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Cost Concepts

The document discusses various cost concepts including: - Costs are composed of direct/indirect material, labor, and expenses. - Direct costs can be identified with specific cost objects, while indirect costs cannot. - Prime cost includes direct material, labor, and expenses. - Overhead includes indirect material, labor, and expenses. - Cost sheets track total costs and cost components to calculate cost of production.

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MRIDUL GOEL
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
21 views

Cost Concepts

The document discusses various cost concepts including: - Costs are composed of direct/indirect material, labor, and expenses. - Direct costs can be identified with specific cost objects, while indirect costs cannot. - Prime cost includes direct material, labor, and expenses. - Overhead includes indirect material, labor, and expenses. - Cost sheets track total costs and cost components to calculate cost of production.

Uploaded by

MRIDUL GOEL
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Cost Concepts

• A cost is composed of three elements, i.e material, labour


and expense. Each of these elements can be direct or
indirect
Total Cost

Direct Indirect
Cost Cost

Ind. Ind.
Material Expenses
D. Expenses
D. Material
Ind.
D.Labour Labour
Material Cost

• It is the cost of commodities supplied to an undertaking.


• It includes cost of procurement, freight inward etc. directly
attributable to the acquisition.

It is of two types
A) Direct Material
B) Indirect Material
Direct Material
• Direct Material Cost is that cost which can be
conveniently identified with and allocated to cost units.
Direct materials generally become a part of the finished
products.
For example: cotton used in a textile mill is a direct
material, tyre used in manufacturing a car is direct
material
Indirect Materials
• These are those materials which cannot be conveniently
identified with individual cost units.
For ex-
1. Those items which do not physically become a part
of the finished products like coal, lubricating oil,
grease.
2. Small and relatively inexpensive items which may
become a part of the finished product e.g., pins,
screws, nuts and bolts, thread etc.
Labour Cost

• This is the cost of remuneration of the employees of


the undertaking.

It is of two types :-
A) Direct Labour
B) Indirect Labour
Direct Labour

• Direct labour cost consists of wages paid to the workers directly


engaged in converting raw materials into finished product. These
wages can be conveniently identified with a particular product, job or
process
Indirect Labour

• It cannot be conveniently identified with a particular cost unit. In other


words, indirect labour is not directly engaged in the production
operations but only to assist or help in production operations.

• Eg security guards, quality assurance workers, etc.


Expenses

• All cost other than material and labour are termed as expenses. It is
defined as “ the cost of services provided to an undertaking and the
notional cost of the use of owned assets.”
• Direct expenses
• Indirect expenses
Direct Expenses

• Direct expenses are those expenses which can be


identified with and allocated to cost centres or units.”

• For eg.- Hire of special Plant for a particular job, cost of patent rights,
royalty paid in mining.
Indirect Expenses

• All indirect costs, other than indirect materials and indirect labour
cost, are termed as indirect expenses. These cannot be directly
identified with a particular job, process and are common to cost units .

• For e.g. Rent and rates, depreciation, lightening etc.


Direct materials Indirect material
1. Clay in bricks 1. Lubricating Oil
2. Leather in shoes 2. Sand paper
3. Steel in machines 3. Nuts and bolts
4. Cloth in garments 4. Coal
5. Timber in furniture 5. Office stationery

Direct Labor Indirect Labor


1. Machine operator 1. Supervisor
2. Shoe maker 2. Inspector
3. Carpenter 3. Cleaner
4. Weaver 4. Clerk
5. Tailor 5. Peon, Watchmen

Direct expenses Indirect expenses


1. Hire of special plant for a particular job 1. Rent and rates
2. Travelling expenses in securing a particular 2. Depreciation
contract 3. Lighting and power
3. Cost of patent right 4. Advertising
4. Experimental cost 5. Insurance
5. Cost of special drawing, designs and layouts 6. Repairs
6. Royalty paid in mining
Prime Cost

Prime cost = Direct material+ Direct Labour +Direct expenses


Overhead

Overhead = Indirect material + Indirect Labor + Indirect Expenses


Overhead

This is the aggregate of Indirect Material cost, Indirect Labour and


Indirect expenses.

Overheads are divided into three groups:-


1. Production overheads
2. Office and administration overheads
3. Selling and distribution overheads
Production Overheads

• These are those overheads which are concerned with the production
function. They include indirect materials, indirect wages and indirect
expenses.

