Ma unit 2

Definition of Costing, Cost Accounting and Cost Accountancy
Costing is "the technique and process of ascertaining costs". It means finding cost by any
process or technique. It consists of principles & rules which are used for determining the
cost of manufacturing a product, e.g. furniture, car, paper, steel etc. or the cost of
providing a service, e.g. education, transport, electricity etc.
Cost accounting is defined as the process of determining the cost of some particular
products or services which begins with the recording of income and expenditure and ends
with the preparation of periodical statements and reports for ascertaining and controlling
costs. It denotes the formal accounting mechanism by means of which costs are
ascertained & controlled by recording them in the books of accounts.
Cost accountancy has been defined as "the application of costing and cost accounting
principles, methods and techniques to the science, art and practice of cost control and the
ascertainment of profitability. It includes the principles, conventions, techniques which
are employed in the business to plan & control the utilization of resources and ensure
effective decision- making.
NEED FOR COSTING / OBJECTIVES OF COST ACCOUNTING:
The main objectives of Cost Accounting are as follows:
1) Determination of Selling Price: The total product cost & cost per unit of product
are important in deciding the selling price of a product. Cost Accounting helps in
ascertaining the cost per unit of the different products manufactured by a business
concern and provides information which helps in determining the selling price of
the product according to relevant situation.
2) Controlling costs: Cost Accounting aims at improving the profitability by
controlling cost by using various techniques such as budgetary control, standard
costing, inventory control etc. Each item of the cost (material, labour, overhead) is
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budgeted at the beginning of the period & actual expenses incurred are compared
with the budget. This increases the efficiency of the enterprise.
3) Providing information for decision- making: Cost Accounting helps in
supplying useful data to the management for taking various financial decisions &
formulating operative policies such as introduction of new products, replacement
of labour by machine etc.
4) Ascertainment of cost & profit: The primary objective of cost accounting is to
ascertain the cost per unit of product, job, process or department. It pre-
determines the cost by employing various methods & techniques under different
situations. It also helps in ascertaining the profitability of each of the products and
advises the management as to how these profits can be maximized.
5) Facilitates preparation of financial & other statements: Cost Accounting helps
to produce statements at short intervals as the management may require. In order
to operate the business at high efficiency, it is essential for management to have a
review of production, sales & operating results. Cost Accounting discloses the
sources of wastage whether of material, time or expense or in the use of
machinery, equipment and tools and to prepare such reports which may be
necessary to control such wastage.
6) Facilitates reliability: Cost Accounting provides specialized services of cost
audit in order to prevent the errors and frauds and to facilitate prompt and reliable
information to the management.
7) Others:
a) To exercise effective control of stocks of raw materials, work-in-progress,
consumable stores and finished goods in order to minimize the capital locked
up in these stocks.
b) To reveal sources of economy by installing and implementing a system of
cost control for materials, labour and overheads.
c) To advice management on future expansion policies and proposed capital
projects.
d) To help in the preparation of budgets and implementation of budgetary
control.
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e) To organize an effective information at the right time in right form for
carrying out their individual responsibilities in an efficient manner.
f) To guide management in the formulation and implementation of incentive
bonus plans based on productivity and cost savings.
g) To help in supervising the working of punched card accounting or data
processes through computers.
h) To organize cost reduction programme with the help of different departmental
managers.
i) To find out costing profit or loss by identifying with revenues the costs of
those products or services by selling which the revenues has resulted.
ADVANTAGES OF COST ACCOUNTING
The main advantages of cost accounting are given below:
1) Importance to management: Cost accounting helps the management in carrying
out efficiently its functions (i.e. planning, budgeting, decision-making,
organizing, control, pricing and evaluation of operating efficiency) by developing
practical cost procedures that provide information useful in controlling the
operations of the business enterprise. Cost accounting does this by analyzing,
recording, standardizing, forecasting, comparing, reporting and recommending.
Cost accounting methods supply the basis of factual information on which
management can build up its presentation of planning and control.
