This document discusses various concepts related to cost accounting including definitions of cost, classifications of cost, elements of cost, and overhead costs. It defines cost as the value of economic resources used in production and classifies costs as direct or indirect, fixed or variable. The key elements of cost are defined as material, labor, and expenses. Overhead costs are classified as production, administration, or selling and distribution overhead. Formulas are provided for calculating prime cost, factory overhead, cost of production, and total cost.

1. BCA
Financial Management Accounting
UNIT 4

2. CONCEPT OF COST
• The term ‘cost’ does not have definite
meaning and its scope is extremely broad and
general. it is therefore not easy to define or
explain this term without leaving any doubt
concerning its meaning .cost accountants
,economist and others develop the concept of
cost according to their needs because one
complete description of ‘cost’ to all situations
is not possible. how ever some of the cost
definitions given below:

3. COST
• 1. ACCORDING TO THE OXFORD DICTIONERY
• ‘THE PRICE PAID FOR SOMETHING’ 2.COST IS ‘THE
AMOUNT OF EXPENDITURE (ACUTAL OR NOTIONAL
)INCURRED OR ATTRIBUTABLE TO A GIVEN THING’
(CIMA,LONDAN) 3- ‘A COST IS THE VALUE OF
ECONOMIC RESOURCES USED AS A RESULT OF
PRDUCING OR DOING THE THINGS COSTED’
• (W M HARPER)

4. Concept of cost
• In fact ,in order to assign a definite meaning to
the term cost . It should be used with a
modifier or an adjective according to the
specific purpose for its use. For example-direct
cost ,fixed cost ,variable cost ,selling cost,
marginal cost etc. have specific meanings.

5. CLASSIFICATION OF COST
• CLASSIFICATION IN TO DIRECT AND INDIRECT
COST-
(A)DIRECTCOST-A price that can be completely
attributed to the production of specific goods or
services. Direct costs refer to materials, labor and
expenses related to the production of a product.
(B)INDIRECT COST-Other costs, such as
depreciation or administrative expenses, are
more difficult to assign to a specific product, and
therefore are considered indirect costs.

6. CLASSIFICATION IN TO FIXED AND VARIBLE
COSTS
• FIXED COST- THESE COSTS REMAIN CONSTANT
IN ‘TOTAL’ AMOUNT OVER A SPECIFIC RANGE
OF ACIVITY FOR A SPECIFIC PERIOD OF TIME
i.e THESE DO NOT DECREASE OR INCREASE
WHEN VOLUME OF PRODUCTION CHANGES.
• e.g BUILDING RENT ,MANAGERIAL SALARY

7. VARIABLE COSTS -
• THESE COST VERY IN DIRECT PROPORTION TO
THE VOLUME OF OUTPUT. eg- DIRECT
MATERIAL S,DIRECT WAGES ,POWER.

8. SEMI-VARIABLE COST
• THESE COSTS INCLUDE BOTH A
FIXED AND A VARIABLE
COMPONENT i.e THESE ARE
PARTLY FIXED AND PARTLY
VARIABLE. eg LIGHT AND
POWER,MAINTENANCE AND
REPAIRS.

9. SUNK COST
• A SUNK COST IS AN EXPENDITURE
MADE IN THE PAST THAT CAN
NOT BE CHANGED AND OVER
WHICH MANAGEMENT NO
LONGER HAS CONTROL.

10. MARGINAL COST
• MARGINAL COST IS THE
ADDITIONAL COST OF
PRODUCING ONE ADDITIONL
UNIT.MARGINAL COST IS THE
SAME THING AS VARIABLE COST .

11. OPPORTUNITY COST
• OPPORTUNITY COST IS THE SACRIFICE
INVOLVED IN ACCEPTING AN ALTERNATIVE
UNDER CONSIDERATION.IN OTHER WORDS ,IT
IS A COST THAT MEASURES THE BENEFIT THAT
IS LOST OR SACRIFICEDWHEN THE CHOICEOF
ONE COURSE OF ACTION REQUIRES THAT
OTHER ALTERNATIVECOURSE OF ACTION BE
GIVEN UP.

12. Cost accounting
costing
• The chartered institute of management
accountants (CIMA) London has defined
costing as “the techniques and process
ascertaining costs”
• Wheldon has defined costing “the classifying
recording and appropriate allocation of
expenditure for determination of costs,the
relation of these costs to sales value and
ascertainment of of profitability.

13. costing
• Thus simply costing means cost finding by any
process or technique.
• Cost accounting-CIMA london defined as follows
“cost accounting is the process of accounting for
costs from the point at which expenditure is
incurred or committed to the establishment of its
ultimate relationship with cost centers and cost
units. In its widest usage ,it embraces the
preparation of statistical data ,the application of
cost control methods and ascertainment of
profitability of activities carried out or planned”

14. Scope of cost accounting
• The scope of cost accounting is very wide.
There are lots of techniques, tools,
procedures, processes, programs are used in
cost accounting for calculating cost and its
control. But basically, we divide its scope
within three major parts.

