UNIT - IV: COST CONCEPTS: Classification of costs - Direct and Indirect expenses- Cost Sheet - Unit Costing - Job Costing - Mechanics & Application of Marginal Costing in terms of cost control - Profit Planning - concept of CVP relationship; BEP and their applications.

1. UNIT - IV: COST CONCEPTS: Classification of costs - Direct and Indirect expenses-
Cost Sheet - Unit Costing - Job Costing - Mechanics & Application of Marginal Costing in
terms of cost control - Profit Planning - concept of CVP relationship; BEP and their
applications.
Elements of Cost
The elements of costs are the essential part of the cost. There are broadly three elements of
cost, as explained below:
(A) Material
The substance from which the produce is made is called material. It can be direct as well as
indirect.
I) Direct Material: It refers to those materials which become an integral part of the final
productand can be easily traceable to specific physical units.
e.g., carton, wrapping, card-board boxes etc.).
II) Indirect Material: All materials which are used for purpose ancillary to the business
and which cannot conveniently be assigned to specific physical units are known as
`indirect materials’. Oil, grease, consumable stores, printing and stationery material etc.
Are a few examples of indirect materials?
(b) Labour
In order to convert materials into finished products, human effort is required. Such human
effort is known as labour. Labour can be direct as well as indirect.
I) Direct Labour:
It is defined as the wages paid to workers who are engaged in the production process and
whose time can be conveniently and economically traceable to specific physical units.e.g.,
wages paid to driver, conductoretc. Of a bus in transport service.
Indirect Labour:
Labour employed for the purpose of carrying out tasks Incidental to goods produced or
services provided is called indirect labour or indirect wages. Wages which cannot be
directly identified with a job, process or operation, are generally treated as indirect wages.
Examples of indirect labour are: wages of store-keepers, foremen, supervisors, inspectors,
internal transport men etc.
(C) Expenses
Expenses may be direct or indirect.
I) Direct Expenses:

2. These are expenses which can be directly, conveniently and wholly identifiable with a job,
process oroperation.
Examples of such expenses are: cost of special layout, design or drawings, hire of special
machinery required for a particular contract, maintenance cost of special tools needed for a
contract job, etc.
Ii) Indirect Expenses:
Expenses which cannot be charged to production directly and which are neither indirect
materials nor indirect wages are known as indirect expenses. Examples are rent, rates and
taxes, insurance, depreciation, repairs and maintenance, power, lighting and heating etc.
Overheads
The term overheads includes, indirect material, indirect labour and indirect expenses,
explained in the preceding paragraphs.
Overheads may be incurred in the factory, office or selling and distribution
departments/divisions in an undertaking. Thus overheads may be of three types:
 Factory
overheads
 Office
and administrative overheads and
 Selling
and distribution overheads.
CLASSIFICATION (OR) TYPES OF COSTS
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. Fixed, Variable and Semi-Variable Costs
The cost which varies directly in proportion with every increase or decrease in the volume
of output or productionis known as variable cost. Some of its examples are as follows:
· Wages of laborers
· Costof direct material
· Power
The cost which does not vary but remains constant within a given period of time and a
range of activity in spite of the fluctuations in production is known as fixed cost. Some of
its examples are as follows:
· Rent or rates
· Insurance charges

3. · Management salary
The cost which does not vary proportionately but simultaneously does not remain
stationary at all times is known as semi-variable cost. It can also be named as semi-fixed
cost. Some of its examples are as follows:
· Depreciation
· Repairs
Fixed costs are sometimes referred to as “period costs” and variable costs as “direct costs”
in system of direct costing. Fixed costs canbe further classified into:
· Committed fixed costs
· Discretionary fixed costs
Committed fixed costs consist largely of those fixed costs that arise from the possession of
plant, equipment and a basic organization structure. For example, once a building is erected
and a plant is installed, nothing much can be done to reduce the costs such as depreciation,
property taxes, insurance and salaries of the key personnel etc. without impairing an
organization’s competence to meet the long-term goals.
Discretionary fixed costs are those which are set at fixed amount for specific time periods
by the management in budgeting process. These costs directly reflect the top management
policies and have no particular relationship with volume of output. These costs can,
therefore, be reduced or entirely eliminated as demanded by the circumstances. Examples
of such costs are research and development costs, advertising and sales promotion costs,
donations, management consulting fees etc. These costs are also termed as managed or
programmed costs.
In some circumstances, variable costs are classified into the following:
· Discretionary cost
· Engineered cost
The term discretionary costs is generally linked with the class of fixed cost. However, in
the circumstances where management has predetermined that the organization would spend
a certain percentage of its sales for the items like research, donations, sales promotion etc.,
discretionary costs will be of a variable character.
Engineered variable costs are those variable costs which are directly related to the
production or sales level. These costs exist in those circumstances where specific
relationship exists between input and output. Forexample, in an automobile
industry there may be exact specifications as one radiator, two fan belts, one battery etc.
would be required for one car. In a case where more than one car is to be produced, various
inputs will have to be increased in the direct proportionof the output.
Thus, an increase in discretionary variable costs is due to the authorization of management
whereas an increase in engineered variable costs is due to the volume of output or sales.
2. Product Costs and PeriodCosts
The costs which are a part of the cost of a product rather than an expense of the period in
which they are incurred are called as “product costs.” They are included in inventory
values. In financial statements, such costs are treated as assets until the goods they are

4. assigned to are sold. They become an expense at that time. These costs may be fixed as
well as variable, e.g., cost of raw materials and direct wages, depreciation on plant and
equipment etc.
The costs which are not associated with production are called period costs. They are treated
as an expense of the period in which they are incurred. They may also be fixed as well as
variable. Such costs include general administration costs, salaries salesmen and
commission, depreciation on office facilities etc. They are charged against the revenue of
the relevant period. Differences between opinions exist regarding whether certain costs
should be considered as product or period costs. Some accountants feel that fixed
manufacturing costs are more closely related to the passage of time than to the
manufacturing of a product. Thus, according to them variable manufacturing costs are
product costs whereas fixed manufacturing and other costs are period costs. However, their
view does not seem to have been yet widely accepted.
3. Directand Indirect Costs
The expenses incurred on material and labor which are economically and easily traceable
for a product, service or jobs 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. Certain other expenses are also incurred directly. All of these take an active
and direct part in the manufacture of a particular commodity and hence are called direct
costs.
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. All of
these cannot be conveniently allocated to production and hence are called indirect costs.
4. Decision-Making Costs andAccounting Costs
Decision-making costs are special purpose costs that are applicable only in the situation in
which they are compiled. They have no universal application. They need not tie into
routine-financial accounts. They do not and should not conform the accounting rules.
Accounting costs are compiled primarily from financial statements. They have to be altered
before they can be used for decision-making. Moreover, they are historical costs
and show what has happened under an existing set of circumstances. Decision-making
costs are future costs. They represent what is expected to happen under an assumed set of
conditions. For example, accounting costs may show the cost of a product when the
operations are manual whereas decision-making cost might be calculated to show the costs
when the operations are mechanized.
5. Relevantand Irrelevant Costs
Relevant costs are those which change by managerial decision. Irrelevant costs are those
which do not get affected by the decision. For example, if a manufacturer is planning to
close down an unprofitable retail sales shop, this will affect the wages payable to the
workers of a shop. This is relevant in this connection since they will disappear on closing