2) Importance to employees: Cost Accounting discloses the relative efficiencies of
different workers and thereby facilitates the introduction of suitable plans of wage
payment to rewards efficiency and to provide adequate incentive to the less
efficient workers. A good system of costing promotes prosperity of the business
and thus ensures greater security of service and adequate reward to workers.
3) Importance to consumers: The ultimate aim of costing is to reduce cost of
production to the minimum and maximize the profits of the business. A part of
the benefit resulting from the reduction of the cost is usually passed on to the
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consumers in the form of lower prices. Besides, the installation of a costing
system will infuse confidence in the minds of the public about the fairness of the
prices charged.
4) Helpful to creditors: It enables the creditors and investors to judge the financial
strength and creditworthiness of the business. A sound business concern with a
good system of costing can attract more investors than a similar concern without
an adequate system of costing.
5) Importance to national economy: An effective costing system benefits the
economy by stepping up the government revenue by achieving higher production.
The overall economic development of a country takes place due to efficiency of
production.
6) Classification and Sub-divisions of Costs: Costs are collected and classified by
various ways in order to provide information to the management for control
purposes and to ascertain the profitability of each area of activity. It enables a
concern to measure the efficiency, and then to maintain and improve it.
Unprofitable activities are disclosed and steps can be taken to make an
improvement in those activities.
7) Help in formulating business Policies: Business Policy may require the
consideration of alternative methods and procedures and this is facilitated by cost
information correctly presented. For example, by the aid of cost reports,
management can decide whether the manufacture of certain products increases
overhead expenditure disproportionately. Thus, it helps the management to take
vital decisions such as introduction of a new product, selection of a most
profitable product mix, utilization of spare capacity, exploration of additional
market, whether to make or buy, problem of limiting factor, replacement of
existing assets, appraisal of proposed investment to meet expansion programme
etc. with the help of marginal costing techniques and differential cost analysis.
8) Budgeting: It provides the use of budgets and performance reports and enables
the management to correct inefficiencies before they enter into business. It is a
co-ordinate plan of action for every responsible person for comparing the actual
results with the budgets. Two important cost accounting tools for helping
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managers are budgets and performance reports. Budgets are financial and/or
quantitative statements prepared and approved prior to a defined period of time,
of the policies to be pursued during that period for the purpose of attaining
objectives of the management. Thus, budgets are the formal quantifications of the
plans of the management. Performance reports measure actual performance and
give accounts of comparisons of budgets with actual results, which facilitate
action against those persons whose performance is less than the performance
specified in the budgets. The technique of control through performance reports is
technically know as management by exception, which is the practice of
concentrating on areas whose performance is not up to the mark as it was planned
and ignoring areas that are running smoothly as these were planned.
9) Best use of Limited Resources: In all varied fields we are concerned to make the
best use of limited resources that are available to us. Thus the intention is to
obtain the maximum output from a given input. Cost accounting provides the
reliable data of costs with regards to materials, wages and other expenses. These
help management to get maximum output at the minimum cost by indicating
where economics may be affected, waste eliminated and efficiency increased;
some of the loss occasioned by reduced turnover and falling prices may be
avoided.
10) Cost Audit: The operation of a system of cost audit in the organization will assist
in prevention of errors and frauds. It will help to improve cost accounting
methods and techniques to facilitate prompt and reliable information to the
management.
Limitations of Cost Accounting
Cost accounting like other branches of accountancy is not an exact science but is an art
that has developed through theories and accounting practice based on reasoning and
common sense. Many theories can be proved or disproved in the light of conventions and
basic principles of cost accounting. These principles are not static but changing with the
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change of time and circumstances. The following are the main limitations of cost
accounting:
(i) Cost accounting lacks a uniform procedure. It is possible that two
equally competent cost accountants may arrive at different results
from the same information. Keeping in view this limitation, all cost
accounting results can be taken as mere estimates.
(ii) There are a large number of conventions, estimates and flexible
factors such as classification of cost into its elements, issue of
materials on average or standard price, apportionment of overhead
expenses, arbitrary allocation of joint cost, division of overheads into
fixed and variable costs, division of costs into normal and abnormal
and controllable and non- controllable and adoption marginal and
standard costs due to which it becomes difficult to have exact costs.
