Introduction to Costing Lecture Ppt

FINANCIAL & MANAGEMENT ACCOUNTING

PROF. RANJAN DASGUPTA

UNIT 5:

COST ACCOUNTING

ACCOUNTING

FINANCIALACCOUNTING

COSTACCOUNTING

MANAGEMENTACCOUNTING

COST ACCOUNTANCY

COSTACCOUNTING

COSTING

COST ACCOUNTANCY?The Terminology published by the Institute of Cost & Management Accountants (ICMA), London:

“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.”

THE FOLLOWINGS FALL UNDER THE PURVIEW

OF COST ACCOUNTANCY:

COST ACCOUNTING COSTING COST CONTROL TECHNIQUESBUDGETING &COST AUDIT

COST ACCOUNTING?

Institute of Cost & Management Accountants

(ICMA), London:

“ process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres

and cost units.”

IN ANOTHER WAY:

KOHLER:

“ that branch of accounting dealing with the

classification, recording, allocation, summarisation and reporting of current and prospective costs.”

DEFINITION IMPLIES THE FOLLOWING ASPECTS OF COST ACCOUNTING:

COST CLASSIFICATION COST RECORDINGCOST ALLOCATIONCOST DETERMINATION/FINDINGCOST REPORTING

COSTING?

The Terminology published by the Institute

of Cost & Management Accountants (ICMA),

London:

“the technique and process of ascertaining

costs”.

DEFINITION EMPHASISES TWO IMPORTANT

ASPECTS:

THE TECHNIQUE & PROCESS OF COSTING

ASCERTAINMENT OF COST

YOU HAVE TO KNOW:

COSTCONCEPT

COSTOBJECT COST EXPENSE

COSTCENTRE

COSTUNIT

RESPONSIBILITYCENTRE

COST CONTROLVS.

COST REDUCTION

COST ALLOCATIONVS.

COST APPORTIONMENT

CLASSIFICATIONOF COSTS

TYPES/TECHNIQUES OF

COSTING

METHODS OFCOSTING

COSTCONVENTIONS

COST ACCUMULATION&

COST ASSIGNMENT

COST CONCEPT/COST:

(a) The amount of expenditure (actual or notional) incurred on or attributable to a specified article, product or activity. (here the word cost is used as a noun)

(b) To ascertain the cost of a given thing. (here the word cost is used as a verb)

EXPENSE:

The costs of running the business during the specific accounting period may be termed as expenses. Expenses are always linked with generation of revenue.Expenses may be of two types;1) Revenue Expenses, &2) Capital Expenses.

COST Vs. EXPENSE:AICPA COMMITTEE ON TERMINOLOGY:Cost can be defined as; “ the amount measured in money, of 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.”

Expenses can be defined as;“ all expired costs which are deductible

from revenue.”

COST OBJECT:

Anything for which a separatemeasurement of cost is desired.Examples of cost objects include aproduct, a service , a project , acustomer , a brand category , anactivity , a department , a

programme.

COST CENTRE:ICMA, London Terminology:

It is defined as; “A location, person or an item of equipment(or group of these) in respect of which costsmay be ascertained and related to cost units.”and used for the purpose of Cost Control.

Cost Centres are of two types, viz., Personaland Impersonal.

In a manufacturing concern there are two main types of Cost Centres as indicated below :

– Production Cost Centre : It is a Cost Centre where raw material is

handled for conversion into finished product. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops are examples of Production Cost Centres. – Service Cost Centre : It is a Cost Centre which serves as an ancillary unit to a Production Cost Centre. Power house, gas production shop, material service centres, plant maintenance centres are examples of Service Cost Centres.

COST UNIT:

ICMA, London Terminology:

It is;

“ A quantitative unit of product, service or time (or combination of these) in relation to which costs are ascertained.” or expressed.

One may, for instance, determine the cost per tonne of steel, per tonne kilometre of a transport service or cost per machine hour. Sometime, a single order or a contract constitutes a cost unit. A batch which consists of a group of identical items and maintains its identity through one or more stages of production may also be consideredas a cost unit. Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value.

RESPONSIBILITY CENTRE:It is defined as an activity centre of a business organisation entrusted with a special task. Under modern budgeting and control,

financialexecutives tend to develop responsibility centres for the purpose of control. Responsibility centres can broadly be classified into three categories. They are;

– Cost Centres ; – Profit Centres ; & – Investment Centres.

COST CONTROL Vs. COST REDUCTION:COST CONTROL:

“The guidance and regulation, by executiveaction of the cost of operating anundertaking”.

COST REDUCTION:

“The achievement of real and permanentreduction in the unit cost of goodsmanufactured or services rendered withoutimpairing their suitability for the use

intendedor diminution in the quality of the product.”

To exercise cost control, broadly speaking the following steps should be observed:

– Determine clearly the objective, i.e., pre-determine the desired results;

– Measure the actual performance; – Investigate into the causes of failure to perform

according to plan; &– Institute corrective action.

The three-fold assumptions involved in thedefinition of cost reduction may be

summarisedas under :

– There is a saving in unit cost. – Such saving is of permanent nature. – The utility and quality of the goods and services

remain unaffected, if not improved.

COST ALLOCATION Vs. COST APPORTIONMENT:

ICMA, London:Allocation of ‘Expenses’ (or Cost) means:

“ the allotment of whole items of cost to cost centres or cost units.”

In other words, overhead expenses/costs identifiable to a department is charged to that department only, and, this is called ‘allocation’.

ICMA, London:Apportionment of ‘Expenses’ (or Cost) means:

“ the allotment to two or more departments or cost centres of proportions of common items of cost on estimated basis of benefit received.”

In other words, ‘apportionment’ is, therefore, charging to a cost centre or a department a fair share of an overhead expense/cost.

