COST ANALYSIS: COST CLASSIFICATION AND COST SHEET 2 ☞ Cost Classification—Basis ☞ Miscellaneous Cost Terms ☞ Cost Sheet/Cost Statement ☞ Cost Sheet—Advantages Cost analysis and cost classification involve grouping of costs into various logical groups on some suitable basis. Cost analysis and classification are essential for the purpose of cost control and managerial decision making. There are various methods of classification of costs. The method selected is based on the purpose for which it is needed. The important bases of classification are: 1. By nature or element 2. By relation to cost centre or product 3. By function 4. By behaviour or variability 5. By time 6. By controllability 7. For decision making purpose 8. By payment 9. By normality.
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Cost analysis and cost classification involve grouping of costs into various logical groups on somesuitable basis. Cost analysis and classification are essential for the purpose of cost control andmanagerial decision making.
There are various methods of classification of costs. The method selected is based on the purposefor which it is needed. The important bases of classification are:
Cost Analysis: Cost Classification and Cost Sheet 15
(c) Expenses
It includes all costs other than materials and labour cost. It is the cost of various services consumedby an undertaking. It is further classified into direct expenses and indirect expenses.
(i) Direct expenses: It includes cost of all services specifically incurred for a product, process, job orcost centre. They are directly identified with a particular cost object. It is conveniently allocatedto a particular cost object in whole. It is also called chargeable expenses. It includes excise duty,royalty, hire charges and repairs and maintenance of special equipment required for a job; cost ofspecial drawings, designs, moulds and patterns.
(ii) Indirect expenses: Indirect expenses are expenses incurred in relation to two or more products,processes, jobs or cost centres. It is apportioned to various cost objects. It includes rent, rates,taxes, insurance, lighting, depreciation, power, fuel, advertisement and repairs and maintenance.
2.2 BY RELATION TO COST CENTRE
On the basis of relation to cost centre, costs are classified as direct costs and indirect costs.
(a) Direct Costs
Direct costs are incurred in relation to a specific product, process, job or cost centre. They consistsof direct materials, direct labour and direct expenses. The total of all direct costs is called primecost.
(b) Indirect Costs
Indirect costs are general expenses incurred for two or more products, processes, jobs or cost centres.They are apportioned to various cost objects on suitable basis. They include indirect materials,indirect labour and other indirect expenses. The total of all indirect costs is also called overheads,oncost or burden.
2.3 BY FUNCTION
All indirect costs are called overheads and can be classified on functional basis into:
(a) Factory overheads
(b) Office and administration overheads
(c) Selling overheads
(d) Distribution overheads.
(a) Factory Overheads
Factory overheads is also called production overheads, works overheads or manufacturing overheads.It includes all indirect expenses in relation to production activity. It includes all indirect materialsused in production, indirect labour expended in production, works manager’s salary and allowances,repairs, maintenance, depreciation and insurance of factory building, plant, equipment and machin-
The change in the cost of two alternatives is called differential cost. The increase in the total costdue to increase in output is called ‘incremental cost’. The decrease in the total cost due to decreasein output is called ‘decremental cost’.
(c) Relevant Cost and Irrelevant Costs
Cost items taken into consideration while making a decision are called relevant costs. Costs whichare not necessary for a particular decision making are called irrelevant costs. A cost relevant for aparticular decision may be irrelevant for another decision. A cost irrelevant for a decision may berelevant for another decision. For example rent for own premises may be relevant for comparison ofprofitability with another firm paying rent. But it is irrelevant for computing tax liability of a firmusing own building.
(d) Opportunity Cost
The benefit foregone due to an alternative decision taken is called opportunity cost. For example, aperson decides to start a business of his own. For the purpose he resigns his present employment andwithdraws his savings kept in a bank deposit. Due to this decision to start a business he foregoeshis salary income and interest income. The loss of salary and interest income is opportunity cost forthe business.