5. down of a shop. But prepaid rent of a shop or unrecovered costs of any equipment which
will have to be scrapped are irrelevant costs which should be ignored.
6. Shutdown and Sunk Costs
A manufacturer or an organization may have to suspend its operations for a period on
account of some temporary difficulties, e.g., shortage of raw material, non-availability of
requisite labor etc. During this period, though no work is done yet certain fixed costs, such
as rent and insurance of buildings, depreciation, maintenance etc., for the entire plant will
have to be incurred. Such costs ofthe idle plant are known as shutdown costs.
Sunk costs are historical or past costs. These are the costs which have been created by a
decision that was made in the past and cannot be changed by any decision that will be
made in the future. Investments in plant and machinery, buildings etc. are prime examples
of such costs. Since sunk costs cannot be altered by decisions made at the later stage, they
are irrelevant for decision-making.
An individual may regret for purchasing or constructing an asset but this action could not
be avoided by taking any subsequent action. Of course, an asset can be sold and the cost of
the asset will be matched against the proceeds from sale of the asset for the purpose of
determining gain or loss. The person may decide to continue to own the asset. In this case,
the cost of asset will be matched against the revenue realized over its effective life.
However, he/she cannot avoid the cost which has already been incurred by him/her for the
acquisition of the asset. It is, as a matter of fact, sunk cost for all present and future
decisions.
Example
Jolly Ltd. purchased a machine for $. 30,000. The machine has an operating life of five
yea$ without any scrap value. Soon after making the purchase, management feels that the
machine should not have been purchased since it is not yielding the operating advantage
originally contemplated. It is expected to result in savings in operating costs of $. 18,000
over a period of five years. The machine can be sold immediately for $. 22,000.
To take the decision whether the machine should be sold or be used, the relevant amounts
to be compared are $. 18,000 in cost savings over five yea$ and $. 22,000 that can be
realized in case it is immediately disposed. $. 30,000 invested in the asset is not relevant
since it is same in both the cases. The amount is the sunk cost. Jolly Ltd., therefore, sold
the machinery for $. 22,000 since it would result in an extra profit of $. 4,000 as compared
to keeping and using it.
7. Controllable and Uncontrollable Costs
Controllable costs are those costs which can be influenced by the ratio or a specified
member of the undertaking. The costs that cannot be influenced like this are termed as
uncontrollable costs.
A factory is usually divided into a number of responsibility centers, each of which is in
charge of a specific level of management. The officer in charge of a particular department
can control costs only of those matte$ which come directly under his control, not of other
matte$. For example, the expenditure incurred by tool room is controlled by the foreman in

6. charge of that section but the share of the tool room expenditure which is apportioned to a
machine shop cannot be controlled by the foreman of that shop. Thus, the difference
between controllable and uncontrollable costs is only in relation to a particular individual
or level of management. The expenditure which is controllable by an individual may be
uncontrollable by another individual.
8. Avoidable or Escapable Costs and Unavoidable or Inescapable Costs
Avoidable costs are those which will be eliminated if a segment of a business (e.g., a
product or department) with which they are directly related is discontinued. Unavoidable
costs are those which will not be eliminated with the segment. Such costs are merely
reallocated if the segment is discontinued. For example, in case a product is discontinued,
the salary of a factory manager or factory rent cannot be eliminated. It will simply mean
that certain other products will have to absorb a large amount of such overheads. However,
the salary of people attached to a product or the bad debts traceable to a product would be
eliminated. Certain costs are partly avoidable and partly unavoidable. For example, closing
of one department of a store might result in decrease in delivery expenses but not in their
altogether elimination.
It is to be noted that only avoidable costs are relevant for deciding whether to continue or
eliminate a segment of a business.
9. Imputed or Hypothetical Costs
These are the costs which do not involve cash outlay. They are not included in cost
accounts but are important for taking into consideration while making management
decisions. For example, interest on capital is ignored in cost accounts though it is
considered in financial accounts. In case two projects require unequal outlays of cash, the
management should take into consideration the capital to judge the relative profitability of
the projects.
10. Differentials, Incremental or DecrementCost
The difference in total cost between two alternatives is termed as differential cost. In case
the choice of an alternative results in an increase in total cost, such increased costs are
known as incremental costs. While assessing the profitability of a proposed change, the
incremental costs are matched with incremental revenue. This is explained with the
following example:
Example
A company is manufacturing 1,000 units of a product. The present costs and sales data are
as follows:
Selling price per unit $. 10
Variable costper unit $. 5
Fixed costs $. 4,000
The management is considering the following two alternatives:
i. To accept an export order for another
200 units at $. 8 per unit. The expenditure of the export order will increase the fixed costs
by $. 500.

7. ii. To reduce the production from present
1,000 units to 600 units and buy another 400 units from the market at $. 6 per unit. This
will result in reducing the present fixed costs from $. 4,000 to $. 3,000.
Which alternative the management should accept?
Solution
Statement showing profitability under different alternatives is as follows:
Particulars
Present situation
$. $.
Proposed situations
Sales.
Less:
Variable purchase
costs
Fixed costs Profit
5,000
4,000
10,000
9,000
1,000
6,000
4,500
11,600
10,500
1,100
5,400
3,000
10,000
8,400
1,600
Observations
i. In the present situation, the company is
making a profit of $. 1,000.
ii. In the proposed situation (i), the
company will make a profit of $. 1,100. The incremental costs will be $. 1,500 (i.e. $.
10,500 - $. 9,000) and the incremental revenue (sales) will be $. 1,600. Hence, there is a
net gain of $. 100 under the proposed situation as compared to the existing situation.
iii. In the proposed situation (ii), the
detrimental costs are $. 600 (i.e. $. 9,000 to $. 8,400) as there is no decrease in sales
revenue as compared to the present situation. Hence, there is a net gain of $. 600 as
compared to the present situation.
Thus, under proposal (ii), the company makes the maximum profit and therefore it should
adoptalternative (ii).
The technique of differential costing which is based on differential cost is useful in
planning and decision-making and helps in selecting the best alternative.
In case the choice results in decrease in total costs, this decreased cost will be known as
detrimental costs.
11. Out-of-PocketCosts
Out-of-pocket cost means the present or future cash expenditure regarding a certain
decision that will vary depending upon the nature of the decision made. For example, a
company has its own trucks for transporting raw materials and finished products from one
place to another. It seeks to replace these trucks by keeping public carriers. In making this
decision, of course, the depreciation of the trucks is not to be considered but the
management should take into account the present expenditure on fuel, salary to drive$ and
maintenance. Such costs are termed as out-of-pocketcosts.
12. Opportunity Cost