TECHNIQUES OF COSTING:

ABSORPTIONCOSTING

STANDARDCOSTING

MARGINALCOSTING

LIFE CYCLECOSTING

TARGETCOSTING

UNIFORMCOSTING

DIFFERENTIALCOSTING

ACTIVITY-BASED

COSTING

VARIABLECOSTING

METHODS OF COSTING:

JOBCOSTING

PROCESSCOSTING

FARMCOSTING

BATCHCOSTING

TERMINAL/CONTRACTCOSTING

MULTIPLE/COMPOSITE

COSTING

SINGLE/OUTPUTCOSTING

OPERATIONCOSTING

OPERATINGCOSTING

CLASSIFICATION OF COSTS:

CLASSIFICATION ON THE BASIS OF

ELEMENTSOF

COST/NATURE OFEXPENSES

FUNCTIONS/ACTIVITIES

BEHAVIOUR

CONTROLLABILITY

NORMALITY

IDENTIFIABILITY/THE RELATION

TOCOST CENTRE

INVESTMENT

NATURE OF PRODUCTIONPROCESS

TIME

FORMANAGEMENT

DECISIONMAKING

CLASSIFICATION ON THE BASIS OF ELEMENTS OF COST/ NATURE OF EXPENSES:

MATERIALCOST

LABOURCOST

EXPENSES

DIRECTINDIRECT/

OVERHEADS

CLASSIFICATION ON THE BASIS OF FUNCTIONS/ACTIVITIES:

PRODUCTIONCOST

ADMINISTRATIONCOST/OVERHEAD

SELLING COST/OVERHEAD

DISTRIBUTIONCOST/OVERHEAD

RESEARCH &DEVELOPMENT

(R&D) COST

CLASSIFICATION ON THE BASIS OF BEHAVIOUR:

FIXEDCOST

VARIABLECOST

SEMI-FIXED-SEMI-VARIABLE

COST

CLASSIFICATION ON THE BASIS OF CONTROLLABILITY:

CONTROLLABLECOST

UNCONTROLLABLECOST

CLASSIFICATION ON THE BASIS OF NORMALITY:

NORMALCOST

ABNORMALCOST

CLASSIFICATION ON THE BASIS OF IDENTIFIABILITY/ THE

RELATION TO COST CENTRE:

DIRECTCOST

INDIRECTCOST

MATERIAL LABOUR EXPENSESMATERIAL

LABOUR

EXPENSES

CLASSIFICATION ON THE BASIS OF INVESTMENT:

CAPITALCOST

REVENUECOST

CLASSIFICATION ON THE BASIS OF NATURE OF PRODUCTION

PROCESS:

BATCHCOST

PROCESSCOST

OPERATIONCOST

OPERATINGCOST

CONTRACTCOST

JOINTCOST

CLASSIFICATION ON THE BASIS OF TIME:

HISTORICALCOST

PRE-DETERMINEDCOST

STANDARDCOST

ESTIMATEDCOST

CLASSIFICATION ON THE BASIS OF- FOR MANAGEMENT

DECISION MAKING:

MARGINALCOST

DIFFERENTIALCOST

OPPORTUNITYCOST

REPLACEMENTCOST

RELEVANTCOST

IMPUTEDCOST

SUNKCOST

NORMALCOST

ABNORMALCOST

AVOIDABLECOST

UNAVOIDABLECOST

COST ACCUMULATION & COST ASSIGNMENT:

Cost Accumulation:Collection of cost data in some organized way through an Accounting System.Cost Assignment: Tracing (for direct costs) & the allocating (for indirect costs) of accumulated costs to a cost object to help decision making and facilitateproduct or customer profitability analysis.

NEED/OBJECTIVES OF COSTING: TO RECORD & ANALYSE THE EXPENSES WITH A

VIEW TO KNOW THE COST OF A UNIT OF OUTPUT, OF A JOB, OF A PROCESS OR OF AN OPERATION. IT INVOLVES, THEREFORE, ALLOCATION OF EXPENDITURE.

TO EXERCISE CONTROL OVER COST. COSTING EXERTS CONTROL OVER ALL ELEMENTS OF COST IN DETAIL, IN ORDER TO MINIMISE COST & MAXIMISE PROFIT.

TO HELP FORMULATING POLICIES. COSTING HELPS THE MANAGEMENT BY SUPPLYING ACCURATE & RELIABLE COST-RELATED INFORMATION SO THAT THE MANAGEMENT CAN ADOPT A SOUND POLICY ON ANY MATTER.

TO HELP THE MANAGEMENT IN FIXING THE SELLING PRICE. SELLING PRICE IS FIXED BY ADDING THE MARGIN OF PROFIT TO COST OF SALES AS ASCERTAINED BY COSTING.

TO HELP THE MANAGEMENT IN ITS EFFORT TO MAXIMISE OUTPUT AND PROFIT. BY BEP ANALYSIS, COSTING CAN ASCERTAIN THE APPROPRIATE OUTPUT THAT GIVES THE DESIRED AMOUNT OF PROFIT.

TO HELP IN COST NEGOTIATION. TO FORECAST. LONG-TERM FORECAST

REQUIRES THE CONSIDERATION OF FACTORS LIKE, SALES, CAPITAL EXPENDITURE, PROFIT EXPECTED, ETC. THE OVERALL GUIDING FACTOR IS THE RETURN ON CAPITAL EMPLOYED (ROCE).

TO DO THE PLANNING OF CAPITAL EXPENDITURE & CAPITAL STRUCTURE. THE VALUABLE STATISTICS, SUCH AS, OPERATING COSTS, COST BEHAVIOUR AT DIFFERENT LEVELS OF ACTIVITIES, RAPIDITY OF TURNOVER, WORKING CAPITAL REQUIREMENTS, ETC. ARE SUPPLIED BY COSTING.