(iii) For getting the benefits of cost accounting many formalities are to be
observed by a small and medium size concern due to which the
establishment and running costs are so much that it becomes difficult
for these concerns to afford its cost. Thus cost accounting can be
used only by big concerns.
(iv) The results shown by cost accounts differ from those shown by
financial accounts. Preparation of reconciliation statement frequently
is necessary to verify the accuracy. This leads to unnecessary
increase in the workload.
Financial Accounting vs. Cost Accounting
Both Financial and cost accounting are the branches of accounting whose main object is
to provide information by recording the business transactions systematically and
scientifically so that it may serve the purpose of the management for policy formulation
and controlling and to provide necessary protection to the outsiders. Both are based on
double entry system and their roles are supplementary.
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The main differences between financial and cost accounting are given as under:
S.No. Point of Distinction Financial Accounting Cost Accounting
1. Purpose / Objective It provides information
about the business in a
general way. It tells
about the profit and loss
and financial position
of the business to
owners and other
outside parties.
It provides information
to the management for
proper planning,
operation, control and
decision-making.
2. Statutory requirementThese accounts are kept
in such a way as to
meet the requirement of
Companies Act and
Income Tax Act.
These accounts are
generally kept
voluntarily to meet the
requirements of the
management. But now
Companies Act has
made it obligatory to
keep cost records in
some manufacturing
industries.
3. Recording It classifies records and
analyses the
transactions in a
subjective manner i.e.
according to the nature
of expenses.
It records the
expenditure in an
objective manner i.e.
according to the
purposes for which the
costs are incurred.
4. Control It lays emphasis on the
recording aspect
without attaching any
importance to control.
It provides a detailed
system of control for
materials, labour and
overhead costs with the
help of standard costing
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and budgetary control.
5. Periodicity of
reporting
It reports operating
results and financial
position usually at the
end of the year.
It gives information
through cost reports to
management as and
when desired.
6. Analysis of profit Financial accounts are
the accounts of the
whole business. They
are independent in
nature and disclose the
net profit or loss of the
business as a whole.
Cost Accounting is only
a part of the financial
accounts and discloses
profit or loss of each
product, job or service.
7. Reporting of costs The costs are reported
in aggregate in financial
accounts.
The costs are broken
down on a unit basis in
cost accounts.
8. Nature of transactionsFinancial accounts
relate to economic
transactions of the
business and include all
expenses viz.,
manufacturing, office,
selling and distribution
etc. Financial accounts
are concerned with
external transactions i.e.
transactions between
the business concern on
one side and third
parties on the other.
These transactions form
the basis for payment or
receipt of cash.
Cost Accounts relate to
transactions connected
with the manufacture of
goods and services and
include only those
expenses which enter
into the production.
Cost accounts are
concerned with internal
transactions which do
not form the basis of
payment or receipt of
cash.
9. Information Monetary informationNon-monetary
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is only used(i.e. only
monetary transactions
are recorded)
information like units is
also used (i.e. it deals
with monetary as well
as non- monetary
information).
10. Fixation of selling
Price
Financial accounts are
not maintained with the
object of fixing selling
prices.
Cost accounting
provides sufficient data
for fixation of selling
prices.
11. Figures Financial accounts deal
mainly with actual facts
and figures.
Cost accounting deal
partly with facts and
figures and partly with
estimates.
12. Evaluation of
efficiency
The information
provided by financial
accounting is not
sufficient to evaluate
the efficiency of the
business.
The cost data helps in
evaluating the
efficiency of business.
13. Stock valuation Stocks are valued at
cost or market price
whichever less is.
Stocks are valued at
cost.
Cost: its meaning & role
The literal meaning of cost is the amount paid or required in payment for a purchase or
for the production or upkeep of something. It is the amount of resources given up in
exchange for some goods or services. Cost is generally measured in monetary terms. It
means the amount of expenses (actual or notional) incurred on or attributable to a
specified thing or activity. Thus, material cost of a product will mean the expenses
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incurred in procuring, storing & using material in the product. Similarly, labor cost will
represent that part of payment made to the workmen for time spent on the product during
its manufacture. The term ‘cost’ does not mean the same thing under all circumstances.