8. Opportunity cost refers to an advantage in measurable terms that have foregone on account
of not using the facilities in the manner originally planned. For example, if a building is
proposed to be utilized for housing a new project plant, the likely revenue which the
building could fetch, if rented out, is the opportunity cost which should be taken into
account while evaluating the profitability of the project. Suppose, a manufacturer is
confronted with the problem of selecting anyone of the following alternatives:
a. Selling a semi-finished productat $. 2 per unit
b. Introducing it into a further process to make it more refined and valuable
Alternative (b) will prove to be remunerative only when after paying the cost of further
processing, the amount realized by the sale of the product is more than $. 2 per unit. Also,
the revenue of $. 2 per unit is foregone in case alternative (b) is adopted. The term
“opportunity cost”refers to this alternative revenue foregone.
13. Traceable, Untraceable orCommon Costs
The costs that can be easily identified with a department, process or product are termed as
traceable costs. For example, the cost of direct material, direct labor etc. The costs that
cannot be identified so are termed as untraceable or common costs. In other words,
common costs are the costs incurred collectively for a number of cost centers and are to be
suitably apportioned for determining the cost of individual cost centers. For example,
overheads incurred for a factory as a whole, combined purchase cost for purchasing several
materials in one consignment etc.
Joint cost is a kind of common cost. When two or more products are produced out of one
material or process, the cost of such material or process is called joint cost. For example,
when cottonseeds and cotton fibers are produced from the same material, the cost incurred
till the split-off or separation point will be joint costs.
14. Production, Administration and Selling and Distribution Costs
A business organization performs a number of functions, e.g., production, illustration,
selling and distribution, research and development. Costs are to be curtained for each of
these functions. The Chartered Institute of Management accountants, London, have defined
each of the above costs as follows:
i. Production Cost
The cost of sequence of operations which begins with supplying materials, labor and
services and ends with the primary packing of the product. Thus, it includes the cost of
direct material, direct labor, direct expenses and factory overheads.
ii. Administration Cost
The cost of formulating the policy, directing the organization and controlling the
operations of an undertaking which is not related directly to a production, selling,
distribution, research or development activity or function.
iii. Selling Cost
It is the cost of selling to create and stimulate demand (sometimes termed as marketing)
and of securing orders.
iv. Distribution Cost

9. It is the cost of sequence of operations beginning with making the packed product available
for dispatch and ending with making the reconditioned returned empty package, if any,
available for reuse.
v. ResearchCost
It is the cost of searching for new or improved products, new application of materials, or
new or improved methods.
vi. DevelopmentCost
The cost of process which begins with the implementation of the decision to produce a new
or improved product or employ a new or improved method and ends with the
commencement of formal productionof that productor by the method.
vii. Pre-ProductionCost
The part of development cost incurred in making a trial production as preliminary to formal
production is called pre-production cost.
15. ConversionCost
The cost of transforming direct materials into finished products excluding direct material
cost is known as conversion cost. It is usually taken as an aggregate of total cost of direct
labor, direct expenses and factory overheads.
COST SHEET
PROFORMA OF COST SHEET
PARTICULARS TOTALCOST
Rs.
TOTAL
COST
Rs.
Opening stock Raw Materials
Add: Purchase
Add: carriage inward
Add:octroi and customs duty
Less: closing stock of raw materials
Cost of direct material consumed
Add: direct wages
Prime cost
Add: works of factory overheads
Indirect materials
Indirect wages
Leave wages
Bonus to workers
Overtime wages
Fuel and power
Rent and taxes

10. Insurance
Factory lightings
Supervision
Works stationery
Canteen and welfare expenses
Repairs
Works salaries
Depreciation of plant and machinery
Work expenses
Gas and water
Technical directors fees
Laboratory expenses
Works transport expenses
Works telephone expenses
Add: opening stock of work- in- progress
Less: closing stock of work-in-progress
Less: sale of waste (scrap)
Works cost
Add: Office and Administration
Overheads
Office salaries
Directors fees
Office rents and rates
Office stationery and printing
Sundry office expenses
Depreciation on office furniture
Subscription to trade journals
Office lightings
Establishment charges
Directors travelling expenses
Consultants fees
Contribution to provident fund
Postage
Legal charges
Audit fees
Bank charges
Audit fees
Depreciatiom&repairs of office equipments
Bonus to staff
Cost of production

11. Add: opening stock of finished goods
Less: closing stock of finished goods
Cost of goods sold
Add: Selling &Distribution overheads
Advertising
Show room expenses
Salesman’s salaries and expenses
Carriage outward
Commission of sales agents
Cost of catalogues
Expenses o delivery vans
Collection charges
Travelling expenses
Cost of tenders
Warehouse expenses
Cost of mailing literature
Sales mangers salaries
Insurance of showroom
Sale directors fees
Sales office expenses
Rent of sales office
Depreciation of delivery vans
Expenses of sales branch establishments
Branch office expenses
TOTAL COST OF SALES
PROFIT OR LOSS
SALES
NON COST ITEMS
Non – costitems re those items which do not form part of costof a product. Such items
should not be considered while ascertaining the costof a product.
These are items included in the profit & loss A/C.
These will not come in the costsheet
a) Income tax paid
b) Interest on capital
c) Interest on loan
d) profit/loss on sale of fixed assets
e) Donations
f) Capital expenditure

12. g) Discount on shares &debentures
h) Commission to partners, managers etc
i) Brokerage
j) Preliminary expenses written off.
k) Wealth tax etc
Problem
The following figures have been extracted from the records of a manufacturing company
for the year ending 31st December 2008. You are required to prepare a statement of cost
showing:
1. Cost of
raw materials consumed.
2. Prime
cost
3. Factory
cost
4. Cost of
production
5. Cost of
goods sold
6. Total
costof goods sold and profit on sales.
Rs:
Stockof raw materials ( 1-1-2008) 3000
Stockof raw materials ( 31-12-2008) 2400
Purchase of Raw materials 14000
Stockof work in progress (1-1-
2008)
1000
Stockof work in progress (31-12-
2008)
800
Carriage inward 500
Manufacturing wages 4000
Other direct expenses 200
Experiment expenses 400

