different elements of cost CHARACTERISTICS OF COST ACCOUNTS Cost accounts are important part of financial accounts Cost accounts tell about per unit cost of production or service Main areas are material, labour and expenses OBJECTIVE OF COST ACCOUNTS To ascertain the cost To control the cost against various variances To provide reliable cost data for controlling business activities TECHNIQUES OF COSTING 1. Historical cost actual expenses incurred in the production 2.Standard cost it is estimated before actual production. Later it is compared with the actual costs for the variances and changes are made in standard costs for future purpose 3.Marginal costing only those expenses which are directly related to production like variable costs and no part of fixed costs are taken. METHODS OF COSTING Single costing also called output or unit costing. Used in those industries where only one item is produced in large quantites during the whole year.E.g. cement, flour, sugar, coal. Operating costing used in those industries where no commodity is produced but public utility services are provided. E.g. railways, bus transport, electricity supply Process costing used in those industries where production is completed through many processes or production may be sold after the completion of one or more processes.E.g. chemical, textile, oil Departmental costing used in those factories where more than one items are made and the cost of each item has to be ascertained. Cost is divided amongst various departments and per unit cost of every department is found. E.g. in a furniture factory it has boxes, beds, tables etc. ELEMENTS OF COST Elements of cost Material Labour Expenses Direct material Indirect material Direct labour Indirect labour Direct expenses Indirect expenses Direct costs Indirect costs Basic Cost Terms: Direct and Indirect Costs
Direct Costs- Costs that can be traced to a given cost object product, department, etc.in an economically feasible way. Indirect Costs- Costs that cannot be traced to a given cost object in an economically feasible way. These costs are also known as overhead. Cost Assignment -Direct costs are traced to a cost object. Indirect costs are allocated or assigned to a cost object.
Direct cost A Direct cost B Indirect cost C Object X Object Y Basic Cost Terms: Product and Period Costs
Product Costs -Costs that attach to the units that are produced i.e., manufacturing costs) and are not reported expenses until the goods are sold. Period costs- Costs that must be charged against income in the period incurred and cannot be inventoried e.g., selling and administrative expenses Unit Costs -Total cost of units divided by units produced.
Product Costs Direct cost Indirect cost Product X Inventory Income statement Period cost Sale Basic Cost Terms: Direct and Indirect Costs Variable Costs Costs that change directly in proportion to changes in the related cost driver
Fixed Costs Costs that remain unchanged for a given time period regardless of changes in the related cost driver.
Other Common Functions for Cost Behavior Semi-variable costs (part variable and part fixed) Step costs (aka semi-fixed costs) Main Assumptions Needed to Define Fixed and Variable Costs Cost object, Time span, Linear functional form Relevant range-the band of cost driver activity in which a specific relationship between a cost and a driver holds. Basic Cost Terms:
Product costs can be Direct or Indirect (Overhead) Not all Direct costs are variable . The depreciation of a special piece of equipment bought to manufacture a single product line. Not all Overheads are fixed . Processing of raw material purchase orders . Electricity used in operating production equipment. Direct material + Direct labour + Direct expenses = Prime Cost Indirect material + Indirect labour + Indirect expenses = Factory overheads Prime Cost + Factory Overheads = Factory Cost Factory Cost + Selling & Distribution & Admin Overheads = Total Cost Indirect materials are threads, lubricants, glue etc. Indirect labour are supervision, inspection, salary of factory clerks, general helpers, cleaners, employees in maintenance work Indirect expenses are rent, insurance, taxes, depreciation, maintenance & repair, power, light, heat, small tools Selling & Distribution Overhead are advertising, samples, depreciation of sales equipment, rent of branches, telephone, stationery , printing, freight, carriage out, sales promotion, sales accounting
Administrative overhead office salaries, rent, depreciation equipment, telephone, travel, property taxes, auditing expenses, stationery, printing, postage, Classification of Costs Natural classification of costs : Direct material raw cotton, construction material, crude oil to make diesel, steel for automobiles. Even primary packing material like wrappings, cardboard boxes passing from one stage to the other. Import duties, dock charges, transport costs & storage of materials for direct production, cost of purchasing & receiving materials are all direct material cost Direct labour operators & assemblers. They may be direct labour for some hours of the day & indirect labour for the remaining hours. Direct Expenses other than direct material & direct labour. Cost of hiring special machinery, cost of special designs & patterns, fees paid to architects, surveyors, cost of transport & conveyance to the site of job or operations, cost of patents & royalties, cost of defective trials, licence fees, Hire charges for plants, insurance on special material chargeable to a job. Factory Overhead is the result of all indirect material, labour & expenses. They are indirect because though they are needed for the completion of a project but are either too small or so complex that it may not be possible to treat them properly Cost Associated with the product Product cost it is full factory cost prior to sale & are identified with the products Period cost not identified with the product or job & are deducted as expenses during the period in which they are incurred like selling & admin expenses RELATIONSHIP WITH ACCOUNTING PERIOD Capital cost provides benefit to the future periods & is classified as an asset. They flow into the cost stream as an expense when the asset is used up or written off. Revenue expenditure benefits the current period & is classified as an expense.
