3. Use of Information about costs
• Performance Measurement: Efficiency and
effectiveness of an organization are determined by the
reports on costs incurred.
• Product Cost and Cost of Services
• Inventory Cost: All the costs of manufacturing is
measured and some part of the costs are assigned to
each unit of product. For instance, the cost is incurred
by Maruti Suzuki to produce different sub-parts of
automobiles and to assemble them into final product.
• Profitability Analysis: Information about sales,
marketing and distribution costs allows mangers to
evaluate the profitability of product of product line.
Like, Maruti Suzuki’s indirect expenses have
increased and contributed to the total cost of car.
4. • Product Mix: Companies that offer more than one
product or service, information about costs is a key to
managing the mix of products or services offered to
clients. For instance, Maruti incurs more cost on
advertising for its Nexa series as compared to Arena
series.
• Pricing: Although prices are determined by market
forces of demand and supply, product differentiation
and marketing offer many managers some degree of
latitude in setting prices. For instance, Maruti defines
the price of their product on the basis of the total cost
incurred.
• Cost of Service: Many products require the seller to
provide additional services to the clients. Maruti
Suzuki provide additional service like insurance and
free after services to its customer which is a part of
total price of the product.
5. Cost Behavior
Knowledge about cost behavior is necessary for
understanding, using, or designing cost accounting or cost
management systems.
Relation of Cost to Volumes
Understanding the effect of changes in volume on costs is
essential to measuring, analysing, and using information
about costs for both performance measurement and product
costing. Increase in costs is not proportional to increase in
product volume.
• Variable Costs: This cost changes in strict
proportionality with volume. Over the last several years
this has happened with Maruti, its raw material cost has
increased 9.2% this year as compare to previous year.
6. • Non-variable Costs: This cost does not vary at all with volume.
For example, Maruti Suzuki’s net profit stood at ₹4,358.9 crore,
23.6% lower than the year-ago period, on account of lower sales
volume, higher sales promotion expenses, and higher
depreciation, partially offset by cost reduction efforts, higher fair
value gains on invested surplus and reduction in corporate tax
rate.
• Semi-variable Costs: This cost includes a combination of
variable and non-variable costs. For example, The estimated
maintenance cost of Maruti Swift for 5 years is Rs. 20,545
whereas Baleno is expected to incur an estimated maintenance
cost is Rs 23,599 for 5 years.
• Chunky Costs: These costs are fixed for a range of volume of
production but change in a chunk when volume drops below or
exceeds the limits of the relevant range of volume. In Maruti
Suzuki, production of mini and compact segment cars stood at
1,02,185 units as against 95,883 units in November last year, up
6.5 per cent.
7. Accounting for Costs
In cost accounting, costs are
classified into two categories: direct
costs and indirect costs.
• Direct Costs: This is a price that
can be directly tied to the
production of specific goods or
services.
• Indirect Costs: These are costs
that are not directly accountable to
a cost object.
8. • Resources acquired are classified as materials,
payroll, or overhead. Payroll becomes part of
overhead.
• In the production process, material, labour, and
overhead cost becomes the cost of work-in-
process inventory. Maruti Suzuki acquires
various raw materials, employs labor and
incurs overhead cost.
• When completed, work-in-process becomes
finished goods and, later, cost of goods sold.
Cars are the finished goods made by Maruti
after the completion of work-in-process.
• These direct costs are transferred with
products.
Accounting for Direct Costs
9. • Cost accounting systems use a two-stage procedure for
assigning indirect costs to products or other cost objects.
• First, costs are assigned to cost centers, or cost
pools.
• Seconds, costs are assigned from each pool to
products using cost drivers.
• How many cost centers to use?
• How to assign costs to each cost centre or cost or cost
pool?
• How to assign the costs collected for each centre to the
products that are manufactured by or pass through that
centre?
Accounting for Indirect Costs
10. • There is great diversity in the cost accounting
systems used by different organizations.
• The components of indirect cost in Maruti
Suzuki are Rent, rates and taxes, other
administrative expenses, selling expenses
and Miscellaneous expenses.
Miscellaneous expenses contribute to the
highest percentage of indirect costs.
Miscellaneous expenses for Maruti include
tools and supplies, computers, employee
travel, etc.