TO HELP FACING THE DEPRESSION. IN AN ATTEMPT TO FACE THE DEPRESSION, STEPS LIKE, COST CONTROL, COST REDUCTION, SELECTING NEW PRODUCTS OR PRODUCT-MIX, CREATING COST-CONSCIOUSNESS, ETC. ARE TAKEN WITH THE SUPPORT OF COSTING.

TO DO THE PLANNING TO CLOSE DOWN, IF NEEDED.

TO HELP ‘CHOOSING’ BETWEEN ‘MAKING’ & ‘BUYING’.

ADVANTAGES/ MERITS/ IMPORTANCE OF COSTING:

ELIMINATION OF WASTES, LOSSES & INEFFICIENCIES

COST REDUCTIONDETECTION OF REASONS FOR

PROFIT/LOSSADVICES ON VARIOUS MATTERS TO THE

MANAGEMENT, HELPFUL IN DECISION MAKING*

FIXATION OF THE SELLING PRICECOST CONTROLASSISTING THE GOVERNMENT, TRADE

UNIONS, ETC.

MARGINAL ANALYSIS OF COSTFIXATION OF RESPONSIBILITY FOR

DIFFERENT INDIVIDUALSHELPING PREPARATION OF FINAL

ACCOUNTS UNDER THE FINANCIAL ACCOUNTING SYSTEM

PREVENTION OF FRAUDS, ETC., THEREBY HELPING THE MANAGEMENT, THE GOVERNMENT AND OTHERS CONNECTED WITH THE ORGANISATION

FACILITATES INTER-PERIOD AND INTER-FIRM COMPARISONS

ASSISTS IN INCREASING PROFITABILITYGUIDES FUTURE PRODUCTION POLICY

** Decision Making:

PRICEPROFIT

MAKE ORBUY

CAPACITY

EXPORTPRICE

OPERATEOR

SHUT

SALESVOLUME

NEWMODEL

http://images.google.co.in/imgres?imgurl=http://in.yimg.com/i/in/specials/getzmain.jpg&imgrefurl=http://in.autos.yahoo.com/&h=1661&w=2281&sz=369&tbnid=nsRykljhBdIJ:&tbnh=109&tbnw=150&hl=en&start=12&prev=/images%3Fq%3Dmaruti%2Bcar%26svnum%3D10%26hl%3Den%26lr%3D

COST CONVENTIONS:CLASSIFICATION OF EXPENSES

ACCORDING TO NATURE OF COSTCLASSIFICATION OF COSTS INTO FIXED

& VARIABLECLASSIFICATION OF COSTS INTO

NORMAL & ABNORMALPRINCIPLE OF EXCEPTIONESTABLISHMENT OF STANDARDSCLASSIFICATION OF COSTS AS

CONTROLLABLE & UNCONTROLLABLECONSISTENCY

COST CONTROL TO BE EXERCISED THROUGH CLOSE CONTACT WITH THOSE WHO INCUR THE COSTS

COST SHOULD REPRESENT SACRIFICE INVOLVED WHEN A BUSINESS IS OPERATING AT AN EFFICIENT LEVEL OF OPERATION

THE SYSTEM OF COST ACCOUNTING SHOULD BE DESIGNED SO AS TO MEET THE SPECIFIC REQUIREMENTS OF A BUSINESS

Cost Accounting Vs. Financial Accounting:

Need

Purpose

Recording

ProfitAnalysis

Contents

Compulsory Obligatory

Final Financial Results to Stake Holders

Subjective Recording

Total Profit/Loss

External Transactions

Cost Information

Objective Recording

Product Wise

Internal

FA CAFactor

Periodicity

Control

Nature

Valuation

Once/Twice Daily/weekly/monthly

Inadequate

Historical

Cost or Market

System at Place

Historical/Predetermined

Cost Price

FA CAFactor

MANAGEMENT ACCOUNTING CONTRASTED WITH COST ACCOUNTING:

Dimension Management Accounting Cost Accounting Main Emphasis Impact & Effect Aspect of Costs Ascertainment, Allocation, Distribution

& Accounting Aspect of Costs

Collection of Data Derived both from the Cost & Financial Accounts

Derived from the Cost Books & Accounts & Provide to Management Accounting

Scope Broader Narrower

Approach Forward-Looking Historical & Past-Oriented

Purview The Management Accountant has the Responsibility to Suggest Corrective Actions on Weaknesses

The Cost Accountant is only Responsible to Compare the Actual with the Budgeted Performance

More Tools & Techniques The Management Accountant has more tools & techniques, such as, Marginal Costing, Cash Flow Statement, Budgetary Control, etc.

The Cost Accountant does not have so much tools & techniques, only a few, such as, Cost Sheet, etc.

Time Horizon Both Short & Long-Term Short-Term Planning

Concerned With Assisting Management in its Functions & Evaluating the Performance of the Management

Only Concerned with Assisting the Management in its Functions

Installation It cannot be Installed without a Proper Cost Accounting System

It can be Installed without a Management Accounting System

Style & Details Tailored to Requirement & Summarized Standardized

Unit of Account Money/Physical Units Money

Nature of Data For Use by Non-Accountants Somewhat Technical

THE ‘COST SHEET’ OR

‘STATEMENT OF COST’

‘COST SHEET’ IS OF 2 TYPES:

GENERAL COST SHEET

ESTIMATED COST SHEET

THE FORMAT OF A ‘COST SHEET’OR ‘STATEMENT OF

COST’

M/s. XYZ Ltd.Cost Sheet for the year ended 31.03.09 Output:

Particulars Amount(in Rs.)

Amount(in Rs.)

Raw Materials Consumed: Opening Stock of Raw Materials

Add: Purchase of Raw Materials Add: Expenses on Purchase (Carriage Inward, etc.)

Less: Purchase Return/Return Outward

×××××××××

×××(××)


Amount

(in Rs.)

