CONCEPTS ,CLASSIFICATIONS AND COST SHEET

For proper control and managerial decisions, management is to be provided with necessary data to analyze and classify costs. For this purpose ,the total cost is analysed by elements of cost i.e., MATERIALS, LABOUR and other expenses.

ELEMENTS OF COST ARE Materials Direct and indirect. LABOURDirect and indirect. OVERHEADSDirect and indirect.

These are those materials which can be identified in the product and can be conveniently measured and directly charged to the product. For eg:

all raw materials like jute in the manufacture of gunny bags.

Materials specifically purchased for a specific job.

Parts or components purchased or produced. Primary packing materials like cartons.

It is all labour expended in altering the construction , composition ,confirmation or condition of the product.

It is the labour which can be conveniently identified or attributed wholly to a particular job ,product or process or expended in converting raw materials into finished goods. Wages of such labour are known as direct wages.

All expenses which can be identified to a particular cost centre and hence directly charged to the centre are known as direct expenses.

All expenses (other than direct material and direct labour) incurred specifically for a particular product ,job ,department etc. are called direct expenses.

These are directly charged to the product. Examples of such expenses are

royalty ,excise duty etc.

It may be defined as the aggregate of the cost of indirect materials ,indirect labour and such other expenses including services as conveniently be charged direct to specific cost units.

So , these are all expenses other than direct expenses. These comprise all expenses incurred for or in connection with the general organization of the whole or part of the undertaking i.e. the cost of operating supplies and services used by the undertaking and including the maintenance of capital assets.

1) MANUFACTURING/FACTORY/PRODUCTION/WORKS OVERHEADS It is the indirect expense of operating the manufacturing

divisions of a concern and covers all indirect expenditure incurred by the undertaking from the receipt of the order until its completion ready for dispatch either to the customer or to the finished goods store.

For example depreciation and insurance charges on fixed assets like plant and machinery, works building, and electric equipments and floating assets like stores finished goods etc.

2)ADMINISRATION/OFFICE OVERHEADS It is the indirect expenditure incurred in formulating the policy,

directing the organization, controlling and managing the operations of an undertaking which is not related directly to a research, development, production or selling activity or function.

For example expenses in running the general office eg. Office rent, light, heat, salaries and wages.

3)SELLING OVERHEAD It is the cost of seeking to create and stimulate

demand and of securing orders and comprises the cost of soliciting and recurring orders for the articles or commodities dealt in and of efforts to find and retain customers.

It refers to those indirect cost which are associated with marketing and selling activities.

For example sales office expenses, showroom expenses, samples ands free gifts.

4)DISTRIBUTION OVERHEAD It is the expenditure incurred in the process which

begins with making the packed product available for dispatch and ends with making the reconditioned return empty package, if any available for reuse.

For example warehouse rent, warehouse staff salaries, insurance etc.

5)RESEARCH AND DEVELOPMENT EXPENSES Research cost is the cost of searching for

new and improved products, new applications of materials or products, and new applications and improved methods .

Development cost is the cost of the process which begins with implementations of the decision too produce a new or improved method and ends with the commencement of formal production of that product or by that method.

Indirect materials : those materials which do not normally form a part of the finished product. These are the materials which can not be allocated but which can be apportioned to or absorbed by cost centres or cost units.

Indirect labour : the wages of that labour which can not be allocated but which can be apportioned to or absorbed by cost centres or cost units is known as indirect labour.

Indirect expenses : such expenses which can not be allocated but can be apportioned to or absorbed by cost centres or cost units ,as rent, rates, insurance, municipal taxes, etc are known as indirect expenses.

Total cost Cost per unit

Direct materials Direct labour Direct or chargeable expenses PRIME cost

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Add : administration overheadsCOST OF PRODUCTION

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Add : selling and distribution overheadsTOTAL COST or COST OF SALES

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Some of the which are used in the cost accounts are as follows :

a) Costb) Expenses and lossesc) Cost centred) Profit centre e) Cost object and cost driver f) Conversion cost g) Contribution margin h) Carrying cost i) Out –of-stock cost j) Ordering costk) Development costl) Policy cost

m)Discretionary costn)Idle facilities cost o)Expired costp)Incremental revenueq)Added valuer)Urgent cost s)Postponable cost t)Pre –production costu)Research costv)Training cost

Cost classifications is the process of grouping costs according to their common characteristics. It is the placement of like items together according to their common characteristics.

Cost may be classified according to their nature as follows:

1) By nature of elements 2) By functions 3) By degree of traceability4) By changes in activity or volume5) By controllability6) By normality

7)By relationship with accounting period 8)By time9)By association with the product 10)According to planning and control11)For managerial decisions

Cost accounting is a branch of accounting and has been developed due to limitations of financial accounting.

Cost accounting involves the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for purposes of control and guidance of management.

Thus cost accounting indicates the costs of single units and overcome financial accounting.