Cost for Decision making & Planning Opportunity cost it is the cost of opportunity lost. Machine used to make product A has the opportunity cost if the machine can be sold or if it can make product B. This is important in decision making but not recorded in accounting. Sunk Cost is that already incurred. They are unavoidable cost & are all pat costs since these amounts cannot be changed once the cost is incurred. These costs happen due to decision in the past e.g.B.V. of existing assets, plant & equipment, inventory, investment in securities. Costs for control Controllable cost a cost which can be influenced by the action of a specified member of an undertaking.e.g. indirect labour, cutting tools, power, lubricants. Standard costs are planned or predetermined cost estimates for a unit of output in order to provide a basis for comparison with actual costs. They are used to prepare budgets. It is a unit concept & is on per unit of output, per labour hour etc. Budgetd cost is a total cost of an item at some activity level or output level. Features of Cost control Creation of responsibility centres with defined authority & responsibility for cost Formulation of standards & budgets that incorporate objectives & goals to be achieved Timely cost control reports (responsibility reporting) describing the variances Formulation of corrective measures to eliminate the unfavourable variances A systematic & fair plan of motivation to encourage the workers Follow-up to ensure the corrective measures are being applied Cost reduction Areas Product improvement : Quality of the product Unnecessary weight, machine or labour operations Wastes & losses to be eliminated Proper product design Production methods & layout : Material & labour control Standardisation of methods Designing of tools, machinery & equipment Modernisation of plant & equipment Marketing areas : Channels of distribution Sales promotion schemes Marketing research plan Packaging methods & materials handling
Cost reduction Areas Administrative areas : Effective purchasing procedure Fair personnel policy & schemes Investment planning Cash discount policy Mechanised system of accounting Labour welfare measure Availability of servicing departments Cost sheet Prime cost has direct material, labour & expenses Factory cost (work cost)- are factory overheads & includes indirect materials, labour & expenses Cost of production has office & admin Overheads Cost of sales has selling & Distribution Overheads Finally, deduct Cost of Sales from Sales to get Net profit Cost sheet format Direct materials: Opening stock + purchases + carriage inwards - Closing stock - Scrap Direct wages Direct expenses + Factory overheads : Indirect materials Loose tools Indirect wages Rent & rates (factory) Lighting & heating (factory) Power & fuel Repairs & maintenance Cleaning Cost sheet format Research & experiment cost Factory plant depreciation Works stationery Welfare service expenses Insurance : Fixed assets Stock & finished goods Work managers salary Factory or Works Cost Add: Office & Admin Overheads: Rent (office) Salaries (office) Lighting & heating Insurance of office building Telephone & postage Printing & stationery Depreciation of office furniture & office equipments Legal expenses Audit fees Bank charges Cost of Production
Cost sheet format Add: Selling & Distribution Overheads : Showroom rent & rates Lighting & heating Salesman salaries Commission Travelling expenses of salesmen Sales printing & stationery Advertising Bad debts Postage Depreciation & expense of delivery van Debt collection expenses Carriage freight outwards Samples & other free gifts Cost of Sales Net profit or Loss Sales
Cost sheet format Items of expenses which are appropriated from profits do not form part of the cost of a product They are : Income tax Dividends to shareholders Commission out of profit to MD or Partners Capital loss( loss arising out of sales of assets) Interest on loan Donations Capital expenditure Discount on shares & debentures Underwriting commission Writing of goodwill Q1) From the following particulars prepare a cost sheet for the year ended 31/12/2010 Stock of finished good (1.1.10) 6000 Stock of raw material (1.1.10) 40000 Work-in-progress (1.1.10) 15000 Purchase of raw materials 475000 Carriage inwards 12500 Factory rent, taxes 7250 Other production expenses 43000 Stock of goods(31.12.10) 15000 Wages 175000 Work managers salary 30000 Factory employees salary 60000 Power expenses 9500 General expenses 32500 Sales for the year 860000 Stock of raw material 50000 Work-in-progress (31.12.10) 10000 Materials Control Materials refers to the raw material used in production. Sometimes stores are also referred to as materials At times finished & partly finished goods are also referred to as materials It is the prime cost of production s it aims at efficient