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CONCEPT OF COST
Cost is frequently used word. Since all use the word cost as per their own need and purpose,
therefore the meaning of cost differs depending upon the need and purpose. An accountant,
economist, engineer and a manager define it according to their need. Therefore, it is not easy to
define the term “cost”. However, in simple words, cost is defined as an amount of money spent
for obtaining any thing, goods or service. Cost is a resource foregone or sacrifice in monetary
terms, to achieve particular objectives.
According to U.S.A., it is defined as an exchange price, the foregoing, a sacrifice made to
source some benefits.
CONCEPT OF COSTING
The process of fixing costs of activity is defined as costing. The activity refers to manufacture
products/articles or services rendered, or function performed. Each activity needs cost. The
procedure applied to ascertain unit cost of product or service is costing. So, costing comprises
of collection, classification and analysis of cost for ascertaining unit cost of product and
services. Manufacturing and service industries follow costing to ascertain cost of products or
services.
According to W.H. Wheldon, costing is the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and for the presentation
of suitability arranged data for purpose of control and guidance of management.
Classification of costs
Classification of cost refers to the division of cost on the basis of characteristics of costs. it is
concerned with dividing cost into different types. it is fact grouping of cost according to their
common characteristics. A suitable classification of cost is important to identify cost by product,
process or operation. Cost can mainly be classified on the following bases:
1.Element/Nature
2.Functions or activities
3.Variability or behaviour
4.Controllability
Elements/ Nature
Cost of product of an industry comprises of material cost, labour cost and expenses. Therefore,
cost appears into material cost, labour cost, expenses under the classification of costs based or
physical characteristics. Cost has three main elements such as raw materials, labour and other
expenses. It can be classified into materials, labour and expenses based on physical
characteristics.
Material cost
Material cost represents the total of costs of main raw materials, components, consumable
stores and packing materials. Materials cost also includes import duties, dock charges, transport
cost, storing cost receiving and inspection cost, and other costs associated with the materials
purchased.
Labour cost
Labour cost is the total of wages incurred for the effort or services made by labours in the
productions of goods and services. Therefore, wages paid to the workers are termed as labour
costs.
Expenses
Expenses are the total of costs incurred for production, administration and selling and
distributing operations. Such expenses include the cost of drawing, cost of special tools, cost of
trial production, royalties, rent, lighting and welfare expenses.
All the three elements of cost can further be divided or grouped into two types based on their
nature such as direct and indirect costs.
Direct costs
Direct costs are those materials, labour and other expenses which can easily be attributed or
identified with a unit of product, process or operation. The cost of raw materials, productive
labour, and carriage of materials paid are the examples of direct cost. The total of direct cost is
termed as prime cost.
Indirect costs
Indirect costs are those types of cost, which cannot easily be attributed to or identified with a
unit of product, process or operation. Therefore, the total of costs of indirect materials, indirect
labour and indirect expenses is referred to as indirect costs. They are also called overhead
costs. The examples of indirect costs are repair charges, salaries, rent, telephone and water.
Direct materials cost: The cost of materials having physical identity with the end product is
defined as direct materials cost. Main raw materials and necessary components are a few
examples of direct materials.
Indirect materials cost: Materials are not used as inputs of product are called indirect
materials. Cost of materials incurred for repair of a machine used for printing of textbook is
defined as indirect materials cost.
Direct labour cost:Labour or wages incurred for the operative workers engaged in production
process are categorized as direct labour cost. Wages paid to the workers involved in production
and handling materials, workers engaged in productive operation by way of supervision and
maintenance etc is direct labour costs.
Indirect labour cost: Smooth operation of an organization needs operation of account
department, marketing department, and internal transport also besides production department.
Indirect labour cost mean salary paid to staff.
Direct expenses: Direct expenses are charged directly to finished product like direct materials
cost. It is also called designed chargeable expenses. These include special layout cost, drawing
and designed charges, royalties and so on.
Indirect expenses:
The cost which is not directly connected with finished product but occur on account of operation
are termed as indirect expenses. Indirect expenses are also more frequently called on cost or
overheads and include expenses such as canteen expenses, lighting, heating charge, rent,
insurance and so on.
Components of indirect materials: Production supplies and consumable stores, greases,
waste, Non-durable tools and equipment, maintenance material and supplies, inspection and
testing materials.
Components of indirect labour: Managerial salary, supervisory salary, foremen salary,
clerical salary, general labour, unallocated times wages, over-time wages and so on.
