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C A: C C C S: OST Nalysis OST Lassification AND OST Heet
C A: C C C S: OST Nalysis OST Lassification AND OST Heet
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 15
(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.
2.3 BY FUNCTION
All indirect costs are called overheads and can be classified on functional basis into:
2.8 BY PAYMENT
On the basis of payment involved costs are classified as follows:
2.9 BY NORMALITY
Costs are classified into the following two groups:
(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.
Prime cost
Indirect cost or overheads or oncost
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.
24 Cost Accounting
Illustration-1
|
Opening stock of raw materials 18,000
Purchase of raw materials 2,30,000
Carriage inward 27,000
Sale of raw material scrap 8,000
Closing stock of materials 20,000
26 Cost Accounting
Illustration-3
|
Stock on materials on 1.4.09 28,000
Purchase of materials 1,60,000
Expenses in connection with purchases 20,000
Direct materials returned to supplier 20,000
Stock of direct materials on 31.3.10 35,000
Manufacturing wages 90,000
Royalty charges 75,000
Hire and maintenance charges of a special 45,000
machinery
Solution
Statement showing computation of prime cost:
| |
Materials consumed:
Stock on materials on 1.4.09 28,000
Add: Purchase of materials 1,60,000
Cost Analysis: Cost Classification and Cost Sheet 27
Illustration-4
|
Opening stock of raw materials 40,000
Purchase of raw materials 7,50,000
Carriage inward 25,000
Closing stock of raw materials 35,000
Carriage outward 30,000
Chargeable expenses 65,000
Indirect expenses 50,000
Factory wages 2,25,000
Factory rent 16,000
Solution
| Total |
Materials consumed:
Opening stock of materials 40,000
Add: Purchase of raw materials 7,50,000
28 Cost Accounting
Illustration-5
From the following information prepare a cost sheet showing (i) Prime cost, (ii) Works cost, (iii)
Cost of production, (iv) Cost of sales and (v) Profit:
|
Purchase of materials 5,35,000
Stock of materials on 1.4.09 28,000
Stock of materials on 31.3.10 32,500
Manufacturing wages 2,85,000
Indirect materials 21,000
Indirect wages 42,700
Office salaries 57,600
Carriage inward 18,300
Chargeable expenses 53,000
Internal transport (factory) 27,500
Drawing office expenses 25,500
Advertisement 44,600
Printing and stationery 16,400
Works manager’s salary 30,000
Carriage outward 18,500
Officer rent, rates and insurance 21,600
Director’s fees 22,000
Cost Analysis: Cost Classification and Cost Sheet 31
Illustration-6
(Simple cost sheet with stocks)
The following information is taken from the records of Arthi Ltd. for the month of April 2009.
01.04.2009 30.04.2009
| |
Stock of raw materials 37,500 41,250
Stock of work-in-progress 28,700 23,200
Stock of finished goods 46,400 53,200
Transactions during the month are:
Indirect materials 17,550
Productive wages 97,500
Indirect wages 20,900
Purchase of materials 1,46,500
Other factory expenses 24,800
32 Cost Accounting
Prepare a cost sheet showing (a) Prime cost, (b) Works cost, (c) Cost of production, (d) Cost of
sales and (e) Profit.
Solution
Solution
Cost sheet for 6 months ending 31.3.2009
Total Ratio Model Model
Particular
(|) ‘A’ (|) ‘B’ (|)
Materials Consumed:
Stock of materials
On 1.10.08 29,800
Add: Purchase of materials 1,24,500
1,54,300
Less: Stock of materials on 31.3.09 21,970 1,32,330 5:6 60,150 72,180
Direct labour 81,900 4:5 36,400 45,500
Prime cost 96,550 1,17,680
Factory overheads 62,100 4:5 27,600 34,500
Works cost 1,24,150 1,52,180
Office overheads 43,000 1:1 21,500 21,500
Cost of production 1,45,650 1,73,680
Selling overheads 35,700 2:3 14,280 21,420
Total cost 1,59,930 1,95,100
Profit: 20% on sales (or) 20/80 on cost 39,983 48,775
Sales 1,99,913 2,43,875
Number of units produced 2,500 3,000
Selling price per unit 79.97 81.29
(Approx.) (Approx.)