purchasing of materials, storage & usage. Material control is at two levels : 1) quantity controls (2) financial controls (lesser investment in material) So a balance has to be maintained between two opposing needs i.e. (1) maintenance of sufficient inventory for efficient production (2) maintenance of investment in inventory at the lowest level Objectives of Material Control Desired quantity of material will be available when needed for uninterrupted production Material will be purchased as per needs & in economic quantities The investment in materials will be maintained at the lowest levels in tune with the operational needs Material will be purchased at the most favourable prices Protection under loss by fire theft, handling Storage in such a way that minimum of handling time & cost is there Vouchers will be approved for payment only if the materials have been received & is available for issue
Economic Order Quantity (EOQ) (Reorder Quantity) The EOQ is the optimum or the most favourable quantity which should be purchased each time the purchases are to be made EOQ is where the costs of carrying inventory is equal or almost equal to the cost of not carrying inventory (cost of placing orders). At EOQ level the total of these costs is minimum The cost of carrying the inventory is the out of pockets cost associated with having inventory on hand e.g. warehouse charges, insurance, heat, light, losses due to breakage, spoilage Another opportunity cost which is not the out-of- pocket cost is cost incurred in purchasing the inventory. If funds borrowed to purchase the inventory then interest payments will be the direct cost. Economic Order Quantity (EOQ) The costs of not carrying the inventory arise because of frequent placing of order at short intervals. E.g. extra purchasing, handling, transportation, higher price due to smaller quantities etc. The cost of placing the order decrease as the size of order increases. However the costs of carrying the inventory goes up if purchases have been made in large quantities. The point where there is lowest total cost per unit is EOQ EOQ or Re-Order Quantity The point where there is lowest total costs and the size of material is ideal is EOQ. EOQ = 2 * U * O I C U = Annual usage in units O= Cost of placing an order I= Percent cost of carrying inventory C= Cost per unit of material E.g. If the annual usage in units is 4000, cost of placing an order is Rs.20, carrying cost is 10% & cost per unit is Rs.10 then what is the EOQ? Re-order Level The EOQ tells how much to buy at a particular time, but when to buy is told by Re-Order level. There is lead time involved , i.e. the time interval between placing an order & receiving delivery. The re-order level is the point or quantity level at which if materials in stores reach, the order for supply of materials must be placed. This point initiates a new order. It is calculated with three factors : 1. The expected usage 2. The time interval between initiating an order & its receipt, called lead time. 3. The minimum inventory or safety stock Re-order level= Max. Usage per period * Max. Re-order period. Minimum Stock Level (Safety Stock) The safety stock is kept to prevent stock out. It is to be used only in abnormal cases. If the usage pattern is known with certainty, & the lead time is also known accurately then no safety stock is needed. However, either usage or lead time is varying then it is necessary for a firm to maintain safety stock level equal to the difference between expected usage over lead time & the maximum usage over lead time that the firm feels it is required for cost minimisation. Min. Stock level= Re-order level-(Avg. rate of consumption* Avg. Re-order period) Maximum Stock Level The max. stock level means that the stock will not exceed this limit although there may be low demand for materials or quick delivery from suppliers. Max. stock level = Re-order level + Re-order Qty (Min. consumption * Min re-order period)
Danger Level Generally the danger level of stock is below the min. stock level. Sometimes the danger level of stock is between re-order level & max. level. Danger level= Avg. consumption* lead time for emergency Practice questions Q1) Max. usage (units) 500 per day Min. usage (units) 200 per day Normal usage (units) 300 per day EOQ (units) 50000 Reorder period or lead time 20-30 days Minimum level (units) 5000 (10 days at normal usage) Find : Reorder level, Maximum level, Q2) If a companys weekly minimum & maximum consumption of material A are 25 & 75 units respectively. The re-order quantity as fixed by the company is 300 units, The material is received within 4 to 6 weeks from issues of supply order. Calculate minimum & maximum level of material A. Q3) About 50 items are required every day for a machine. A fixed cost of Rs.50 per order is incurred for placing an order. The inventory carrying cost per item amount to Rs. 0.02 per day. The lead period is 32 days. Compute: EOQ and Reorder level