Less: Abnormal Loss of Raw Materials (if any)Less: Closing Stock of Raw MaterialsRAW MATERIALS CONSUMED

Add: Direct Wages (Productive Labour) Add: Direct Expenses/ Chargeable Expenses Add: Royalty (if any)

PRIME COST

(××)

(××)

××××××

×××××××××


Amount

(in Rs.)

* IF IT IS GIVEN THAT WIP IS AT PRIME COST, THEN:

Adjustment for WIP at Prime Cost:

Add: Opening Stock of WIPLess: Closing Stock of WIP

PRIME COSTAdd: Factory Overheads: Factory Rent, Power Indirect Materials

×××(×××)

××××××

××××××


Amount

(in Rs.)

Indirect Wages Supervisors’ Salary Factory Assets’ Depreciation Consumable Stores, etc.

Less: Sale of Scraps

Adjustment for WIP at Manufacturing Cost:

Add: Opening Stock of WIP Less: Closing Stock of WIP

×××××××××××××××(××)

×××(×××)

×××

×××


Amount

(in Rs.)

FACTORY COST/WORKS COST

Add: Office & Administration Overheads: Office Rent, Electricity Office Assets’ Depreciation Directors’ Fees Auditors’ Fees Bank Charges Office & Admin. Salaries Other Office Expenses, etc.

×××××××××××××××××××××

×××


Amount(in Rs.)

COST OF PRODUCTION

Adjustment for Stock of FinishedGoods: Add: Opening Stock of Finished Goods Less: Closing Stock of Finished Goods ( Note 2)

COST OF GOODS SOLD

×××(×××)

××××××

××××××


Amount(in Rs.)

Add: Selling & Distribution Overheads: Salesmen’s Commission, Salary, etc. Traveling Expenses Carriage Outward Advertisement Delivery-Men Expenses Insurance on Finished Goods Sales Tax, Bad Debts, etc.

TOTAL COST/COST OF SALES

×××××××××××××××××××××

××××××


Amount

(in Rs.)

Add: PROFIT (balancing figure)

SALES/SELLING PRICE

××××××

YOU HAVE TO REMEMBER:

3. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units

Produced.4. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units Sold.

5. Items not to be considered in Cost Sheet: (i) Income Tax Paid, (ii) Cash Discount (Received & Paid), (iii) Donations, Dividends (Received & Paid), (iv) Preliminary Expenses/ Goodwill Written Off, (v) Transfer to Reserves, (vi) Interest (Received & Paid), (vii) Rent Receivables,(viii) Losses on the Sales of Investments, Building

etc., (ix) Profits made on the Sale of Fixed Assets, (x) Transfer Fees Received.

GENERAL ‘COST SHEET’OR


COST SHEET- PROBLEM 1:THE ACCOUNTS OF P.K.MANUFACTURERS LTD. FORTHE YEAR ENDED 31.12.08 SHOW THE FOLLOWING;

PARTICULARS AMOUNT

(IN RS.)

PARTICULARS AMOUNT

(IN RS.)STOCK OF RAWMATERIALS ASON 01.01.08RAW MATERIALSPURCHASEDBAD DEBTS W/OTRAVELLING SALESMEN’SSALARIES &COMMISSIONDEPRECIATION W/O ON OFFICE

67,200

2,59,000

9,100

10,780

FURNITURERENT, RATES,TAXES & INSURANCE (FACTORY)PRODUCTIVE WAGESDIRECTORS’ FEESGENERAL EXPENSESGAS & WATER(FACTORY)

420

11,900

1,76,4008,400

4,760

1,680

PARTICULARS AMOUNT

(IN RS.)

PARTICULARS AMOUNT

(IN RS.)TRAVELLINGEXPENSESSALESMANAGER’SSALARYDEPRECIATION ONPLANT & MACHINERYCASH DISCOUNTSALLOWEDREPAIRS TO PLANT & MACHINERYCARRIAGE &CARTAGE OUTWARDS

2,940

6,00,00015,000

18,200

4,060

6,230

6,020

DIRECT EXPENSESRENT, RATES &INSURANCE (OFFICE)GAS & WATER (OFFICE)STOCK OF RAW MATERIALS AS ON31.12.08

10,010

2,800

560

87,920

THE MANAGER’S SALARY IS TO BE APPORTIONED IN THE RATIO OF 2:1 IN BETWEEN FACTORY AND OFFICE.

PREPARE A COST SHEET/STATEMENT OF COST GIVING THE DETAILS OF PRIME COST, WORKS COST, COST OF PRODUCTION,

COSTOF SALES & TOTAL PROFIT.

SOLUTION OF PROBLEM 1:-

P.K. Manufacturers Ltd. Cost Sheet for the year ended 31.12.08 Output:

Particulars/Elements of Cost

Amount(in Rs.)

Amount(in Rs.)

Raw Materials Consumed: Raw Materials as on 01.01.08

Add: Materials Purchased

Less: Raw Materials as on 31.12.08

Add: Productive Wages

67,2002,59,00

03,26,20

0

(87,920)

2,38,280

1,76,400


Amount(in Rs.)

Amount(in Rs.)

Add: Direct ExpensesPRIME COST

Add: Factory Overheads: Rent, Rates, Taxes & Insurance (Factory) Gas & Water (Factory) Manager’s Salary (2/3 of Rs. 15,000) Depreciation on Plant & Machinery Repairs to Plant & Machinery

11,900

1,68010,000

18,200

6,230

10,0104,24,690

48,010


Amount(in Rs.)

Amount(in Rs.)

FACTORY COST/WORKS COST

Add: Office & Administration Overheads: Depreciation W/O on Office Furniture Directors’ Fees General Expenses (W.N.1) Manager’s Salary (1/3 of Rs. 15,000) Rent, Rates & Insurance (Office) Gas & Water (Office)

420

8,4004,7605,000

2,800

560

4,72,700


Amount(in Rs.)

