal, Cotton, oils and
lubricants, stationary material, sand paper etc.
Labour Cost
The cost of remuneration (wages, salaries, bonus, commission
etc.) paid to the employees of the organisation.
Direct Labour Cost –
identified with the individual cost centre i.e. it can be
conveniently identified with a particular product, job or
process and is incurred for those employees who are engaged
in the manufacturing process.
Indirect Labour Cost –
cost which cannot be identified with the individual cost centre
and is incurred for those employees who are not engaged in
the manufacturing process but only assist.
wages paid to foreman/storekeeper, salary of works manager,
Accountant/Personnel dept. salaries etc.
Expenses
This is the cost of services provided to the organisation and the
notional cost of assets owned.
Direct Expenses Cost –
Expenses which can be identified with and allocated to individual
cost centers or units.
Also known as chargeable expenses
Hire charges of machinery/equipment for particular job, cost of
defective work , cost of patent rights, experimental cost, cost of
special design, drawings, layout, royalty, depreciation on plant
etc.
Indirect Expenses Cost –
Expenses which cannot be identified by individual cost centers.
Rent , Telephone expenses, Insurance, Lightening , Advertising,
repairs etc.
Direct Material Cost
+
Direct Labour Cost Prime Cost
+
Direct Expenses Cost

Indirect Material Cost


+
Overheads Indirect Labour Cost
+
Indirect Expenses Cost
Overheads- Classification
Production/ Manufacturing/Factory / Works Overheads
Consist of all overhead costs incurred from the stage of
procurement of material till the production of finished goods.
Indirect material such as Consumable stores, Cotton waste, oils
and lubricants, stationary material etc.
Indirect labour cost such as wages paid to
foreman/storekeeper, salary of works manager,
Accountant/Personnel dept. salaries, salaries of factory office
staff etc.
Indirect Expenses cost such as Carriage inward cost, Factory
lightening/power expenses, rent/ Insurance /repairs for factory
building/machinery, depreciation on factory building or
machinery etc.
Overheads- Classification
Office and Administrative Overheads
These overheads consists of all overheads costs incurred for the
overall administration of the organisation. i.e. planning and
controlling the functions, directing and motivating the
personnel etc. They include :
Indirect material such as stationary items, office supplies ,
broom, brush etc.
Indirect labour cost such as salaries paid to account and
administrative staff, office staff, Directors’ remuneration etc.
Indirect expenses such as postage/telephone, depreciation on
office building, legal/audit charges, Bank charges .
Rent/insurance / repairs in offices etc.
Overheads- Classification
Selling and Distribution Overheads
Selling cost is the cost of promoting sales and retaining customers.
Distribution cost consist of all overhead costs incurred from the
stage of final manufacturing of finished goods till the stage of sale
of goods in the market and collection of dues from customers.
 Indirect material such as packaging material, samples , catalogues,
oil, grease for delivery vans etc.
Indirect labour like salaries paid to sales personnel, commission
paid to sales manager, salary of warehouse staff, salary of driver of
delivery vans etc.
Indirect expenses like carriage outward, warehouse charges,
advertisement, bad debts, repairs and running of distribution van,
discount offered to customers , insurance of goods in transit etc.
Classification Meaning Example
By Nature or Element

Direct Material Cost


Elements of Cost
Which can be directly allocated to a Basic raw material,
product, job or process primary packing material
Which cannot be directly allocated to a Stores, consumables,
Indirect Material Cost
product, job or process some low value items
Labour directly engaged for a specific
Direct Labour Cost Shop floor labour
job, contract or work order.
Labour not directly engaged for a
Indirect Labour Cost Staff departments
specific job, contract or work order.
Processing charges,
All direct costs other than materials
Direct Expenses machine hire charges,
and labour costs.
excise duty, etc
Rent, repairs, telephones,
All indirect costs other than indirect
Indirect Expenses electricity, utility costs,
materials and indirect labour costs.
insurance, depreciation
Sum of indirect material, indirect labour
Factory Overheads
and indirect expenses for the factory.
Administration Sum of indirect material, indirect labour
Overheads and indirect expenses for the office.
Sum of indirect material, indirect labour
Selling Overheads
and indirect expenses for selling.
Distribution Sum of indirect material, indirect labour
Overheads and indirect expenses for distribution.
Cost Components
No. Cost Component Description
Direct Material Cost + Direct Labour Cost + Direct Expenses
1. Prime Cost (Direct Material Cost = Opg. Stock of RM + Net Purchase Cost
– Clg. Stock of RM)
Works or Factory Prime Cost + Factory Overheads + Opg. Stock of WIP – Clg.
2.
Cost Stock of WIP
Cost of Production
3. or Cost of Goods Factory Cost + Admin Overheads
Produced
4. Cost of Goods Sold Cost of Production + Opg. Stock of FG – Clg. Stock of FG
5. Cost of Sales Cost of Goods Sold + Selling & Distribution Overheads
Output or Unit Costing (Cost Sheet)

