CLASSIFICATION OF COST - Affiliated To GGSIPU

CLASSIFICATION OF COSTMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

COST “the amount of expenditure incurred on orattributable to a given thing”.COSTING Costing is the technique and process ofascertaining costs. In simple words costing is a systematic procedureof determining the unit cost of product/service.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

OBJECTIVE OF COST ACCOUNTING Analysis and Ascertainment of costs Presentation of costs for cost reduction and costcontrol. Planning and decision makingMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

CLASSIFICATION OF COSTSThe main objective of costing is to ascertain cost ofeach product, process, department, service oroperation.Costs can be classified into differentcategories depending upon the purpose of theirclassification.1. Classification by nature or element.2. Functional classification.3. Classification on the basis of behaviour.4. Classification on the basis of managerialdecision making and control.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Classification on the basis of nature orelement:(a) Direct Costs.(b) Indirect Costs.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

CLASSIFICATION BY NATUREELEMENTS OF COSTSDIRECT COSTSINDIRECT COSTSMATERIALLABOUREXPENSEMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Direct Cost:These are costs directly attributable to producing a product.The following comes under the Direct Cost: Direct Material Cost:- It is the cost of material whichcan be directly allocated to a cost centre.Example:-Raw material consumed for production of a product. Direct Labour Cost:- It is the cost of wages of thoseworkers who are readily identified or link with cost centre. Direct Expense:- These are the expenses otherthan direct material or direct labour which can beidentified with cost centre.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Indirect Costs:- These are the costs which cannot be assign to any particular cost unit, i.e jobproduct or process. Indirect Material:- Material which cannot bedirectly allocated to a particular cost centre. Indirect Labour:- These are the wages ofemployees which are not directly allocable to aparticular cost centre. Indirect Expense:- These are the expense otherthan the nature of material or labour and cannotbe directly attributable to a particular cost centre.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

FUNCTIONAL CLASSIFICATIONS PRIME COST Direct Material Direct Labour Direct Expense. FACTORY COSTPrime cost Factory Overheads Opening stock of work- inprogress- closing stock of work- in- progress. COST OF PRODUCTION: Factory cost Office andAdministration overhead R&D overheads.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

COST OF GOOD SOLD : Cost of Production Opening stock forfinished goods. - closing stock of finished goods TOTAL COST Cost of good sold Selling & distributionoverhead.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

CLASSIFICATION ON THE BASIS OF BEHAVIOUR Fixed costs: Costs which do not vary with the levelof production are known as fixed costs. Variable Cost:- Costs that vary in directproportion to the volume of production. Semi-variable costs:- Costs which contain bothfixed and variable components are called semi variable costsMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

CLASSIFICATION ON THE BASIS OF MANAGERIALDECISION MAKING & control Marginal costs: Costs of producing one additional unit. Itis useful for price fixation. Opportunity costs: It refers to the value of sacrifice madefor benefit of opportunity foregone in accepting analternative course of action. Normal & Abnormal costs: Normal costs are normallyincurred at a given level of output, while Abnormal cost is anunusual or unexpected and due to some abnormal situationof the production.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Sunk Costs: It is a cost which has been already incurredor sunk in the past. It is not relevant for decision making. Imputed cost: The cost which do not involve anyexpenditure in real sense. They included in cost accountsonly for taking managerial decisions.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

FORMAT OF COST SHEETMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Note: Direct wages, Productive Wages, Manufacturingwages, Wages paid to labour means the same. Chargeable expenses treated as Direct expenses. Consumable Stores treated as Factory Expenses itmeans factory oil, Grease, Cotton etc. If Depreciation is given but question does notspecify its relation to asset pertaining to factoryoffice etc, then we consider it to be factoryoverhead. Some time Cost sheet divided in to two parts: Up to cost of Production- Cost Sheet Cost of production to Sales – Statement of ProfitMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Items not including in Cost Sheet Interest on Bank Loan, Debenture, Mortgages etc. Loss on sale of fixed Assets. Expenses on transfer of Company s Office. Damage Payable. Penalties and Fine. Remuneration paid to the Proprietor in excess of afair reward for service rendered. Loss to business property on account of theft, fireor other natural calamities.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Items not including in Cost Sheet Interest received on Investment and on BankDeposit. Profit on sale of Fixed Assets. Transfer fees received. Any Income Received i.e. rent received, Dividendreceived etc. Brokerage, Discount, Commission etc received.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Items not including in Cost Sheet Appropriation to sinking food. Dividend paid. Taxes on income and Profit. Transfer to General Reserve. Excess provision for Depreciation on Building, Plantetc. and for Bad Debts. Amount Written off on Goodwill, PreliminaryExpenses, Underwriting Commission, Discount onDebentures Issue, Expenses on Issue of Shares. Charitable Donation.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