Amount(in Rs.)

COST OF PRODUCTIONAdd: Selling & Distribution Overheads: Travelling Salesmen’s Salaries & Commission Travelling Expenses (W.N.2) Bad Debts W/O Carriage & Cartage Outwards

10,780

2,940

9,100

6,020

21,9404,94,640


Amount(in Rs.)

Amount(in Rs.)

TOTAL COST/COST OF SALESAdd: PROFIT (balancing figure)

SALES

28,8405,23,480

76,5206,00,000

WORKING NOTES:

1) It has been assumed that ‘General Expenses’ is related to Office & Administration.

2) It has also been assumed that ‘Travelling Expenses’ have been incurred in connection with sales.

3) ‘Cash Discounts Allowed’ has been treated as a financial charge and excluded from Cost Accounts.

COST SHEET- PROBLEM 2:THE ACCOUNTS OF M/S. BANI TRADERS FOR THE YEAR ENDED 30.06.08 SHOW THE FOLLOWING;

PARTICULARS AMOUNT

(IN RS.)

PARTICULARS AMOUNT

(IN RS.)STOCK OF RAWMATERIALS ASON 01.07.07RAW MATERIALSPURCHASEDW-I-P AS ON 01.07.07:AT PRIME COSTAdd: MANUFACTURINGEXPENSES

12,500

1,10,000

15,000

3,00018,000

FINISHED GOODS AT COST AS ON 01.07.07 (8,000 UNITS)FREIGHT ON RAW MATERIALS PURCHASEDLOSS OF MATERIALS BY FIREFACTORY EXPENSES

60,000

5,000

5,000

70,000

PARTICULARS AMOUNT

(IN RS.)

PARTICULARS AMOUNT

(IN RS.)CHARGEABLEEXPENSESDIRECT LABOURADMINISTRATIVE EXPENSESSELLING EXPENSESDISTRIBUTIONEXPENSESSALE OF FINISHED GOODS (28,000 UNITS)RAW MATERIALS AS ON 30.06.08

25,000

1,35,000RS. 2/UNIT

RS. 1/UNIT

15,000

4,00,000

20,000

W-I-P AS ON 30.06.08:AT PRIME COSTAdd: MANUFACTURINGEXPENSES

STOCK OF FINISHED GOODS AS ON 30.06.08 (10,000 UNITS)

Assume Sales are made on FIFO basis

10,000

8,000

18,000

?

PREPARE A COST SHEET/STATEMENTOF COST GIVING THE DETAILS OF PRIME COST, WORKS COST, COST

OF PRODUCTION, COST OF SALES,

TOTALPROFIT & PROFIT P.U..


M/S. BANI TRADERSCost Sheet for the year ended 30.06.08 Output: 30,000 Units Particulars/Elements of

Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

RAW MATERIALS CONSUMED:Raw Materials as on 01.07.07 Add: Raw Materials PurchasedAdd: Freight on Raw Materials PurchasedLess: Loss of Materials by FireLess: Raw Materials as on 30.06.08

12,500

1,10,000

5,0001,27,500

(5,000)

(20,000)

Particulars/Elements of

Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

Add: Direct LabourAdd: Chargeable ExpensesAdd:W-I-P AT PRIME COST:As on 01.07.07Less: As on 30.06.08

PRIME COSTAdd: Factory ExpensesAdd: Manufacturing Expenses

15,000(10,000)

1,02,5001,35,000

25,000

5,0002,67,500

70,000

3.41664.50000.8333

0.16668.91652.3333


Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

As on 01.07.07Less: As on 30.06.08

FACTORY/WORKS COSTAdd: Administrative Expenses Rs. (2 × 30,000)COST OF PRODUCTIONAdd: Finished Goods at Cost as on 01.07.07Less: Stock of Finished Goods as on 30.06.08

COST OF GOODS SOLD

3,000(8,000)

60,000

(1,30,832)

(5,000)3,32,500

60,0003,92,500

(70,832)3,21,668

(0.1666)

11.0832

2.000013.083

2


Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

Add: Selling Expenses Rs. (1 × 28,000)Add: Distribution Expenses

COST OF SALES/TOTAL COSTAdd: PROFIT

SALES

28,00015,000

3,64,668

35,3324,00,000

1.2619

WORKING NOTES:1) We know that; Opening Stock + Units Produced = Units Sold + Closing

Stock

According to the given information: Opening Stock = 8,000 Units Units Sold = 28,000 Units Closing Stock = 10,000 Units

SO, Units Produced = ?Units Produced = (Units Sold + Closing Stock) – Opening

StockUnits Produced = (28,000 + 10,000)Units – 8,000 UnitsUnits Produced = 30,000 Units

2) Calculation of Value of Finished Goods as on 30.06.08:

= Rs. (13.0832 × 10,000) = Rs. 1,30,832

As we have assumed FIFO Method of Sales:

UNITS SOLD:

28,000

OPENINGSTOCK:8,000

UNITSPRODUCED:

30,00010,000

CLOSINGSTOCK10,000

ESTIMATED ‘COST SHEET’OR


COST SHEET- PROBLEM 3:THE FOLLOWING DATA RELATE TO THE MANUFACTURE OF A STANDARD PRODUCTDURING THE MONTH IN JULY, 2008:

RAW MATERIALS CONSUMED – RS. 25,000MANUAL AND MACHINE LABOUR WAGES (DIRECTLY CHARGEABLE) - RS. 15,000CHARGEABLE EXPENSES – RS. 4,500MACHINE HOURS WORKED – 1,000MACHINE HOUR RATE – RS. 2.50ESTABLISHMENT & GENERAL EXPENSES – RS. 4,700