Output/ Unit/ Single costing is a method of cost


ascertainment which is used in those industries where:
Production consist of a single or few variety of same
product with variation in size, shape, colour etc.
Production is uniform and on continuous basis

It is a statement which is prepared periodically to provide


detailed cost of a cost center or cost unit. A cost sheet
not only shows the total cost but also the various
components of the total cost.

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Costing P&L Account
No. Particulars Amount Per Unit

Direct Material Cost


= Opening Stock of Materials
+ Purchases
A + Expenses on Purchases (on number of units produced)
- Purchase Returns
- Closing Stock of Materials
- Value of Normal Scrap of Direct Materials

Direct Labour Cost


= Direct Labour Cost Paid
B (on number of units produced)
+ Outstanding / Payable
- Prepaid

C Direct Expenses (on number of units produced)

D Prime Cost = (A + B + C) (on number of units produced)

Works / Factory Overheads


= Factory Overheads Paid
E - Value of Normal Scrap of Indirect Materials (on number of units produced)
+ Opening Stock of WIP
- Closing Stock of WIP

F Works or Factory Cost = (D + E) (on number of units produced)


Costing P&L Account
No. Particulars Amount Per Unit

G Office and Admin Expenses (on number of units produced)

H Cost of Goods Produced = (F + G) (on number of units produced)

FG Stock Adjustment
I + Opening Stock of FG
- Closing Stock of FG

J Cost of Goods Sold = (H + I) (on number of units sold)

K Selling & Distribution Expenses (on number of units sold)

L Cost of Sales = (J + K) (on number of units sold)

M Profit (on number of units sold)

N Sales = (L + M) (on number of units sold)


Expenses excluded from Costs

Item of expenses which are apportionment of profit should not


form a part of the costs. These are-
Income tax
Dividend to share holders
Commission to partners, managing agents etc.
Capital Loss
Interest on Capital
Interest paid on debentures
Capital expenses etc.
Statement of Cost / Cost Sheet
Rs. Rs.
Raw Materials
Opening stock of Raw materials  
Raw Material purchased  
Cost of Materials available for use  
Less : Closing stock of raw Materials () 
Cost of Raw materials used / Consumend  
Direct labour Wages  
Other Direct charges  
Prime Cost  
Factory Overheads:  
Indirect materials  
Indirect Labour  
Depreciation on factory Building  
Depreciation on Factory equipments  
Insurance  
Repairs and maintenance  
Other factory overheads  
Gross Factory Cost  
Add : Work-in-progress (Opening)  
Less: Work-in-progress (Closing)  ()
Factory cost  
Office and Administrative overheads  
Office salaries  
Office rents, Insurance  
Other office overheads  
Office Cost / Cost of Production  
Add : Opening Stock of Finished goods  
Goods available for sale  
Less: Closing Stock of Finished Goods  ()
Cost of Goods sold  
Selling and Distibution Expenses  
Cost of Sales  
Profit  
sales  
From the viewpoint of managerial needs, cost concepts fall into
four broad categories.

(1)
(1)Income
IncomeMeasurement
Measurement

(2)
(2)Profit
ProfitPlanning
Planning

(3)
(3)Cost
CostControl
Control

(4)
(4)Special
SpecialSituations
Situations

7-40
COST CONCEPTS RELATING TO
INCOME MEASUREMENT

(i) (ii)
(ii)Absorbed
AbsorbedCosts
Costs
(i)Product
ProductCosts
Costs and
and
andPeriod
PeriodCosts
Costs andUnabsorbed
Unabsorbed
Costs
Costs

(iii)
(iii)Expired
ExpiredCosts
Costs (iv)
(iv)Joint
Jointproduct
product
and
andUnexpired
Unexpired Costs
Costsand
andSeparable
Separable
Costs
Costs Costs
Costs

7-41
(i) Product costs and Period costs

Production costs are costs which can be identified with goods


produced/purchased for resale. Period costs are costs which
are not necessary for production and are incurred even if
there is no production and matched against the revenue of
the current period.