Q4) The cost of placing an order is Rs.20. The number of units to be purchased during the year is 5000 units. Purchase price per unit inclusive of transportation cost is Rs. 50. Annual cost of storage per unit is Rs.5. Details of lead time are Average 10 days. Max. 15 days, Min. 6 days. For emergency purchases 4 days. Rate of consumption is Average 15 units per day & max. 20 units. Calculate : Reordering level Maximum level Minimum level Danger level Material Costing This is done when materials are purchased at different times for different processes & jobs. So different pricing has to be done for the materials issued from the storeroom. This is based on the different methods used. Only few of them are taken here : FIFO (First in First out) LIFO (Last in First out) HIFO (Highest in First out) Simple Averages Weighted Averages Selection of a Material Pricing Method The various methods which are in use have advantages & disadvantages. The factors which should be taken into consideration are as follows: Customs & practices within the industry Frequency of price fluctuations & frequency of material purchases. Relative value of materials cost to total cost of products. Relative rate of stock turnover. Quantities of materials to be purchased at any one time. The effect of different pricing methods on tax liability. The accuracy with which material issues can be computed. Cost of clerical work involved in making these records. The relationship of selling prices to the costs that are matched with those prices. The probability of using different methods for various classes of inventory. FIFO Here it is good for the stocks that deteriorate very fast. So the oldest units should be sold or used first & the inventory will only consist of the latest purchases. Q1) Jan 1. Opening balance is 500 units @ Rs.25 per unit Jan 3. Issued 70 units Jan 4. Issued 100 units Jan 8. Issued 80 units Jan 13. Received from supplier 200 units @ Rs.24.5 per unit Jan 14. Returned to store 15 units @ Rs.24 per unit Jan 16. Issued 180 units Jan 20. Received from supplier 240 units @ Rs.24.75 per unit Jan 24. Issued 304 units Jan 25. Received from supplier 320 units @ Rs.24.5 per unit Jan 26. Issued 112 units Jan 27. Returzned to store 12 units @ Rs.24.5 per unit Jan 28. Received from supplier 100 units @ Rs.25 per unit Calculate on the FIFO basis the valuation of Closing Stock.
LIFO The cost of the last lot of materials received is used to price materials issued until the cost is exhausted. It is a better matching of current costs with current revenues. It is good for tax saving. Q2) Prepare a stores ledger account from the following transactions under LIFO method. Feb 1. Received 1000 units @ Re.1 per unit Feb 10. Received 260 units @ Re.1.05 per unit Feb 12. Issued 700 units Feb 14. Received 400 units @ Rs.1.15 per unit Feb 21. Received 300 units @ Rs.1.25 per unit Mar 16. Issued 620 units Apr 12. Issued 240 units May 10. Received 500 units @ Rs.1.10 per unit May 25. Issued 380 units
HIFO Highest in First Out. Here the materials received at the highest price in the stock are issued first. So here the highest cost enters into the cost of goods sold & the inventory valuation is done at the lowest possible price. Simple Averages The materials issued should be priced on an average price & not on the exact cost price. Weighted Average Here the issued materials are priced at the average cost price of the materials in hand, a new average being computed whenever materials are received. It is calculated each time the purchases are made. Q3) Use Simple & Weighted Averages to calculate the closing stock. May 1. Received 500 units @ Rs. 20 per unit May10. Received 300 units @ Rs.24 per unit May 15. Issued 700 units May 20. Received 400 units @ Rs.28 per unit May 25. Issued 300 units May 27. Received 500 units @ Rs.22 per unit May 31. Issued 200 units
Labour Costs & Control Cost accounting for labour has three primary objectives : 1. Determining labour costs in the cost of product or service. 2. Reporting labour costs for planning & control 3. Reporting labour costs for decision making Direct labour It consists of wages paid to the labour which convert raw materials into finished output. It comprises of the wages which can be identified & allocated to cost units. E.g. assembly line workers, moulders, operators, samplers etc. Indirect labour Is which is not engaged in converting raw materials into finished output. It is the cost which cannot be allocated but which can be apportioned to or absorbed by the cost centres or cost units. It includes foremen, inspectors, watchmen, supervisors, storekeepers, timekeepers. After all the direct labour is charged what is remaining is indirect labour.
