IIS Accounting

for Managen

6.0 AIMS AND OBJECTIVES

LESSON
After studying this lesson, you should be able to:
• Define cost accounting
• Describe the difference between cost accounting and financial accounting
•BASICS OF
Describe the keyCOST ACCOUNTING
elements of cost accounting
• Effectiveness of cost accounting
CONTENTS
6.0
6.1Aims and Objectives
INTRODUCTION
6.1 Introduction
Cost accounting is that branch of the accounting information system, which records, measures and reports
6.2 Meaning
information of Cost
about Accounting
costs. The primary purpose of cost accounting is cost ascertainment and its use in
decision-making and performance evaluation. It is also useful in planning and controlling.
6.3 Cost Classification
6.3.1 By Nature or Element or Analytical Segmentation
6.2 MEANING OF COST ACCOUNTING
6.3.2 By Functions
It is the 6.3.3
processDirect
of classifying,
and Indirectrecording
Cost and appropriate allocation of expenditure for the determination of
costs of products or sendees through the presentation of data for the purpose to take decisions and guide the
business 6.3.4 By Variability
organization.
The next6.3.5 By Controllability
one important aspect is the differences between the cost accounting and management accounting.
6.3.6 By Normality
Table 6.1:
6.3.1 ByDifferences
Time
between
6.3.8 For Planning and Control
Cost
Accounting
6.3.9 For Managerial Decisions
and
6.4 Distinction Manageme
between Financial Accounting and Cost Accounting
6.5 Unit Costingnt Accounts
6.5.1 Cost Sheet - Definition
6.5.2 Direct Material
6.5.3 Direct Labour
6.5.4 Direct Expenses
6.5.5 Indirect Material
6.5.6 Indirect Labour
6.5.7 Indirect Expenses
6.6 Direct Cost Classification
6.7 Indirect Cost Classification
6.8 Stock of Raw Materials
6.9 Stock of Semi-finished Goods
6.10 Stock of Finished Goods
 2. Scope It deals only with the cost and related It not only deals with the cost but also
aspects revenue. It is wider than the cost
accounting
3. Utilization of Data It uses only quantitative information It uses both qualitative and quantitative
pertaining to the transactions information for decision making
4. Utility It ends only at the presentation of But it starts from where the cost
information accounting ends: means that the cost
information are major inputs for decision-
5. Nature It deals with the past and present data But it deals with future policies and
course of actions

What is a cost of a product?

Cost denominates the use of resources only in terms of monetary terms. In brief, cost is nothing but total of
all expenses incurred for manufacturing a product or attributable to given thing. In clear, the cost is nothing
but ascertained expression of expenses in terms of monetary, incurred during its production and sale.
To ascertain a cost, the firm should atleast smallest division of activity or responsibility for which costs are
accumulated, at where the costs ascertained and controlled. In brief, cost centre normally a location where a
specified activity takes place.
 Basics of Cost Accounting 119

Accumulation of all cost incurred for an activity leads to ascertainment of cost for the specified activity, but
the control is being done by the head or incharge of that activity is responsible for control of costs of his
centre.

Product centre is a centre at where the cost is ascertained for the product which passes through the process.

Service centre is the centre or division which normally incurs direct or indirect costs but does not work
directlv on products. Normally, Maintenance dept, and general factor." office are verv good examples of the
service centre.
Apart from the above classification, one more important centre is profit centre.
What is meant by profit centre?
It is a centre not only responsible for both revenue as well as expenses but also for the profit of an activity.

6.3 COST CLASSIFICATION

The costs are classified into various categories according to the purpose and requirements of the firm. Some
of the most important classifications are as follows:
1 . By nature or element or analytical segmentation
2 . By functions
3 . Direct and Indirect cost
4 .By variability
5 .By controllability
6 .By normality
7 .By time
8 . According to planning and control
120 Accounting for Mrnsgexi

9 . For managerial decisions

10 3.1 By Nature or Element or Analytical Segmentation

The costs are classified into three major categories materials, labour, and expenses.

11 3.2 By Functions
Under this methodology-, the costs are classified into various divisions or functions of the enterprise M^.
production cost, administration cost, selling & distribution cost and so on.
The detailed classification is that total of production cost sub-classified into cost of manufacture, fabrication
or construction.
And another classification of cost is commercial cost of operations; which is other than the cost of
manufacturing and production.
The major components of commercial costs are known as administrative cost of operations and selling and
distribution cost of operations.