(ii) Absorbed costs and Unabsorbed costs

Absorbed costs are defined as those costs, which have been


charged to production. Costs, which
remain uncharged to production are referred
to as unabsorbed costs.
7-42
(iii) Expired costs and Unexpired costs

An expired cost is one which cannot contribute


to the production of future revenues. An unexpired cost has the
capacity to contribute to the
production of revenue in future, for example, inventory.

(iv) Joint product costs and Separable costs

Joint product costs are the costs of a single process/series of


processes that simultaneously produce two or more products of
significant sale value. Separable costs refer to any cost that can be
attributed exclusively and wholly to a particular
product/process/division/department.

7-43
Example 1: Absorbed, Underabsorbed and Overabsorbed Costs
Suppose that fixed costs are Rs 30,000 and the normal production is
15,000 units. The standard fixed overhead rate (SFOR) of recovery is
Rs 2 per unit (Rs 30,000 ÷ 15,000 units). In other words, every unit of
production absorbs Rs 2 of fixed costs.

If the company produces 10,000 units, the total absorbed costs will be Rs
20,000 (10,000 units × Rs 2, SFOR). Obviously, Rs 10,000 constitutes
unabsorbed costs (Rs 30,000, actual cost – Rs 20,000, absorbed costs).

In contrast, overabsorbed costs represent the positive difference of fixed


costs charged to production and actual fixed costs. Such a situation will
arise if actual production is more than the normal production.

In the above example, if the company produces 16,250 units, the costs
charged to production will be Rs 32,500 (16,250 units × Rs 2, SFOR). The
overabsorbed cost will be Rs 2,500 [Rs 30,000, actual fixed costs (AFC) –
Rs 32,500 charged to production]. Figure 1 portrays these relationships.

7-44
Absorbed costs = Units produced × SFOR
Unabsorbed costs = [AFC – (Units produced × SFOR)]
Overabsorbed costs = [Units produced × SFOR) – AFC]

32,500

Over-absorption
30,000 FC Line

Under-absorption
Full absorption
1,5000
) s eepur ni ( s daehr ev O dexi F

Y
10,000 1,5000 1,5000
Volume of Activity (in Units)

Figure 1: Absorbed and Unabsorbed Costs

7-45
COST CONCEPTS RELATING TO PROFIT
PLANNING

(i)
(i)Fixed,
Fixed,Variable
Variableand
andSemi-
Semi-
variable/Mixed
variable/MixedCosts
Costs

(ii)
(ii)Future
FutureCosts
Costsand
andBudgeted
Budgeted
Costs
Costs

7-46
Fixed Costs
Fixed (non-variable) costs do not change with changes in
volume of output or activity within a specified range of
activity/output (relevant range) for
a given budget period.

Committed Fixed Costs


Committed fixed costs are costs that are incurred in maintaining
physical facilities and managerial setup.

Discretionary/ Programmed Fixed Costs

Discretionary fixed costs are costs caused


by management policy decisions i.e. these may be avoided
7-47
Table 1: Production Volume and Fixed Costs
Total fixed cost Production (in units) Average fixed cost per unit
Rs 10,000 1,000 Rs 10
10,000 2,000 5
10,000 5,000 2
10,000 10,000 1

Y Y
10,000 10

2
pur ni ( t s oC dexi F egar ev A
s ee pur ni ( t s oC dexi Fl at oT

X X
0 0
2,000 4,000 6,000 8,000 10,000 2,000 4,000 6,000 8,000 10,000 X
Volume of Activity (in Units) Volume of Activity (in Units)
Figure 2: Volume and Total Fixed Costs Figure 3: Volume and Fixed Costs Per Unit

7-48
Variable costs

Costs that tend to vary in total in direct proportion within a


relevant range and for a given period
to production/sales/some other measure
of volume are variable costs.