13. Wastage of materials 500
Factory overheads 7000
Indirect wages 1000
Establishment on cost 2000
Selling overhead 4000
Distribution overhead 1000
Stockof finished goods(1-1-2008) 1200
Stockof finished goods(31-12-2008) 3000
Sales 4000
Costsheetfor the period of 31-12-2008
Particulars Rs Rs
Opening stockof raw materials 3000
Add:- Purchase of raw materials 14000
(3000+14000)
17000
Less:- closing stockof raw materials 2400
Materials Consumed
(17000-2400)
14600
Add:- Carriage Inwards 500
Manufacturing Wages 4000
Other Direct Expenses 200
Prime
Cost(14600+500+4000+200)
19300
Add:- Factory Overheads:-
Factory Overheads 7000
Indirect Wages 400
Experiment Expenses 1000
Wastage of Materials 50
Work cost
Total(7000+400+1000+50)
8450
Add:- Openining work in progress 1000
9450
Less: Closing work in progress 800 8650
Work Cost/
FactoryCost
27950

14. Add:- Office and Administration over head:-
Establishment Cost 2000 2000
Costof
Production
29950
Add:- Opening stockof finished goods 1200
Less:- closing stockof finished goods 3000 (-)1800
Costof
Goods Sold
28150
Add:- Selling overheads 4000
32150
Add:- Distribution overhead 1000
Total Cost/
Costof Sales
33150
Profit(
Balancing Figure)
6850
Sales
40000
Components of total cost:-
Prime Cost
Factory Cost/Work Cost
Office Cost/ Cost of production
Cost of sale
Total Cost
Prime Cost ( First Cost/ Basic Cost)
Direct Material Cost
Direct Labor Cost
Direct Expenses
Prime Cost = Direct Material Cost+ Direct Labor Cost+ Direct Expenses
Factory Cost or Works Cost
Factory Overheads

15. Indirect Materials cost – Repairs and maintenance
Indirect Labor cost- Salaries for supervisors/factory employees
Indirect Expenses- Rent Taxes, Electricity etc
Factory Cost= Prime Cost+ factory or works Overheads
Office Cost/ Cost of Production
Office Overheads
Indirect Materials cost- Ex: (Office Stationary)
Indirect Labor cost- (Salaries for Office employees)
Indirect Expenses- Bank charges, Telephone charges etc
Office Cost= Work Cost+ Office and Administrative Overheads
Cost of sale/ total cost
Selling and distribution overheads
Indirect Materials cost- Ex: (Advertising Expenses, sales promotions)
Indirect Labor cost- (Salesman Salary)
Indirect Expenses- Warehouse, freight, fitting, heating, lighting of warehouse etc
Marginal Costing:
Marginal Cost: The term Marginal Cost refers to the amount at any given volume of
output by which the aggregate costs are charged if the volume of output is changed by one
unit. Accordingly, it means that the added or additional costofan extra unit of output.
Marginal cost may also be defined as the "cost of producing one additional unit of
product." Thus, the concept marginal cost indicates wherever there is a change in the
volume of output; certainly there will be some change in the total cost. It is concerned with
the changes in variable costs. Fixed cost is treated as a period cost and is transferred to
Profit and Loss Account.

16. Marginal Costing: Marginal Costing may be defined as "the ascertainment by
differentiating between fixed cost and variable cost, of marginal cost and of the effect on
profit of changes in volume or type of output." With marginal costing procedure costs are
separated into fixed and variable cost.
According to J. Batty, Marginal costing is "a technique of cost accounting pays special
attention to the behavior of costs with changes in the volume of output." This definition
lays emphasis on the ascertainment of marginal costs and also the effect of changes in
volume or type of output on the company's profit.
FEATURES OF MARGINAL COSTING
(1) All elements of costs are classified into fixed and variable costs.
(2) Marginal costing is a technique of costcontroland decision making.
(3) Variable costs are charged as the costof production.
(4) Valuation of stock of work in progress and finished goods is done on the basis of
variable costs.
(5) Profit is calculated by deducting the fixed cost from the contribution, i.e., excess of
selling price over marginal costof sales.
(6) Profitability of various levels of activity is determined by costvolume profit analysis.
Mechanics ofMarginalCosting:
The Following are the main important equations of Marginal Cost:
Sales = Variable Cost+ Fixed Expenses ± Profit I Loss
(or)
Sales - Variable Cost= Fixed Cost± Profit or Loss
(or)
Sales - Variable Cost= Contribution
Contribution = Fixed Cost+ Profit
Contribution
The term Contribution refers to the difference between Sales and Marginal Cost of Sales. It
also termed as "Gross Margin." Contribution enables to meet fixed costs and profit. Thus,
contribution will first covered fixed cost and then the balance amount is added to Net
profit. Contribution can be represented as:
Contribution = Sales - Marginal Cost
Contribution = Sales - Variable Cost
Contribution = Fixed Expenses + Profit

17. Contribution - Fixed Expenses = Profit
Sales - Variable Cost= Fixed Cost+ Profit
METHODS OF COSTING
The basic principles of ascertaining costs are the same in every system of cost accounting.
However, the methods of analyzing and presenting the cost may vary from industry to
industry. The method to be used in collecting and presenting costs will depend upon the
nature of production. Basically there are two methods of costing, namely. Job costing and
Process costing.
Job costing: Job costing is used where production is not repetitive and is done against
orders. The work is usually carried out within the factory. Each job is treated as a distinct
unit, and related costs are recorded separately. This type of costing is suitable to printers,
machine tool manufacturers, job foundries, furniture manufactures etc. The following
methods are commonly associated with job costing:
Batch costing: Where the cost of a group of product is ascertained, it is called 'batch
costing'. In this case a batch of similar products is treated as a job. Costs are collected
according to batch order number and the total cost is divided by the numbers in a batch to
find the unit cost of each product. Batch costing is generally followed in general
engineering factories which produce components in convenient batches, biscuit factories,
bakeries and pharmaceutical industries.
Contract costing: A contract is a big job and, hence, takes a longer time to complete. For
each individual contract, account is kept to record related expenses in a separate manner.
It is usually followed by concerns involved in construction work e.g. building roads,
bridge and buildings etc.
Process Costing: Where an article has to undergo distinct processes before completion, it
is often desirable to find out the cost of that article at each process. A separate account for
each process is opened and all expenses are charged thereon. The cost of the product at
each stage is, thus, accounted for. The output of one process becomes the input to the next
process. Hence, the process cost per unit in different processes is added to find out the
total cost per unit at the end. Process costing is often found in such industries as
chemicals, oil, textiles, plastics, paints, rubber, food processors, flour, glass, cement,
mining and meat packing. The following methods are used in process costing:

18. Output/Unit Costing: This method is followed by concerns producing a single article or
a few articles which are identical and capable of being expressed in simple, quantitative
units. This is used in industries like mines, quarries, oil drilling, cement works, breweries,
brick works etc. for example, a tonne of coal in collieries, one thousand bricks in brick
works etc. The object here is to find out the cost per unit of output and the cost of each
item of such cost. A cost sheet is prepared for a definite period. The cost per unit is
calculated by dividing the total expenditure incurred during a given period by the number
of units produced during the same period.
Operating Costing: This method is applicable where services are rendered rather than
goods produced. The procedure is same as in the case of unit costing. The total expenses
of the operation are divided by the units and cost per unit of service is arrived at. This is
followed in transport undertakings, municipalities, hospitals, hotels etc.
Multiple Costing: Some products are so complex that no single system of costing is
applicable. Where a concern manufactures a number of components to be assembled into a
complete article, no one method would be suitable, as each component differs from the
other in respect of materials and the manufacturing process. In such cases, it is necessary
to find out the cost of each component and also the final product by combining the various
methods discussed above. This type of costing is followed to cost such products as radios,
airplanes, cycles, watches, machine tools, refrigerators, electric motors etc.
Operating Costing: In this method each operation at each stage of production or process
is separately identified and costed. The procedure is somewhat similar to the one followed
in process costing. Process costing involves the costing of large areas of activity whereas
operation costing is confined to every minute operation of each process. This method is
followed in industries with a continuous flow of work, producing articles of a standard
nature, and which pass through several distinct operations in a sequence to completion.
Since this method provides for a minute analysis of cost, it ensures greater accuracy and
better control of costs. The costs of each operation per unit and cost per unit upto each
stage of operation can be calculated quite easily. This method is in force in industries
where toys, leather and engineering goods are manufactured.
Departmental Costing: When costs are ascertained department by department, such a
method is called 'departmental costing'. Where the factory is divided into a number of
departments, this method is followed. The total cost of each department is ascertained and

19. divided by the total units produced in that department in order to obtain the cost per unit.
This method is followed by departmental stores, publishing houses etc.
TECHNIQUES OF COSTING
In addition to the different costing methods, various techniques are also used to find the
costs. Thesetechniques may be grouped under the following heads:
Historical Absorption Costing: It is the ascertainment of costs after they have been
incurred. It is defined as the practice of charging all costs, both variable and fixed, to
operations, process or products. It is also known as traditional costing. Since costs are
ascertained after they have been incurred, it does not help in exercising control over costs.
However, It is useful in submitting tenders, preparing job estimates etc.
Marginal Costing: It refers to the ascertainment of costs by differentiating between fixed
costs and variable costs. In this technique fixed costs are not treated as product costs.
They are recovered from the contribution (the difference between sales and variable cost
of sales). The marginal or variable cost of sales includes direct material, direct wages,
direct expenses and variable overhead. This technique helps management in taking
important policy decisions such as product pricing in times of competition, whether to
make or not, selection of productmix etc.
Differential Costing: Differential cost is the difference in total cost between alternatives
evaluated to assist decision making. This technique draws the curtain between variable
costs and fixed costs. It takes into consideration fixed costs also (unlike marginal costing)
for decision making under certain circumstances. This technique considers all the revenue
and cost differences amongst the alternative courses of action to assist management in
arriving at an appropriate decision.
Standard Costing: It refers to the ascertainment and use of standard costs and the
measurement and analysis of variances. Standard cost is a predetermined cost which is
computed in advance of production on the basis of a specification of all factors affecting
costs. The standards are fixed for each element of cost. To find out variances, the standard
costs are compared with actual costs. The variances are investigated later on and wherever
necessary, rectificational steps are initiated promptly. The technique helps in measuring
the efficiency of operations from time to time.

20. Applications of MarginalCosting in terms of Costcontrol:
(1)Profit Planning,
(2) Acceptance of offer and submission of tenders.
(3) Make or buy decisions.
(4) Shutdown or continue decisions or alternative use of productionfacilities.
(5) Retain or replace a machine.
(6) Decisions as to whether to sell in the export market or in the home market.
(7) Fixation of Selling Price
(8) Whether to expand or contract.
(9) Productmix decisions
PROFIT PLANNING
The basic objective of running any business organization is to earn profits. Profits
determine the financial position, liquidity and solvency of the company. They serve as a
yardstick for judging the competence and efficiency of the management. Profit planning is
therefore a fundamental part of the management function and is a vital part of the total
budgeting process.
The management determines the profit goals and prepares budgets that will lead them to
the realization of these goals. However, profit planning can be done only when
management is aware about the various factors which affect profits. Some of the important
factors affecting profits are as follows:
Selling Price
Variation in the selling price causes variation in the amount of profit also. An increase in
the selling price increases the profits and vice versa.
Cost
The term ‘cost’, means ‘the amount of expenditure (actual or notional) incurred on or
attributable to a specified thing or activity’. A variation in the cost also affects the amount
of profit.
Volume
The term ‘volume’ refers to the level of activity. This may be expressed in any of the
following manners:
(i) Sales capacity as a percentage of maximum sales;
(ii) Value of sales;
(iii) Quantity of sales;
(iv) Productioncapacity as a percentage of maximum production;
(v) Value of production;

21. (vi) Quantity of production
ADVANTAGES OF MARGINAL COSTING:
1. Effective cost control: since marginal costing techniques segregate total cost to
fixed and variable portions the emphasis is laid on variable cost for control. The
fixed costs are also controlled by ascertaining them separately for computing
profit and for control. The constant focus on cost and volume, and their effect on
profit pave way for costreduction.
2. Simplicity: The statement prepared under marginal costing can be easily
followed, as it breaks up the costas variable and fixed.
3. Helpful to the management: It enables the management to start a new line of
production which is advantageous. It is helpful in determining which is profitable
and whether to buy or manufacture a product. The management can take decision
regarding pricing.
4. Fixation of selling price: The differentiation between fixed and variable costs is
very helpful in determining the selling price of the products or services.
Sometimes, different prices are charged for the same article in different markets
to meet varying degrees of competition.
5. Budgetary control: The classification of expenses is very helpful in budgeting
and flexible budget for various levels of activities.
6. Production planning: It shows the amount of profit at every level of output with
the help of cost-volume-profit relationship. Here the break-even chart is made use
of.
7. Profit planning: The cost-volume-profit relationship is perfectly analyzed to
reveal efficiently of products, processes and departments. Break-even point and
Margin of safety are the two important concepts helpful in profit planning. Most
advantageous is that the volume and cost to maximize profits with in the existing
limitations can be planned.
8. Meaningful reporting: Marginal costing serves as a good basis for reporting to
management. The profits are analyzed from the point of view of sales rather than
that of production.
9. Make or buy decision: Sometimes, a decision has to be made whether to
manufacture a component or buy it ready-made from the market. The decision to
purchases it would be taken if the price paid recovers some of the fixed expenses.
10.Better presentation: The statements and graphs prepared under marginal costing
are better understood by the management executives. The B.E.P. analysis