Components of indirect expenses: factory rent, electricity, lighting, conveyance and travelling,
postage and telegrams, insurance, depreciation of plants and machinery.
Functions or activities
The classification of costs based on the functions like manufacturing, administrative, selling and
distribution is called functional classification. Functional classification of cost focuses on the
different activities and segregate costs accordingly. Production (manufacturing) and non-
production (non-manufacturing) costs are the major costs division made after prime cost under
this classification.
Prime cost known as Basic, Flat or Direct cost comprises direct material, direct labour, direct
expenses. They are attributable to and are identified to particular finished goods.
Production Cost
Production cost is the sum of the cost incurred for realizing finished goods. It includes direct
material cost and conversion cost needed to convert such direct material into finished goods.
So, it is the sum of Prime cost plus manufacturing expenses or factory overhead or work
overhead. It is also called manufacturing cost or factory cost or work cost.
Manufacturing expenses include indirect materials, indirect labour and indirect expenses
associated with manufacturing operations. Conversion cost includes direct labour cost and
manufacturing expenses need to convert input material into finished goods.
Process cost
Production cost depending upon the stage of production operation can be categorized into
different costs.The output of one process becomes input cost of immediate next process. Costs
of each individual process are collected separately and are term as cleaning process cost,
cooking process cost and so on. Each process cost is divided by the number of units produced
by the same process. It goes on cumulating and total manufacturing cost equals the sum of all
cost accumulated at the final process. The cost so accumulated is divided but the number of
units produced to ascertain cost per unit of finished goods.
Non-Production cost
Non-production cost refers to the expenses incurred for running administrative and selling and
distribution works. So, non-production cost is known as operation cost or non-manufacturing
cost that include administrative overhead and selling and distribution overheads. Such costs
keep no direct link with production operation therefore defined as non-production cost.
However, cost of production comprises manufacturing cost and administrative expenses.
Administrative overheads
The expenses incurred for administrative work like planning, coordinating, directing, controlling,
are called administrative overheads. It is also called office cost.
Selling overheads
The expenses incurred for selling finished goods to customers are termed as selling expenses.
Variable Cost
Cost which change proportionality with volume of output or services are called variable costs.
They increase or decrease in total amount with the increase or decrease in volume of output.
However, the per unit variable cost is constant. Variable manufacturing cost are also called
product cost and include direct material, direct labour and fluctuating indirect materials, labour
and manufacturing overheads.
Fixed Cost
Cost that does not change with output is cost. It remains fixed for a stipulated period and for a
specific capacity output. Fixed cost is called constant or capacity cost. It is also called create
cost as it remains unchanged for a stipulated period. Fixed cost in total amount remains
constant whereas fixed cost per unit changes inversely with output changes. Therefore,
increase in output decreases fixed cost per unit and decrease in output increases fixed cost per
unit. For example: depreciation, rent and salaries.
Semi-variable cost
Those cost which do not change proportionately like variable costs but their increase will be less
than proportionate unlike the variable costs is termed as semi-variable cost. The examples of
semi-variable costs are salary of supervisors, travelling salesman salary, repair and
maintenance costs etc. such costs contain fixed and variable portions. So, semi variable cost is
also called mixed costs.
Controllability
Controllability may be defined in terms of change or alternation of costs. An effective cost
control requires knowledge of cost controllability. A sharp division of cost into controllable and
uncontrollability cost is a relative one and is influenced by the action of a person at management
hierarchy. The term controllable cost should not be used as synonymous of variable cost and
direct costs. Knowledge of controllability of cost is important to control cost.
Cost under controllability may be categorized into controllable and uncontrollable costs.
Controllable cost: The cost subject to control or substantial influence of a particular manager
or individual is called controllable cost. In controllable cost, the cost can be changed or altered
by the action of a specific managers. Example; direct materials, direct labour, other overheads
such as indirect labour, factory supplies, cutting tools, power costs, repair and maintenance etc
are controllable costs.
Uncontrollable costs: Costs that are not subject to influence by the action of manager is called
uncontrollable costs. These costs remain unchanged or unaltered. Example: managerial
salaries, staff salaries, depreciation after purchase of equipment, rent. Some costs may be
controllable in the short run but not in the long run.