Organisation for Labour Control These departments contribute to the efficient utilisation of labour & adequate control over labour costs. 1. Personnel Dept. 2. Engineering Dept. 3. Time-keeping Dept. 4. Payroll Dept. 5. Cost Accounting Dept. Personnel Dept.- various dept. heads along with directors of personnel dept. involve in employment, discharge, classification of employees, wage & wage systems. Engineering dept.- It is involved in the preparation of plans for every job. Inspection of posts & jobs at stages of production. Initiation & supervision of research work. Safety & efficient working conditions. Time keeping dept.- The total no. of hours worked by each employee to match his earnings. Absence of time-keeping will frustrate the l loyal & punctual employees . Pension, gratuity, leave with pay, P.F., salary, promotion are linked to attendance records. Overhead costs being indirect costs can be done on the basis of labour hours.
Payroll Dept.- It is the intermediate function between the timekeeping & the cost accounting dept. The functions are to : To compute employee wages To prepare departmental payroll summaries To calculate payroll taxes, deductions etc. Cost Accounting Dept.- On the basis of the labour summary or job cards, the cost dept. records direct labour costs on the cost sheets & indirect labour costs on the departmental expense sheets. Wage System: It is a part of labour cost control. The following objectives have to be met with an efficient wage system: 1. Provision for flexibility 2. Acceptance by employees to avert slowdowns & work stoppages 3. Stabilisation of labour turnover 4. Minimising of absenteeism 5. Provision for incentive plans There are two wage systems to pay for labour: 1. Straight time which is by hour, day or week. 2. Piece work, which is by unit of product. So, the job performed or no. of operations completed & the workers wages depend upon his output & the not upon the time he spends in the factory. Straight time- is found in those industries where: The speed of production cannot be influenced by the energy or the dexterity of the worker. The quality of work is of paramount importance It is difficult to measure the work done by the employee. Piece Work- are suitable in the following cases: Managerial supervision is not needed much for production. Higher production reduces overhead cost per unit of output. Labour costs can be computed in advance of production. Labour control is easier by isolating workers whose work is inefficient & below the minimum standard requirements. Time & Motion Study: Time study means the time spent on each element of a job. The total time taken by all the elements (stages) of a job is called the standard time. This standard time is the time which should be taken by an average employee to complete a job under standard (normal) working conditions. Motion study means dividing the work into basic elements of a job or a process for the purpose of eliminating unnecessary (defective) elements in a job. After investigating all movements in a job, process or operation it finds out the most scientific & systematic method of performing the operation. The time study fixes the standard time for a job or process & motion study eliminates the wasteful movements of a worker on the job. Both are complementary to each other. Objectives of Time & Motion Study 1. Eliminating unnecessary human efforts 2. Improving methods, techniques, processes 3. Utilising effectively the materials, machines, human resources & other facilities. 4. Improving the workout environment, layout & design of plant & equipment. Labour Turnover It is the rate at which employees leave employment at a factory & is normally measured as the ratio of the no. of persons leaving in a period to the average no. on the payroll. Here all the persons who leave must be included, irrespective of voluntarily leaving or getting replaced. Labour Turnover= Employees leaving/ Avg. no. employed * 100 The effects of high or low turnover rate should then be analysed on training costs, production efficiency & employee morale etc. Some Labour Cost Related Items Overtime- is the work done beyond the normal hours of work. Factories Act of 1948 says more than 8 hours of work in a day is O.T. So they should be paid generally at double rate than of basic time. Idle Time- Many times workers spend more time on the job but are paid less than that. That difference is idle time, the employer must pay though he obtains no direct benefit from that. In this holidays & leave are not included. Fringe Benefits- They are given in the form other than (basic wages, DA, HRA, CCA) like vacation & holiday pay, pension costs, group insurance, hospitalisation benefits, sick pay, night shift premium etc. These indirect benefits are treated as factory overhead like Leave with Pay for leaves like CL, EL, Special Leave etc. Employers Contribution to Insurance is treated as production overhead. Q1) In a factory Ram & Sham produce the