7-49
Table 2: Production Volume and Variable Costs
Production (unit) Material costs Labour costs Total variable cost
1 Rs 5 Rs 2 Rs 7
10 50 20 70
100 500 200 700
1,000 5,000 2,000 7,000

Y Y

TVC Line TVC Line

ti nu r e p st s oC el bai r a V
ni ( st s oC el bai r a V l at oT
) s ee pur

X ) s eepur ni ( X
Production in Units Production in Units

Figure 5: Total Variable Cost Figure 6: Variable Cost Per Unit

7-50
Semi-Variable (mixed) Costs
All costs which are neither perfectly variable nor absolutely
fixed in relation to volume changes
are called semi-variable (mixed) costs.
They consist of both fixed costs
and variable costs.
Y
ni ( st s oC el bai r a V-i meS
) s ee pur

Figure 7: Semi-Variable Cost

7-51
Future Costs
Future costs are costs reasonably expected to be
incurred at some future date as a
result of a current decision.

Budgeted Costs

Budgeted costs are costs which are incorporated


formally in the budgeted of a specific period.

7-52
Cost Concepts For Control

(i)
(i)Responsibility
ResponsibilityCost
Cost

(ii)
(ii)Controllable
Controllableand
andNon-
Non-
Controllable
ControllableCosts
Costs

(iii)
(iii)Direct
Directand
andIndirect
IndirectCosts
Costs

7-53
(i) Responsibility costs
Responsibility costs are costs which are classified/identified /accumulated
with the person(s) responsible for their incurrence.

(ii) Controllable
(ii) Controllableand
and Non-controllable
Non-controllable costscosts

The costs which may be directly regulated at a given level of management


authority. VC are generally controllable by Management heads. Otherwise, it
is non-controllable like factory rents, salaries etc.

(ii) Direct and indirect costs


Those costs which can be identified logically and practically in their entirety
to a particular department/product/cost unit/process are called
direct costs. Those costs which are not practically
identifiable exclusively and wholly to a particular product/division/segment
are called indirect
(common) costs.
7-54
Cost Concepts
For Decision- Making

Relevant
Relevantand
and Differential
DifferentialCosts
Costs
Irrelevant
IrrelevantCosts
Costs

Out-of-pocket
Out-of-pocket Opportunity
OpportunityCosts
Costs
Costs
Costsand
andSunk
Sunk and
andImputed
ImputedCosts
Costs
Costs
Costs

7-55
Relevant and Irrelevant costs

Not all costs are relevant for specific decisions. Costs which are
influenced by a decision are a relevant. These are future cost which
are affected by a decision being made and cost which is not affected
by a decision is irrelevant cost.

Differential costs

Differential/incremental costs are the differential/additional costs which


would be incurred if the management chooses one course of action as
opposed to another. They are differential/incremental
costs caused by a particular decision.

7-56
Out-of-pocket costs and Sunk costs

A cost which requires a current/future cash expenditure


as a result of a decision is an out of pocket cost. Costs which have already
been incurred in the past are sunk costs.

Opportunity costs and Imputed costs

Opportunity cost represents the benefits foregone by not choosing the


second best alternative in favour of the best one. Imputed costs are
hypothetical costs that must be considered for correct decision, for
example, interest on capital, rented value of building owned by the firm.

7-57
Marginal Cost

Additional cost of producing one additional unit. It is same as variable


costs. It helps is decision like make or buy, pricing of products, selection
of sales mix etc.

Conversion Cost

It is the total cost of converting raw material into finished product. In


other words it is the total of direct labour and factory overhead costs

7-58
Assignment on:
Consumption & Costing of Apparel Production

Submitted To:
Md. Bashir Ahmed
Lecturer of
BIBT University College

Submitted By:
Sazzad Hossain Sakib
Department: AMT
Student ID: 1502019
Reg. No: 14505000088

Submission Date:
29-08-2018

1
Consumption & Costing

Subject: Consumption, Costing

Consumption: In the apparel business, consumption means quality of raw


materials with a view to determine the price of a garment. In order to calculate the
quantity how much fabric, sewing thread, zipper, button and other accessories are
required to produce a garment up to the exporting is called consumption.

Costing: Costing is the most sensitive issues in the aspect of profit and loss in any
kind of dealings. Costing means calculating process of a product to fix profit and loss
mathematically. RMG sector is a business where so many guys have to perform to
achieve a particular target. It is a hard working track where every minute is counted.
Costing of a garment is a mandatory task for an RMG merchandiser, especially in soft
line. Overall chance of getting order and profit depends on it simultaneously. Product
costing is a vital matter to know profit and loss in apparel industry. It is not only
mandatory in apparel industry but also other industry should calculate product
costing accurately. Otherwise, that business will not run a long time. It’s probably
one of the toughest tasks for someone to find out accurate product pricing. There
are two main hazards and someone should be aware of under pricing and overpricing
while evaluating and planning overall business strategies. Causes, both elements are
harmful for any organization. It’s a general trend for all to gain profit by selling a
product.