Accounting for Material
Introduction
Commodities which are used in the production of finished product are called materials. All those
items, which are used in the process of producing goods or rendering services, are called
materials. It includes all raw materials and supplies like lubricants, fuel and loose tools.
Sometimes materials are also denoted by the term inventory of stores.
Materials are of two types as direct and indirect materials
Direct materials:
Direct materials cost means the cost of materials that can be identified with and allocated to
cost centre or cost units. Cost of paper used to print textbook is direct cost since it is main input
of textbook. Thus, main raw materials, and necessary components are a few examples of direct
materials.
Indirect materials:
Indirect materials cost refers to the material costs, which cannot be allocated but can be
apportioned to or absorbed by cost centres or cost units. Cost of materials incurred for repair or
a machine used for printing of text is defined as indirect materials cost. Fuel, lubricating oil,
materials used for repair, coal, maintenance work etc. are few examples of indirect materials.
Material control
The systematic and regular control over purchasing, storing and consumption of materials is
material control. Material control involves the planning, operating, organizing and controlling the
purchasing, storing and using of materials so as to achieve the objectives of minimizing possible
cost of materials and uninterrupted production. In other words, it is a system, which helps to
provide the right quality of materials in the right quantity at the right time and right place with the
right amount of investment. Effective control also requires the systematic preparation of periodic
summaries and reports. It can be defined as a systematic control over purchasing, storing and
consumption of materials. It helps to maintain a regular and timely supply of materials by
avoiding over and under stocking.
STORE ROUTING
The process set by a manufacturing company to control materials is called store routing. It
consists of all the processes involved in proper purchasing, storing and issuing of materials to
the concerned departments. The store routing can be summarized as follows:
1.Purchasing and receiving of materials
Request for purchase of materials
Inquiry and tender quotation forms issued to potential suppliers
Selecting a suitable supplier
Placing the order
2.Storing of materials
Classification and codification of materials
Keeping records of the materials in Bin Cards, Store ledger and so on.
3.Issuig of materials
Requition form
Pricing of materials issued
Purchasing
Purchasing involves acquiring materials of right quality, at right quantity, at right time from right
source, and at a reasonable price. A separate purchase department should be established to
perform purchasing activities. The department which performs purchasing activities in the
manufacturing concern in the managed way is termed as purchasing department. The
purchasing department plays a very important role in an organization because purchasing has
its effect on every vital factor concerning the manufacture, quality, cost efficiency and prompt
delivery of goods to customers.
Purchase control
A manufacturing company is required to invest a huge amount of money in purchasing
materials. It is, therefore, essential to exercise proper materials and purchase control. Purchase
control refers to the purchase of materials of right quality in right quantity at a reasonable price
and at a right time. It requires a good amount of attention to the purchasing procedures of
materials relating to cost, quality, volume, time and delivery of materials.
Centralized purchasing
Centralized purchasing refers to the purchase of materials by a single purchase department.
This department is headed and managed by a purchasing manager. Under centralized
purchasing, all purchase s are made by the purchase department to avoid duplication,
overlapping and the non-uniform procurements. Under this system, the purchasing department
purchases the required materials for all the departments and branches of the company.
Advantages
It uses the specialized knowledge and skill by appointing specialized and expert purchasing
staff.
It brings about economics of bulk purchase.
It facilitates the standardization of materials.
It facilitates effective control over purchases, by maintaining an efficient system of ordering,
receiving inspection, accounting etc.
It ensures consistent policy with regard to purchase such as terms of payment, cost of delivery
etc.
It brings about economics of centralized accounting of purchase.
a)When there is only one plant or
b)Several plants are not located far away from each other and are using same materials.
Disadvantages
It is expensive due to increase in administration cost of a separate purchase department.
It is not suitable when plants of departments are located far away from one another or are using
different materials.
Decentralized purchasing
Decentralized purchasing refers to purchasing materials by all departments and branches
independently to fulfil their needs. Such a purchasing occurs when departments and branches
purchase separately and individually. Under decentralized purchasing, there is no one
purchasing manager who has the right to purchase materials for all departments and divisions.
The defects of centralized purchasing can be overcome by the decentralized purchasing
system. It helps to purchase the materials immediately in case of an urgent situation.
Advantages:
It avoids unnecessary cost of setting up a purchasing department.
It avoids delay in purchasing because the required material can be easily purchase as and
when required.
Department can get the benefit of localized purchasing.
Due to then provision of purchase of material by the concerned department the material may be
purchased in right quantity and quality.