22. presents the behavior of cost, sales, contribution, and so on in terms of charts and
graphs. Thus the results can easily be grasped.
11.Preparing tenders: Many business enterprises have to compete in the market in
quoting the lowest price. Total variable cost, when separately calculated,
becomes the ‘floor price’. Any price above this floor price may be quoted to
increase the total contribution.
DISADVANTAGES OF MARGINAL COSTING:
In spite of some many advantages, the technique of marginal costing suffers from the
following limitations:
1. Assumptions: The technique of marginal costing is based upon a number of
assumptions which may not hold good under all circumstances.
2. All costs are not divisible into fixed and variable: There are certain costs,
which are semi-variable in nature. It is very difficult and arbitrary to classify
these costs into fixed and variable elements. Variable costs do not always either
remain constant or vary in direct proportion to volume of output because of the
laws of diminishing and increasing returns.
3. Automation: In these days of automation and technical advancement, huge
investments are made in heavy machinery which results in heavy amount of fixed
costs. Ignoring fixed costs, in this context, while decision-making is not rational.
4. Production aspect is ignored: Marginal costing lays too much emphasis on
selling function and, as such, production function has been considered to be less
significant. But from the business point of view, both the functions are equally
important.
5. Not applicable in all types of business: In contract type and job order business,
full cost of the job or the contract is to be charged. Therefore, it is difficult to
apply marginal costing in these types of business. Though marginal costing
suffers from certain limitations, it is a very useful tool in the hands of the
management and is extensively used for control, decision-making and profit
planning.
ASSUMPTIONS OF MARGINAL COSTING:
1. All costs canbe divided into two categories: Fixed and variable. The variable part
of semi-variable costcan be identified.
2. Fixed costs remain constant at all levels of activity.
3. Variable costs vary in total, but remain constant per unit.

23. 4. Prices of variable costs, suchas material prices and labor rates remain unchanged.
5. Selling price, unless otherwise mentioned, remains constant at different levels of
activity.
6. The productrisk remains unaltered, unless specified otherwise.
7. Level of efficiency of operations is uniform throughout a costing period. No
changes in manufacturing process dueto non-static operating efficiency.
8. No stocks of finished products unless otherwise mentioned. It means the number
of units produced and sold is the same.
COST VOLUME PROFIT ANALYSIS
Cost Volume Profit Analysis (C V P) is a systematic method of examining the relationship
between changes in the volume of output and changes in total sales revenue, expenses
(costs) and net profit. In other words. it is the analysis of the relationship existing amongst
costs, sales revenues, output and the resultant profit.
Objectives of CostVolume Profit Analysis
The following are the important objectives of costvolume profit analysis:
(1) Costvolume is a powerful tool for decision making.
(2) It makes use of the principles of Marginal Costing.
(3) It enables the management to establish what will happen to the financial results if a
specified level of activity or volume fluctuates.
(4) It helps in the determination of break-even point and the level of output required to earn
a desired profit.
(5) The PN ratio serves as a measure of efficiency of each product, factory, sales area etc.
and thus helps the management to choosea most profitable line of business.
(6) It helps us to forecast the level of sales required to maintain a given amount of profit at
different levels of prices.
BREAK EVEN ANALYSIS
Break-Even Analysis is also called Cost Volume Profit Analysis. The term Break-Even
Analysis is used to measure interrelationship between costs, volume and profit at various
level of activity. A concern is said to break-even when its total sales are equal to its total
costs. It is a point of no profits no loss. This is a point where contribution is equal to fixed
cost. In other words, the break-even point where income is equal to expenditure {or) total
sales equal to total cost.

24. BREAK EVEN CHART:
The break-even point can be calculated by the following formula:
Break-Even Point in Units
(1) Break-Even Point in Units (or) B E P (in units)
Total Fixed Cost
Break-Even Point in Units = ----------------------------
Contribution per unit
(Or)
Total Fixed Cost
Break-Even Point in Units = ---------
-------------------
Selling Price Per Unit – Variable CostPer Unit
Break-EvenPointin Sales Volume
(1) Break-
Even Sales:
Fixed Cost
Break-Even Sales= ------------------------------------ X Sales
Sales - Variable Cost
(OR)

25. Fixed Cost
Break-Even Sales= ------------------------
P/V RATIO
CONTRIBUTION
P/V RATIO (PROFT –VOLUME RATIO)= ---------
--------------------------- X 100
SALES
BREAKEVEN ANALYSIS
The study of Cost-Volume-Profit (CVP) relationship is often referred as BEA. The term
BEA is interpreted in two senses. In its narrow sense, it is concerned with finding out BEP;
BEP is the point at which total revenue is equal to total cost. It is the point of no profit, no
loss. In its broad determine the probable profit at any level of production.
Assumptions:
1. All costs are classified into two – fixed and variable.
2. Fixed costs remain constant at all levels of output.
3. Variable costs vary proportionally with the volume of output.
4. Selling price per unit remains constant in spite of competition or change in the
volume of production.
5. There will be no change in operating efficiency.
6. There will be no change in the general price level.
7. Volume of production is the only factor affecting the cost.
8. Volume of sales and volume of productionare equal. Hence there is no unsold stock.
9. There is only one product or in the case of multiple products. Sales mix remains
constant.
Merits:

26. 1. Information provided by the Break Even Chart can be understood more easily then
those contained in the profit and Loss Account and the coststatement.
2. Break Even Chart discloses the relationship between cost, volume and profit. It
reveals how changes in profit. So, it helps management in decision-making.
3. It is very useful for forecasting costs and profits long term planning and growth
4. The chart discloses profits at various levels of production.
5. It serves as a useful tool for costcontrol.
6. It can also be used to study the comparative plant efficiencies of the industry.
7. Analytical Break-even chart present the different elements, in the costs – direct
material, direct labour, fixed and variable overheads.
Demerits:
1. Break-even chart presents only cost volume profits. It ignores other considerations
such as capital amount, marketing aspects and effect of government policy etc., which are
necessary in decision making.
2. It is assumed that sales, total cost and fixed cost can be represented as straight lines.
In actual practice, this may not be so.
3. It assumes that profit is a function of output. This is not always true. The firm may
increase the profit without increasing its output.
4. A major drawback of BEC is its inability to handle production and sale of multiple
products.
5. It is difficult to handle selling costs such as advertisement and sale promotion in
BEC.
6. It ignores economics of scale in production.
7. Fixed costs do not remain constant in the long run.
8. Semi-variable costs are completely ignored.
9. It assumes production is equal to sale. It is not always true because generally there
may be opening stock.
10. When production increases variable cost per unit may not remain constant but may
reduce on account of bulk buying etc.
11. The assumption of static nature of business and economic activities is a well-known
defect of BEC.
Break Even Point Representation

27. Requirements of Break EvenAnalysis
1. Fixed cost
2. Variable cost
3. Contribution
4. Margin of safety
5. Profit volume ratio
6. Break-Even-Point
1. Fixed cost: Expenses that do not vary with the volume of production are known as
fixed expenses. Eg. Manager’s salary, rent and taxes, insurance etc. It should be noted that
fixed changes are fixed only within a certain range of plant capacity. The concept of fixed
overhead is most useful in formulating a price fixing policy. Fixed cost per unit is not
fixed.
2. Variable Cost: Expenses that vary almost in direct proportion to the volume of
production of sales are called variable expenses. Eg. Electric power and fuel, packing
materials consumable stores. It should be noted that variable costper unit is fixed.