ParticularsTotal Cost20,0008,000Prime CostAdd:- Factory OverheadsIndirect Labour2,500Supervision Cost1,000Factory Rent1,600Factory Lighting600Oil for Machine100Depreciation of Machines 500Work CostPer unit CostDirect MaterialDirect Labour28,0006,30034,300Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)28.006.3034.30

Add:- Office and Administration ExpensesOffice Overheads8,000Office Salary2,000Misc. Expenses1,000Cost of ProductionAdd:- Selling & Distribution OverheadsTotal Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)11.0045.306.0051.3010.2661.56

Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Answer:Prime cost 92,300Work Cost 99,800Cost of Production 1,06,300Cost of Sales 1,09,000Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

NATURE OF COST ACCOUNTING(I)Cost accounting is an organized body of knowledge.(II)These certain principles to which the technique of costingshould be applied.(III) These principles and rules have been developed over a periodof time by experience.(IV)Besides being a science, cost accounting is an art also. Itsprinciples, rules and techniques are not static but dynamic.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

(V)Although it is an organized body of knowledge, its principlescan not be verified and proved by experiments. Hence, it is notan exact science. Since it is operated by human beings, so it is abehavioral science.(VI)Old principles and techniques are replaced by new. It not onlylays down the rules but also shows the way of achieving theobjectives for which it is installed.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

Scope of Cost Accounting 1. Cost AscertainmentIn this region of cost accounting, cost accounting collectsproduct's material, labor and overhead cost and try tocalculate total and per unit cost of product. This total costcalculation will be based on historical or standard orestimated basis. After this, cost accountant will use anymethod of costing like specific order costing, operationcosting, and direct costing technique.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

2. Cost RecordsIn this part of cost accounting, cost accountant maintains costbooks, vouchers, ledgers, reports and other cost relateddocuments for future comparison and reference. It will also beunder the scope of cost accounting.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

3. Cost ControlThis is the end boundary of cost accounting scope. In this division,cost accountant used different techniques and methods forcontrolling the cost. Save One Rupees in the cost of productmeans we have earned one rupees in the production of goods.So, Cost accountant uses budgetary control, standard costing,break even point analysis and many other techniques forcontrolling the cost.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

ADVANTAGES OF COST ACCCOUNTING Cost accounting is not only helpful to provide cost information forinternal use by management but it also helps management insetting objectives and programme of operation in comparingactual performance with expected performance.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

BENEFITS Provide data and cost information Disclose operating efficiency Helpful in decision making Maximum utilization of resources Help financial accounting Helpful in avoiding lossesMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

RELATIONSHIP BETWEEN COST ANDMANAGENENT ACCOUNTINGMa nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

THE FOLLOWING ARE THE MAIN POINTS OF RELATION BETWEEN COSTAND MANAGEMENT ACCOUNTING:- 1)OBJECT : The object of cost accounting is to record the costof producing a product or providing a service. The cost isrecorded product wise or unit wise. Besides recording, it dealswith cost control, matching of cost with revenue and decisionmaking. The purpose of management accounting is to provideinformation to the management for planning and co-ordinatingthe activities of the business.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

2.SCOPE : The scope of management accounting is very wide. Itincludes financial accounting, Cost accounting, budgeting, taxplanning, reporting to management and interpretation offinancial data. On the other hand , cost accounting deals primarily with costascertainment.3.NATURE : Management accounting is generally concerned withthe projection of figures for future. The policies and plans areprepared for providing future guidelines. Cost accounting uses both past and present figures.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

4.DATA USED : In cost accounting only those transactions aretaken which can be expressed in figures only quantitative aspectis recorded in cost accounting. Management accounting uses bothquantitative and qualitative information.5.DEVELOPMENT : The development of cost accounting is relatedto industrial revolution. Financial accounting could not satisfyinformation need of management. Cost accounting was thus evolved as supplementary accountingmethods. Cost accounting was able to provide information notonly about cost structure but also for planning and decisionmaking. Management accounting has developed only in the last 30 years. Management accounting and cost accounting are bothcomplementary subjects.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

6.PRINCIPLE FOLLOWED : Certain principles and procedures arefollowed for recording cost of different products. The same rulesare applicable at different times too . No specific rules and procedures are followed in reportingmanagement accounting. The information is prepared and presented as is required bythe management.Ma nju Tya gi (B.Ed, MBA, M.Com, MA, Net Qualified)

In this region of cost accounting, cost accounting collects product's material, labor and overhead cost and try to calculate total and per unit cost of product. This total cost calculation will be based on historical or standard or estimated basis. After this, cost accountant will use any method of costing