SELLING & DISTRIBUTION OVERHEADS P.U. – RS. 0.08UNITS PRODUCED – 10,000UNITS SOLD – 8,000SELLING PRICE P.U. – RS. 6

(a) YOU ARE REQUIRED TO PREPARE A COST SHEET IN RESPECT OF THE ABOVE SHOWING THEREIN THE COST P.U. UNDER EACH ELEMENT OF COST AND THE PROFIT FOR THE PERIOD. ALSO, SHOW THE PERCENTAGE THAT THE WORKS OVERHEAD COST BEARS TO THE MANUAL

AND MACHINE LABOUR WAGES AND THE PERCENTAGE THAT THE ESTABLISHMENT AND GENERAL EXPENSES BEAR TO THE WORKS COST.(b) WHAT PRICE SHOULD THE COMPANY

QUOTE TO PRODUCE 1,000 UNITS OF ANOTHER PRODUCT WHICH WILL REQUIRE AN EXPENDITURE OF RS. 8,000 FOR RAW MATERIALS AND RS. 6,000 FOR DIRECT WAGES, SO THAT IT WILL YIELD A PROFIT OF 25% ON THE COST OF SALES?


(a) Cost Sheet for the month ended July, 2008

Output: 10,000 Units


Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

RAW MATERIALS CONSUMEDMANUAL & MACHINELABOUR WAGESCHARGEABLE EXPENSES

PRIME COSTFACTORY OVERHEADRS. (2.50 × 1,000)

FACTORY COST

25,000

15,000

4,500

44,5002,500

47,000

2.50

1.50

0.45

4.450.25

4.70


Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

ESTABLISHMENT &GENERAL EXPENSESCOST OF PRODUCTIONLess: CLOSING STOCK OF FINISHED GOODSRS. (51,700 × 2/10)COST OF GOODS SOLDSELLING & DISTRIBUTION OVERHEADSRS. (0.08 × 8,000)

COST OF SALESAdd: PROFIT

SALESRS. (6 × 8,000)

4,700

51,700

10,340

41,360640

42,0006,000

48,000

0.47

5.17

0.08

5.250.75

6.00

CALCULATION OF WORKS OVERHEAD COST TO MANUAL & MACHINE LABOUR WAGES:

RS. 2,500 = × 100

RS. 15,000

= 16.67% Ans.

CALCULATION OF ESTABLISHMENT & GENERAL EXPENSES TO WORKS COST:

RS. 4,700

= × 100

RS. 47,000

= 10%

(b) Cost Sheet (Estimated) for the year ended 2009 Output: 1,000

Units Particulars/Elements of

Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

RAW MATERIALS CONSUMEDMANUAL & MACHINELABOUR WAGESCHARGEABLE EX.

PRIME COSTFACTORY OVERHEAD

FACTORY COSTESTABLISHMENT & GENERAL EXPENSESCOST OF PRODUCTION

8,000

6,000

45014,4501,000

15,450

1,54516,995

8.00

6.00

0.4514.451.00

15.45

1.54516.995


Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

SELLING & DISTRIBUTION OVERHEADSRS. (0.08 × 1,000)

COST OF SALES

Add: PROFITRS. (25/100 × 17,075)

SALES

80

17,075

4,268.75

21,343.75

0.08

17.075

4.26875

21.34375

WORKING NOTES:1) CALCULATION OF NO. OF MACHINE HOURS WORKED:

1,000= 1,000

10,000

= 100 HOURS Ans.

1,000= × 1,000 10,000

= RS. 100

COST SHEET- PROBLEM 4:IN 2008, THE ACCOUNTS OF A COMPANY MANUFACTURING MINI GENERATORSDISCLOSED THE FOLLOWING PARTICULARS:

MATERIALS USED – RS. 16,00,000DIRECT WAGES – RS. 17,40,000FACTORY OVERHEAD EXPENSES – RS. 2,82,000ESTABLISHMENT & GENERAL EXPENSES – RS. 2,78,000

YOU ARE ASKED TO PREPARE A STATEMENT SHOWING THE PRICE AT WHICH THE COMPANY SHOULD SELL GENERATORS DURING 2009 ASSUMING;

(a) THAT IT IS ESTIMATED THAT EACH GENERATOR WILL REQUIRE MATERIALS WORTH RS. 2,900 AND AN EXPENDITURE IN DIRECT WAGES RS. 1,200.

(b) THAT DURING 2009, THE FACTORY OVERHEAD EXPENSES WILL BEAR THE SAME RATIO TO DIRECT WAGES AS IN 2008.

(c) THAT THE PERCENTAGE OF ESTABLISHMENT & GENERAL EXPENSES ON FACTORY COST WILL BE THE SAME IN 2009 AS IN 2008.

(d) THAT THE COMPANY HAS DECIDED TO EARN A PROFIT OF 10% ON SELLING PRICE.


A Company Cost Sheet for the year ended 2008

Output:


Amount(in Rs.)

Amount(in Rs.)

MATERIALS USEDDIRECT WAGES

PRIME COSTFACTORY OVERHEAD EXPENSES

WORKS COSTESTABLISHMENT & GENERAL EXPENSES

TOTAL COST

16,00,000

17,40,000

33,40,000

2,82,00036,22,00

0

2,78,00039,00,00

0

A Company Estimated Cost Sheet for the year ended

2009 Output:


Amount(in Rs.)

Amount(in Rs.)

MATERIALS USEDDIRECT WAGES

PRIME COSTFACTORY OVERHEAD EXPENSES RS. (16.2069% OF RS. 1,200)

WORKS COSTESTABLISHMENT & GENERAL EXPENSESRS. (7.6753% OF RS. 4,294.48)

2,900.001,200.004,100.00

194.48

4,294.48

329.61


Amount(in Rs.)

Amount(in Rs.)

