Cost, Expense and Loss• Expense which is incurred after derived thebenefit. Ex. Wages paid to worker, rent paidfor using the building, etc.• Cost is incurred before deriving the benefit.Ex. Prepaid insurance, advertising, etc.• Loss when no benefit is derived by theincurrence of cost. Ex. Goods destroyed byfire, etc.
Direct ExpensesThese are those expenses, which are directlychargeable to a job or a process and become apart of prime cost.The aggregate of direct materials cost, directwages and direct expense is called Prime cost.Examples are payment of royalty and patentfee, Salesmen’s commission, travellingexpenses of particular job, etc.
Indirect ExpensesThese are expenses which cannot be directly,conveniently and wholly allocated to cost centersor cost units.Indirect materials cost, indirect wages andindirect expenses are collectively called overheadcost.The examples of indirect expenses are rent, rates,insurance, salaries, lighting charges, etc.
DifferencesDirect expenses Indirect expensesThese are charged directly toa job or a cont centerThese expenses which cannot be chargedto a specific job or a cost centreThe benefit of such expensesis received by a specific jobonly and they are not to beapportionedThe benefit of such expenses go to morethan one job or cost centre, and theyhave to be apportionedThese are included in primecostThese are included in factory overhead ifthey are related to factory, inadministrative overheads if they relatedto administration, or in selling anddistribution overhead if they related toSD.
OVERHEADS• Indirect Materials– These are those which cannot be traced as a part of theproduct.– Examples: Lubricating oil, grease, fuel oil, etc.• Indirect Labour/Wages– It is the cost of labour which cannot be directly identifiedwith 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.
Classification of Overheads• Function wise– Manufacturing overheads– Administrative overheads– Selling overheads– Distribution overheads• Element wise– Indirect Material– Indirect Labour– Indirect Expenses
Classification of Overheads• Behavior wise– Fixed overheads– Variable overheads– Semi-variable overheads– Step overheads (it do not change when there is a smallchange in the level of activity but change considerablywhenever there is a slightly bigger change.)• Control wise– Controllable cost– Non-controllable cost
Classification of Overheads• Nature wise– Normal overheads• Expected overheads/expenses– Abnormal overheads• Which are not expected
Allocation• The allotment of whole item ofcost to cost centers.• The technique of charging theentire overhead expenses to a costcentre is known as cost allocation.
Apportionment• The allotment of proportionsof items of cost to costcenters or cost units.• Example, rent of factorybuilding is not allocated, butapportioned to variousdepartments.
Basis of ApportionmentBasis of Apportionment Items of ExpenditureFloor area or cubic contentRent, rates, taxes, maintenance of building,depreciation and insurance of building, lighting andheating, electricity.Number of employeesExpenses associated with workmen such assupervision, canteen expense, recreation expense,timekeeping, ESIC, etc.Capital valueDepreciation and insurance of plant and machineryequipments and furniture.Value of materials Material handlingHorse-power hours KWH PowerNo. of material requisitions Storekeeping expensesDirect machine hour, directlabour hr., direct wagesOther overhead expenses
Methods of Secondary DistributionDirect Re-distribution MethodStep Method Reciprocal ServiceMethodRepeatedDistribution MethodSimultaneousEquation MethodTrial and ErrorMethod
Direct Re-distribution MethodThe cost of service department isdirected to re-distribution to theproduction departments withoutconsidering the services rendered byone service department to anotherservice department.
Step Method• The cost of most serviceable department isfirst distributed to production departmentsand other service departments.• Thereafter, the next service department isdistributed and later the last servicedepartment until the cost of all the servicedepartments are redistributed to theproduction department.
Reciprocal Service Method• If a service department receives services fromother department, the services should becharged in the receiving department.• Thus, the cost of inter departmental servicesis taken into account on reciprocal basis.• Simultaneous Equation Method: The true costof total overhead of each service department