Elements of costs and classification of expenditure

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Elements of costs and classification of expenditure

  1. 1. Elements of Costs and Classification of Expenditure Prof. Bhagyaashri Kulkarni
  2. 2. Elements of costs In order to interpret the term cost correctly and to ascertain the cost with respect to the cost centers, the cost attached with the manufacturing process may be subdivided, known as Elements of Costs. (A) Material (B) Labour (C)Expenses Rights reserved by Prof. Bhagyashree Kulkarni
  3. 3. Elements of Cost Material Direct Indirect Labour Direct Indirect Expenses Direct Indirect Selling & Distribution Overheads Administration Overheads Factory / Works Overheads Rights reserved by Prof. Bhagyashree Kulkarni
  4. 4. Material Cost The cost of commodities and materials used by the organization. Direct Material Cost – all raw materials, either purchased from outside or manufactured in house. Indirect Material Cost – material which cannot be identified with the individual cost centre, assist the manufacturing process and does not become an integral part of finished goods. Consumable stores, Cotton waste, oils and lubricants, stationary material etc. Rights reserved by Prof. Bhagyashree Kulkarni
  5. 5. Labour Cost The cost of remuneration paid to the employees of the organisation. Direct Labour Cost – identified with the individual cost centre and is incurred for those employees who are engaged in the manufacturing process. Indirect Labour Cost – cost which cannot be identified with the individual cost centre and is incurred for those employees who are not engaged in the manufacturing process but only assist. wages paid to foreman/storekeeper, salary of works manager, Accountant/Personnel dept. salaries etc. Rights reserved by Prof. Bhagyashree Kulkarni
  6. 6. Expenses Cost This is the cost of services provided to the organisation and the notional cost of assets owned. Direct Expenses Cost – Expenses identified by individual cost centers. Hire charges of machinery/equipment for particular job, cost of defective work etc. Indirect Expenses Cost – Expenses which cannot be identified by individual cost centers. Rent , Telephone expenses, Insurance, Lightening etc. Rights reserved by Prof. Bhagyashree Kulkarni
  7. 7. Direct Material Cost + Direct Labour Cost + Direct Expenses Cost Indirect Material Cost + Indirect Labour Cost + Indirect Expenses Cost Prime Cost Overheads Rights reserved by Prof. Bhagyashree Kulkarni
  8. 8. Overheads- Classification Factory / Works Overheads Consist of all overhead costs incurred from the stage of procurement of material till the production of finished goods.  Indirect material such as Consumable stores, Cotton waste, oils and lubricants, stationary material etc.  Indirect labour cost such as wages paid to foreman/storekeeper, salary of works manager, Accountant/Personnel dept. salaries etc.  Indirect Expenses cost such as Carriage inward cost, Factory lightening/power expenses, rent/ Insurance /repairs for factory building/machinery, depreciation on factoryRights reserved by Prof. Bhagyashree Kulkarni
  9. 9. Office and Administrative Overheads These overheads consists of all overheads costs incurred for the overall administration of the organisation. They include :  Indirect material such as stationary items, office supplies etc.  Indirect labour cost such as salaries paid to account and administrative staff, Directors’ remuneration etc.  Indirect expenses such as postage/telephone, depreciation on office building, legal/audit charges, Bank charges . Rent/insurance / repairs in offices etc. Overheads- Classification Rights reserved by Prof. Bhagyashree Kulkarni
  10. 10. Selling and Distribution Overheads These overhead consist of all overhead costs incurred from the stage of final manufacturing of finished goods till the stage of sale of goods in the market and collection of dues from customers.  Indirect material such as packaging material, samples etc.  Indirect labour like salaries paid to sales personnel, commission paid to sales manager.  Indirect expenses like carriage outward, warehouse charges, advertisement, bad debts, repairs and running of distribution van, discount offered to customers etc. Overheads- Classification Rights reserved by Prof. Bhagyashree Kulkarni
  11. 11. Selling and Distribution Overheads  Subscription to mercantile agencies and journals.  Printing of catalogues and price lists and general stationary. Overheads- Classification Rights reserved by Prof. Bhagyashree Kulkarni
  12. 12. Classification of Expenses A. Direct Material Direct Labour Prime Cost Direct Expenses B. Works Expenses, Indirect Materials Works or Factory cost Indirect Labour i.e. A + B Rent & taxes of factory (Also often Production Cost) premises, Depreciation, Repairs, Fuel & power etc. C. Office Expenses Office Rent, Rates, Office Cost Stationary i.e. A + B + C Directors fees etc. Or Cost of Production Rights reserved by Prof. Bhagyashree Kulkarni
  13. 13. D. Selling Expenses, such as Sales staff salaries Show room expenses Cost of Sales, Advertising i.e. A + B + C + D Carriage outwards Packing Bad Debts E. Plus Profit Or Selling price Minus Loss i.e. A + B + C + D + E Classification of Expenses Rights reserved by Prof. Bhagyashree Kulkarni
  14. 14. Expenses excluded from Costs Item of expenses which are apportionment of profit should not form a part of the costs. These are-  Income tax  Dividend to share holders  Commission to partners, managing agents etc.  Capital Loss  Interest on Capital  Interest paid on debentures  Capital expenses etc. Rights reserved by Prof. Bhagyashree Kulkarni
  15. 15. Treatment of Stock Stocks are generally categories as- I. Raw Material II. Work-in-progress III. Finished Goods Stock of raw materials should be adjusted in order to find out cost of consumption of raw materials: Value of Raw material consumed = Opening Stock of Raw Material + Net Purchases – Closing Stock of Raw Materials Rights reserved by Prof. Bhagyashree Kulkarni
  16. 16. Treatment for semi finished goods Work-in-progress is Semi finished goods at the time of finding of Total Cost of Production. Work-in-progress consists of : I. Cost of Materials to date II. Cost of labour to date III. Manufacturing expenses to date The amount of work-in-progress consumed is excess of opening balance of work-in-progress over closing work-in-progress.
  17. 17. Statement of Cost / Cost Sheet Rs. Rs. Raw Materials Opening stock of Raw materials P Raw Material purchased P Cost of Materials available for use P Less : Closing stock of raw Materials (P) Cost of Raw materials used / Consumend P Direct labour Wages P Other Direct charges P Prime Cost P Factory Overheads: Indirect materials P Indirect Labour P Depreciation on factory Building P Depreciation on Factory equipments P Insurance P Repairs and maintenance P Other factory overheads P P Gross Factory Cost P Add : Work-in-progress (Opening) P Less: Work-in-progress (Closing) (P) Factory cost P Office and Administrative overheads Office salaries P Office rents, Insurance P Other office overheads P P Office Cost / Cost of Production P Add : Opening Stock of Finished goods P Goods available for sale P Less: Closing Stock of Finished Goods (P) Cost of Goods sold P Selling and Distibution Expenses P Cost of Sales P Profit P sales P

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