same product using the same input of same material & at the same normal wage rate. Bonus is paid to both of them in the form of normal time wage rate adjusted by the proportion which time saved bears to the standard time for the completion of the product. The time allotted to the product is 50 hours. Ram takes 30 hours & Sham takes 40 hours to produce the product. The factory Cost of the product for Ram is Rs.3100 and for Sham Rs.3280. The factory OH rate is Rs.12 per man hour. Calculate 1) Normal Wage Rate 2) Cost of material used for the product 3) the input of material if the unit material cost is Rs.16. Q2) An article passes through five hand operations as follows: Operation Time per Grade of Wage rate No. article worker per hour 1 15 min. A Re 0.65 2 25 min. B Re 0.50 3 10 min. C Re 0.40 4 30 min. D Re.0.35 5 20 min. E Re 0.30 The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a statement showing for each operation and in total the number of operations required, the labour cost per dozen and the total labour cost per week to produce the total targeted output. Factory Overheads FOHS cannot be directly traced to a particular unit of output i.e. product or jobs. It is the aggregate of indirect materials, indirect wages & indirect expenses. FOHS are Fixed, Semi-Variable & Variable. Fixed FOHS do not vary in total amount with increase or decrease in production activity. They are like management salaries, depreciation, rent, property taxes & amortisation of leaseholds. Semi-variable or semi-fixed are that remain fixed in total amount over a relatively short range of variation in output & then are abruptly changed to a new level where they remain fixed for another range of output. So if a third shift is added without increasing the plant facilities, i.e. the Fixed Costs such as Supervisor salaries may be increased because of night supervision, insurance premium may be raised due to additional fires, theft risk. Variable Costs are like repairs, power, workmens compensation, indirect labour which varies with changes in production. Though the proportion of increase or decrease of variable costs may not correlate to the increase or decrease in production of items. Accounting of FOHS 1) Collection & Codification 2) Allocation & Apportionment 3) Absorption 1) Collection & Codification- The Factory OHS are collected & coded under different Cost Accounting numbers like factory supplies-O1, Indirect labour-O2, Insurance-O3 etc. 2) Allocation & apportionment- Here the costs are allocated to various departments or cost centres like production & service departments. Some expenses do not originate in a specific department. They are incurred for all & must be apportioned or appropriated to any or all departments using such items, e.g. power, light, rent, dep. on factory building etc. Cost apportionment is the process of charging expenses in an equitable proportion to the various cost centres or department. They are like: Floor area occupied- for OHS like lighting & heating, depreciation on building, caretaking, rent & rates etc. Capital values- Dep. On plant, insurance on building, maintenance of plant etc. Direct Labour hours or machine hours- repairs & maintenance costs, insurance on tools & fixtures etc. No. of workers employed- accident insurance, dental, medical first aid. Technical estimate- usage of oil & grease etc. Absorption of Factory OHS After all the service dept. OHS have been apportioned to production dept. the next step is to spread factory OHS to different products or jobs produced. This is called OHS absorption. It is the allotment of OHS to cost units. So, the expenses of a particular cost centre is finally charged to or absorbed in the cost of products, jobs etc passing through it. Methods of Absorption Percentage on Direct Materials- It is by dividing total estimated factory OHS by total direct materials cost. If factory OHS is Rs.300000 & Mat.cost is Rs.250000 then the absorption rate is (300000/250000)* 100= 120% Each job or product would be charged on the basis of 120% absorption rate. So if the mat.cost is Rs.50000 then by % on direct materials the factory OHS would be (50000)*120/100= Rs.60000. Percentage on Direct Wages: (Factory OHS/ Direct labour Cost)* 100 If FOHS is Rs.200000 & the direct labour cost is rs.200000 then the absorption rate is (200000/200000)*100 = 100% So, a product with direct labour cost of Rs.30000 would be charged with Rs.30000 for factory OHS. Unit of Production basis : It is the simplest method of charging factory OHS. FOHS per unit= (FOHS/Units of production)*100 Labour Hour rate- One of the most popular methods. The absorption of FOHS on this basis= (FOHS/Direct labour hours)*100. this is generally where lots of direct labour is involved in the process. Machine Hours rate- here the work is primarily on machines = (FOHS/Machine hours)*100 Admin., Selling & Distribution OHS: In this the following items are there: Indirect material- Printing & stationery used