Cost is always ascertained with reference to some object such as material, labor, job,
process etc.
The interpretation of the term cost depends on:
1) The nature of business or industry.
2) The context in which it is used.
In a business, where selling & distribution cost are quite nominal, the cost of an article
may be calculated without considering these overheads, However, in a business where the
product requires heavy selling & distribution expenses, calculation of cost without taking
into account selling & distribution expenses may prove very costly to the business. The
context in which the term cost is used is also important. Cost may mean prime cost, office
cost, selling cost etc.
Cost Classification: Classification refers to the process of grouping the costs
according to their common characteristics. The different bases of cost classification are:
1) Classification by nature or elements: Material, Labor, Expenses
To produce or manufacture, material is required. For example to manufacture shirt,
cloth is required and to produce flour, wheat is required. All material which becomes
an integral part of finished product and which can be conveniently assigned to
specific physical unit is termed as “Direct Material”. It is also described as raw
material, process material, prime material, production material, stores material, etc.
The substance from which the product is made is known as material. It may be in a
raw or manufactured state. Material is classified into two categories:
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• Direct Material
• Indirect Material
Direct Material is that material which can be easily identified and related with
specific product, job, and process. Timber is a raw material for making furniture,
cloth for making garments, sugarcane for making sugar, and Gold/ silver for making
jewellery, etc are some examples of direct material.
Indirect Material is that material which cannot be easily and conveniently identified
and related with a particular product, job, process, and activity. Oil and waste,
printing and stationery etc, are some examples of indirect material. Indirect materials
are used in the factory, office, or in selling and distribution department.
Labour
Labour is the main factor of production. For conversion of raw material into finished
goods, human resource is needed, and such human resource is termed as labour.
Labour cost is the main element of cost in a product or service. Labour can be
classified into two categories:
• Direct Labour, and
• Indirect labour
Labour which takes active and direct part in the production of a commodity. Direct
labour is that labour which can be easily identified and related with specific product,
job, process, and activity. Direct labour cost is easily traceable to specific products.
Direct labour varies directly with the volume of output. Direct labour is also known
as process labour, productive labour, operating labour, direct wages, manufacturing
wages, etc. Cost of wages paid to carpenter for making furniture, cost of a tailor in
producing readymade garments, cost of washer in dry cleaning unit are some
examples of direct labour.
Indirect labour is that labour which cannot be easily identified and related with
specific product, job, process, and activity. It includes all labour not directly engaged
in converting raw material into finished product. It may or may not vary directly with
the volume of output. Labour employed for the purpose of carrying out tasks
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incidental to goods or services provided is indirect labour. Indirect labour is used in
the factory, the office, or the selling and distribution department. Wages of store-
keepers, time-keepers, salary of works manager, salary of salesmen, etc, are all
examples of indirect labour cost.
Expenses
All cost incurred in the production of finished goods other than material cost and
labour cost are termed as expenses. Expenses are classified into two categories:
• Direct expenses, and
• Indirect expenses
Direct expenses:
These are expenses which are directly, easily, and wholly allocated to specific cost
center or cost units. All direct cost other than direct material and direct labour are
termed as direct expenses. Direct expenses are also termed as chargeable expenses.
Some examples of the direct expenses are hire of special machinery, cost of special
designs, moulds or patterns, fees paid to architects, surveyors and other consultants,
inward carriage and freight charges on special material, cost of patents and royalties.
Indirect expenses:
These expenses cannot be directly, easily, and wholly allocated to specific cost center
or cost units. All indirect costs other than indirect material and indirect labour are
termed as indirect expenses.
Thus, Indirect Expenses = Indirect cost – Indirect material – Indirect labour.
Indirect expenses are treated as part of overheads. Rent, rates and taxes of building,
repair, insurance and depreciation on fixed assets, etc, are some examples of indirect
expenses.
2) Classification by Activity/Volume: Fixed, variable, semi-variable and step costs.
Costs that tend to be constant at different volumes of output is called fixed costs. These
costs do not have any significant relation with the output. E.g., rent, insurance charges,
manager’s salary etc.