Costs to Consider:

• Direct cost: Cost of raw material — 66%. Cost of size and chemicals – 4%.
Production cost comprising of running the machine, maintenance, power
fuel, humidification and other utilities — 8 % and worker wages and
salaries — 8% losses incurred due to shrinkage, wastage, grading, and also
selling commissions.
• Indirect cost: Interest on investment, loan, working capital, depreciation,
etc. Above 7%, overheads and administrative expenses like traveling,
telephone, couriers, legal issues, taxes comprising of 7%.
• Profit: 10 – 20% depending on the order size. In some companies, 70% of
the fabric cost will comprise of direct cost, but incorporate selling only 40%
cost of the fabric is direct cost and 60% is overheads.

2
Consumption & Costing

Subject: Merchandising Consumption & Costing

When buyer placed an export order to vendor, a merchandiser has to schedule


the following functions on urgent basis:

 Compute fabric requirement based on consumption.


 Calculate accessories requirement based on sample physical checking i.e.
need a quantity of Zipper, Thread, Snap, interlining, sticker, label, zip puller,
poly bag and carton box etc.
 Sourcing of fabric and accessories.
 Product Cost Analysis
 Prepare final consumption sheet and double check that file to erase any
missing item.

There are some parameters which should be taken into consideration while
doing costing. Following parameters need to be counted for garments costing:

 Quantity of garments
 Fabric consumption
 Nature of fabric
 Knitting pattern
 Yarn content
 Yarn count and type
 Yarn cost per kg.
 Cost of accessories like hangers, cartons, ply-boards, poly-bags etc.
 Cost of trims likes hangtags, labels, badges, buttons, bows, twill tapes, etc.
 Other operational charges like heat seal, print, embroidery, washing etc.
 CMT charges.
 Design and pattern of garments
 Packing method and assortment
 Any restriction on use of dyes and chemicals
 Tolerance in dye lot and shade variation
 Type of dyes and chemicals to be used
 Number of garments to be packed per poly, blister and carton box
 Quality of carton box, type and thickness of poly bag

3
Consumption & Costing

Subject: Merchandising Consumption & Costing

Following factors should be considered while doing garments costing:

 Details of printing, embroidery, and lab test requirement


 Number of color and size in the order including lab test requirement for all
colors
 Government cash incentive
 Factory variable cost
 Direct labor
 Indirect labor
 Depends on shipping method
 Depends on MOQ
 Level of AQL & inspection authority
 Amount of raw materials used
 Production lead time
 Payment terms
 Miscellaneous cost
 Bank liability
 Profit margin
 Total utility cost
 Sales and distribution cost
 Office and administrative cost
 Any hidden charges
 Transport cost including freight and insurance

4
Consumption & Costing

Subject: Overhead Cost

Common Over Heads of a Garment Factory


 Building Rent
 Salary of the stuffs and associate pay role cost
 Electricity Bill
 Gas Bill
 Others Utility Bill
 Transport expenses
 Expenses on consumable (Diesel, Chemicals etc)
 Administration Cost
 Employee welfare expenses
 Professional and Legal expenses
 House keeping
 Stationary and Printing Cost
 Over Time expenses

5
Consumption & Costing

Subject: Fabric Consumption & Costing

Fabric consumption

Once the sample is approved and a pattern is developed, the amount of fabric
required per unit is calculated. The fabric cost constitutes 60 to 70 percent of the
total garment making cost. The fibre content, spinning process used, fabric GSM
(Gram Square Meter), and the percentage of shrinkage and wastage in the fabric are
also determined while deriving the cost. The consumption for knitted garments is
determined in kilograms while for woven it is determined in yards. Two popular
systems used for the calculation of amount of fabric required per garment are
mathematical and marker planning systems.

The mathematical system provides a rough estimate to the manufacturer and is


generally used in the sampling stage of production. The consumption of fabric for
producing a certain style of garment is calculated by measuring the length and the
width of each and every piece of the garment pattern. Either by using software like
Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) or
manually the marker planning can be done.

Weaving or knitting cost

For knitted garments, the Gram Square Meter (GSM) of the fabric plays a vital role in
costing. The type of machines, fabrics & blends, and configurations used for knitting
the fabric of the garment affects the price of making. Similarly for woven apparels,
the Ends per Inch (EPI) are taken into account. The bigger the beaming length, the
lesser will be the cost of weaving. Hence, the beam size can increase or decrease the
cost of making a garment. The kinds of weave like twill, satin, and plain and the sort
of machineries used for the particular garment influence the weaving cost.