12 3.3 Direct and Indirect Cost

Direct cost This classification of costs are incurred for the manufacture of a product or service; can be
conveniently and easily identified.
Material cost for the product manufacture: Direct material - For garments factory - cloth is the direct
material for ready made garments.
Labour cost for production: Labour who directlv involved in the production of a product as well as
attributable to single product expenses and so on.
Indirect cost: The costs which are incurred for and cannot be easily identified for any single cost centre or
cost unit known as indirect cost.
Indirect material cost: Indirect labour cost and Indirect expenses are the three different components of the
indirect expenses.
Indirect material: Cost of the thread cannot be convenientlv measured for single unit of the product.
Indirect Labour: Salarv paid to the supervisor.

13 3.4 By Variability
The costs are grouped according to the changes taken place in the level of production or activity.
It mav be classified into three categories:
Fixed cost: It is cost which do not vary irrespective level of an activity or production. Rent of the factory,
salarv to the manager and so on.
Variable cost: It is a cost which varies in along with the level of an activity or production.
For example, material consumption and so on.
Semi variable cost: It is a cost which is fixed upto certain level of an activity, then later it fluctuates or varies
in line with the level of production. It is known in other words as step cost, for example, electricitv charges.
122 BrsiC: of Cost Accounting 121
Accounting
for Maaagers

6.4 3.5DISTINCTION
14 BETWEEN FINANCIAL ACCOUNTING AND COST
By Controllability
ACCOUNTING
The cost are classified into two categories in accordance with controllability, as follows:
Controllable
The next onecosts: Cost aspect
important which iscanthebedifferences
controlled in
through some
between the measures
financial known as controllable
accounting, costs. and
cost accounting All
variable cost are
management considered to be controllable in segment to some extent.
accounting.
Uncontrollable costs:
TableCosts which cannot be controlled are known as uncontrollable costs. All fixed costs are
verv difficult to control
6.2: or bring down; they rigid or fixed irrespective to the level of production.
Differenc
15 3.6 By Normality es
between
Under this methodology,
Financialthe costs which are normally incurred at a given level of output in the conditions in
which that level of Accounti
activity normally attained.
Normal cost: It isngthe andcost which is normally incurred at a given level of output in the conditions in which
that level of outputCost
is normally achieved.
Accounti
Abnormal cost: Itngis the cost which is not normally incurred at a given level of output in the conditions in
which that level of output is normally attained.

16 3.7 By Time
According to this classification, the costs are classified into historical costs and predetermined costs:
Historical costs: The costs are accumulated or ascertained only after the incurrence known as past cost or
historical costs.
Predetermined costs: These costs are determined or estimated in advance to any activity by considering the
past events which are normally affecting the costs.

17 3.8 For Planning and Control

The following are the two major classifications viz standard cost and budgetary control:
Standard cost is a cost scientifically determined by way of assuming a particular level of efficiency in
utilization of material, labour and indirect expenses.
The prepared standards are compared with the actual performance of the firm in studying the variances in
between them. The variances are studied and analysed through an exclusive analysis.
Budget: A budget is detailed plan of operation for some specific future period. It is an estimate prepared in
advance of the period to which it applies. It acts as a business barometer as it is complete programme of
activities of the business for the period covered.
The control is exercised through continuous comparison of actual results with the budgets. The ultimate aim
of comparing with each other is to either to secure individuals' action towards the objective or to provide a
basis for revision.

18 3.9 For Managerial Decisions

The major classifications are sunk cost and marginal cost.
Marginal cost is the amount at any given volume of output by which aggregate costs are changed if the
volume of output is decreased or increased by one unit.

SI. No. Point of Difference Financial Accounting Cost Accounting

1. Objectives To determine the volume of earnings Its mam purpose is to ascertain the cost and
and financial position control
 2. Scope It deals with only the monetary It deals only with the cost and related aspects
transactions of the business

3. Utilization of Data It uses only the financial transactions It uses only quantitative information pertaining
alone to the transactions
It reveals the capacity & status of the
4. Utility firm It ends only at the presentation of information

5. Nature It deals only the past of the firm It deals with the past and present data

6.5 UNIT COSTING

Under costing, the role of unit costing is inevitable tool for the industries not only to identify the volume of
costs incurred at everv level but also to determine the rational price on the commodities in order to withstand
among the competitors. The determination of the selling price is being done through the process of
determining the cost of the product. After having been finalized the cost of the product, the profit margin has
to be added in order to derive the final selling price of the product.