• Examples:
• Indirect material - Coal, oil, grease, stationery in factory
• Indirect Labour- Works Manager’s salary, wages of factory Sweeper
• Indirect Expenses- Factory rent, depreciation of plant
Office and administration overhead

• This is the indirect expenditure incurred in general administrative


function. These overheads are general character and have no direct
connection with production or sales activities.

• Examples- stationery used in general administrative office , salary of


office staff, rent of office building, office lightening and power.
Selling and Distribution Expenses

• Selling overhead is the cost of promoting sales and retaining


customers. It includes expenditure incurred from the time to time the
product is completed until it reaches its destination.

• Example- Packaging material, catalogues, salary of sales manager,


salary of sales office staff, advertising, travelling expenses etc.
COST- SHEET

• It is a statement which is prepared periodically to provide detailed


cost of a cost centre.
• A cost sheet not only shows total cost but also the various
components of total cost.
Elements of cost
Prime cost Overheads

Direct Direct Direct


Material labour expenses
Indirect Indirect Indirect
Material Labour Expenses

Factory Office & Selling & distribution


Overheads administration overheads
overheads
Cost Sheet
• A cost sheet is a
statement of cost
which is prepared to
ascertain the cost of
products. It shows
element wise cost of
products.

20
Calculation of Cost

• Prime cost or direct cost or First cost


= Direct material+ Direct labour+ Direct expenses

• Work cost or Factory cost = Prime cost + Work overheads

• Cost of production = Work cost + Admin overhead

• Cost of sale= Cost of production+ Sales and distribution expenses


Adjustment of inventories

• Direct material consumed=


Opening stock of direct material + purchase of direct material - Closing stock

• Work cost = Gross work cost+ Opening work in progress - Closing work in progress

• Cost of production of Goods sold


= Cost of production+ Opening Stock of finished goods - closing stock of finished
goods
Numerical

Calculate prime cost from the following information:-


 
Direct material - Rs. 40,000
Direct labour - Rs. 30,000
Direct expenses - Rs. 25,000
 
Solution

Prime cost = Direct Material + Direct labour + Direct expenses

= Rs. 40,000 + Rs.30, 000 + Rs. 25,000

= Rs. 95,000
Numerical

Calculate prime cost from the following information:-

Opening stock of raw material = Rs. 12,500


Purchased raw material = Rs. 75,000
Expenses incurred on raw material = Rs. 5,000
Closing stock of raw material = Rs. 22,500
Wages Rs. 47,600
Direct expenses Rs. 23,400
 
Solution

Calculation of raw material consumed:-


Raw material consumed = Opening stock of material + purchases of Raw material + expenses
incurred on raw material - closing stock of raw material
 
= Rs 12,500 + Rs 75,000 + Rs 5,000 – Rs 22,500
= Rs. 92,500 – Rs 22,500
= Rs. 70,000
 
Prime cost = Raw material consumed + Direct labour + Direct expenses
 = Rs 70,000 + Rs 47,600 + Rs 23,400
 = Rs 1, 41,000
 
Calculate works cost or factory cost from the following details:-

Raw material consumed = Rs 50,000


Direct wages = Rs20,000
Direct expenses = Rs 10,000
Factory expenses 80% of direct wages
Opening stock of work in progress = Rs 15,000
Closing stock of work in progress = Rs 21,000
 
Numerical

Calculate cost of production from the following information:-

Raw material purchased = Rs 42,500


Freight paid = Rs 5,000
Labour charges = Rs 12,500
Direct expenses = Rs 10,000
Factory overhead 80% of Direct labour charges
Administrative overhead = 10% of work cost
 
 Opening stock Closing stock
Raw material 8,000 10,000
Work in progress 7,500 9,000
• 1. DRAWING OFFICE SALARY - FACTORY OVERHEADS EXPL : DRAWING OFFICE SALARIES ARE
INTERPRITED AS SALARY PAID FOR DRAWING THE PRODUCTION CHART OR FOR THE PURPOSE OF
PRODUCTION PLAN OR PRODUCTION PROCESS THAT HAS TO CARRIED OUT AND HENCE SUCH
SALARY SHOULD BE RECORDED AS FACTORY OVERHEADS....
`

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