TOTAL COST/COST OF SALES

Add: PROFITRS. (4,624.09 × 10/90)

SELLING PRICE

4,624.09

513.79

5,137.88

WORKING NOTES:1) CALCULATION OF THE RATIO OF FACTORY OVERHEAD EXPENSES TO DIRECT WAGES:

FACTORY OVERHEAD EXPENSES

= ×100

DIRECT WAGES RS. 2,82,000= × 100 = 16.2069% RS. 17,40,000

WORKING NOTES:2) CALCULATION OF THE RATIO OF ESTABLISHMENT & GENERAL EXPENSES TO WORKS COST: ESTABLISHMENT & GENERAL EX.=

×100 WORKS COST RS. 2,78,000= × 100 = 7.6753% RS. 36,22,000

COST SHEET- PROBLEM 5:THE JAY ENGINEERING CO. LTD. MANUFACTURED AND SOLD 1,000 SEWINGMACHINES IN 2008. FOLLOWING ARE THE PARTICULARS OBTAINED FROM THE RECORDS OF THE COMPANY:

MATERIALS CONSUMED – RS. 80,000WAGES PAID – RS. 1,20,000MANUFACTURING EXPENSES – RS. 50,000SALARIES – RS. 60,000RENT, RATES & INSURANCE – RS. 10,000

SELLING EXPENSES – RS. 30,000GENERAL EXPENSES – RS. 20,000SALES – RS. 4,00,000

THE COMPANY PLANS TO MANUFACTURE 1,200 SEWING MACHINES IN 2009. YOU ARE REQUIRED TO SUBMIT A STATEMENT SHOWING THE PRICE AT WHICH THESE MACHINES WOULD BE

SOLD AS TO SHOW A PROFIT OF 10% ON

SELLINGPRICE.

THE FOLLOWING ADDITIONAL INFORMATION IS PROVIDED TO YOU:(a) PRICE OF MATERIALS WILL RISE BY

20% ON THE PREVIOUS YEAR’S LEVELS.(b) WAGE RATES WILL GO UP BY 5%.(c) MANUFACTURING EXPENSES WILL

RISE IN PROPORTION TO THE COMBINED COST OF MATERIALS AND WAGES.

(d) SELLING EXPENSES P.U. WILL REMAIN UNCHANGED.

(e) OTHER EXPENSES WILL REMAIN UNAFFECTED BY THE RISE IN OUTPUT.


Jay Engineering Co. Ltd.Cost Sheet for the year ended 2008 Output: 1,000 Sewing

Machines Particulars/Elements of

Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

MATERIALS CONSUMEDWAGES PAID

PRIME COSTMANUFACTURINGEXPENSES

FACTORY COSTOFFICE & ADMIN.

OVERHEADS:SALARIESRENT, RATES & INS.GENERAL EXPENSES

60,00010,00020,000

80,0001,20,0002,00,000

50,000

2,50,000

60.0010.0020.00

80.00120.00200.0050.00

250.00


Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

COST OF PRODUCTIONSELLING EXPENSES

COST OF SALESAdd: PROFIT

SALES

90,0003,40,000

30,0003,70,000

30,0004,00,000

90.00340.0030.00

370.0030.00

400.00

Jay Engineering Co. Ltd.Cost Sheet for the year ended 2009 Output: 1,200 Sewing

Machines Particulars/Elements of

Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

MATERIALS CONSUMED(W.N. 1)WAGES PAID (W.N. 2)

PRIME COSTMANUFACTURINGEXPENSES (W.N. 3)

FACTORY COSTOFFICE & ADMIN.

OVERHEADS:SALARIES

60,000

1,15,200

1,51,2002,66,400

66,6003,33,000

50.00

96.00

126.00222.00

55.50277.50


Cost

TotalAmount(in Rs.)

TotalAmoun

t(in Rs.)

Per Unit

Amount

(in Rs.)

Per Unit

Amount

(in Rs.)

RENT, RATES & INS.GENERAL EXPENSES

COST OF PRODUCTIONSELLING EXPENSES

COST OF SALESAdd: PROFIT (W.N. 4)

SALES

10,00020,000

90,0004,23,000

36,0004,59,000

51,0005,10,000

8.3316.67

75.00352.5030.00

382.5042.50

425.00

WORKING NOTES:1) CALCULATION OF MATERIALS CONSUMED COST (TOTAL) IN 2009:

MATERIALS PRICE P.U. IN 2008 – RS. 80MATERIALS PRICE P.U. IN 2009 – RS. (80 + 20% OF RS. 80) = RS. 96MATERIALS CONSUMED COST (TOTAL) IN2009: RS. (96 × 1,200) = 1,15,200

WORKING NOTES:2) CALCULATION OF WAGES PAID IN 2009:

WAGES PAID P.U. IN 2008 – RS. 120WAGES PAID P.U. IN 2009 – RS. (120 + 5% OF RS. 120) = RS. 126WAGES PAID (TOTAL) IN 2009:RS. (126 × 1,200) = 1,51,200

WORKING NOTES:3) CALCULATION OF MANUFACTURING EXPENSES IN 2009:

TOTAL MANUFACTURING EXPENSES IN 2008 – RS. 50,000MANUFACTURING EXPENSES × 100 IN

2008 PRIME COST RS. 50,000= × 100 = 25% RS. 2,00,000

SO, IN 2009, MANUFACTURING EXPENSES

WILL BE:

RS. (1,15,200 + 1,51,200) × 25%= RS. (25% OF RS. 2,66,400)= RS. 66,600

WORKING NOTES:4) CALCULATION OF PROFIT IN 2009:

LET US ASSUME THAT SELLING PRICE WILLBE RS. 100.PROFIT IS 10% OF SELLING PRICE (GIVEN),I.E., RS. 10.SO, COST WILL BE:RS. (100 – 10) = RS. 90RATIO OF PROFIT TO COST IS:RS. (10/90) = 1/9. SO,RS. (4,59,000 × 1/9) = RS. 51,000 WILL BETHE PROFIT IN 2009.