6.5.1 Cost Sheet - Definition

"It is a statement of costs incurred at every level of manufacturing a product or service".
"It is a statement prepared to depict the output of a particular accounting period alongwith break up of
costs".
How to find a total cost of the product or service?
To find the total cost of the product or service, the costs incurred are grouped under various categories.
 Basics of Cost Accounting 123

The cost of the product or service should have to come across many stages. The determination of the unit
cost involves two different major stages viz direct and indirect costs.
What is meant by direct cost?
Direct cost is the cost incurred by the firm which can be ascertained and measured for a product.
Direct cost of the product can be classified into three major categories.

6.5.2 Direct Material

Direct material which is especially used as a major ingredient for the production of a product. For example,
the wood is a basic raw material for the wooden furniture. The cost of the wood procured for the furniture is
known direct material cost.
The cotton is a basic raw material for the production of yarn. The cost of procuring the cotton is known as
direct material for the manufacturing of yarn.

6.5.3 Direct Labour

Direct labour is the cost of the labour which is directly involved in the production of either a product or
sendee. For example, the cost of an employee who is mainly working for the production of a product/service
at the centre, known as direct labour cost.

6.5.4 Direct Expenses

Direct expenses which are incurred by the firm with the production of either a product or sendee. The excise
duty, octroi duty are known as direct expenses in connection with the production of articles and so on.
Indirect cost is the cost whatever incurred by the firm can be ascertained but not measured more specifically
for a product.
124 Accounting for Mrnzgen

6.5.5 Indirect Material

The material which is spent cannot be measured for a product is known as indirect material. For example, the
thread which is used for tailoring the shirt cannot be measured or quantified in specific length as well as
ascertained the cost.

6.5.6 Indirect Labour

Indirect labour is the cost of the labour incurred by the firm other than the direct labour cannot be
apportioned. For example, cost of supervisor, cost of the inspectors and so on.

6.5.7 Indirect Expenses

Indirect expenses are the expenses other than that of the direct expenses in the production of a product. The
expenses which are not directly part of the production process of a product or service known as indirect
expenses. For example, rent of the factory, salesmen salary and so on.

Advantages of Preparing the Cost Sheet

1. It is a only statement reveals the cost of the output as well as unit cost of the output.
2. It facilitates the manufacturer to access the control on the costs through breakups in the cost
3. It extends room for the management to study the variations of the cost with the help of an effective
comparison of standard costs.
4. The businessman is able to get an insight on the various components of cost as well as able to exercise
the control on the excessive costs incurred.
5. It poses the firm to supply the goods against the orders with reasonable accuracy in submitting the
orders.
To find out the unit cost of the product, the statement of cost plays pivotal role in determining the cost of
production, cost of goods sold, cost of sales and selling price of the product at every stage.
During the preliminary stage of preparing the cost statement of the product, there are two things to be borne
in our mind at the moment of classification.
1. Direct cost classification
2. Indirect cost classification

6.6 DIRECT COST CLASSIFICATION

Under this classification, the direct costs of the product or sendee are added together to know the volume of
total direct cost. The total volume of direct cost is known as "Prime Cost".
 Brnci of Cost Accounting 125

Direct Materials + Direct Labour + Direct Expenses = Prime Cost

The next stage in the unit costing to find out the factory cost. The factory cost could be computed by the
combination of the indirect cost classification.

6.7 INDIRECT COST CLASSIFICATION

Among the classification of the overheads, the first and foremost is factorv overheads. The factory overheads
and work overheads are synonymously used. The factory overheads are nothing but the indirect costs
incurred at the factory site. To find out the total factory cost or works cost incurred in the factory could be
derived by adding the both direct cost and indirect cost incurred during the factory process.
Factory cost = Prime cost + Factory overheads
Factory overheads are nothing but the indirect expenses incurred during the industrial process.