28. 3. Contribution: Contribution is the difference between sales and variable costs and it
contributed towards fixed costs and profit. It helps in sales and pricing policies and
measuring the profitability of different proposals. Contribution is a sure test to decide
whether a productis worthwhile to be continued among different products.
Contribution = Sales – Variable cost
Contribution = Fixed Cost+ Profit.
4. Margin of safety: Margin of safety is the excess of sales over the break even sales. It
can be expressed in absolute sales amount or in percentage. It indicates the extent to which
the sales can be reduced without resulting in loss. A large margin of safety indicates the
soundness of the business. The formula for the margin of safety is:
Present sales – Break even sales or
ratioV.P.
Profit
Margin of safety can be improved by taking the following steps.
1. Increasing production
2. Increasing selling price
3. Reducing the fixed or the variable costs or both
4. Substituting unprofitable productwith profitable one.
5. Profit Volume Ratio is usually called P. V. ratio. It is one of the most useful ratios for
studying the profitability of business. The ratio of contribution to sales is the P/V ratio. It
may be expressed in percentage. Therefore, every organization tries to improve the P. V.
ratio of each product by reducing the variable cost per unit or by increasing the selling
price per unit. The concept of P. V. ratio helps in determining break even-point, a desired
amount of profit etc.
The formula is,
Sales
onContributi
X 100
6. Break – Even- Point: If we divide the term into three words, then it does not require
further explanation.
Break-divide

29. Even-equal
Point-place or position
Break Even Point refers to the point where total cost is equal to total revenue. It is a point
of no profit, no loss. This is also a minimum point of no profit, no loss. This is also a
minimum point of production where total costs are recovered. If sales go up beyond the
Break Even Point, organization makes a profit. If they come down, a loss is incurred.
1. Break Even point (Units) =
unitperonContributi
ExpensesFixed
2. Break Even point (In Rupees) =
onContributi
expensesFixed
X sales
Applications of Break Even Analysis
Safety Margin:
The break-even chart helps the management to know at a glance the profits generated at the
various levels of sales. The safety margin refers to the extent to which the firm can afford a
decline before it starts incurring losses.
Safety Margin = (Sales – BEP)/Sales x 100
TargetProfit:
The break-even analysis can be utilized for the purpose of calculating the volume of sales
necessary to achieve a target profit.
When a firm has some target profit, this analysis will help in finding out the extent of
increase in sales by using the following formula:
Target Sales Volume = Fixed Cost+ Target Profit/Contribution Margin Per Unit.
By way of illustration, we can take Table 1 given above. Suppose the firm fixes the profit
as Rs. 100, then the volume of output and sales should be 250 units. Only at this level, it
gets a profit of Rs. 100. By using the formula, the same result will be obtained.

30. Changein Price:
The management is often faced with a problem of whether to reduce prices or not. Before
taking a decision on this question, the management will have to consider a profit. A
reduction in price leads to a reduction in the contribution margin.
This means that the volume of sales will have to be increased even to maintain the previous
level of profit. The higher the reduction in the contribution margin, the higher is the
increase in sales needed to ensure the previous profit.
The formula for determining the new volume of sales to maintain the same profit, given a
reduction in price, will be
New Sales Volume = Total Fixed Cost + Total Profit/New Selling Price – Average
Variable Cost
For example, suppose a firm has a fixed cost of Rs. 8,000 and the profit target is Rs.20,000.
If the sales price is Rs.8 and the average variable cost is Rs. 4, then the total volume of
sales should be 7,000 units on the basis of the formula given under target price.
Changein Costs:
When costs undergo change, the selling price and the quantity produced and sold also
undergo changes.
Changes in costcan be in two ways:
(i) Change in variable cost, and
(ii) Change in fixed cost.
(i) Variable CostChange:
An increase in variable costs leads to a reduction in the contribution margin. This reduction
in the contribution margin will shift the break-even point downward. Conversely, with the
fall in the proportion of variable costs, contribution margins increase and break-even point
moves upwards.
Under conditions of changing variable costs, the formulas to determine the new
quantity or the new selling price are:
(a) New Quantity or Sales Volume = Contribution to Margin/Present Selling Price – New
Variable CostPer Unit

31. (b) New Selling Price = Present Sale Price + New Variable Cost-PresentVariable Cost
Example:
The contribution margin is Rs. 64,000, the present sale price is Rs.10 and the present
variable cost is Rs.6. If the variable cost per unit goes up from Rs.6 to Rs. 7, what will be
the new sales volume and price?
New Sales Volume = 64,000 /10-7 = 64,000 /3 = 21,300 units
New Sales Price = (10+7-6) = Rs.11.
(ii) Fixed CostChange:
An increase in fixed cost of a firm may be caused either due to a tax on assets or due to an
increase in remuneration of management, etc. It will increase the contribution margin and
thus push the break-even point upwards. Again to maintain the earlier level of profits, a
new level of sales volume or new price has to be found out.
New Sales Volume = Present Sale Volume + (New Fixed Cost + Present Fixed
Costs)/(PresentSelling Price-Present Variable Cost)
New Sale Price = Present Sale Price + (New Fixed Costs – Present Fixed Costs)/Present
Sale Volume
Example:
The fixed cost of a firm increases from Rs. 5,000 to Rs. 6,000. The variable cost is Rs. 5
and the sale price is Rs. 10 and the firm sells 1,000 units of the product
New Sales Volume = 1,000 + 6,000 – 5,000/10-5=1,000+1,000/5 = 1,000+200 = 1,200
units
New Sale Price =10 + 6,000-5,000/1,000 = 10 + 1,000/1,000 = Rs.10 + Re 1
= Rs. 11

32. Decision on Choice of Techniqueof Production:
A firm has to decide about the most economical production process both at the planning
and expansion stages. There are many techniques available to produce a product. These
techniques will differ in terms of capacity and costs.
The breakeven analysis is the most simple and helpful in the case of decision on a choice
of technique of production. For example, for low levels of output, some conventional
methods may be most probable as they require minimum fixed cost.
For high levels of output, only automatic machines may be most profitable. By showing the
cost of different alternative techniques at different levels of output, the break-even analysis
helps the decision of the choice among these techniques.
Makeor BuyDecision:
Firms often have the option of making certain components or for purchasing them from
outside the concern. Break-even analysis can enable the firm to decide whether to make or
buy.
Example:
A manufacturer of car buys a certain components at Rs. 20 each. In case he makes it
himself, his fixed and variable cost would be Rs. 24,000 and Rs.8 per component
respectively.
BEP = Fixed Cost/PurchasePrice – Variable Cost
=24,000/20-8 = 24,000/12 = 2,000 units
From this, we can infer that the manufacturer can produce the parts himself if he needs
more than 2,000 units per year.
However, certain considerations need to be taken account of in a buying decision,
such as:
(i) Is the required quality of the productavailable?
(ii) Is the supply from the market certain and timely?
(iii) Do the supplies of the components try to take any monopoly advantage?

