Costing Presentation

COSTING
CONTENT
• Objectives of the course

• What is cost?
• Cost classification –By Nature & elements
• Calculation of cost per unit
• Job Costing
• Cost Accounting
• Objectives & Advantages of cost accounting
• Price Setting Formula
• Manufacturing Accounts & its importance
Objectives
After the training session on costing, the entrepreneurs will be able:
• Define cost
• How to classify cost (By elements, by function direct vs. indirect cost,)
• How to calculate cost per unit
• Job Costing
• Define Cost Accounting
• Differentiate between cost and cost accounting
• The importance of cost accounting
• Setting price of their products
• How to calculate their cost of production through manufacturing account
WHAT IS COST?
Cost Classification
• Cost classification is the arrangement of cost items into logical groups.
For example by their nature (materials, wages, etc..) or function
(administration, production etc)
• The eventual aim of costing is to determine the cost of producing a
product/service, for profitability analysis, selling price determination
and stock valuation purposes.
Cost Unit
• A cost unit is a unit of product or service in relation to which costs may be ascertained
Example 1
During June, the following costs were incurred in a process
Direct Materials 20,000

Direct Labour 10,000
Overhead 8,000
2000 units were produced.

What is the cost per unit?
Workings 1
Rs
Direct Materials 20,000
Direct Labour 10,000
Overhead 8,000
Total Cost 38,000
No of units produced: 20,000 units

Cost per unit=38000/2000
=Rs 19 /unit
Job Costing
• Job Costing is relevant in the situation where a customer orders a specific job (as opposed to simply
purchasing goods that we already produce in quantity)
• In this situation the job is costed separately, with all associated costs listed to arrive at a total cost.
Example 1
The estimated cost for job xxx are as follows:
Direct Materials 4kg at Rs 25 per kg
Labour 10 hours at Rs 5 per hour
Variable overheads are recovered at the rate of Rs 2 per direct labour hour.
Fixed Production overheads are absorbed at the rate of Rs 4 per direct labour hour
Other, non production, overheads are charged at the rate of Rs 100 per job.
What is the total cost of job xxx.
Workings
Rs
Direct Materials (4x25) 100
Labour (10x5) 50
Variable Overhead (2x10) 20
Fixed Production overhead (4x10) 40
Total Production Cost 210

COST ACCOUNTING
Cost accounting involves recording, controlling estimating and reporting for costs.
The eventual aim of costing is to determine the cost of producing a product/service, profitability analysis or
stock valuation.
Objectives:
• The main objectives of Cost Accounting are as follows:
• Cost control and cost reduction.
• Assisting management in decision-making including pricing, profit planning,
Advantages
• Helps in identifying unprofitable activities, losses or inefficiencies in any form.
• Application of cost reduction techniques, operation research techniques and value
• analysis technique.
Price Setting Formula
• Add a percentage of profit to the cost of sales.
For example
Cost of sales 35,000

Add Profit (10%) 3,500
Selling Price 38,500

MANUFACTURING ACCOUNTS
• Manufacturing businesses are those that take raw materials and with the help of
labour and machinery, turn these raw materials into finished goods.
• These businesses do not purchase finished goods, they purchase raw materials to
turn into finished goods. So, they need to know how much it costs to produce the
goods they are going to sell.
Types of cost of a manufacturing business
Direct Cost
• These costs can be traced to the product being manufactured. For
example wages of labour who actually manufacture the product (direct
labour), raw materials

Indirect cost
• These costs which cannot be traced to the product being manufactured
yet are still a cost of the factory for example wages of cleaners &
supervisors, rent of the factory, factory electricity and depreciation of
the factory machinery/equipment.
Importance of manufacturing account
• It ascertains the cost of the goods manufactured
• It shows the profit and loss of the manufacturing unit
• It provides a basis for the fixing of the selling price of a product
• It helps to control manufacturing costs
Template of a Manufacturing Account
Opening stock of raw materials5,000
Add Purchases of raw materials 10,000
Carriage Inwards 1,000
16,000

LessClosing Stock of Raw Materials 3,000 13,000

Add Direct Labour (wages) 6,000
Direct Expenses 4,000

PRIME COST 23,000

Add Factory Overhead
Rent 7,000
Insurance 2,000
Depreciation of machinery 1,000
Electricity 6,000 16,000

PRODUCTION COST OF GOODS COMPLETED 39,000

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COSTING

• Objectives of the course

Direct Materials 20,000

2000 units were produced.

Total Cost 38,000

No of units produced: 20,000 units

Total Production Cost 210

Cost of sales 35,000

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