2. INTRODUCTION
• Costing
• Aims of costing
• Costing as an aid to management.
• Cost terms related to income measurement,
• profit planning and cost control for textile industry.
• Inventory control in textile industry,
• Types of costing
• Aims of estimation
• Difference between Estimation and Costing
• Types of estimates.
UNIT 1
3. Costing:
Costing may be defined as
• the system of accounts
• which systematically and
• accurately records every expenditure
• in order to determine the cost of a
product after knowing the different
expenses incurred in various
departments.
Define costing/What is costing- 2 marks
4. Need of COSTING
To
• Determine, classify, analysis the cost
• Determine the price
• Managerial decisions
• Expansion and contraction
• Continuation of business
Give the need for costing- 2 marks
5. Cost Components
Components of total cost
Direct material
Direct labor
Direct expenses
Prime cost or direct cost or
first cost
Prime cost plus works overheads
Works or factory cost or
production cost or
manufacturing cost
Works cost plus office and
administration overheads
Office cost or total cost of
production
Office cost plus selling and
distribution overheads
Cost of sales or total cost
Direct material cost Direct labour cost Direct expenses
Prime cost Factory over heads
Factory costs Administration over heads
Cost of production Selling & distribution over heads
Total cost or cost of sales Profit
Selling price
Explain about cost components -16 marks
7. Objectives or Aims of Costing
1. Determining Selling Price
2. Determining and Controlling
Efficiency
3. Facilitating Preparation of Financial
and Other Statements
4. Providing Basis for Operating Policy
What are the objectives of costing?- 2 marks
8.
9. 1. Costing may be defined as the system of accounts which systematically
and accurately records every expenditure
True
FALSE
2. COSTING helps in taking managerial decisions
True
FALSE
3. Direct material is not a prime cost
True or False
True
True
False
10. List the key performance indicators of a mill-2 marks
11. PARAMETERS
HEALTHY LEVEL
Utilisation % 96 – 98.5
Prodn. Efficiency % 93-94
30s CH Production – Grams / Spindle / 8Hours (GPS) 230-240
IPI (Imperfections / Yarn Km) 30-40
Yarn realisation %(combed count) 72-74
Power – Units per Kilogram of Yarn Production UKG (Units / Kg) 3.8-3.6
Men Employed / 1000 Spls / Day (50,000 Spindles – Auto Doffing
Autoconer – Round Magazine Technology)
9-10
Manufacturing Cost – US$ / Kilogram (Wages, Salary, Power, Stores
Overheads, Interest & Depreciation)
0.75-0.8
Spinning Industry Key Performance Indicators
12.
13.
14.
15.
16. Raw material cost 60-65%
Salaries and wages 8 to 10%
Power cost 8 to 10%
Inventory cost 3 to 4%
Interest on loans 6 to 8%
Maintenance cost 3 to 4 %
Overhead expenses 3 to 4 %
Miscellaneous 2%
Tax and others 4 to 5%
19. DETAILS IN USD
INVESTMENT:
Land and building 1,444,440
Machinery, accessories & service equipments 11,832,115
Electrical and Humidification ducts 1,823,000
TOTAL INVESTMENT15,099,555
WORKING CAPITAL 3,000,000
GRAND TOTAL18,099,555
RECURRING EXPENDITURES PER DAY
Salaries and Wages 949.5
Power cost 2087
Stores , repairs and insurance 1260.8
TOTAL4297.3
INTEREST CALCULATION (per day)
On capital 8% 3355.5
on working capital 9% 750
TOTAL EXPENSES INCLUDING INTEREST 8402.8
TOTAL CONTRIBUTION PER DAY 13312
NET PROFIT( before depreciation & taxation) 4909.2
PAY BACK PERIOD 8.54 years
23 ring frames with 1120 spindles
20. (i) Decline in capacity utilization;
(ii) Shortages of liquid funds to meet short-term financial
obligations;
(iii) Inventories in excessive quantities;
(iv) Non-submission of data to banks and financial institutions;
(v) Irregularity in maintaining bank accounts;
(vi) Frequent breakdowns in plants and equipment’s;
(viii) Decline in the quality of product manufactured or service
rendered;
(viii) Delay or default in the payment of statutory dues such as
provident fund, sales tax, excise duty, employees’ state insurance,
etc.;
(ix) Decline in technical deficiency; and
(x) Frequent turnover of personnel in the industry
21. (i) Persisting shortage of cash;
(ii) Deteriorating financial ratios;
(iii) Widespread use of creative accounting;
(iv) Continuous tumble in the prices of the shares;
(v) Frequent request to banks and financial institutions for
loans;
(vi) Delay and default in the payment of statutory dues;
(vii) Delay in the audit of annual accounts; and
(viii) Morale degradation of employees and desperation
among the top and middle management level.