2.8 BY PAYMENT
On the basis of payment involved costs are classified as follows:
(a) Out of Pocket Costs or Explicit Costs
The costs result in actual outflow of cash, e.g., salary, wages, rent, advertisement, etc. paid.
(b) Imputed Costs or Notional Costs or Implicit Costs
These expenses are considered for decision making purpose only. They do not result in any cashoutflow, e.g., rent for own premises, interest on own capital and depreciation on fully depreciatedasset.
2.9 BY NORMALITY
Costs are classified into the following two groups:
(a) Normal Costs
Expenses incurred in a normal business condition is called normal costs. These costs are includedin cost of production.
(b) Abnormal Costs
These costs are occasional and occur due to the happening of some unforeseen event, e.g., loss dueto fire, theft, accident etc. These costs are not included in the cost of production. They are debitedto costing profit and loss account.
(ii) Production cost centre and service cost centre Production cost centre refers to a place wheregoods are produced. They actually stand for a production department.
Service cost centre stands for divisions which help the production departments by providing variousservices like maintenance department, time office, boiler house, canteen etc.
(iii) Operation and process cost centre Operation cost centre stands for the total activities carriedout in a production department is divided into smaller functions or operation in relation to whichcosts are accumulated, e.g., cutting, welding, machining, boring etc.
Process cost centre stands for a department where production is carried on continuously. Costs arecollected for a process as a single unit.
(h) Profit Centre
Profit centre is a place or division in an organisation which brings revenue.
(i) Value Added
Value added refers to increase in the market value of a product in excess of the cost incurred foraltering or changing the composition of the product.
(j) Stock-Out Cost
Stock-out cost refers to the loss suffered by a company due to stoppage of production due to non-availability of raw materials.
(k) Shut-Down Cost
Shut-down cost refers to expenses continued to be incurred even after temporary closure of produc-tion facilities, e.g., insurance, security, management expenses like director’s fees, managing director’ssalary, salary and wages to skilled employees, Audit fees, etc.
The following chart shows classification of costs:
Carriage outward, delivery van expenses xxx xxx xxx
Cost of sales/total cost xxx xxx
Profit/loss xxx xxx
Sales xxx xxx
Advantages of a cost sheet
1. It helps to ascertain total cost and cost per unit.
2. Costs are classified under proper headings and presented in a logical order.
3. It enables inter-firm and intra-firm comparison of costs.
4. It helps in price fixation.
5. It helps to ascertain profit or loss for a period.
6. It helps in preparing tenders and quotations.
7. It helps in preparing budgets.
8. It enables close watch over cost for cost control.
Production or manufacturing accounts
If information for a period relating to cost of production is presented in a ledger format, it is calledproduction account or manufacturing account. All production expenses are debited to this account.Opening stock of work-in-progress is shown on the debit side. Closing stock of work-in-progress isshown on the credit side. The following is a proforma of a production account.
From the following information prepare a cost sheet showing (i) Prime cost, (ii) Works cost, (iii)Cost of production, (iv) Cost of sales and (v) Profit:
Cost Analysis: Cost Classification and Cost Sheet 37
(ii) Valuation of stock of finished goods on average cost basis:
Cost sheet for the year ending 31.3.2009
Units Total|
Cost of production (Same as in (i)) 3,500 7,70,000
Add: Opening stock of finished goods 350 70,000
3,850 8,40,000
Less: Closing stock of finished goods 400 87,272
Cost of goods sold 3,450 7,52,728
Selling overheads - 36,000
Cost of sales 3,450 7,88,728
Profit (bf) - 1,08,272
Sales 3,450 8,97,000
Note:
Valuation of closing stock of finished goods:
(i) Current cost of production per unit =Cost of production during the year
Number of units produced during the year
=7,70,000
3,500= |220
Value of closing Stock = 400× 220 = |88,000
(ii) Average cost of production per unit =Cost of production + Value of opening stock
Units produced + Opening stock units
=8,40,000
3,850= |218.18 (Approx.)
Value of closing stock = 400× 218.18 = |87,272
Illustration-10
(Finding the missing information)
The books of Adarsh Manufacturing Company presents the following data for the month of April,2001.