Disadvantages:
There is chance of overstocking and blocks the capital of the company.
The benefits of a bulk purchase cannot be obtained.
Fewer chances of effective control of materials.
Lack of proper cooperation and coordination among various departments.
There may be lack of special knowledge about the purchasing with purchasing staff.
3.Purchase order
After completion of the above procedure, the purchase department prepares a purchases order
for the supply of materials. The purchase order is a contractual agreement with the suppliers for
the supply of materials. It is prepared in five copies, the original copy is sent to the supplier, the
second copy for receiving department, third for account department, fourth for imitating
department and the fifth one is retained in the purchasing department for reference.
Store-keeping
Store keeping refers to the act of storing materials for their safe custody till these are issued to
the production and other departments. It involves receiving, storing and issuing of materials.
The place where materials are kept is known as 'store'. The term 'stores' has wide meaning and
includes raw materials used in production, consumable store such as oil, grease etc, tools,
patterns, maintenance materials etc, stock of work in progress and stock of finished goods.
Objectives of storekeeping
All of proper place for every item of store
Keep every item of store in fixed place
Maintain proper and upto date records
Issuing materials quickly to department
Classify and codify the materials for easy identification
Types of stores
1.Centralized stores
A centralized stores is that store which receives materials for and issue them to all departments
divisions and production floors of the company. Such a store is only one in the company which
receives materials for and issues them to all who need them. The materials required for all the
departments and branches are stored and issued by only one store.
Advantages:
Economy in cost
Better supervision of store
Better layout and control of stores
Minimum investment in store
Less space is occupied
Better safety and security of stock
Disadvantages:
Delay in sending materials to the department and branch.
increase in the material handling cost.
Greater risk of loss by fire.
Not suitable for a large company.
2.Decentralized Stores
Decentralized stores is that type of store which receives materials for and issues them to only
one department and not to the whole company. The decentralized store may be many in the
company, as each department has its own such store. Purchasing and handling of materials are
undertaken by each and every department separately. Each and every branch has their own
store for operation of production activities.
Advantages:
Saving in material handling cost
Prompt issue of material is possible
Storing and control will be easy and effective
Smooth production will be possible
Risk of loss by fire can be minimized
Disadvantages:
Higher cost of supervision.
More space is required for individual departments.
Higher amount of investment is required.
More time for stock taking and checking.
Higher cost for staff and stationery.
Improved technique is less possible for controlling of materials.
LOCATION OF STORES
It refers to the place where stores are situated. The location of stores should be near to the
receiving department so that the materials handling charges are at a minimum. There should be
an easy excess to all other department so that the minimum of expenses is incurred in
unloading. The stores should be located considering the nature of materials; the bulky materials
should be stored nearer to the user's department to minimize the labour and transport, the
planned location charges. In conclusion, the planned location of the store will avoid delay in the
movement of materials to the department in which these needed.
Storekeeper
A manufacturing company appoints a person for careful storing and safeguarding materials in a
store who is called storekeeper. A storekeeper is a person who is the chief of the stores and
who is given the responsibility of store management. He is responsible for safeguarding the
materials and supplies in proper place until they are required for production activities. A
storekeeper should be well-experienced, well-trained, honest and familiar with the tricks of
storekeeping.
The main functions of storekeeper are as follows;
To maintain a proper record of materials relating to the receipt and issue of materials.
Checking the physical quantity of materials and verify with a bin card.
To prevent unauthorized entrance into the storeroom.
To maintain the stock registers, entering therein all receipts, issues and balance of materials.
To check and control losses due to evaporation, leakage, theft, and so on.
To arrange for physical verification of store items periodically.
To keep the stores always neat clean and tidy.
To supply information of materials, stock position, and so on whenever needed.
ISSUE OF MATERIALS
Preparation and treatment of requisition form
The storekeeper receives materials and other items, stores them carefully and finally issues
them for the purpose of production. But, the storekeeper must not issue materials unless a
properly authorized materials requisition is presented to him. Request for the issue of materials
should be made to the storekeeper in the prescribed form signed by the person demanding
them. The document, which authorizes and records the issues of materials, is known as
material requisition from.
Advantages
This method is appropriate for matching cost and revenue.
This method is simple to operate and easy to understand.
It facilitates complete recovery of material cost.
It is most suitable when prices are rising.
Disadvantages
Inventory valuation does not reflect the current prices and therefore are useless in the context of
current conditions.