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Costs that tend to vary with output & have a major relation with output are termed as
variable costs. e.g., wages of laborers, power cost of material etc.
Costs which neither vary proportionately nor remain stationery are called as semi-
variable or semi-fixed costs. E.g. repairs, supervision charges, telephone rent,
depreciation etc.
Costs which remain fixed over a certain range of activity & then shifts to a new level as
activity changes are termed as step costs. These are taken as a type of semi-variable costs.
E.g., foremen supervising a given number of employees, if the number of employees
increases more foreman are required to be appointed.
3) Classification by association with the product: Product costs & Period costs
Costs that become part of the cost of the product are called as product costs. E.g., direct
material, direct labor etc.
Costs that are not traceable to the product & are treated as expense in the period in which
they are incurred. E.g., rent, insurance, salaries etc. They cannot be attributed to a product
because they are incurred for several products at a time.
4) Classification by traceability: Direct costs & indirect costs.
Costs which can be easily traceable to a product, service, job or process is called direct
cost. In the process of manufacture or production of an article, materials are purchased,
laborers are employed & wages paid to them, certain other expenses are also incurred
directly. All these take an active & direct part in the manufacture of a commodity, hence
are called direct costs.
Expenses which are not directly chargeable to production are called as indirect costs. E.g.
salaries of time-keepers, storekeepers etc. They are common to several products & have
to be apportioned to different products on a suitable basis.
5) Classification by time: Historical costs & predetermined costs.
Historical costs are computed after they are incurred. Such costs are available only after
the production or manufacturing is over.
Predetermined costs are computed in advance of production on the basis of factors
influencing costs. Such costs may be estimated costs & standard costs. Estimated costs
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are based on lot of guess work. They help to ascertain what the cost will be, based on
certain factors. They are less accurate as only past experience is taken into account.
Standard costs are based on technical estimate for material, labour and other expenses &
for specifies set of working conditions. They help us to ascertain what the cost should be.
6) Classification by controllability: Controllable cost & uncontrollable cost
Costs which can be influenced by the action of a specified member of an undertaking are
called as controllable costs e.g. direct material, direct labour etc.
Costs which cannot be influenced are termed as uncontrollable costs e.g. rent, taxes,
salary etc.
7) Cost classification by decision-making purposes:
• Opportunity cost: It is the cost of the next best alternative foregone. It is
the value of benefit sacrificed in favor of choosing a particular action. For
e.g. if an owned building is proposed to be utilized for a new project, the
likely revenue that it could fetch if rented out is the opportunity cost which
should be considered while evaluating the profitability of the project. It is
the net benefit that would have been received from an asset if put to its
next best use.
• Sunk cost: These are the costs which have been created by a decision
made in the past & which could not be changed by any decision that will
be made in the future. Investments in plant & machinery, amount spent on
research & developments are the examples of sunk costs. Since they
cannot be altered by later decisions they are irrelevant for decision
making.
• Differential cost: The difference in total cost from selecting one option
over another is called differential cost. In case the choice of alternative
results in increase in total cost such increased cost is called incremental
cost & in case it results in decrease in total cost such decrease is called
decremental cost.
• Imputed or hypothetical cost: These are the cost which do not involve
cash outlay but are considered while making decisions. E.g. interest on
capital, rent of owned building.
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• Out-of-pocket cost: It is the cost which involves cash outlays or requires
the utilization of current resources. E.g. Wages, material cost, insurance
etc. these are also known as explicit costs. Costs which do not require any
immediate cash outlay are known as implicit costs. E.g. Depreciation on
plant & machinery.
• Marginal cost: It is the additional cost of producing one additional unit.
Marginal costing is the technique of charging only variable cost to
products. It helps in decisions like make or buy, pricing of product etc.
• Relevant & irrelevant costs- Relevant costs are the future costs that will
differ depending upon the actions of the management. Irrelevant costs are
the costs that will not be affected by the actions of the management.