Direct Labour Cost |17,500 being 175% of works overhead and cost of goods sold excluding admin-istration expenses |56,000. Inventory accounts showed the following opening and closing balances:
Cost Analysis: Cost Classification and Cost Sheet 45
5. Find the net works cost:
|
Prime cost 1,50,000
Production overheads 60,000
Opening stock of work-in-progress 27,000
Closing stock of work-in-progress 30,000
(Ans: Net works cost |2,07,000)
6. Prepare a cost sheet from the following:
|
Raw materials consumed 80,000
Wages 20,000
Works expenses charged at 100% of wages, office overheads charged at 25% on works cost andselling overheads at 10% on works cost.
(Ans: Cost of sales |1,62,000)
7. Calculate profit and sales from the following:
|
Cost of sales 5,00,000
Profit 20% on sales
(Ans: Profit |1,25,000; Sales - |6,25,000)
8. In a factory a standard product is manufactured. From the following particulars prepare acost sheet showing total cost and profit made:
|
Raw materials consumed 30,000
Labour 60,000
Works overhead is charged at 40% of works cost and office overheads is taken at 20% of totalcost. The standard product sold during the period is 180 units at |1200 each.
(B.Com., Bharathidasan University)
(Ans: Total cost |1,87,500; Total profit - |28,500; Cost per unit |1041.67; Profit per unit|158.33)
Cost Analysis: Cost Classification and Cost Sheet 47
Depreciation, repairs and maintenance
Of Plant and machinery 42,000
Of office furniture and equipment 27,500
Drawing office salaries 18,000
Motive power, fuel and oil 39,000
Lubricants and cotton waste 13,400
Office salaries 52,000
Printing and stationery 11,300
Warehouse expenses 26,000
Advertisement 31,600
Travelling expenses
General 12,700
Sales promotion 17,500
Samples and gifts 14,000
Bad debts written off 10,000
General manager’s salary 60,000
General manager’s salary to be apportioned in the ratio of 4 : 3 : 3 to factory, office and salesdepartments. Sale of finished goods amounted to |15,00,000.(Ans: Prime cost - |8,30,700; Works cost - |10,51,100; Cost of production - |11,72,600; Costof sales - |13,14,600; and Profit - |1,85,400)
2. Simple cost sheet with opening and closing stocks
From the following particulars, prepare a cost sheet for the year ending 31.03.2010:
(Ans: Prime cost - |10,07,850; Works cost - |11,77,450; Cost of production - |13,04,850; Costof goods sold - |13,07,950; Cost of sales - |13,72,650; Profit |2,27,350)
3. Dev Ltd. provides the following particulars for the month of August, 2009. Prepare a costsheet:
Cost Analysis: Cost Classification and Cost Sheet 49
Direct labour 1,70,000
Sale of factory scrap 16,000
Office overheads 34,500
Sales 6,00,000
(Ans: Prime cost - |4,35,000; Works cost - |5,32,500; Cost of production - |5,67,000; Cost ofgoods sold - |5,55,000; Cost of sales - |5,82,500; Profit - |17,500)
4. Apportionment of Common Expenses
TV Ltd. produces television sets in two models - Deluxe and Premium. The followinginformation is taken from their records for the year ending 31.3.2010.
1.4.2009 31.3.2010
| |
Deluxe Premium Deluxe Premium
Stock of work-in-progress 70,000 40,000 90,000 80,000
Stock of finished goods 1,65,000 1,10,000 2,10,000 1,70,000
Purchase of materials - |12,00,000; Direct labour - |7,50,000. Materials consumed were inproportion of 5 : 7 and wages incurred were in the ratio of 2 : 3 for the two models. Factoryoverheads is charged at 80% of direct labour, Administration overheads charged at 25% onworks cost and selling and distribution overheads estimated at 15% on works cost.
The company wants to earn a profit of 25% on sales. Find the profit of each model for theyear 2009.