The next stage in the process of the unit costing is to find out the cost of the production The cost of
production is the combination of both the factory cost and administrative overheads.
Cost of production = Factory cost + Administrative overheads
Administrative overheads is the indirect expenses incurred during the office administration for the smooth
flow production of finished goods.
126 Accounting for Manager: Basics of Cost Accounting 12“

Under the unit costing, the selling price of the product can be determined through the statement form.
The cost sheet or cost statement is as follows in the determination of the selling price of the product.
Illustration 1:
Calculate the prime cost, factory cost, cost of production cost of sales and profit form the following
particulars:

Immediate next stage to determine in the process of unit costing is the component of cost of sales. The cost
of sales is the blend of both viz. Selling overheads and cost of production.
What ever
Direct the cost involved in the production
Materials process in Office
2,00,000 the factor}' as well in the administrative proceedings
stationery 1000
areDirect
clubbed
wageswith the selling overheads to determine
50,000 the cost of sales.
Telephone charges 250
Direct expenses Cost of sales = 10,000
Cost of production + telegrams
Postage and Selling overheads 500
Selling
Wages ofoverheads
foreman are nothing but the indirect5,000 expenses incurred
Salesmens’ salaries by the firm at the moment 2500of selling
products. In
Electric power
brief, whatever the expenses in relevance
1,000
with the selling
Travelling expenses
and distribution are known as Selling
1,000
overheads.
Lighting :Factory 3,000 Repairs and renewal plant ‘,000
Office 1,000 Office premises 1,000
Solution:
Storekeeper's wages 2,000 Carriage outward 750
Cost Statement/Cost Sheet
Oil and water 10,00 Transfer to reserves 1,000

Rent Factory 10,000 Discount on shares written off 1000

Office 5,000 Advertising 2,500

Depreciation: Plant 1000 Warehouse charges 1000

Office 2,500 Sales 3,79,000
Consumable store 5,000 Income tax 20,000
Managers'' salary 10,000 Dividend 4,000

Directors’ fees 2,500

Particulars (?) (?)

The last but most important stage in the unit costing is determining the selling price of the commodities. The
selling price of the commodities is fixed by way of adding both the cost of sales and profit margin out of the
product sales.

Sales = Cost of Sales - Margin of Profit

128Direct Materials
Accounting for Managers 2,00,000
Direct wages 50,000
Direct expenses 10,000
Prime Cost 2,60,000
Factory Overheads:
Wages of foreman 5,000
Electric power 1,000
Lighting :Factory 3,000
Storekeeper’s wages 2,000
Oil and water 1000

RentFactory 10,000
Depreciation Plant 1000
Consumable store 5,000
Repairs and renewal Plant 7,000
35,000
Factory cost 2,95,000
Administration overheads
Rent Office 5,000
Depreciation office 2,500
tanagers’ salarv 10,000
Directors’ fees 2,500
Office stationery 1000
Telephone charges 250
Postage and telegrams 500
Office premises 1,000
Lighting Office 1,000
23,"50
Cost of production 3,18,750
Selling and distribution overheads
Carriage outward 750
Sales mens’ salaries 2500
Travelling expenses 1,000
Advertising 2500
Warehouse charges 1000
7,750
Cost of sales 3,26,500
Profit 52,500
Sales 3,79,000

Conid....
 Basics of Cost Accounting 129
Particulars (?)
Opening stock of Raw materials xxxxx
(+) Purchases of Raw materials xxxxx
(—) Closing stock of Raw materials xxxxx
Cost of Materials consumed xxxxx

6.10 STOCK OF FINISHED GOODS

The treatment of the stock of finished goods should carried over in between the opening stock and closing
stock and adjusted among them before the finding the cost of goods sold.
Particulars (?)
Prime cost xxxxxx
(+) Factory overheads incurred xxxxxx
(+} Opening work in progress xxxxxx
(—) Closing work in progress xxxxxx
Factor}- cost xxxxxx
Illustration 2:
The following data has been from the records of Centre corporation for the period from June 1 to June 30,
2005.