15. Three parts
1-Cost Ascertainment
2. Cost Records
3. Cost Control

16. scope
• 1. Cost Ascertainment
In this region of cost accounting, cost accounting
collects product's material, labor and overhead cost
and try to calculate total and per unit cost of product.
This total cost calculation will be based on historical or
standard or estimated basis. After this, cost accountant
will use any method of costing like specific order
costing, operation costing, and direct costing
technique. These techniques and methods may be
used for calculating different nature products in same
organization.

17. Scope of cost accounting
• 2. Cost Records
In this part of cost accounting, cost accountant
maintains cost books, vouchers, ledgers,
reports and other cost related documents for
future comparison and reference. It will also
be under the scope of cost accounting.

18. Scope of cost accounting
• 3. Cost Control
This is the end boundary of cost accounting
scope. In this division, cost accountant used
different techniques and methods for controlling
the cost. Save One Rupees in the cost of product
means we have earned one rupees in the
production of goods. So, Cost accountant uses
budgetary control, standard costing, break even
point analysis and many other techniques for
controlling the cost.

19. ELEMENTS OF COST
• There are broadly three elements of cost - (1)
material, (2) labour and (3) expenses.:
• The substance from which the product is
made is known as material. It may be in a raw
state-raw material, e.g., timber for furniture
and leather for shoe, etc. It may also be in
manufactured state-components, e.g., battery
for car, speaker for radio, etc, Materials can be
direct and indirect.

20. Direct Material
• Direct Material: All materials which become
an integral part of the finished product, the
cost of which are directly and completely
assigned to the specific physical units and
charged to the prime cost, are known as direct
material. The following are some of the
materials that fall under this category:

21. (a) Materials which are specifically purchased;
acquired or produced for a particular job,
order or process.
(b) Primary packing material (e.g. carton,
wrapping, cardboard, etc.)
(c) Materials passing from one process to
another as inputs.
In order to calculate the cost of material,
expenses such as import duties, dock charges,
transport cost of materials are added to the
invoice price.

22. Material considered direct at one time may be
indirect on other occasion.
Indirect Material: All materials, which cannot
be conveniently assigned to specific physical
units, are termed as 'indirect material'. Such
commodities do not form part of the finished
products. Consumable stores, lubrication oil,
stationery and spare parts for the
machinery,pins,screws, nuts and bolts, thread
etc are termed as indirect materials

23. LABOUR
• Labour
• Human efforts used for conversion of
materials into finished products or doing
various jobs in the business are known as
labour. Payment made towards the labour is
called labour cost. It can also be direct and
indirect.

24. DIRECT LABOUR
• Direct Labour: Direct labour is all labour
expended and directly involved in altering the
condition, composition or construction of the
product. The wages paid to skilled and unskilled
workers for manual work or mechanical work for
operating machinery, which can be specifically
allocated to a particular unit of production, is
known as direct wages or direct labour cost.
Hence, 'direct wage' may be defined as the
measure of direct labour in terms of money. It is
specifically and conveniently traceable to the
specific products Wages paid to the goldsmith for
making gold ornament is an example of direct
labour.

25. Example of direct labour
• Machine operator
• Shoe-maker
• Carpenter
• Weaver
• tailor

26. INDIRECT LABOUR
• Indirect Labour: Labour employed to perform
work incidental to production of goods or those
engaged for office work, selling and distribution
activities are known as 'indirect labour'. The
wages paid to such workers are known as
'indirect wages' or indirect labour cost.
• Example: Salary paid to the driver of the delivery
van used for distribution of the product.

27. Example of indirect labour
• Supervisor
• Inspector
• Cleaner
• Clerk
• Peon
• watchman

28. EXPENSES
• Expenses
• All expenditures other than material and
labour incurred for manufacturing a product
or rendering service are termed as 'expenses'.
Expenses may be direct or indirect.

29. DIRECT EXPENSES
• Direct Expenses: Expenses which are
specifically incurred and can be directly and
wholly allocated to a particular product, job or
service are termed as 'direct expenses'.
Examples of such expense are: hire charges of
special machinery hired for the fob, carriage
inward, royalty, cost of special and specific
drawings, cost of patent rights,etc. These are
also known as 'chargeable expenses'.

30. Indirect Expenses
• Indirect Expenses: All expenses excluding
indirect material and indirect labour, which
cannot be directly and wholly attributed to a
particular product, job or service, are termed
as 'indirect expenses'. Some examples of such
expenses are: repairs to machinery, insurance,
lighting and rent of the
buildings,advertising,depreciation.

31. PRIME COST & OVERHEAD
• This is the aggregate of direct material, direct
labour,direct expenses. Thus,
• Direct Material +Direct labour+Direct
expenses = Prime Cost
• Overhead- This is the aggregate of indirect
material cost,indirect labour,indirect
expenses. Thus,
• Indirect material+ indirect labour+indirect
expenses = overhead

32. Classification of overhead
• 1-production overhead.
• 2-office and administration overhead.
• 3-selling and distribution overhead
• Production overhead- also known as factory
overhead, works overhead or manufacturing
overhead, these are those overheads which are
concerned with the production function .
It includes indirect materials ,indirect
wages, and indirect expenses in producing goods
or services.

