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COST ANALYSIS: C OST CLASSIFICATION
AND COST SHEET 2
Cost Classification—Basis
Miscellaneous Cost Terms
Cost Sheet/Cost Statement
Cost Sheet—Advantages
Cost analysis and cost classification involve grouping of costs into various logical groups on some
suitable basis. Cost analysis and classification are essential for the purpose of cost control and
managerial decision making.
There are various methods of classification of costs. The method selected is based on the purpose
for which it is needed. The important bases of classification are:
1. By nature or element
2. By relation to cost centre or product
3. By function
4. By behaviour or variability
5. By time
6. By controllability
7. For decision making purpose
8. By payment
9. By normality.
Cost Analysis: Cost Classification and Cost Sheet
(c) Expenses
It includes all costs other than materials and labour cost. It is the cost of various services consumed
by an undertaking. It is further classified into direct expenses and indirect expenses.
(i) Direct expenses: It includes cost of all services specifically incurred for a product, process, job or
cost centre. They are directly identified with a particular cost object. It is conveniently allocated
to a particular cost object in whole. It is also called chargeable expenses. It includes excise duty,
royalty, hire charges and repairs and maintenance of special equipment required for a job; cost of
special drawings, designs, moulds and patterns.
(ii) Indirect expenses: Indirect expenses are expenses incurred in relation to two or more products,
processes, jobs or cost centres. It is apportioned to various cost objects. It includes rent, rates,
taxes, insurance, lighting, depreciation, power, fuel, advertisement and repairs and maintenance.
2.2 BY RELATION TO COST CENTRE
On the basis of relation to cost centre, costs are classified as direct costs and indirect costs.
(a) Direct Costs
Direct costs are incurred in relation to a specific product, process, job or cost centre. They consists
of direct materials, direct labour and direct expenses. The total of all direct costs is called prime
cost.
(b) Indirect Costs
Indirect costs are general expenses incurred for two or more products, processes, jobs or cost centres.
They are apportioned to various cost objects on suitable basis. They include indirect materials,
indirect labour and other indirect expenses. The total of all indirect costs is also called overheads,
oncost or burden.
2.3 BY FUNCTION
All indirect costs are called overheads and can be classified on functional basis into:
(a) Factory overheads
(b) Office and administration overheads
(c) Selling overheads
(d) Distribution overheads.
(a) Factory Overheads
Factory overheads is also called production overheads, works overheads or manufacturing overheads.
It includes all indirect expenses in relation to production activity. It includes all indirect materials
used in production, indirect labour expended in production, works manager’s salary and allowances,
repairs, maintenance, depreciation and insurance of factory building, plant, equipment and machin-
20 Cost Accounting
(ii) Production cost centre and service cost centre Production cost centre refers to a place where
goods are produced. They actually stand for a production department.
Service cost centre stands for divisions which help the production departments by providing various
services like maintenance department, time office, boiler house, canteen etc.
(iii) Operation and process cost centre Operation cost centre stands for the total activities carried
out in a production department is divided into smaller functions or operation in relation to which
costs are accumulated, e.g., cutting, welding, machining, boring etc.
Process cost centre stands for a department where production is carried on continuously. Costs are
collected for a process as a single unit.
(h) Profit Centre
Profit centre is a place or division in an organisation which brings revenue.
(i) Value Added
Value added refers to increase in the market value of a product in excess of the cost incurred for
altering or changing the composition of the product.
(j) Stock-Out Cost
Stock-out cost refers to the loss suffered by a company due to stoppage of production due to non-
availability of raw materials.
(k) Shut-Down Cost
Shut-down cost refers to expenses continued to be incurred even after temporary closure of produc-
tion facilities, e.g., insurance, security, management expenses like director’s fees, managing director’s
salary, salary and wages to skilled employees, Audit fees, etc.