The next stage in the preparation of the cost statement is to induct the stock of raw materials, work in
progress and finished goods.
Particulars (?)
6.8CostSTOCK OF RAW MATERIALS
of production xxxxx
The raw materials stock should be taken into consideration for the preparationxxxxx
(+) Opening stock of finished goods
of the cost sheet. The cost of
the(—) Closing
raw stock ofisfinished
materials nothing but the direct materials cost of the product. The xxxxx
goods cost of the materials is in other
words cost
Cost of of the
goods soldmaterials consumed for the production of a product. xxxxx
1-Jan 2005 31» Jan 2005
Cost of raw materials 60,000 50,000
Cost of work in progress 24.000 30,000

6.9 STOCK OF SEMI-FINISHED GOODS

The treatment of the stock of semi finished goods is mainly depending upon the two different approaches viz
prime cost basis and factory cost basis. The factory cost basis is considered to be predominant over the earlv
one due to the consideration of factory overheads at the moment of semi finished goods treatment. The
indirect expenses are the expenses converting the raw materials into semi finished goods which should be
relatively considered for the treatment of the stock valuation rather than on the basis of prime cost.
130 Accounting for Managers
Cost of finished good 1,20,000 1,10,000
Transaction during the month
Purchase of raw materials 9,00,000
Wages paid 4,60,000
Factory overheads 1,84,000
Administration overheads 60,000
Selling overheads 40,000
Sales 18,00,000
Particulars (?) (?)
Opening stock of raw materials 1st Jan 60,000
{+'. Purchase of raw materials 9,00,000
{— Closing stock of raw materials 31” Jan 50,000
Raw materials consumed during the year 9,10,000
Illustration 3:
(+)Wages paid 4,60,000
From the following information extracted from the records of the M/s. Sundaram & Co. Stock position of
Prime cost 13,70,000
the firm.
Factory overheads 1,84,000
(~ Opening stock of semi goods 24,000
{— Closing stock of semi goods 30,000
Factory overheads l,”8,000
Faetón,- or Works cost 15,48,000
(A Administration overheads 60,000
Cost of Production 16,08,000
(~ Opening stock of finished goods 1,20.000
{— Closing stock of finished goods 1,10,000
Cost of goods sold 16,18,000
(+) Selling overheads 40,000
Cost of Sales 16,58,000
Net profit 1,42,000
Sales 18,00,000

Draft the cost sheet.

Solution:
Cost Sheet
Particulars 1-4-1994 (?) 31-3-1995 (?)
Stock of raw materials 80,000 1,00,000
Stock of finished goods 2,00,000 3,00,000
Stock of work in progress 20,000 28,000
Particulars (?)Particulars (?)
Indirect labour 1,00,000 Administrative expenses 2,00,000
Oil 20,000Electricity 60,000
Insurance on fixtures 6,000Direct labour 6,00,000
Purchase of raw materials 8,00,000 Depreciation on Machinery 1,00,000
Sale commission 1,20,000 Factory rent 1,20,000
 Salaries of salesmen 2,00,000 Property tax on building 22,000
Basics of Cost Accounting 151
Carriage outward 40,000Sales 24,00,000
Particulars (?) (?)
Opening stock of raw materials 1“ April 1994 80,000
(+)Purchase of raw materials 8,00,000
- Closing stock of raw materials 31,: Jan 1,00,000
Raw materials consumed during the year “,80,000
(+)Direct labour 6,00,000
Prime cost 13,80,000
Factory overheads: Indirect labour 1,00,000
Oil 20,000
Insurance on fixtures 6,000
Electricity 60,000
Depreciation on machinery 1,00,000
Factory rent 1,20,000
Property tax on factory building 22,000 4,28,000
(+) Opening stock of semi goods 2,0,000
Note: Property
(—) Closing taxofon
stock thegoods
semi plant is to included under the tactorc overheads. The tax is paid by the firm on the 28,000
plant which
Factor}- costis engaging in the production process. IS,00,000
(+) Administration overheads 2,00,000
Illustration 4:
Cost of Production 20,00,000
Prepare the cost
(+) Opening stocksheet to show
of finished the total cost of production and cost per unit
goods of goods manufactured by a 2,00,000
company for stock
(—) Closing the month of Jan.
of finished goods2005. Also find the cost of sale and profit. 3,00,000
Cost of goods sold 19,00,000
Selling overheads: Sales commission 1,20,000
Salaries of salesmen 2,00,000
Carriage outward 40,000
Cost of sales 22,60,000
Profit margin 1,40,000
Sales 24,00,000

The number of units produced during Jan. 2005 was 6.000.

