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Cost of Product
Cost is an expenditure attributable to a product, item, or service to secure an economic benefit Cost per unit is a ratio and is expressed as Rs per unit
Cost
Expense which is incurred after deriving the benefit
Expense
All explicit (not hidden) costs which are deductible from revenue eg., wages paid to workers, rent paid for using building
Deferred Cost Cost before deriving the benefit Eg. Prepaid insurance, restructuring expenses, and promotion cost for product launch Written off to expense over their estimated useful economic lives. Loss When no benefit derived by the incurrence of cost. Ex. materials destroyed by fire, salary paid for a period of strike.
Cost Object
An entity or a part of an entity Product, group of product, a plant, territory Cost objective represents the overall objective for which cost collection, cost analysis, cost control is being attempted Cost objective can be a cost unit or cost center
Cost Unit
Cost Unit
Unit of finished product, service or time or a combination of these in relation to which cost is ascertained or expressed
Cost Unit Per no of vehicle produced Per tonne Per patient-day Per 1000 bricks made Per tonne Per guest-room, guest-day, per plate, meals Per kWh
Cost Unit
Methods of Costing
Method Name or Industry Furniture Final Cost unit Per unit
Job Costing
Batch Costing Contract Costing Single or Output Costing Multiple Costing
Per ship Per book Per batch of dozen or 100 Per Contract Per km
Per 1000, Per litre Each part by batch costing, Assembling cost by single or output costing
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Cost Unit
Methods of Costing
Method Name or Industry Cement Paints Oil Refinery Transport Powerhouse Final Cost unit Per tonne Per litre Per litre Passenger-km or tonne-km kWh Patient-day Per meal, per cup of tea or coffee, per room or bed
Process Costing
Cost Center
Cost center
Location, person or an item of equipment for which cost may be ascertained for the purpose of cost control
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Classification of cost
By Nature or element
Material Cost
Direct material
Raw materials, semi-finished parts Material passing from one process to another Physically traced in some form of finished product Packing materials, eg. Cartons, card board boxes
Indirect Material
Material required for production process but do not become an integral part of finished or saleable product Cotton waste, lubricating oil
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Classification of cost
By Nature or element
Labour cost
Cost of personnel work Direct labour
Wages of operators, workers, weavers
Indirect labour who do not work directly on the product but whose services are quite essential for manufacturing process
Production deptts supervisors, security guards, maintenance employees
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Classification of cost
By Nature or element
Expenses
Incurred for business activities Not in nature of material or labour Direct Expenses
linked with a specific saleable product or service, but may not be physically traceable in finished product Expenses on making automobile design Fees of consultants
Indirect Expenses
Factory rent, expenses for handling stores
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Classification of cost
By Nature or element
Expenses
Chargeable Expenses
Directly chargeable to cost centers, cost unit or jobs are called chargeable expenses Cost of patents, license fees, traveling expenses to sites
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Classification of cost
By Function
Production or Manufacturing Cost
Cost of converting raw materials into finished goods thro the use of labour, service and other facilities
Administration Cost
Related to general administration activities, management which cannot be directly related to production, marketing, R&D and financing of the business
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Classification of cost
By Function
Selling Cost
Expenses incurred on selling activities Publicity, advertising, sales force wages, sales executives salary
Distribution Cost
Cost incurred on delivering products and other related activities Transporting articles from central to local storage Moving articles to and fro from the customer perspective on sales or return basis 19
Classification of cost
By Function
Finance Cost
Costs associated with borrowed funds Interest paid or accrued on capital borrowed
Research Cost
Cost incurred in discovering new ideas, new facts, new application of accepted facts, new interpretation of available information, improvement of existing products/ processes/ equipments
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Classification of cost
By Function
Development Cost
Begins with Implementation of the decision to produce a new or improved product Ends with commencement of formal production
Pre-Production Cost
Cost incurred in making trial production prior to regular and normal production Costs to cover all activities prior to production including R & D
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Classification of cost
By Conversion
Conversion Cost
Sum of direct wages, direct expenses and overhead cost for converting raw materials into finished product OR converting materials from one stage of production to the next stage
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Classification of cost
By Variability or Behaviour
Fixed or Constant Cost
Remain constant at all level of production Ex. Rent, insurance of factory building
Variable Cost
These costs tend to vary with the volume of output Cost of direct material and direct labour
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Classification of cost
By Variability or Behaviour
Stepped Fixed Cost
Which are fixed over a certain level of activity, but increase by a no of fixed amount when the activity rises above this level A doctor looks after 50 beds. For additional patient additional doctor is required to be appointed
Semi-variable Cost
Partly fixed and partly variable in relation to the output Ex. Telephone bill, electricity bill
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Classification of cost
Semi-Variable Cost Stepped fixed Cost Variable Cost
Amount in Rs
Fixed Cost
Level of Activity
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Classification of cost
By Controllability
Controllable Cost
Costs which can be influenced by action of specified member of an undertaking
Uncontrollable Cost
Costs which can not be influenced by the action of a specified member of an undertaking Ex. A technician can control the cost of his job but not the share in factory expenditure