The following chart shows classification of costs:
Total cost
Materials Labour Other expenses
Direct materials
Indirect materials
Direct labour
Indirect labour
Direct
23, expenses
Indirect expenses
Prime cost Indirect cost or overheads or oncost
Production overheads
Office and administration overheads
Selling overheads
Distribution overheads
Cost Analysis: Cost Classification and Cost Sheet 23
Add: Opening stock of finished goods xxx xxx
Cost of goods available for sale xxx xxx
Less: Closing stock of finished goods xxx xxx
Cost of goods sold xxx xxx
Add: Selling and Distribution overheads:
Advertisement, free samples, showroom expenses xxx
Sales office salary and allowances xxx
Salesmen’s salary and commission xxx
Travelling expenses (for sales purpose) xxx
Warehouse rent and rates xxx
Carriage outward, delivery van expenses xxx xxx xxx
Cost of sales/total cost xxx xxx
Profit/loss xxx xxx
Sales xxx xxx
Advantages of a cost sheet
1. It helps to ascertain total cost and cost per unit.
2. Costs are classified under proper headings and presented in a logical order.
3. It enables inter-firm and intra-firm comparison of costs.
4. It helps in price fixation.
5. It helps to ascertain profit or loss for a period.
6. It helps in preparing tenders and quotations.
7. It helps in preparing budgets.
8. It enables close watch over cost for cost control.
Production or manufacturing accounts
If information for a period relating to cost of production is presented in a ledger format, it is called
production account or manufacturing account. All production expenses are debited to this account.
Opening stock of work-in-progress is shown on the debit side. Closing stock of work-in-progress is
shown on the credit side. The following is a proforma of a production account.
26 Cost Accounting
Add: Purchase of materials 4,00, Add: Import duty and clearing charges 1,00, Add: Carriage on purchase 60, Add: Transit insurance and handling charges 25, 6,35, Less: Return of defective materials to supplier 40, Less: Sale of raw materials scrap 20, Less: Stock of materials on 31.3.10 60,000 1,20, Cost of materials consumed 5,15,
Illustration-
(Computation of prime cost)
From the following calculate the prime cost:
| Stock on materials on 1.4.09 28, Purchase of materials 1,60, Expenses in connection with purchases 20, Direct materials returned to supplier 20, Stock of direct materials on 31.3.10 35, Manufacturing wages 90, Royalty charges 75, Hire and maintenance charges of a special machinery
45,
Solution
Statement showing computation of prime cost:
| | Materials consumed: Stock on materials on 1.4.09 28, Add: Purchase of materials 1,60,
Cost Analysis: Cost Classification and Cost Sheet 27
Add: Expenses in connection with purchases 20, 2,08, Less: Direct materials returned 20, Less: Stock of direct materials on 31.3.10 35,000 55,000 1,53, Manufacturing wages 90, Direct expenses: Royalty charges
75,
Hire and maintenance charges of a special machinery 45,000 1,20,
Prime cost 2,40,
Illustration-
(Computation of prime cost)
From the following information calculate the prime cost:
| Opening stock of raw materials 40, Purchase of raw materials 7,50, Carriage inward 25, Closing stock of raw materials 35,
Carriage outward 5,
Chargeable expenses 65,
Indirect expenses 50,
Factory wages 2,25,
Factory rent 16,
Solution
Statement showing prime cost:
| Total | Materials consumed: Opening stock of materials 40, Add: Purchase of raw materials 7,50,
Salesmen’s salary, allowances and
(Simple cost sheet with stocks)
Prepare a cost sheet showing (a) Prime cost, (b) Works cost, (c) Cost of production, (d) Cost of
sales and (e) Profit.