33. EXAMPLES
• INDIRECT MATERIAL- coal, oil grease etc.
stationery in factory office. Cotton
waste,brush,etc.
• Indirect labour- works manager salary, salary
of factory office staff ,wages to factory watch
man,factory sweeper.
• Indirect expenses- Factory rent,depreciation
of plant,insurance of factory building ,factory
lighting and power,internal transport expense.

34. Office and administration overhead
• This is the indirect expenditure incurred in
general administrative function, i.e., in
formulating policies,planning and controlling the
functions, directing and motivating the personnel
of an organization in the attainment of its
objectives.
These overheads are of general character and
have no direct connection with production of
sales activities .this category of overhead is also
classified in to indirect material ,indirect labour
and indirect expenses.

35. EXAMPLES
• INDIRECT MATERIAL- stationery used in
general administrative office, postage etc.
• Indirect labour – salary of office staff, salary of
managing director, Remuneration of directors
of the company.
• In direct expenses- Rent of office building,
legal expenses, office lighting and power,
telephone expenses,Dep. of office furniture
and equipments, sundry office expenses.

36. SELLING AND DISTRIBUTION EXPENSES
• Selling overheads is the cost of promoting
sales and retained customers.e.g.,
advertisement ,sample for free gifts, salaries
of sales man.
Distribution cost includes all expenditure
incurred from the time the product is
completed until it reaches its destination.e.g.,
carriage outwards ,insurance of goods in
transit, up-keep of delivery vans , warehousing
etc.

37. Selling & Distribution expenses are
also grouped in to
• 1-indirect material-packing material, stationery
used in sales, cost of samples, price list
,catalogues,oil,grease etc.
• 2-indirect labour-salary of sales manager, salary
of sales staff, salary of warehouse staff, salary of
drivers of delivery van,etc.
• 3-indirect expenses- Advertising, travelling
exp.,showroom exp.,carriage outwords,rent of
warehoue, bad debts,insurance of goods in
transit etc.

38. COMPONENTS OF TOTAL COST
• Direct Material xxx
• Direct Labour xxx
• Direct expenses xxx
• Prime cost ……..
• Factory overhead xxx
• Factory overheads or works cost …..
• Admin overhead xxx
• Cost of production ……
• Selling & distribution overhead xxx
• Total cost or cost of sales …..

39. From the following information relating to pune industries
ltd.for the year ending 31st march 2011 you are required to
prepare a statement of cost showing (a) prime cost
(b)Factory overhead (c)cost of production (d) Total cost
(e)profit or loss for the year.
Direct wages---------------------------------------------- 2,40,0000
Direct material purchased---------------------------- 3, 22,000
Purchase returns-------------------------------------- 13000
Drawing office salaries-------------------------------- 3100
Carriage on direct material----------------------------- 4200
Chargeable expenses--------------------------------------- 2800
Provision for bad debts------------------------------------- 2400
Office expenses-------------------------------------------- 6400
Factory rent and rates------------------------------------14600
Depreciation on plant------------------------------------ 8600
Showroom rent------------------------------------- --------3000

40. Misc.selling expenses------------------------------------- 3,200
Lighting-------------------------------------------------------- 900
Coal and water---------------------------------------------- 3400
Power---------------------------------------------------------- 2800
Haulage hire------------------------------------------------- 2000
Travelling expenses---------------------------------------- 6000
Showroom telephone expenses------------------------ 1500
Labour welfare expenses-------------------------------- 4600
Sales of scrap----------------------------------------------- 450
Factory supervision---------------------------------------3500
Sales----------------------------------------------------------6,40,000

41. The following information were received from the books of
poonam & co. for the quarter ending On 31stmarch2006.
Sock of material on 31.3.2006-----70000
Expanses of stationery---------------11350
Stock material on 1.1.2006--------100000
Travellers salaries and commission—9000
Purchase of materials--------------8,03,290
Depreciation on office furniture------700
Travelling expenses----------------- 5100
Director’s fees----------------------------8000
Carriage inwards---------------------- 4500
Fuel, gas and water---------------------17,900
Carriage outwards-------------------- 9150
Manager’s salary------------------------18000
Drawing office salaries-------------- 7000
Income tax paid------------------------12000
Depreciation on plant----------------8000
Donations-------------------------------4600

42. Factory, rent rates & insurance-----11,200
Air conditioning charges------------4000
Show room exp. ------------------------9000
labour welfare expenses-------------7200
Production wages paid--------------2, 27,000
outstanding productive wages-----33,000
Repair of machine, plant& tool----10,000
sales---------------------------------------13, 70,000
Office expenses----------------------- 5000
office rent, rates & insurance-------29100
Prepare cost sheet giving the following information,
assuming managers devotes 2/3 of his time to factory.
1)material used (2)prime cost(3)works cost(4)cost of
production(5)cost of sales or Total cost
6) Net profit and its percentage on total cost.

43. References
• Accounting for Managers by Dr. Sakshi Vasudeva Galgotia Publishing
Company Chapter 21 Marginal Costing and Decision Making page no. 697

44. • Thank you