6
Consumption & Costing

Subject: Knit Fabric Consumption

Consumption of a basic knit T shirt

# A T-shirt Body length is 72 cm, Half Chest 33 cm, Sleeve length 24 cm,
Armhole 38 cm, Fabric GSM 180. Find out fabric consumption of per dozen T-
shirt.

Consumption:
(Body L + Allowance )×(Width +Allowance )×GSM ×No .of parts ×12
Formula:
10000000

Here given,

Body length= 72 cm
Armhole= 38 cm
Half chest= 33 cm
GSM=180
Sleeve length= 24 cm

Front & Back part Consumption


(Body L + Allowance )×(Width +Allowance )×GSM ×No .of parts ×12
=
10000000
(72 + 2)×(33+2)×180 ×2 ×12
=
10000000
= 1.11888
= 1.12 kg

Sleeve Consumption
(Body L + Allowance )×(Width +Allowance )×GSM ×No .of parts ×12
=
10000000
(24 +2)×(38+1)×180 ×2 ×12
=
10000000
= 0.438048
= 0.44 kg

Total Fabric= (1.12+0.44) kg


= 1.56 +3%
=1.61 kg/dozen

7
Consumption & Costing

Subject: Consumption in Excel Sheet

Knit Fabric Consumption by Excel Sheet

Merchendising Consumption of Knit (Per Dozen)


Item Name Length Width L.S.A W.S.L GSM no.of p Consumption
1 Front&Back 72 33 2 2 180 2 1.11888
2 Sleeve 24 38 2 1 180 2 0.438048
3 0
4 0
5 0
6 0
7 0
8 0
9 0
10 0
11 0
12 0
13 0
14 0
15 0
16 0
17 0
18 0
19 0
20 0
Total 1.556928

Note: By this excel sheet any one can do consumption of any knit garments easily by
input only measurement. Here no need to calculate manually but need to add
allowance.

8
Consumption & Costing

Subject: Woven Fabric Consumption

Consumption of a basic Woven Fabric Shirt

# A Shirt Front length is 30 inch, across chest 18 inch, back length 32 inch,
across back 14 inch, sleeve length 30 inch, armhole 18 inch, Fabric width 60
inch. Find out fabric consumption of per dozen shirts.

Consumption:
(Body L + Allowance )×(Width +Allowance )×No .of parts ×12
Formula:
Fabric Width ×36

Here given,

Front length= 30 inch Sleeve length= 32 inch


Across chest= 18 inch Armhole= 14 inch
Back length= 30 inch Fabric width= 60 inch
Across back= 18 inch

(Body L + Allowance )×(Width +Allowance )×No .of parts ×12


Front part consumption =
Fabric Width ×36

(30+ 1.5)×(18+4)×1 ×12


=
60 ×36

=3.85 yds

(Body L + Allowance )×(Width +Allowance )×No .of parts ×12


Back part consumption =
Fabric Width ×36

(30+ 1.5)×(18+1)×1 ×12


=
60 ×36

=3.33 yds

9
Consumption & Costing

Subject: Woven Fabric Consumption

(Body L + Allowance )×(Width +Allowance )×No .of parts ×12


Sleeve consumption =
Fabric Width ×36

(32+ 1)×(14+1)×2 ×12


=
60 ×36

=5.5 yds

Total = (3.85+3.33+5.5)

=12.68+3%

=13.1 yds/dozn

10
Consumption & Costing

Subject: Consumption in Excel Sheet

Woven Fabric Consumption by Excel Sheet

Merchendising Consumption of WOVEN


Item Name Length Width L.S.A W.S.L no.of p F Width Consumption
1 Front part 30 18 1.5 4 1 60 8316 2160 3.85
2 Back part 30 18 1.5 1 1 60 7182 2160 3.325
3 Sleeve 32 14 1 1 2 60 11880 2160 5.5
4 0 0 #DIV/0!
5 0 0 #DIV/0!
6 0 0 #DIV/0!
7 0 0 #DIV/0!
8 0 0 #DIV/0!
9 0 0 #DIV/0!
10 0 0 #DIV/0!
11 0 0 #DIV/0!
12 0 0 #DIV/0!
13 0 0 #DIV/0!
14 0 0 #DIV/0!
15 0 0 #DIV/0!
16 0 0 #DIV/0!
17 0 0 #DIV/0!
18 0 0 #DIV/0!
19 0 0 #DIV/0!
20 0 0 #DIV/0!