• Replacement costs- It is the current market cost of replacing an asset. It is
the cost at which an asset could be purchased identical to one being
replaced. The management has to consider the replacement cost of an asset
& not the price at which the asset was purchased earlier. Suppose
equipment was purchased in 2000 for Rs.10, 00,000, the company is
planning to discard it & replace it with new machinery in 2010 for
Rs.30, 00,000. The replacement cost of the equipment is Rs.30, 00,000.
These costs are relevant for decision making.
• Shut-down costs- These represent the fixed costs which have to be
incurred even during the period when a factory is shut down on account of
some temporary difficulties, viz., shortage of raw materials, non-
availability of requisite labour force, etc. during this period, though no
work is done, the fixed costs, such as rent, insurance, depreciation,
maintenance, etc. for the entire plant have still to be incurred. Such costs
of the idle plant are known as shut down costs.
• Avoidable and unavoidable cost: Avoidable costs are those, which can
be eliminated if a particular product or department, with which they are
directly related, is discontinued. For example, salary of the clerks
employed in particular department can be eliminated, if the department is
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discontinued. Unavoidable costs are those which cannot be eliminated if a
product or department is discontinued e.g. rent`.
8) Classification on the basis of normality: Normal costs & Abnormal costs
Costs that are expected to be incurred under normal operating conditions at a given level
of output are called normal costs. These costs are the part of cost of production.
Costs which are not incurred under normal operating conditions are called as abnormal
costs e.g. fines, penalties etc.
9) Classification on the basis of functions or operations:
Production cost- It is the cost of operations commencing with supply of material, labour,
services & ends with packing of the product. It includes total cost of raw material, labor,
production overheads etc.
Selling & distribution cost- It is the cost of creating, stimulating the demand, securing
orders & making the packed product available for dispatch e.g. advertisement, showroom
expenses, warehouse cost, transportation cost, carriage outward, cost of samples etc.
Development cost- It is the cost of process which begins with the implementation of a
decision to produce a new product or to employ a new or improved method & ends with
the commencement of formal production of that product or employment of that method.
10) Traceable Costs: These are costs which can be identified or traced to specific products,
services or units of the company such as raw material and labour, etc.
Untraceable Costs: These are costs which cannot be identified with a department
process or product. Such costs are also termed as common costs, as they are incurred
collectively for a number of products or cost centers e.g., overheads incurred for the
factory as a whole. As such they are apportioned among various products or cost centers
using suitable criterion.
11) Conversion costs: It is the cost of transforming direct material into finished goods. It is
the aggregate of direct labor, direct material, and direct expenses.
12) Committed Costs: These are the fixed costs that arise as a result of consequences of
commitments previously made or are incurred to maintain certain facilities and cannot
be quickly eliminated. The management has little or no discretion in such type of costs
e.g. rent, insurance, depreciation on building or equipment purchased.
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13) Discretionary Costs: These costs are not related to the operation but can be controlled
by the management. These costs arise from some policy decisions, new researches etc.
and can be eliminated or reduced to a desirable level at the discretion of the
management. E.g. advertising costs, R&D costs.
Structure of Cost Sheet:
Cost Sheet is a statement designed to show the output of a particular accounting period
along with the breakup of costs. It analyzes & classifies the expenditure on different
items for a particular period. It may also depict the data for the preceding period along
with the data for the present period to know the trend. Cost data for more than two
periods can also be depicted for comprehensive study. It may also be prepared for making
inter firm comparison by including cost data for different firms.
Importance of Cost Sheet: A cost sheet helps in ascertainment & control of costs. It
also provides data on the basis of which the selling price of products can be fixed. Thus, a
cost sheet performs the following functions:
1) Ascertainment of cost- it ascertains total cost cost per unit at different stages of
production. The information provided by cost sheet helps the management in
taking various decisions like make or buy a product, to sell or not to sell in a
foreign market etc.
2) Controlling costs: - A cost sheet presents the cost data for two or more periods in
comparative form. Such presentation helps in identifying the elements whose
costs have gone up & where control is required.
3) Fixation of selling price- A cost sheet provides data about the cost of a job,
product or process. The business can fix appropriate selling price for its products
on the basis of such data.