22. UKG in spinning mill indicates the energy consumed for producing I kg of yarn /day
True or false
% contribution of Raw material cost in a final product cost will around 60-65%
True or false
Yarn realization high for 40’s Ne combed count is more than that of 4o’ s Ne carded
count
True or false
True
True
False
23. How to control cost at mill :
-Reduction of manufacturing cost
-Higher production
-Higher productivity per employee (kg/employee or HOK)
-Higher yields (yr)
-Less energy to produce (unit per kg)
-Control on consumables
-Control packing cost
profit planning and cost control for textile industry
24. Inventory control in textile industry
Inventory is the store of goods and stock
Inventory control is the activity that maintains stocks at
desired level
Define inventory/What is inventory- 2 marks
25. OBJECTIVES OF INVENTORY
•To maintain overall investment at the
lowest
•To supply items to users at right time and
right place
•To keep waste and surplus at minimum
•To minimize shortage and handling cost
•To maximize efficiency of production
List out the objectives of inventory-2 marks
27. INVENTORY CLASSIFICATION
By cost ABC analysis
By importance VED analysis
By frequency of use FSN analysis
Classify inventory methods- 2 marks
28. VED analysis
V ( vital ) items which are absolutely essential to the
operations
E ( essential ) items, absence of which adversely affects
productivity or quality or both
D ( desirable ) items required for smooth operations
although not essential
30. ABC analysis
Based on Pareto law
•10% of items account for 70% of cost
•20% items account for 20% of cost
•70% of items account for 10% of cost
31. An EOQ Example
1)Determine expected number orders per year (N)
D = 1,000 units Q* = 200 units
S = $10 per order
H = $.50 per unit per year
2) Determine expected time between orders (T)
3) Determine total annual cost:
32. ECONOMIC ORDER QUANTITY
An EOQ Example
1) Determine optimal number of needles to order (Q)
D = 1,000 units per year
S = $10 per order
H = $.50 per unit per year
Q* =
2DS
H
Q* =
2(1,000)(10)
0.50
= 40,000 = 200 units
Problem on EOQ-2 marks
D total annual demand
S setup / procurement cost per order
H-carrying cost per unit per year
33. An EOQ Example
2)Determine expected number orders per year (N)
D = 1,000 units Q* = 200 units
S = $10 per order
H = $.50 per unit per year
= N = =
Expected
number of
orders
Demand
Order quantity
D
Q*
N = = 5 orders per year
1,000
200
34. An EOQ Example
3) Determine total annual cost:
D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders per year
H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost
TC = S + H
D
Q
Q
2
TC = ($10) + ($.50)
1,000
200
200
2
TC = (5)($10) + (100)($.50) = $50 + $50 = $100
35. Methods of Costing
1. Job Costing
2. Contract Costing
3. Cost Plus Costing
4. Batch Costing
5. Process Costing
6. Operation Costing
7. Unit Costing (Output Costing or Single
Costing)
8. Operating Costing
9. Departmental Costing
10. Multiple Costing (Composite Costing)
List out the methods of costing- 2 marks
36. Techniques of Costing
Besides the above methods of costing, following are the types of
costing techniques which are used by management only for
controlling costs and making some important managerial
decisions.
1. Marginal Costing
2. Direct Costing
3. Absorption or Full Costing
4. Uniform Costing
37. Marginal costing
Marginal costing is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of production,
e.g., materials, labor, direct expenses and variable overheads.
Fixed overheads are excluded in cases where production varies because it
may give misleading results.
The technique is useful in manufacturing industries with varying levels of
output.
Marginal cost is the very cost incurred by one additional unit of production.
What is marginal costing?- 2 marks
38. Direct costing
The practice of charging all direct costs to operations, processes or
products and leaving all indirect costs to be written off against
profits in the period in which they arise is termed as direct costing.
The technique differs from marginal costing because some fixed
costs can be considered as direct costs in appropriate
circumstances.
What is Direct costing?- 2 marks
39. Absorption costing
The practice of charging all costs both variable and fixed to
operations, products or processes is termed as absorption
costing.
What is absorption costing- 2 marks
40. Uniform costing
A technique where standardized principles and methods of
cost accounting are employed by a number of different
companies and firms is termed as uniform costing.
Standardization may extend to the methods of costing,
accounting classification including codes, methods of defining
costs and charging depreciation, methods of allocating or
apportioning overheads to cost centers or cost units.
The system, thus, facilitates inter- firm comparisons,
establishment of realistic pricing policies, etc.
What is uniform costing- 2 marks
41. Classification of Cost
Cost may be classified into different categories depending upon the purpose of classification. Some
of the important categories in which the costs are classified are as follows:
1.Classification of cost methods on the basis of nature of production or manufacturing process
i.Job Costing and
ii.Process Costing
2. Classification of Costs on the basis of their variability in relation to output:-
i. Fixed Cost
ii. Variable Cost
iii. Semi-Variable and Semi-Fixed Cost
3. Costs for Managerial Decision Making :-
i. Marginal Costing
ii. Incremental ( or Differential ) Cost
iii. Uniform Costing
iv. Opportunity Cost
v. Replacement Cost
vi. Sunk Cost
vii. Relevant Cost
Classify costing methods- 2 marks
42. 4. Costs According to Functions (Manufacturing & Non-Manufacturing Cost):-
i. Manufacturing or Production Cost
ii. Administrative Cost
iii. Selling and Distribution Cost
iv. Research & Development Cost
v. Pre-Production Cost
5. Classification of cost methods on the basis of Time:-
1. Historical Cost
2. Pre-Determined Costs
Other Types of Costs
Costs which arises in a particular contests and which are used for particular purposes are :-
Conversion Cost
Common Cost
Traceable Cost or Directly Attributable Cost
Joint Cost
Avoidable Cost
Unavoidable Cost
Total Cost
43.