Due to variation of prices, comparison of cost of similar job is not possible.
Calculations become complicated and cumbersome when rates of receipts are highly
fluctuating.
It involves considerable clerical work.
Stock level
Inventory refers to the stock maintained by the manufacturing concern and trading organization
to meet their future requirement for smooth production and sales. It refers to the different level
of stocks, which are required for an efficient and effective control of materials and to avoid over
and under stocking of materials. The purpose of materials control is to maintain the stock of raw
materials as low as possible and at the same time they may be made available as and when
required.
In a scientific system of inventory system of inventory control the following levels of materials
are fixed.
Re-order level
Minimum level(Safety stock)
Maximum level
Average stock level
Re-order quantity
Re-order level
It is that level of inventory which the store keeper should initiate the purchase procedure for
fresh supplies of inventory. Re-order point is the quantity or level of the inventory on hand that
triggers a new purchase order. It is the level at which storekeeper initiates purchase requisition
purchase for fresh supplies of material. Fresh order should be placed before the actual stock
reaches the minimum level to continue the business activities properly.
It is calculated by,
Re-order level= Minimum level (Safety stock) + (Average lead time X average consumption)
Or,
Re-order level=Maximum consumption X Maximum re-ordering period
Re-order quantity
First of all company determines the quantity or size to be ordered at a time. Thereafter, it places
the order for purchasing materials by the same size or quantity, which is known as re-order
quantity. In other words, the quantity of single purchase order while purchasing any materials is
called re-order quantity.
It is calculated by,
Re-order quantity= (Max stock level - ROL) + (Min. consumption X Min. period)
Carrying cost
This refers to the cost of keeping items in stock for a certain period of time. Carrying cost is
concerned with the storing of materials. It suggests purchasing in small quantities. If small
quantities of materials are purchased, the storing cost will be low. The following costs are
included in the carrying cost.
Storage cost
Insurance of material
Obsolescence loss due to a change in process or product
Internet on capital blocked on materials
Maintaining cost of material to avoid deterioration.
Ordering cost
All the cost, which is related with placing an order and secure the supplied are called ordering
cost .in others it refers to the cost related to the purchase related activities. The ordering cost is
the repurchase cost and is repeated in nature. Purchasing of large quantities of materials helps
reduce the ordering cost. The following costs are included in the ordering cost.
Cost of staff appointed in the purchasing, inspection and payment departments.
Cost of stationary purchases, telephone charge, email charge, faxes charge etc.
Formula of EOQ,
EOQ =
A= Annual requirement
O = Ordering cost
C = Carrying cost
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Indirect cost
The cost, which is not easily identified and not vary with level of production.It is that labour
which cannot be easily identified with a specific product or job. It includes all labour indirectly
involved in converting raw materials into finished goods or in altering the construction,
consumption or condition of the product. For example: labour employed in repair and
maintenance, time keeping, cost accounting, store department etc. Remuneration paid to
indirect labour is termed as indirect labour cost and it treated as part of overheads. Payments
made to the sweepers, watchmen, cleaners, supervisors and accounting personnel are the
examples of indirect cost.
The need of labour cost control arises to fulfil the following purposes:
To obtain better quality output with the least effort and time of the workers.
To reduce the cost of production of the products manufactures or services rendered.
To ensure the satisfaction of the workers by creating a good working environment in the factory.
To adopt a fair system of wage payment and to minimize labour turnover.
To minimize wastage of materials by workers, idle time and unusual overtime work.
To maintain safe environment.
To increase the profitability and competitiveness of the organization.
Engineering department
The engineering department involves in preparing plans and specifications for each job. This
department is established with the view of determining the production procedure and working
technique and creating sound working condition for each workers. It inspects the jobs being
done at different production stages to ensure that they are being done as per plans and
specification.
Its main functions are as follows:
Making job analysis.
Setting piece rate.
Preparing the performance evaluation.
Creation of safe environment to minimize the risk of accident.
Preparing of plans.
Time study
It is conducted after the motion study. The main objectives of the time study is to determine the
required time for performing the job or work. Various methods are used for the determination of
basic time. Standard or basic time is fixed for a job or operation providing allowances to worker
for drinking water, smoking and other so on selecting an average workers as model rather than
exceptionally fast or slow workers.