Illustration-8
The following expenses were taken from the account books of Nortan Ltd. for the year ending
31.3.2010:
|
Direct materials 6,00,000
Direct labour 4,25,000
Direct expenses 65,000
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
Illustration-9
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 3,75,000
Direct labour 2,40,000
Factory overheads 95,000
36 Cost Accounting
Additional information:
1. 3,500 units were produced during the year
2. Stock of finished goods 350 units valued at |70,000 as on 01.04.2008
3. Stock of finished goods as on 31.03.2009 are 400 units.
Solution
Note:
Valuation of closing stock of finished goods:
Cost of production during the year
(i) Current cost of production per unit =
Number of units produced during the year
7,70,000
= = |220
3,500
Value of closing Stock = 400 × 220 = |88,000
Cost of production + Value of opening stock
(ii) Average cost of production per unit =
Units produced + Opening stock units
8,40,000
= = |218.18 (Approx.)
3,850
Value of closing stock = 400 × 218.18 = |87,272
Illustration-10
The books of Adarsh Manufacturing Company presents the following data for the month of April,
2001.
Direct Labour Cost |17,500 being 175% of works overhead and cost of goods sold excluding admin-
istration expenses |56,000. Inventory accounts showed the following opening and closing balances:
38 Cost Accounting
April 1 April 30
| |
Raw materials 8,000 10,600
Work-in-progress 10,500 14,500
Finished goods 17,600 19,000
Other data:
Selling expenses 3,500
General and administration expenses 2,500
Sales for the month 75,000
(i)
Computation of value of materials purchased
| |
Cost of goods sold - 56,000
Add: Closing stock of raw materials - 10,600
Closing stock of work-in-progress - 14,500
Closing stock of finished goods - 19,000
1,00,100
Less: Opening stock of raw materials 8,000
Opening stock of work-in-progress 10,500
Opening stock of finished goods 17,600
Direct labour 17,500
Works overhead (17,500×100/175) 10,000 63,600
Raw materials purchase - 36,500
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 8,000
Add: Purchase of materials 36,500
44,500
Less: Closing stock of raw materials 10,600 33,900
Direct labour 17,500
Prime cost 51,400
Factory overheads (17,500×100/175) 10,000
61,400
Add: Opening stock of work-in-progress 10,500
71,900
Less: Closing stock of work-in-progress 14,500
Works cost 57,400
General and administration overheads 2,500
Cost of production 59,900
Add: Opening stock of finished goods 17,600
77,500
Less: Closing stock of finished goods 19,000
Cost of goods sold 58,500
Selling expenses 3,500
Cost of sales 62,000
Profit (bf) 13,000
Sales 75,000
40 Cost Accounting
Illustration-11
Inventories
Beginning Ending
| |
Finished goods 1,10,000 95,000
Work-in-progress 70,000 80,000
Raw materials 90,000 95,000
Additional information:
Cost of goods available for sale 6,84,000
Total goods processed during the period 6,54,000
Factory overheads 1,67,000
Direct materials used 1,93,000
Requirements:
(i) Determine raw materials purchased.
(ii) Determine the direct labour cost incurred.
(iii) Determine the cost of goods sold.
(B.Com. (Hons.), Delhi University)
Solution
(i)
Computation of raw materials purchased
|
Direct materials used 1,93,000
Add: Closing stock of raw 95,000
materials
2,88,000
Less: Opening stock of raw 90,000
materials
Raw materials purchase 1,98,000
Cost Analysis: Cost Classification and Cost Sheet 41
(ii)
Determination of labour cost incurred
|
Total goods processed during the 6,54,000
period
Less: Opening stock of 70,000
work-in-progress
5,84,000
Less: Factory overheads 1,67,000
Prime cost 4,17,000
Less: Direct materials used 1,93,000
Direct labour cost 2,24,000
(iii)
Determining the cost of goods sold
|
Cost of goods available for sale 6,84,000
Less: Closing stock of finished 95,000
goods
Cost of goods sold 5,89,000
2.13 EXERCISES
I. Objective Type Questions
(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)
1. Write short notes on: (a) Cost centre; (b) Opportunity cost; (c) Notional cost; (d) Out of
pocket cost; and (e) Policy cost.
2. What do you understand by cost classification? Explain the various cost elements on the basis
of variability.