in the office Indirect labour- Salaries, allowances, fees of BOD, legal advisor etc Indirect expenses- office rent, rates, lighting, heating & cleaning, legal charges, bank charges, repairs of office equipments. Selling & distribution OHS are apportioned in the same way as FOHS & is apportioned to the particular product or the cost centre. It can be as % OF Sales, % of Factory Cost, % of GP etc. Q1) A factory is having 3 production departments A, B & C and 2 service departments - Boiler House & Pump room. The boiler house has to depend upon the pump room for supply of water & pump room in its turn is dependent on the boiler house for supply of driving the pump. The expenses incurred by the production departments during a period are A Rs.800000, B Rs.700000 & C Rs.500000. The expenses for boiler house are Rs. 234000 & the pump room are Rs.300000. The expenses of the boiler house & pump room are apportioned to the production departments on the following basis: A B C BH PR Expenses of BH 30% 30% 30% 10% Expenses of PR 40% 20% 20% 20% Show clearly as to how the expenses of boiler house & pump room would be apportioned to A,B & C departments. Job, Contract, batch, project Costing It is applied to determine the cost of specific jobs or batches of production generally made as per the customers specifications. The main feature is that no two job orders are necessarily alike & all the orders do not pass through the same manufacturing process. Eg. Building, contracting, furniture, printing, machine tool manufacturing etc. A job may be a product, project, service, batch etc. The main components of a job cost sheet are material costs, labour costs & manufacturing OHS. When a job is finished, its cost is determined by totalling prime costs & absorbed OHS. Here the cost is determined after the job is finished by totalling the prime costs & OHS absorbed. A finished goods account is made. When no unit on a job order is completed , the total cost incurred on the job order so far becomes W-I-P. The Questions here require to calculate the Net Profit derived after the direct costs& OHS have been charged in the particular job. The following information is obtained from the books of a factory: Cost of completed jobs Raw material supplied from stores Rs.88000 Wages Rs.100000 Chargeable expenses Rs.10000 Material returned to stores Rs.1000 Factory OHS are 80% of wages. Office OHS are 25% of factory cost & selling & distribution OHS are 10% of cost of production. The completed jobs realised Rs.410000.Prepare a completed Job Account to find the net profit on the completed jobs. Process Costing This is that form of costing applied to standardised goods produced in large volume with continuous production flow. It is used in industries like chemicals, textiles, steel, petroleum, cement, plastic etc. Nature of Process Costing: They are accumulated for each production dept. or process. Each process or dept. has its own account & records the processing costs incurred by the dept. The product costing under process costing is an averaging process. The unit cost is obtained by accumulating all manufacturing costs & dividing it by units produced Differences between Process & Job Costing Job costing is applicable for specific products or jobs. Process costing is in the case of mass production of similar units having different processes. In job costing, manufacturing costs are calculated for particular jobs. In process the manufacturing costs are for the entire processes & the cost of particular jobs or products cannot be determined. In job costing time is not a major issue & can take more than one accounting period. In process costing the production is measured for specific processes for given time period like a month. Job costing is dependent on customers orders for a product. While process costing has production of units done for future sale. In job costing unit cost is got by dividing the cost of jobs by units produced. In process costing unit cost are process costs divided by process production. In job only one W-I-P a/c is maintained. In process individual W-I-P a/c is maintained for each process.
Method of Process Costing: In this all the materials, labour & direct expenses & factory OHS are taken for each process. A separate process a/c is made & the balance is carried forward to the next process. Process Cost a/c in different situations: When there is no process loss & no opening & closing W-I-P When there are process losses or gains (normal loss or gain, abnormal loss or gain) When there are opening & closing W-I-P at various stages of completion Inter process profits Q) Prepare process cost accounts for the following data: Items Total Process I II III Dir.mat. 4,40,000 3,60,000 60,000 20,000 Dir.wages 80,000 20,000 40,000 20,000 Dir. Expen. 1,00,000 60,000 40,000 Production OHS incurred is Rs.1,60,000 & is recovered on 200% of direct wages. Production during the period was 20,000 units. There was no opening or closing W-I-P.