2. Cost, Expense and Loss
• Expense which is incurred after derived the
benefit. Ex. Wages paid to worker, rent paid
for using the building, etc.
• Cost is incurred before deriving the benefit.
Ex. Prepaid insurance, advertising, etc.
• Loss when no benefit is derived by the
incurrence of cost. Ex. Goods destroyed by
fire, etc.
3. Direct Expenses
These are those expenses, which are directly
chargeable to a job or a process and become a
part of prime cost.
The aggregate of direct materials cost, direct
wages and direct expense is called Prime cost.
Examples are payment of royalty and patent
fee, Salesmen’s commission, travelling
expenses of particular job, etc.
4. Indirect Expenses
These are expenses which cannot be directly,
conveniently and wholly allocated to cost centers
or cost units.
Indirect materials cost, indirect wages and
indirect expenses are collectively called overhead
cost.
The examples of indirect expenses are rent, rates,
insurance, salaries, lighting charges, etc.
5. Differences
Direct expenses Indirect expenses
These are charged directly to
a job or a cont center
These expenses which cannot be charged
to a specific job or a cost centre
The benefit of such expenses
is received by a specific job
only and they are not to be
apportioned
The benefit of such expenses go to more
than one job or cost centre, and they
have to be apportioned
These are included in prime
cost
These are included in factory overhead if
they are related to factory, in
administrative overheads if they related
to administration, or in selling and
distribution overhead if they related to
SD.
6. OVERHEADS
• Indirect Materials
– These are those which cannot be traced as a part of the
product.
– Examples: Lubricating oil, grease, fuel oil, etc.
• Indirect Labour/Wages
– It is the cost of labour which cannot be directly identified
with the product manufactured.
– Examples: overtime, holiday pay, idle time, leave pay, etc.
• Indirect Expenses
– Which are incurred for the business as a whole.
– Examples: rent, tax, insurance, lighting, etc.
7. Classification of Overheads
• Function wise
– Manufacturing overheads
– Administrative overheads
– Selling overheads
– Distribution overheads
• Element wise
– Indirect Material
– Indirect Labour
– Indirect Expenses
8. Classification of Overheads
• Behavior wise
– Fixed overheads
– Variable overheads
– Semi-variable overheads
– Step overheads (it do not change when there is a small
change in the level of activity but change considerably
whenever there is a slightly bigger change.)
• Control wise
– Controllable cost
– Non-controllable cost
9. Classification of Overheads
• Nature wise
– Normal overheads
• Expected overheads/expenses
– Abnormal overheads
• Which are not expected
11. Allocation
• The allotment of whole item of
cost to cost centers.
• The technique of charging the
entire overhead expenses to a cost
centre is known as cost allocation.
12. Apportionment
• The allotment of proportions
of items of cost to cost
centers or cost units.
• Example, rent of factory
building is not allocated, but
apportioned to various
departments.
13. Basis of Apportionment
Basis of Apportionment Items of Expenditure
Floor area or cubic content
Rent, rates, taxes, maintenance of building,
depreciation and insurance of building, lighting and
heating, electricity.
Number of employees
Expenses associated with workmen such as
supervision, canteen expense, recreation expense,
timekeeping, ESIC, etc.
Capital value
Depreciation and insurance of plant and machinery
equipments and furniture.
Value of materials Material handling
Horse-power hours KWH Power
No. of material requisitions Storekeeping expenses
Direct machine hour, direct
labour hr., direct wages
Other overhead expenses
14. Methods of Secondary Distribution
Direct Re-
distribution Method
Step Method Reciprocal Service
Method
Repeated
Distribution Method
Simultaneous
Equation Method
Trial and Error
Method
15. Direct Re-distribution Method
The cost of service department is
directed to re-distribution to the
production departments without
considering the services rendered by
one service department to another
service department.
16. Step Method
• The cost of most serviceable department is
first distributed to production departments
and other service departments.
• Thereafter, the next service department is
distributed and later the last service
department until the cost of all the service
departments are redistributed to the
production department.
17. Reciprocal Service Method
• If a service department receives services from
other department, the services should be
charged in the receiving department.
• Thus, the cost of inter departmental services
is taken into account on reciprocal basis.
• Simultaneous Equation Method: The true cost
of total overhead of each service department