44. Direct and Indirect Costs
The expenses incurred on material and labor which are economically and easily traceable
for a product, service or job are considered as direct costs.
In the process of manufacturing of production of articles, materials are purchased, laborers
are employed and the wages are paid to them.
The expenses incurred on those items which are not directly chargeable to production are
known as indirect costs.
For example, salaries of timekeepers, storekeepers and foremen. Also
certain expenses incurred for running the administration are the
indirect costs.
46. Importance of Estimating
Estimation should be carried out accurately
(realistic estimate)
Too high estimates will not get jobs to the firm by
quoting higher rates according to overestimate
whereas
under estimating will put the owner to a loss
and will lead the concern to utter failure.
47. OBJECTIVES / PURPOSE OF
ESTIMATING
1. To establish the selling price of a product.
2. To ascertain whether a proposed product can be
manufactured and marketed profitably.
3. To determine how much must be invested in equipment.
4. To find whether parts or assemblies can be more cheaply
fabricated or purchased from outside (make or buy
decision).
5. To determine the most economical process, machine or
material for making a product.
6. To establish a standard of performance at the start of
project.
7. For feasibility studies on possible new products.
Explain the objectives of estimation-16 marks
48. OBJECTIVES / PURPOSE OF
ESTIMATING
8. To assist in long term financial planning.
9. To prepare production budget.
10. To help in responding to tender enquiries.
11. To evaluate alternate designs of a product.
12. To set a standard estimate of costs.
13. To control actual operating costs by incorporating these
estimates into the general plan of cost accounting.
49. Types of cost estimation
Four common types of cost estimates are
(1) Planning estimate:
A rough approximation of cost within a reasonable range of values, prepared
for information purposes only. Also called ball park estimate.
(2) Budget estimate:
An approximation based on well-defined (but preliminary) cost data and
established ground rules.
(3) Firm estimate:
A figure based on cost data sound enough for entering into a binding contract.
(4) Not-to-exceed /Not-less-than estimate:
The maximum or minimum amount required to accomplish a given task,
based on a firm cost estimate.
50.
51. DIFFERENCE BETWEEN COST ESTIMATING AND
COST ACCOUNTING
Point of comparison Cost estimating Cost accounting
1. Type of cost It gives an expected cost of the product
based on the calculations by means of
standard formulae or certain established
rules.
It gives actual cost of the product based on the data
collected from the different expenditures actually
done for a product.
2. Duration of
process
It is generally carried out before actual
production of a product. Due to certain
unforeseen or unexpected expenses
coming to light at a later stage, estimate
may be modified or revised.
It usually starts with the issue of order for production
of a product and ends after the product is dispatched
for sale. For sale commitments like free repair or
replacement, the process continues up to the expiry
period of guarantee or warranty because the overhead
expenses incurred in the above case will be included
in the production cost.
Distinguish between estimation and costing- 16 marks
52. Point of comparison Cost estimating Cost accounting
3. Nature of quality A qualified technical person or engineer
having a thorough knowledge of the
drawings and manufacturing process is
required. Thus, it is a technical work,
instead of a clerical one.
It can be done by a person qualified for accounts
instead of a technical person. The cost accountant
develops his knowledge of technical person. The cost
accountant develops his knowledge of technical terms
and process while working. Thus, this work instead of
being of technical nature is more of a clerical nature.
4. Objectives (i) To set standard for actual cost.
(ii) To help in setting up market price for a
proposed product to be manufactured.
(iii) To decide whether it is economical to
buy or manufacture a product under
prevailing market conditions.
(iv) To facilitate in filling up of tenders or
quotation of products for supply. After
receipt of supply order from the buyers the
production will be started.
(i) To help in comparison of cost with estimates to
know if they are over, under realistic as well as to
know where the actual costs involve unnecessary
wastage of men, materials, machines and money.
(ii) To facilitate the budget preparation as well as to
provide cost data for future estimates of new products
of their pricing plans.
(iii) To facilitate in deciding output targets time to
time.
(iv) To facilitate in meeting certain legal obligations
or regulations.
53. The process of forecasting the expenses that must be incurred to manufacture a product or a
service’ IS TERMED AS COST ESTIMATION
TRUE /FALSE
PURPOSE OF ESTIMATING IS TO ESTABLISH THE SELLING PRICE OF A PRODUCT
TRUE /FALSE
