This powerpoint presentation is created by Gyanbikash.com for the students of class nine to ten from their accounting NCTB textbook for multimedia class.

1. This presentation is owned by
ABUL KALAM AZAD PATWARY
“for class 9-10[accounting]”

2. Eleventh Chapter
Cost Price, Cost of
Production and Selling
Price

3. Determination of Cost Price & Selling Price:
The prime objective of a business concern is to ascertain actual profit
and loss. Determination of actual profit or loss will not possible if the
price of the goods purchased and their selling price are not properly
determined. Cost price is determined by adding direct expenses
incurred to the value of goods produced or purchased. Indirect
expenses are added to them to make up total cost of the goods
purchased and a certain percentage of profit is added to this total cost
for determining selling price.

5. Cost of production refers to the total sum of money
needed for the production of a particular quantity of
output. As defined by Gulhrie and Wallace, “In
Economics, cost of production features a special
meaning. It is all about the payments or expenditures
essential to get the factors of production of land, labor,
capital and management needed to produce a
commodity. It signifies the money costs which are to
be incurred for acquisition of the factors of
production.” In the words of Campbell, “Production
Costs are the costs which should be essentially
received by resource owners so as to presume that
they will continue to supply them in a specific period
of time.”

6. Elements of Production Cost
Purchase of raw machinery
Installation of plant and machinery
Wages of labor
Building rent
Interest on capital
Wear and tear of building and machinery
Advertisement expenses
Payment of taxes
Insurance charges
The imputed value of factor of production owned by the firm
itself is also added in the production cost.
The production cost also includes the normal profit of the
entrepreneur.

7. Formula for computing Production
Costs
The general formula used for
computing production cost is:
Production cost per item = Fixed
Cost (FC) + Variable cost (VC) / No.
of units produced

8. Calculating production cost
Determine the fixed cost. These are the costs
which do not alter on the basis of the number of
products produced. This includes the rent paid for
building, salaries of the employees, and utility
costs.
Estimate the variable costs. These are the costs
that change with a change in the quantity of
production. For example, if you are making a
cake, some of the variable costs would be flour,
eggs, and sugar.
Add the fixed costs to the variable costs and divide
this number by the number of items produced
thus reaching the production cost for one item.

9. Fixed costs, in economics, are explained as business
expenses which do not depend on the level of goods and services
proffered by a business. These costs have a propensity to be time-
related. Management studies define fixed costs as expenses which
do not change as a function of a business activity, within a required
period of time. Moreover, fixed costs also make up one of the
components and a strong management tool in calculating the total
costs. A higher level of fixed costs can, however, increase the level of
operational gearing.
Examples
Some of the examples of fixed cost include rent, insurance, salaries
and accountancy costs, forms of depreciation, capital assets, utilities,
property tax, or interest expense. Another good example of fixed cost is a
lease payment. If, in case, you are leasing a building at $1,000 per month,
then you are supposed to pay that amount each month irrespective of the
working condition (good or poor) of the business.

10. Variable costscan be defined as expenses which keep
changing in proportion to the activities of a business. Variable costs can be
calculated as the sum of marginal costs over all units produced.
Variable costs form one of the essential components and an important
management tool in calculation of total costs. Besides, all variable costs are
direct costs (costs which can be easily associated with a particular cost
object). Variable costs are, sometimes, also referred as unit-level costs for
they vary with the number of units produced. Usually, these variable costs
keep on Increasing at a constant rate in proportion to labor and capital.
Formula
The variable cost can be calculated as:
Total Variable Cost = Total Quantity of Output * Variable Cost per Unit of Output
Examples
Some of the examples of variable cost include serviettes, operating costs,
perishable foods, food items, utilities, wages, raw materials, packaging, and alike.
The fuel for an airline is another good example of variable cost. The cost varies
with the number of flights and duration of trips.

11. Objectives of determining cost of production:
Determination of cost of production is the basic objective of cost
accounting. Existence and success of a firm majorly depend on
perfect determination of cost. Some vital objectives of costing are
given below.
1. Ascertaining profit or loss: The prime objective of business is to
get true financial picture through ascertaining correct profit or
loss. Profit and loss ascertainment can easily be done through
determination of cost.
2. Valuation of stock: Determination of cost is important to
determine the actual value of stocks after an accounting period.
3. Fixation of responsibility: Comparison between predetermined
and actual cost can not only find the discrepancy but also find out
the reason behind such gap. By doing so, it can easily be pin the
person pointed out who is responsible for this.

12. 4. Determination of selling price: cost is necessary to determine the
profitable selling price in a competitive market. Using cost as a
strategy, firstly, per unit cost is determined then considering the
demand for goods or services, strength of competitors, government
policy and profit policy the desired percentage of profit is added
with cost of production.
5. Budget preparation: Budget is considered as the guide line of
future action plan.
Budget is prepared for every single unit of expenses of a firm. Since
per unit cost is
determined so total cost budget can easily be prepared.
6. project appraisal: Economic feasibility of a project is evaluated
before the project is in actual operation. So, determination of cost
plays important role in case feasibility study.

13. Elements of Costs

14. Elements of Costs
One of the main functions of cost accounting is to classify the
costs. Costs may be classified according to its elements. We can
distinguish three basic elements in the manufacturing cost of any
product or services. They are material cost, labor cost and other
overheads.
Material costs – The cost of commodities supplied to an
undertaking.
Labor costs – The cost of remuneration of laborers.
Overheads – These are the other expenses incurred.
The expenditure on these various elements of costs may be either
direct or indirect. A direct expenditure is one, the whole of which
can be conveniently charged to a particular product, job or service
whereas an indirect expense is an expense which cannot be
identified with any particular product or job. Therefore, such
expenses are allocated on suitable basis.

15. Examples:
Direct materials - Raw materials used in
manufacturing a product.
Indirect materials - Lubricants and cotton waste
used in maintaining machinery.
Direct Labor - Wages of those workers who are
engaged in production.
Indirect Labor - Wages to those who are aiding
manufacturing activities by way of supervision,
maintenance, tools setting etc.
Direct Overheads - The cost of special pattern, dyes
drawings tools etc. made for specific product.
Indirect Overheads- Office salaries, rent,
electricity, advertisement expenses etc.

16. Overhead can again be sub-divided into three
categories:
Factory Overhead
Administrative
Overhead
Selling Overhead

17. a) Factory Overhead: All costs relating to production other than
direct materials and direct labor is called factory overhead. For
example- Factory rent, Insurance, Municipal taxes, Electricity
and water supply etc.
b) Administrative Overhead: Expense relating to office and administration
matters is called administrative overhead. It refers to all indirect expenses
incurred in connection with overall administration and office management. For
example, salary for office staff, office rent, other office expense, for example-
rates, taxes, postage & telegram, stationery, etc.
c) Selling Overhead: The sum total of indirect expenses incurred for the sale of
finished goods is termed as selling and distributional overhead. All expenses in
connection with order collection of produced goods, create new market, possession old
market, attracting the customers. For example, advertisement, sales manager
commission and salary, sample distribution, showroom expenses etc. On the other hand
all expenses relating to reach to the purchaser is called distribution expenses. For
example insurance for sending goods, carrying cost etc. Again, all expenses relating to
after sales servicing and repairing, changing the goods is also included in selling
expenses.