4) Submitting of tenders- Costs have to be ascertained for submitting of tenders,
giving price quotations etc. Preparation of an estimated cost sheet about the
relevant product or job facilitates this work.
Components of Total Cost:
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The total cost is made up of cost of production & cost of distribution. The total cost is
also known as selling cost which consists of:
a) Prime Cost
b) Factory Cost or Work Cost
c) Administration Cost or Office Overheads
d) Selling & Distribution Cost
Prime Cost: The sum total of direct material, direct labor & overheads are called as
Prime Cost. In this, the opening & closing stock of raw material is adjusted. It is
calculated as:
Opening Stock of raw material xxxx
Add: Purchase of material xxxx
Add: Direct Expenses xxxx
Less: Closing Stock of raw material xxxx
Material Consumed xxxx
Add: Direct Wages xxxx
PRIME COST xxxx
Factory Cost or Work Cost: The sum total of prime cost plus the total factory
overheads or works overheads is factory cost or works cost. Woks overheads includes all
expenses incurred in production of goods such as factory rent, factory insurance,
depreciation on plant & machinery, coal, gas , water, electricity, work manager’s
remuneration, consumable stores etc. In this, opening & closing work-in-progress is
adjusted. It is calculated as:
Prime Cost xxxx
Add: Factory Overheads xxxx
Add: Opening work-in-progress xxxx
Less: Closing work-in-progress xxxx
Less: Sale of scrap xxxx
FACTORY COST xxxx
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Administration Overheads: Administration cost is obtained by adding the office or
administration overheads to works cost. It is also known as office cost or total cost.
Office overheads includes all expenses incurred in carrying on the administration work of
the concern such as salaries of office staff, depreciation on office building, rent & rates,
taxes & insurance, audit fees, legal expenses, director’s fees & remuneration, printing &
stationery, postage, telegram, telephone repairs etc. The administration overheads when
added to works costs gives cost of production. The cost of goods sold is arrived after
adjusting opening & closing stock of finished goods. It is calculated as:
Factory Cost xxxx
Add: Office overhead xxxx
Cost of Production xxxx
Add: Opening stock of Finished Goods xxxx
Less: Closing stock of Finished Goods xxxx
COST OF GOODS SOLD xxxx
Selling Cost: The selling cost or cost of sales is obtained by adding the selling &
distribution overheads to cost of goods sold. The selling & distribution overhead includes
advertisement, selling expenses, salesman’s salaries & commission, travelling expenses,
bad debts, discounts, packing expenses, distribution expenses, carriage outward,
transporting charges etc. It is calculated as:
Cost of Goods Sold xxxx
Add: Selling & Distribution Expenses xxxx
COST OF SALES xxxx
The difference between the sales & cost of sales is net profit earned for that period.
Items excluded from cost accounts
1) Dividends paid
2) Taxes on incomes & profits
3) Donations
4) Transfers to reserves
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5) Amount written off- goodwill, preliminary expenses
6) Losses on sale of investments, buildings etc.
7) Penalties & fines
8) Damages payable
9) Expenses on transfer of company’s office
10) Interest on bank loan, mortgages etc.
11) Remuneration paid to proprietor in excess of fair reward for services
rendered.
12) Interest received on bank deposits
13) Brokerage received
14) Rent receivable
15) Interest, dividends, commission, discount received
16) Profits made on sale of fixed assets, investments etc.
Performa of Cost Sheet
Cost Sheet of………… for the year ended 31st
Mar, 20xx
Output: xxxxx
Particulars Rs. Per Unit
20

Opening Stock of raw material
Add: Purchase of material
Add: Direct Expenses
Less: Closing Stock of raw material
Material Consumed/ Direct Material
Add: Direct Wages
Prime Cost
Add: Factory Overheads
Add: Opening work-in-progress
Less: Closing work-in-progress
Less: Sale of scrap
Factory or Works Cost
Add: Office overhead
Cost of Production
Add: Opening stock of Finished Goods
Less: Closing stock of Finished Goods
Cost of Goods Sold
Add: Selling & Distribution Expenses
Cost of Sales
Profit
Sales
21

Ma unit 2

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Ma unit 2