ASSIGNMENT NO. 1:

COST SHEET- PROBLEM 6:THE ACCOUNTS OF P.K.MANUFACTURERS LTD. FORTHE YEAR ENDED 31.12.08 SHOW THE FOLLOWING;

PARTICULARS AMOUNT

(IN RS.)

PARTICULARS AMOUNT

(IN RS.)STOCK OF RAWMATERIALS ASON 01.01.08RAW MATERIALSPURCHASEDBAD DEBTS W/OSALARIES TO ADMINISTRATIVE STAFF

REPAIRS TO PLANT & MACHINERY

1,88,000

8,32,000

18,800

40,000

42,400

INDIRECT WAGESRENT, RATES &TAXES (FACTORY)DIRECT WAGES PAIDRENT, RATES &TAXES (OFFICE)GENERAL CHARGES

FREIGHT INWARD

16,000

12,0002,38,400

6,400

24,800

32,000

PARTICULARS AMOUNT

(IN RS.)

PARTICULARS AMOUNT

(IN RS.)FREIGHT OUTWARDDIRECTORS’ FEESMANAGER’SSALARYDEPRECIATION ONPLANT & MACHINERYSALESMEN’S SALARIES & COM.

TRAVELLING EXPENSES

DEPRECIATION ON FURNITURE

20,000

24,00048,000

28,400

33,600

12,400

2,400

CASH DISCOUNTS ALLOWEDELECTRICITY CHARGES (FACTORY)FUEL (FOR BOILER)STOCK OF RAW MATERIALS AS ON31.12.08

14,000

48,000

64,000

2,00,000

THE MANAGER’S TIME IS SHARED BETWEEN THE FACTORY AND THE OFFICE IN THE RATIO OF 20:80.

FROM THE ABOVE DETAILS YOU ARE REQUIRED TO PREPARE A STATEMENTSHOWING; (a) PRIME COST, (b) WORKSCOST, (c) COST OF PRODUCTION, (d)

COSTOF SALES/TOTAL COST.

ANSWERS:

(a) RS. 10,90,400(b) RS. 13,10,800(d) RS. 15,12,800

ASSIGNMENT NO. 2:

COST SHEET- PROBLEM 7:

FROM THE FOLLOWING PARTICULARS RELATING TO PRODUCTION AND SALES FORTHE YEAR ENDED 31.12.2007, PREPARE ASTATEMENT OF COST SHOWING THE PRIMECOST, FACTORY/WORKS COST, COST OFPRODUCTION, COST OF GOODS SOLD

(COGS), COST OF SALES, SALES, PROFIT AND ALSOP.U. COST OF SALES AND P.U. PROFIT.

PARTICULARS AS ON 01.01.07

(AMT. RS.)

AS ON 31.12.07

(AMT. RS.)

RAW MATERIALSWORK-IN-PROGRESSFINISHED GOODS(AT COST)3,000 UNITS2,500 UNITS

16,00012,600

16,400

19,6004,600

?

Other Information for the Year: Purchase of Raw Materials – Rs. 1,11,600Sales of Finished Goods – Rs. 2,83,500 (40,500 Units)Productive Wages – Rs. 67,200Office & Administrative Expenses – Rs. 20,800Selling & Distribution Expenses – Rs. 0.50 Per Unit SoldMachine Hours Worked – Rs. 8,000 HoursMachine Hour Rate (MHR) – Rs. 2.50Assume that sales are made on the basis

of‘First-in-First-out’ (FIFO) principle.

ANSWERS:PRIME COST = RS. 1,75,200WORKS COST = RS. 2,03,200COST OF PRODUCTION = RS. 2,24,000CLOSING STOCK OF FINISHED GOODS = RS. 14,000COST OF GOODS SOLD = RS. 2,26,400COST OF SALES = RS. 2,46,650 (P.U. = RS. 6.09)PROFIT = RS. 36,850(P.U. = RS. 0.91)

ASSIGNMENT NO. 3:

COST SHEET- PROBLEM 8:IN RESPECT OF A FACTORY, THE FOLLOWING FIGURES HAVE BEEN OBTAINED FOR THE YEAR ENDED 31.12.2008.

COST OF MATERIALS – RS. 1,50,000DIRECT WAGES – RS. 1,25,000FACTORY OVERHEAD – RS. 75,000ADMINISTRATION OVERHEAD – RS. 84,000SELLING OVERHEAD – RS. 56,000DISTRIBUTION OVERHEAD – RS. 35,000PROFIT – RS. 1,05,000

A WORK ORDER HAS BEEN ISSUED IN 2009AND THE FOLLOWING EXPENSES HAVE BEEN ESTIMATED:COST OF MATERIALS – RS. 3,000DIRECT WAGES – RS. 2,000ASSUMING THAT, IN 2009, FACTORY OVERHEAD WILL GO UP BY 20%, DISTRIBUTION OVERHEAD WILL GO DOWNBY 10% AND SELLING AND ADMINISTRATION OVERHEADS WILL EACHGO UP BY 12½%.

STATE AT WHAT PRICE SHOULD THE

PRODUCT BE SOLD, SO AS TO EARN

THE SAME RATE OF PROFIT ON THE

SELLING PRICE AS IN 2008.

NOTE: Administration, Selling and Distribution Overheads are based on Works Cost.

ANSWERS:SELLING PRICE = RS. 11,729RELATIONS IN 2008: i) Factory Overhead/Direct Wages = 72% ii) Administration Overhead/Works Cost= 25.89%iii) Selling Overhead/Works Cost= 17.26%iv) Distribution Overhead/Works Cost = 8.63%v) Rate of Profit in 2008 = 20% of Cost

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Introduction to Costing Lecture Ppt