Note: By this excel sheet any one can do consumption of any woven garments easily
by input only measurement. Here no need to calculate manually but need to add
allowance.

11
Consumption & Costing

Subject: Costing of T-Shirt

# A t-shirt, which requires 7 kg fabric to produce per dozen product. For 75000
pcs product how much will be cost?

Solution:
Raw material (Fabric) = (7×3.50) $
= 24.5 $

Trims (sewing thread) = 12×10.42 m (10.42m in per gmt)


=125.04m
=(125.04/5000) (5000m per cone)
=0.025×4 $
= 0.1 $

Accessories (Package) =3 $

Cost of Making = 0.83 $

Commercial =0.4 $

Total =28.83 $

So the cost will be 28.83 $ per dozen. Then need to be adding company profit,
buying house commission.

12
Consumption & Costing

Subject: Factory Overseas & FOB Calculation

# calculate factory overseas and FOB price for per dozen T-shirt. Total products
are 200000 and total days invest 4 days fabric 6.5 lbs/dzn.

Solution:
Factory Overhead cost per month:

1. Building Rent = $11905

2. Salary of the stuffs and associate pay role cost = $65476

3. Electricity Bill = $2380

4. Gas Bill = $1190

5. Others Utility Bill = $1190

6. Transport expenses = $2380

7. Expenses on consumable (Diesel, Chemicals etc) = $1190

8. Administration Cost = $1190

9. Employee welfare expenses = $1190

10. Professional and Legal expenses = $1190

11. Housekeeping = $950

12. Stationary and Printing Cost = $1190

13. Over Time expenses = $11905

Total Cost = $103326

13
Consumption & Costing

Subject: Factory Overseas & FOB Calculation

FOB Price:
Calculation for per dozen:

Raw materials = (6.5lbs+3%)× $1.3

=$6.53×1.3

=$8.49

Accessories = $2.85

Trims =$3.00

overheads ×𝑑𝑑𝑑𝑑𝑑𝑑 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 ×12


CM = (1 month= 30 days)
30×𝑛𝑛𝑛𝑛 .𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝

$103326 ×4×12
=
30×200000

=$0.83

Commercial =$0.40

Total =$15.57

Profit 10% =$1.56

Total =$17.13

Buying house commission 4%= $0.69

So FOB price per dozen will be =$17.82

14
Consumption & Costing

Subject: Sweater Consumption

Question: Let us- Women’s 100% acrylic, 7 GG, round neck, full sleeve pullover with
black & white stripe. Approximately 11 pound per dozen. Order quantity is 50000
pcs. Now how much yarn of each color we need to execute this order? Stripe height
black color 5.2cm & white color 4.8cm, body length 70cm.

Solution:

Let,

Black yarn = A
White yarn = B

Black yarn = 5.2×7 =36.4cm


White yarn = 4.8×7 =33.6cm

Black, A% = 52%
White, B% =48%

Total (A+B)%= (52+48)% = 100%

Weight of A = 11lbs × 52% = 5.72 lbs


Weight of B = 11lbs × 48% = 5.28 lbs

Consumption for A = (weight+wastage%) × order quantity ÷ 12


= (5.72+3%)× 50000 ÷ 12

=24541.7 lbs

Consumption for B = (weight+wastage%) × order quantity ÷ 12

= (5.28+3%)× 50000 ÷ 12

=22666.7 lbs

So, we will need 24541.7 lbs of black yarn and 22666.7 lbs of white yarn.

15
Consumption & Costing

Subject: Sewing Thread Consumption

Sewing Thread Consumption


After fabric, thread is another component which needs to be considered for
calculating the cost of garments most. The consumption of thread is calculated by IE
department. It is dependent upon the type of seam and SPI. While ordering the
thread the operation break down and number of sewing M/c for that particular style
should be taken in account. Accordingly number of cones of thread needs to order.
In order to calculate thread consumption special software’s are also available which
gives the accurate thread consumption.
Sometimes thread can be computed as while preparing the sample, initial weight of
thread cone is measured and after preparation of sample again weight measured.
The difference of weight gives how much thread is consumed, and converting it into
meters will give actual thread consumption for that particular garment. While
ordering thread it’s important to consider the wastage, normally which is 10-15%.