Particulars (^) Total |
- Add: Carriage inward 25, - 8,15, - 35,000 7,80, materials
- Factory wages 2,25,
- Chargeable expenses 65, - Prime cost 10,70,
- Illustration- - Purchase of materials 5,35, | - Stock of materials on 1.4.09 28, - Stock of materials on 31.3.10 32, - Manufacturing wages 2,85, - Indirect materials 21, - Indirect wages 42, - Office salaries 57, - Carriage inward 18, - Chargeable expenses 53, - Internal transport (factory) 27, - Drawing office expenses 25, - Advertisement 44, - Printing and stationery 16, - Works manager’s salary 30, - Carriage outward 18, - Officer rent, rates and insurance 21, - Director’s fees 22, - Cost Analysis: Cost Classification and Cost Sheet - Office equipment and furniture 14,
- Managing director’s Salary (30%) 13,
- Lighting - office 9,000 1,55, - Cost of production 13,44,
- Advertisement 44, Selling and distribution overheads: - 23, expenses
- Carriage outward 18,
- Warehouse expenses 19,
- Managing director’s salary (30%) 13,
- Free samples distributed 3,
- Packing and forwarding expenses 12,300 1,35, - Cost of sales/total cost 14,80, - Profit (bf) 1,69, - Sales 16,50,
- Illustration- - 01.04. The following information is taken from the records of Arthi Ltd. for the month of April 2009. - 30.04. |
- Stock of raw materials 37,500 41, |
- Stock of work-in-progress 28,700 23,
- Stock of finished goods 46,400 53,
- Indirect materials 17, Transactions during the month are:
- Productive wages 97,
- Indirect wages 20,
- Purchase of materials 1,46,
- Other factory expenses 24,
- Administration expenses 41, 32 Cost Accounting
- Sale of factory scrap 2,
- Advertisement 26,
- Carriage outward 5,
- Sales 4,35, - Cost sheet for the month of April, Solution
- Stock of materials on 1.4.09 37, Materials Consumed:
- Add: Purchase of materials 1,46, - 1,84,
- Less: Stock of materials on 30.4.09 41,250 1,42,
- Productive wages 97, - Prime cost 2,40, - Indirect materials 17, Production overheads: - Indirect wages 20, - Other factory expenses 24, - 63,
- Less: Sale of factory scrap 2,400 60, - 3,01,
- Add: Stock of work-in-progress on 1.4.09 28, - 3,29,
- Less: Stock of work-in-progress on 30.4.09 23, - Works cost 3,06,
- Administration overheads: 41, - Cost of production 3,48,
Cost Analysis: Cost Classification and Cost Sheet 35
Charge factory overheads at 60% of direct labour, office overheads at 20% on factory cost and selling
overheads at 15% of factory cost.
Prepare a cost sheet showing profit earned if the company earns a profit of 25% on sales.
Solution
Cost sheet for the month of April, Solution
Total (|) Direct materials 6,00, Direct labour 4,25, Direct expenses 65, Prime cost 10,90, Factory overheads - 60% of direct labour
2,55,
Works cost 13,45, Office overheads - 20% on works cost
2,69,
Cost of production 16,14, Selling overheads - 15% on works cost
2,01,
Total cost 18,15, Profit - 25% on sales or 25/75 on total cost
6,05,
Sales 4,35,
Illustration-
(Finding the value of closing stock of finished goods)
The management of Jaihind Ltd. gives you the following information for the year ending 31.3.09.
You are required to prepare a cost sheet.
| Direct materials 3,75, Direct labour 2,40, Factory overheads 95,
36 Cost Accounting
Administration overheads 60, Selling overheads 36, Sales 8,97,
Additional information:
1. 3,500 units were produced during the year
2. Stock of finished goods 350 units valued at |70,000 as on 01.04.
3. Stock of finished goods as on 31.03.2009 are 400 units.
Solution
(i) Valuation of stock of finished goods on current cost basis:
Cost Sheet for the year ending 31.3. Units Total | Direct materials 3,500 3,75, Direct labour - 2,40, Prime cost 3,500 6,15, Factory overheads - 95, Works cost 3,500 7,10, Administration overheads - 60, Cost of production 3,500 7,70,
Stock of finished goods 46,400 53,
3,850 8,40, Less: Closing stock of finished goods 400 88, Cost of goods sold 3,450 7,52, Selling overheads - 36, Cost of sales 3,450 7,88, Profit (bf) - 1,09, Sales 3,450 8,97,
38 Cost Accounting
April 1 |
April 30 | Raw materials 8,000 10, Work-in-progress 10,500 14, Finished goods 17,600 19, Other data: Selling expenses 3, General and administration expenses 2, Sales for the month 75,
You are required to:
(i) Compute the value of raw materials purchased
(ii) Prepare a cost statement showing the various elements of cost and also the profit.