3. Explain the functionwise classification of overheads.
4. Explain cost sheet. What are its uses?
5. All costs are controllable. Explain.
6. Explain what do you understand by chargeable expenses and state its treatment in cost
accounts. (CA-Inter)
7. Explain various costs used in decision making and explain their characteristics.
(B.Com. (Hons), Delhi University)
8. What is the purpose of classifying costs?
|
Opening stock of materials 20,000
Purchase of materials 1,25,000
Carriage on purchases 15,000
Sale of materials scrap 7,000
Closing stock of materials 18,000
|
Purchase of direct materials 3,50,000
Carriage inward 27,000
Carriage outward 18,000
44 Cost Accounting
|
Opening Stock of materials 35,000
Purchase of materials 4,10,000
Import duty and Clearing charges 1,50,000
Other purchase expenses 25,000
Closing stock of materials 30,000
Factory wages 2,40,000
Factory overheads 1,60,000
Royalty paid on production 1,20,000
Hire charges for special machinery 40,000
|
Prime cost 80,000
Factory overheads 45,000
Opening stock of work-in-progress 30,000
Closing stock of work-in-progress 25,000
Office overheads 70,000
|
Prime cost 1,50,000
Production overheads 60,000
Opening stock of work-in-progress 27,000
Closing stock of work-in-progress 30,000
|
Raw materials consumed 80,000
Wages 20,000
Works expenses charged at 100% of wages, office overheads charged at 25% on works cost and
selling overheads at 10% on works cost.
(Ans: Cost of sales |1,62,000)
|
Cost of sales 5,00,000
Profit 20% on sales
|
Raw materials consumed 30,000
Labour 60,000
Works overhead is charged at 40% of works cost and office overheads is taken at 20% of total
cost. The standard product sold during the period is 180 units at |1200 each.
(B.Com., Bharathidasan University)
(Ans: Total cost |1,87,500; Total profit - |28,500; Cost per unit |1041.67; Profit per unit
|158.33)
46 Cost Accounting
Note :
(a) Works cost = 40/60 on prime cost
(b) Office overheads = 20/80 on works cost.
9. The following information is taken from the records of X Ltd. for the year ending 31.3.2010:
B. Comprehensive questions
1. Simple cost sheet-with detailed cost elements
From the following particulars taken from the books of United Engineering Ltd., prepare a
cost sheet for the year ending 31.3.2010.
|
Stock of materials on 1.4.2009 65,700
Stock of materials on 31.3.2010 48,500
Purchase of materials 3,79,000
Productive wages 2,83,000
Hire charges and maintenance of a special equipment 46,000
Royalty paid 84,000
Carriage on purchases 21,500
Carriage outward 24,900
Indirect materials 34,000
Indirect wages 30,000
Foreman salary 20,000
Cost Analysis: Cost Classification and Cost Sheet 47
General manager’s salary to be apportioned in the ratio of 4 : 3 : 3 to factory, office and sales
departments. Sale of finished goods amounted to |15,00,000.
(Ans: Prime cost - |8,30,700; Works cost - |10,51,100; Cost of production - |11,72,600; Cost
of sales - |13,14,600; and Profit - |1,85,400)
1.4.2009 31.3.2010
| |
Stock of materials 22,750 26,300
Stock of work-in-progress 18,200 15,700
Stock of finished goods 37,600 34,500
|
Purchase of raw materials 6,20,000
Carriage inward 21,400
Factory manager salary 25,000
Depreciation of plant and machinery 27,100
Office rent, rates and insurance 14,600
48 Cost Accounting
(Ans: Prime cost - |10,07,850; Works cost - |11,77,450; Cost of production - |13,04,850; Cost
of goods sold - |13,07,950; Cost of sales - |13,72,650; Profit |2,27,350)
3. Dev Ltd. provides the following particulars for the month of August, 2009. Prepare a cost
sheet:
1.8.2009 31.8.2009
| |
Stock of raw materials 75,000 60,000
Stock of work-in-progress 27,000 36,500
Stock of finished goods 50,000 62,000
|
Purchase of raw materials 2,50,000
Factory expenses 82,000
Depreciation of plant and machinery 41,000
Selling and distribution overheads 27,500
Cost Analysis: Cost Classification and Cost Sheet 49
(Ans: Prime cost - |4,35,000; Works cost - |5,32,500; Cost of production - |5,67,000; Cost of
goods sold - |5,55,000; Cost of sales - |5,82,500; Profit - |17,500)
1.4.2009 31.3.2010
| |
Deluxe Premium Deluxe Premium
Stock of work-in-progress 70,000 40,000 90,000 80,000
Stock of finished goods 1,65,000 1,10,000 2,10,000 1,70,000
|
Materials consumed 80,000
Direct labour 55,000
Factory overheads 33,000
Selling overheads at |2 per unit
Number of units produced 4,200
Number of units sold - 4,000 at |45 per unit