Formula: Thread per GMT × GMT Quantity ÷ Length in Cone

Product Name Consumption

Basic T-shirt 120-130 meter

Basic Polo shirt 170-175 meter

Tank top 50-55 meter

Fleece/Sherpa jacket 250-260 meter

Kids/girls dresses 200-450 meter

Basic long sleeve woven shirt 150-200 meter

Basic short sleeve woven shirt 125-150 meter

Basic long trouser/pant/bottom item 350-450 meter

Note: Above chart is an approximate calculation of required sewing thread.

16
Consumption & Costing

Subject: Accessories Consumption

Button Consumption
Buttons can be made up of different types, nylon buttons, plastic buttons, acrylic
based buttons, wood, shell, metal. Every type of button has its own MOQ decided by
manufacturer of button. Buttons are purchased on gross with the line specified.

1 gross = 1 packet =144 dozens = 1728 pcs button.

Poly bag Consumption


The cost of poly bag is highly dependent on thickness, dimension and raw material
used. The poly bag ordered in terms of number of pieces. The cost of poly bag is
equally important as it give significant difference when we consider the whole order
quantity.

1 kg plastic = $0.78 (approximate price)

Zipper Consumption
zippers also has several types like metallic zipper, nylon zipper etc. which plays the
drastic role in cost of zipper. Merchandiser should be aware of the parameters of
zipper for accurate costing and negotiation. MOQ is the parameter which affects the
cost of zipper considerably; at certain MOQ only zipper will get at desired price.

Label Consumption
Several labels are used in garment i.e. main label, care label, content label, the cost
of label depends upon make of label i.e. fibre content, printed, jacquard label, size of
labels, colors used in label, etc. for a unit garment label cost may not play a
significant role but in case of mass production it plays vital role. The other factors
that are important while ordering the labels are MOQ, order quantity.

Hand tags Consumption


Hand tags or price tags are used as packing material, the cost of hand tags are
dependent upon material used, printing on it, and MOQ.

17
Consumption & Costing

Subject: Accessories Consumption

Shanks and rivets Consumption


Generally these trims are made up of metallic, the UOM of rivets and shanks is gross
and No. of pieces respectively. The cost of shanks and rivets is dependent upon the
MOQ and material used.

Hangers Consumption
Hangers are made up of generally hard plastics sometimes wood, the cost of hanger
is depend on material used, size, print and color on it. Generally transparent hangers
are more costly than colored one.

Taps and Velcro Consumption


Tapes are purchased based on the width and mobilon tapes are purchased in kg.
Thus increase in width by 100% increases the cost by 80%. For satin tapes increase in
width by 150% increases the cost by 250%. Another factor that affects cost is MOQ.

Carton Consumption
For carton consumption need height, width and length.

Measurement of paper need to make a cartoon:


(𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ+𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 ℎ+𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 )×(𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 ℎ+ℎ𝑒𝑒𝑒𝑒𝑒𝑒 ℎ𝑡𝑡+𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 )×2
=
1000 0

= …….. m2

Cubic meter calculating for container booking:


𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ×𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 ℎ×ℎ𝑒𝑒𝑒𝑒𝑒𝑒 ℎ𝑡𝑡×𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞
=
1000000

Embroidery Consumption
𝑛𝑛𝑛𝑛 .𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 ℎ 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜𝑜𝑜 ×𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞
No. of stitch unit =
12000

18
Consumption & Costing

Subject: Print

Consumption & Costing of Print


There are several ways to calculate the Consumption & Costing of Print. Among them
wet weight is the best method. For this we have to take the weight of a cut panel
before and after print. Comparing the result we will get the consumption of printing
chemical.

# assumes you have an order of 200000pcs chest printed t shirt. Dry weight of a cut
panel is 90 gm and after print is 105 gm. If we do basic screen print, how much
chemical of each kind we will be needed?

Solution:

Here given,

Dry weight = 90gm


Wet weight = 105gm

So chemical weight = 15gm


We will be needed (15×200000) = 3000kg chemical

We know that,

For basic screen print we need,

Nutrex=4 Binder=2 Oxel=1 Pigment=1

That is total 8 portion of chemical will be needed.

For nutrex= (total chemical ÷ total portion × nutrex portion)


= (3000÷8×4)
=1500kg×80 tk
=120000 tk
In the same way others chemicals weight and cost will be calculated.

The End

Thanks
19

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