33. PlantExpansion Decisions:
Firms often have the option of making certain components or for purchasing them from
outside the concern. Break-even analysis can enable the firm to decide whether to make or
buy.
Example:
A manufacturer of car buys a certain components at Rs. 20 each. In case he makes it
himself, his fixed and variable cost would be Rs. 24,000 and Rs.8 per component
respectively.
BEP = Fixed Cost/PurchasePrice – Variable Cost
=24,000/20-8 = 24,000/12 = 2,000 units
From this, we can infer that the manufacturer can produce the parts himself if he needs
more than 2,000 units per year.
However, certain considerations need to be taken account of in a buying decision,
such as:
(i) Is the required quality of the productavailable?
(ii) Is the supply from the market certain and timely?
(iii) Do the supplies of the components try to take any monopoly advantage?
PlantShutDown Decisions:
In the shut-down decisions, a distinction should be made between out of pocket and sunk
costs. Out of pocket costs include all the variable costs plus the fixed cost which do not
vary with output. Sunk fixed costs are the expenditures previously made but from which
benefits still remain to be obtained e.g., depreciation.
Advertisingand Promotion MixDecisions:
The main objective of advertisement is to stimulate or increase sales to all customers—
former, present and future. If there is keen competition, the firm has to undertake vigorous

34. campaign of advertisement. The management has to examine those marketing activities
that stimulate consumer purchasing and dealer effectiveness.
The break-even point concept helps the management to know about the circumstances. It
enables him not only to take appropriate decision but by showing how these additional
fixed cost would influence BEPs. The advertisement cost pushes up the total cost curve by
the amount of advertisement expenditure.
Decision RegardingAddition or Deletion of Product Line:
If a product has outlived its utility in the market immediately, the production must be
abandoned by the management and examined what would be its consequent effect on
revenue and cost. Alternatively, the management may like to add a product to its existing
product line because it expects the product as a potential profit spinner. The break-even
analysis helps in such a decision.
COST SHEET
The components of cost explained above can be presented in the form of a statement. Such
a statement of cost giving total cost, cost per unit alongwith different cost components of
is termed as a cost sheet. The computation of different cost components and preparation is
a costsheet can be understood with the following illustration :
Illustration 10.1 : Calculate the Prime cost, Factory cost, Total cost of production and Cost
of sales from the following particulars :
Rs
. Rs.
Raw Materials consumed ...... 20,000
Wages paid to labourers ...... 5,000

35. Directly chargeable expenses ...... 1000
Oil &
Waste ...... 100
Wages of Foremen ...... 1,000
Storekeepers' Wages ...... 500
Electric Power ...... 200
Lighting : Factory 500
Office 200 700
Rent : Factory
2,00
0
Office
1,00
0 3,000
Repairs & Renewals :
Factory Plant 500
Machinery
1,00
0
Office Premises 200 1,700
Depreciation :
Office Premises 500
Plant & Machinery 200 700
Consumable Stores 1,000......
Manager's Salary ...... 2,000

36. Directors' Fees ...... 500
Office Printing & Stationery ...... 200
Telephone Charges ...... 50
Postage & Telegrams ...... 100
Salesmen's Commission & Salary ...... 500
Travelling Expenses ...... 200
Advertisin
g ...... 500
Warehouse Charges ...... 200
Carriage Outward ...... 150

37. 26
Solution : COST SHEET
Rs. Rs.
Direct material : Raw material consumed 20000
Direct labour : Wages paid to labourers 5000
Direct expenses : Directly chargeable expenses 1000
PRIME COST 26,000
Add : Factory
Overheads :
Indirect material : Consumable stores
1,00
0
Oil and waste 100 1,100
Indirect labour : Wages of foreman
1,00
0
Storekeepers' wages 500 1,500
Indirect expenses : Electric power 200
Factory lighting 500
Factory rent
2,00
0
Repairs & Renewals :
Plant 500
Machinery
1,00

38. 0
Depreciation :
Plant & machinery 200 4,400 7,000
FACTORYOR WORKS COST 33,000
Add : Office and administrative overheads :
Indirect material : Office printing and stationery 200
Indirect labour : Manager's salary
2,00
0
Directors' fees 500 2,500
Indirect expenses : Office lighting 200
Office rent
1,00
0
Repairs and renewals
office premises 200
Dep. on office premises 500
Telephone charges 50
Postage & telegrams 100 2,050 4,750
TOTAL COST OF PRODUCTION 37750
Add: Selling & Distribution overheads :
Indirect labour : Salesmen's commission
and salary 500
Indirect expenses : Travelling expenses 200
Advertising 500

39. Warehouse charges 200
COST OF SALES
Carriage outward 150 1,050 1,550
39,300

40. Illustration 10.2: The following figures have been extracted from the books of
XYZ Ltd. for the year ending 31st March, 2000.
Rs.
Direct materials 70,000
Direct wages 75,000
Indirect wages 10,000
Other direct expenses 15,000
Factory rent and rates 5,000
Office rent and rates 500
Indirect materials 500
Depreciation of plant 1,500
Depreciation of office furniture 100
Managing Director's remuneration 12,000
General factory expenses 5,700
General office expenses 1,000
General selling expenses 1,000
Travelling expenses 1,100
Office salaries 4,500
Carriage outward 1,000
Advertisements 2,000
Sales 2,50,000
From the above figures, calculate the following :
(a) Prime cost
(b) Works cost
(c) Cost of production
(d) Cost of sales
(e) Net profit

41. Solution :
XYZ LTD.
CostSheet for the year ending 31st March, 2000
R s . Rs.
Direct materials consumed 70,000
Direct wages 75,000
Direct expenses 15,000
Prime Cost 1,60,000
Factoryoverhead:
Indirect wages 10,000
Factory rent & rates 5,000
Indirect materials 500
Depreciation of plant 1,500
General factory expenses 5,700 22,700
Works cost 1,82,700
Office and Administration Overhead
Office rent and rates 500
Depreciation of office furniture 100
Managing Director's remuneration 12,000
Office salaries 4,500
General office expenses 1,000 18,100
Costof Production 2,00,800
Selling and distribution overhead:

42. Travelling expenses 1,100
Carriage outward 1,000
Advertisements 2,000
General selling expenses 1,000 5,100
Costof Sales 2,05,900
Profit 44,100
Sales 2,50,000