Costing Techniques: Classification, Preparation and Analysis of Costs, Exercises of Cost Accounting

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UNIT-II

ELEMENTS OF COST AND COSTING

TECHNIQUES

 Classification of Cost.

 Controllable Costs.

 Concept of Cost.

 Analysis of Cost.

 Elements of Cost.

 Preparation of Cost Sheet.

 From the above two examples it is

clear that cost dose not mean the same thing under all circumstances.

 In other words cost is a flexible

concept which can’t be exactly defined. It depends on:-

a) The nature of business and industry,

and

b) The context in which it is used.

 Classification is the process of

grouping costs according to their common features.

 There are various bases of

classifying costs. Some important classifications are discussed below.

1. Materials Cost (Direct + Indirect)
2. Labour costs (Direct + Indirect)
3. Expenses (Direct + Indirect)

 Observations:

 Direct material +Direct Labour +

Direct Expenses= Prime Cost

 Indirect material +Indirect Labour

• Indirect Expenses= Overhead

Cost

Materials labour expenses

Direct Indirect Direct Indirect Direct Indirect

(Overheads)

Prime Cost

 Direct materials are those materials which can be conveniently identified with and can be directly allocated to a particular product, job or process.

 One of the nature of direct material is that it varies directly with the volume of output.

 Example:

a) Basic raw materials: Timber in furniture, Cloth in garments, Gold or silver in jewelry etc.

b) Primary Packing materials: Bottles for water, wine, Can or tin for drinks, milk, ghee, bag for cement etc.

 Indirect materials are those materials which can not be conveniently identified with and can not be directly allocated to a particular product, job or process.  it may or may not vary directly with the volume of output.  Example: a) Stores used for maintaining machines such as Lubricant, oil, grease, cotton etc. b) Materials of small value etc.

 Indirect Labour is that labour which can

not be readily identified with a specific job, contract or work order.

 it may or may not vary directly with the

volume of output.

 Example:

a) Labour employed in personnel

department, pay roll, engineering, time keeping department etc.

 All direct costs other than direct

material and direct labour costs are

termed as direct expenses.

 It can be directly allocated to a

particular product, job or process.

 It varies directly with the volume of

output.

 Example: Excise duty and Royalty based

on output, Hiring charges of machine

tools etc. Cost of special designs etc.

Overheads = Indirect Material +

Indirect Labour + Indirect

Expenses

 Aggregate of indirect material

cost, indirect labour cost and indirect expenses incurred by production department.

 Example: cost of consumables,

salary of supervisor, rent rates taxes of factory building etc.

 Aggregate of indirect material cost, indirect labour cost and indirect expenses incurred by Sales department.

 Example: cost of printing, postage, of sales department, salary of sales director, rent, rates taxes of sales department/show room, advertising etc.

 Aggregate of indirect material cost, indirect labour cost and indirect expenses incurred by Distribution department.

 Example: cost of printing, postage, of distribution department, salary of staff of distribution dept., rent, rates taxes of distribution department, Freight and carriage outward etc.