Time-keeping department
This department is related with the recording of time of each worker engaged in the factory to
know the attendance and ascertainment of wages. The main objective of this department is to
prepare pay roll, meeting the statutory requirements, maintaining discipline in attendance,
recording of each worker's time 'in' and 'out' of the factory making distinction between normal
time. Over time, late attendance and early leaving and to provide basis for the distribution of
overheads when overheads are absorbed on the basis of labour hours.
To record the time of each worker properly, either an attendance register or time card can be
used.
Time booking
It is concerned with recording the time spent by each worker in the factory on different jobs is
work orders. It determines the exact time spent by the worker in different departments or
processes or products or jobs for the purpose of calculating the correct amount of labour cost.
When the workers spends his time on several jobs or work orders then the need of time
booking arises for the purpose of cost analysis and apportionment.
Pay-roll department
The pay-roll department involves in verifying the time of the workers, calculating wages due to
each worker and preparing the pay roll or wage sheet. It prepares the pay roll or wage sheet for
each department separately and distributed wages and salaries to the workers.
Pay slip
It is prepared for each worker showing the net payable amount of wages. Pay roll is prepared
for each department but pay slip is prepared for each worker. Pay slips of a worker, in fact, is
the copy of the pay roll.
Allocation of overheads
Meaning
Allocation of overheads is the process of charging overhead costs to a particular department or
cost centre. It is the allotment or assignment of an overhead cost to a particular cost unit. If the
overhead cost is associated with a single department or cost centre, the whole amount is
charged or distributed among the units of output of that particular department. For example, the
whole amount of repair and maintenance expenses for a machine is charged pr allocated to that
department where the machine has been installed.
Apportionment of overhead
Distribution of an overhead cost to several department or cost centre is known as apportionment
of overheads. It is the process of charging or apportioning costs to a number of cost centres or
cost units. If a given cost is common to two or more departments or cost centres, such cost
should be apportioned or divided among theses departments on an equitable basis. For
examples, the amount of factory rent should be apportioned to all the departments. Similarly,
the amount of remuneration to the general manager should be distributed to the production,
administration and marketing departments, as the general manager is associated with all these
departments.
Absorption of overhead
The absorption of overheads is also called the recovery of the overhead costs. It is the process
of sharing the overhead costs by all products of a particular department. It is the application of
overheads to each unit of output. In other words, the process of ascertaining the total overhead
costs if each unit of output or job by using overhead rate is known as the absorption of
overhead. Thus, the distribution of the overhead expenses allotted to a department over the
units produced in that department is absorption of overheads.
Unit or Output Costing
Introduction
A manufacturing concern converts raw materials into finished products and sells them at a
certain price. In the manufacturing process, it incurs different types of expenses such as
manufacturing, administrative and selling and distribution expenses.
Concept and meaning
Output or unit costing is one of the important methods of costing under which cost of production
and in turn the selling price unit are determined. This costing method is used by the
manufacturing concern which produces homogeneous products such as sugar, cloth, cement
and so on. A costing method used to ascertain unit cost output is called output-costing method.
Prime cost
Prime costs of product are the sum of direct costs, which varies in proportion to volume of
production. Prime cost includes direct expenses like cost of materials, direct labour and direct
expenses. These costs are directly identifiable with the product and constitute the major part of
total cost of the product.
Factory cost
Factory cost are the total of prime costs and factory expenses. Factory expenses are also as
factory, manufacturing or works overheads. They includes indirect expenses which are incurred
inside the work place where manufacturing takes place.
Factory cost= prime cost + factory overhead
Cost of production
Cost of production includes factory costs and office and administrative overheads. Office
overheads include all expenses incurred in performing administrative activities like planning,
coordinating, staffing and controlling.
Cost of production = Factory cost +Office overheads
Total costs
Total costs are the sum of costs of production and selling and distribution overheads. Selling
and distribution overheads are necessary for the promotion of sales.
Stock of work-in-progress
The stocks of work-in-progress are those units of commodities on which some work has been
done but are in process of completion. These units can neither be treated as raw materials nor
finished product, because such units requires further process to be completely finished
products. Stock of work-in-progress may be both opening and closing.
Manufacturing account
Manufacturing account is the alternative method of determination of total cost and fixation of
selling price. The manufacturing needs to ascertain the cost of goods manufactured and
manufacturing profit or loss during the year. Therefore, an account is prepared for the purpose,
which is known as manufacturing account. Generally, it is prepared by such concerns which do
not have cost office and maintain any cost account.