The stock of finished goods was 400 and 800 units on 1st Jan., 2005 and 31st Jan., 2005 respectively. The total
cost of the
Prepare costunits on hand
statement ofon
the1st Jan.Sundaram
M/s. 2005 is ?&
5,600.
Co. All these had been sold during the month.
Solution:
Solution:
Cost Sheet
The first and foremost step is to find out the cost per unit i.e. cost production per unit. The opening stock
and their values are given, but at the same time(?)the
Particulars
value of the closing stock is ascertained by(?)
Particulars
Stock of raw materials 1.1.2005
? 3. The total number of units are almost. 6,000 Factory rent and rates 6,000
Raw materials procured 56,000 Office rent 1,000
Stock of raw material 31.1.2005 Cost
9,000Sheet
General expenses 4,000
Direct wages 14,000 Discount on sales 600
Plant depreciation 3,000 Advertisement expenses 1,200
Loss on the sale of plant 600 Income tax paid 2000
Sales ?. 1,50,000
Particulars Units (?)
Stock of Raw materials 1.1.2005 6,000
(+) Raw materials procured 56,000
(—) Closing stock of raw material 9,000
Materials consumed 71,000
Direct wages 14,000
132 Accounting for Managers
Prime cost 85,000
Factory overheads:
3,000
Depreciation on plant
Factory rent and rates 6,000

Illustration J:
XYION Co Ltd., is an export oriented company manufacturing internal-communication equipment of a
standard size. The company is to send quotations to foreign buyers of your product. As the cost accounts
chief you are required to help the management in the matter of submission of the quotation of a cost estimate
based on the following figures relating to the year 1984.
Total output (in units) 20,000
Factor}- cost 94,000
Office and Administration overheads:
1,000
Office rent
General expenses 4,000
Cost of production = T. 3 per unit 3,000 99,000
(+) Opening stock of finished goods 400 5,600
(—) closing stock of finished goods 800 2,400
Cost of goods sold 1,02,200
Selling and distribution expenses
.Advertisement expenses 600
Cost of sales 1,02,800
Net profit 4“,200
Sales 1,50,000
Additional Information:
(i)Local
Local
Raw raw materials now cost 10% more.
materials 20,00,000Excise duty 4,00,000

(ii)Imports of raw margin

A profits materialsof 20% on sales is kept. 2,00,000 Administrative office expenses 4,00,000
Direct labour in works 20,00,000Salary of the managing director 1,20,000
ini) The government grants subsidy of ? 200 per unit of exports. 80,000
Indirect labour in works 4,00,000 Salary of the joint managing director
Conta....
Prepare the cost statement in columnar form.
40,000
Storage of raw materials and spares
Solution: 1,00,000 Fees of directors
Fuel Cost 3,00,000ofExpenses
Statement XYIONonLtd.advertising 3,20,000
Tools consumed 40,000 Selling expenses 3,60,000
Depreciation on plant 2,00,000 Sales depots 2,40,000
Salaries of worm personnel 2,00,000 Packaging and distribution 2,40,000
Particulars Cost (?) (?) Unit/Price
Cost 20,000
Local raw materials 20,00,000
(+) Increase in local raw materials 2,00,000
22,00,000
(+) Imports of raw materials 2,00,000
Direct Materials 24,00,000
Basics of Cost Accounting 133
Direct labour 20,00,000
Prime cost 44,00,000
Factory- overheads:
4,00,000
Indirect labour in works
Storage of raw materials and spares 1,00,000
Fuel 3,00,000
Tools consumed 40,000
Depreciation on plant 2,00,000
Salaries of works personnel 2,00,000
Excise duty 4,00,000 16,40,000
Works cost 60,40,000
Administrative & office Expenses 4,00,000
Salaries of Managing director 1,20,000
Salaries of Joint Managing Director 80,000
Fees of directors 40,000 6,40,000
Cost of Production 66,80,000
Selling & Distribution expenses
Expenses of Advertising 3,20,000
Selling expenses 3,60,000
Sales depots 2,40,000
Packaging and distribution 2,40,000 11,60,000
Cost of sales 80% 78,40,000
Profit Margin 20% 19,60,000
Sales 100% 98,00,000 20,000 units 98,00,000 490
xxport subsidy per unit 40,00,000 2C0S
Selling price for local market sales 58,00,000/20,000 units 58,00,000 290

Cotti. ..
134 Accounting for Xirnagen

c) Controllability

d) ) Functions

4. The cost classifications in the cost sheet is based on:

(a) Functions

(b) Variability-

(c) Controllability

(d) None of these

5. Standard costing is brought under the classification of:

a) Controllability-

b) ) Functions

c) Planning and control

d) ) Both (a) & (c)