(CA-Inter)
Solution
(i) Computation of value of materials purchased
| | Cost of goods sold - 56, Add: Closing stock of raw materials - 10,
Stock of work-in-progress 28,700 23,
Closing stock of finished goods - 19, 1,00, Less: Opening stock of raw materials 8, Opening stock of work-in-progress 10, Opening stock of finished goods 17, Direct labour 17, Works overhead (17,500× 100 /175) 10,000 63, Raw materials purchase - 36,
Cost Analysis: Cost Classification and Cost Sheet 39
Note:
(1) All items added in the cost sheet till cost of goods sold is deducted.
(2) All items deducted in the cost sheet till cost of goods sold is added.
(3) Since administration cost is not included in cost of goods sold, it is not deducted.
(ii)
Cost statement for the month of April 2001 Total | Materials consumed: Opening stock of raw materials 8, Add: Purchase of materials 36, 44, Less: Closing stock of raw materials 10,600 33, Direct labour 17, Prime cost 51, Factory overheads (17,500× 100 /175) 10, 61, Add: Opening stock of work-in-progress 10, 71, Less: Closing stock of work-in-progress 14, Works cost 57, General and administration overheads 2, Cost of production 59, Add: Opening stock of finished goods 17, 77, Less: Closing stock of finished goods 19, Cost of goods sold 58, Selling expenses 3, Cost of sales 62, Profit (bf) 13, Sales 75,
Cost Analysis: Cost Classification and Cost Sheet 41
(ii)
Determination of labour cost incurred | Total goods processed during the period
6,54,
Less: Opening stock of work-in-progress
70,
5,84, Less: Factory overheads 1,67, Prime cost 4,17, Less: Direct materials used 1,93, Direct labour cost 2,24,
(iii)
Determining the cost of goods sold | Cost of goods available for sale 6,84, Less: Closing stock of finished goods
95,
Cost of goods sold 5,89,
2.13 EXERCISES
I. Objective Type Questions
A. State whether the following statements are true or false
1. Cost centre is a place where direct materials are expended.
2. Direct materials enter the finished product.
3. The total of direct labour, direct expenses and production overheads is called conversion cost.
4. Hire charges paid for a special machinery is part of production overheads.
5. Royalty payable on production is production overheads.
6. Imputed cost results in outflow of cash.
7. Semi-variable cost is also called step cost.
8. The total of all direct expenses is called prime cost.
9. Valued added refers to cost incurred in the production of a product.
10. Variable cost per unit increases due to increase in production.
11. Fixed cost is also called period cost.
42 Cost Accounting
12. Standard cost is a predetermined cost.
13. Fixed costs are generally uncontrollable.
14. Sunk costs result in cash payment.
15. Office overheads are unavoidable costs.
(Ans: True - 2, 3, 7, 8, 11, 12, 13, 15; False - 1, 4, 5, 6, 9, 10, 14)
B. Fill in the blanks
1. Prime cost refers to total of all expenses.
2. Works cost is the total of prime cost and.
3. Costs which result in actual payment of cash is called.
4. Period cost or time cost is cost.
5. The benefit foregone due to an alternative decision is called.
6. Labour cost incurred for conversion of raw materials into finished goods is called.
7. Bad debts is an example of cost.
8. Costs remaining constant per unit is called.
9. Place, a person, a machine or a group of these in relation to which cost is ascertained is called
10. The division which brings or earns revenue for a business is called.
11. Costs which can be influenced by managerial action is called.
12. Travelling expenses incurred specifically for a particular job is called.
13. Expenses incurred for two or more jobs or cost centres is called.
14. Increase in the market value of a product in excess of costs incurred for changing or altering
its composition is known as.
15. The difference in the total cost between two levels of production is called.
(Ans: 1. Direct, 2. Factory overheads, 3. Out of pocket cost, 4. Fixed, 5. Opportunity cost,
6. Direct labour, 7. Policy, 8. Variable cost, 9. Cost centre, 10. Profit centre, 11. Controllable cost,
12. Direct expenses, 13. Indirect expenses, 14. Value added, 15. Differential cost)
II. Theory Questions
A. Short answer type questions
1. What is cost centre? Explain the various types of cost centre.
2. Explain direct materials.
3. What is direct labour?
4. What is direct expense? Give few examples.
5. What is prime cost?
6. Explain opportunity cost.
7. What is policy cost?
8. What is imputed cost?
9. What is cost classification?
10. Define out-of-pocket cost.