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Classification of cost
By Normality
Normal Cost
Which is normally incurred at a given level of output under the normal condition of working
Abnormal Cost
Costs which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained Charged to costing of P/L acct Ex. Wastage in excess of normal allowed wastage
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Classification of cost
Revenue Cost
Cost incurred to maintain the earning capacity of the concern such as cost of maintaining an asset or running a business Ex. Cost of materials used in production, salaries, depreciation, repair charges
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Classification of cost
By Time or Periodicity
Historical Cost
Cost is incurred in purchasing assets either to earn income or increasing the earning capacity of the business Ex. Cost incurred in purchasing gen set, boiler Key characteristics
Measurable in monetary terms Verifiable objective evidence in support of such cost
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Classification of cost
By Time or Periodicity
Future Cost
Cost expected to be incurred in future under uncertain circumstances Measurement of these future costs is in the form of estimates Required for planning and control
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Classification of cost
By Expiry
Expired Cost
Cost expected to be incurred in future under uncertain circumstances
Unexpired Cost
Are the resources which have been acquired and which have the capacity to generate revenue in the future
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Classification of cost
By Relationship
Direct or Identifiable Cost or Separable Cost
Separately identifiable Cost with the cost object Cost of a stabiliser when the cost object is a refrigerator
Classification of cost
By Product or Period
Product Costs
Identified with goods manufactured Purchased for resale Till sold, they are recorded as asset When they are sold, recorded in P/L In mfg organisation, all mfg costs are treated as product cost
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Classification of cost
By Product or Period
Period Costs
Not included in the stock valuation Treated as expense in the period in which they are incurred Recorded as an expense in P/L in current acctg period In mfg organisation, non-mfg costs are regarded as period cost like administration, selling, distribution expenses
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Classification of cost
Out-of-Pocket costs
Which involves payment
Differential costs
Costs due to change in the level of activity or pattern or method of production If the change increases costs, it is incremental cost If the change decreases costs, it is decremental cost
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Classification of cost
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Classification of cost
Opportunity Costs
Cost which measures the opportunity which is lost or cancelled when choice is made on one course of action Profit or benefit foregone by not taking an alternative course of action
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Classification of cost
Avoidable Costs
Costs which can be eliminated with discontinuance of a product or department If any deptt is discontinued, salaries of clerks can be avoided
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Classification of cost
Programmed Costs
Decisions by mgmt to resulting in periodic appropriations, reflects policy of top mgmt Ex. Expenditure incurred under CSR in the form of maintenance of gardens, Village adoption
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Classification of cost
Committed Costs
Fixed cost which results from the long-term decisions of the management which were taken in the past and is not subject to the management control
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Costing Principles
Relation of the causes costs should be related to their causes, ie cost centers, cost units Abnormal costs to be excluded Past costs not to be charged Future costs not to be charged
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Costing Principles
Expenses excluded from cost accounts Interest on debentures and loans Cash discount Loss on sale of assets or stores and other capital losses Abnormal losses Expenses written off Fines, penalties, donations, subscriptions, charities Discount on issue of shares and debentures
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Costing Principles
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Costing Principles
Costing Principles
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Prime Cost
Direct material + direct labour + direct expenses Highest percentage of total cost
Office Cost Works Cost + Office and Admin expenses Total Cost or Cost of Sales Office cost + Selling and distribution Exp Direct material + direct labour + direct exp + Indirect material + Indirect labour + Indirect expenses + Office & Admin exp +SD exp Serves purpose of fixing the selling price by adding markup on total cost or a profit margin on total sale Margin is profit as %age of sales
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Uniform Costing
No of firms in an industry agree among themselves to follow the same system of costing in detail by adapting common terminology and calculation methods Comparison of the performance of each firm with one another or with the average performance of the industry
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Marginal Costing
Ascertainment of marginal cost by differentiating between fixed and variable cost Used to ascertain the effects of changes in volume or level of output on profit Standard Costing Technique where standard costs are predetermined and subsequently compared with recorded actual costs Technique can be used with any method of costing
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Historical Costing
Ascertainment of costs after they have been incurred Limited utility in real life
Direct Costing
Practice of charging all direct costs to operations, processes, or products and leaving all indirect costs to be written off
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Absorption Costing
Practice of charging all direct costs both variable and fixed to operations, processes or products.
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Cost Tracing
Attempt to assign costs on the basis of their cause
Cost Allocation
Allotment of whole items of cost to cost centres or cost units
Cost Apportionment
Allotment of proportions of items of cost to cost centers to cost units
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