6. Marginal costing is classified on the basis of:

(a) Variability

(b) Managerial decisions

(c) Time

(d) Both (a) & (b) Check Your Progrès:

Choose
7. ^10,the most
000 appropriate
paid one: to the owner of the factory- site is:
on every month
1. Direct materials
(a) Fixed cost is:
a) Opening
(b) stock ~cost
Semi-variable Purchases

b)
(c) )Variable
Purchases + Closing stock
cost
c) Opening
(d) stock
Semi-fixed cost~ Purchases

8. d) ) Purchases
Electricitv - Closing
charges incurredstock —firm
by the Closing
is: stock
2. Salary paid cost
a) Fixed to Supervisor is:

(a) Manufacturing overheads

6.11 LET US SUM UP
(b) Administrative overheads
Cost denominates the use of resources only in terms of monetary terms. In brief, cost is nothing but total of
(c) incurred
all expenses Direct labour
for manufacturing a product or attributable to given thing. In clear, the cost is nothing
but ascertained expression
(d) Selling of expenses
& distribution in terms of monetary, incurred during its production and sale. Service
overheads
centre is the centre or division which normally- incurs direct or indirect costs but does not work directly on
products.
3. FixedNormally, Maintenance
cost is the dept,
cost under the and general
classification of: factory office are very good examples of the service
centre. Costs which cannot be controlled are known as uncontrollable costs. All fixed costs are very difficult
to controla)or bring
Variability
down; they rigid or fixed irrespective to the level of production. A budget is detailed plan Conti...
136 Basics of Cost Accounting 135
Accountin
g for
Managers
Check for some specific future period. It is an estimate prepared in advance of the period to which it
of operation
Your
applies. It acts as a business barometer as it is complete programme of activities of the business for the period
Progre
covered. Under costing, the role of unit costing is inevitable tool for the industries not only to identify the
ss: of costs incurred at every level but also to determine the rational price on the commodities in order
volume
Model among the competitors. Direct labour is the cost of the labour which is directly involved in the
to withstand
Answeof either a product or service. For example, the cost of an employee who is mainly working for
production
r
the production of a product/service at the centre, known as direct labour cost. Indirect expenses are the
expenses other than that of the direct expenses in the production of a product. The expenses which are not
directly part of the production process of a product or sendee known as indirect expenses. For example, rent
of the factor}', salesmen salary and so on.

6.12 KEYWORDS
Cost: Expense incurred at the either cost centre or service centre.
Cost Sheet: It is a statement prepared for the computation of cost of a product/service.
Direct Cost: Cost incurred which can be easily ascertained and measured for a product.
Indirect Cost: Cost incurred cannot be easily ascertained and measured for a product.
Cost Centre: The location at where the cost of the activity is ascertained.
Product Centre: It is the location at where the cost is ascertained through which the product is passed
through.
Service Centre: The location at where the cost is incurred either directly or indirectly but not directly on the
products.
Profit Centre: It is responsibility centre not only for the cost and revenues but also for profits for the activity.
Prime Cost: combination of all direct costs viz. direct materials, direct labour and direct expenses.
Factory Cost: It is the total cost incurred both direct and indirect at the work spot during the production of
an article.
Cost of Production: It is the combination of cost of manufacturing an article or a product and administrative
cost.
Cost of Sales: It is the entire cost of a product.
Selling Price or Sales: The summation of cost of sales and profit margin.

6.13 QUESTIONS FOR DISCUSSION

1. What is cost classification? Classify it, in detail.
2. What do you mean bv unit costing?
3. Explain direct and indirect costing.
4. What is cost-sheet definition?
5. Express indirect and direct expenses.
1. (c)
2. (a)
3. (a)
 4. (a)
5.
6. (a)
7. (a)
8.

6.14 SUGGESTED READINGS

RJL. Gupta and R2.dhas\caznv. Advanced Accountancy.
V.K Goyal, Financial Accounting. Excel Books, New Delhi.
Khan and Jain, Management Accounting.
S.N. Maheswari, Management Accounting.
S. Bhat, Financial Management. Excel Books, New Delhi.
Prasanna Chandra, Financial Management - Theory and Practice. Tata McGraw Hill, New Delhi (1994).
IM. Pandey, Financial Management. Vikas Publishing, New Delhi.
Nitin Balkan-., Accounting ¿^Finance for Managers. Excel Books, New Delhi.