Chapter: 3

Income Measurement and

Reporting
-Indra Bohara
Product cost
 Product cost is the sum of manufacturing cost
 Sum of prime cost (i.e. direct materials, direct labour and
direct expenses) and manufacturing overheads (factory
overheads).
 Manufacturing overheads includes:
a. Fixed manufacturing overheads
b. Variable manufacturing overheads
 Product cost = Direct materials + Direct wages + Direct
expenses + variable manufacturing overheads + Fixed
manufacturing overheads)
Period cost
 Period cost is the amount of cost which is incurred as per
the volume of sales and time contribution or use.
 Period cost includes office overheads and selling
overheads.

 Period cost = Variable office overheads + fixed office

overheads + variable selling overheads + fixed selling
overheads
 Methods of Costing
 Costing is a technique of calculating cost of product or department etc.

 Product cost includes cost of production.

 Product cost per unit is used to determine the value of inventory.

 Therefore, product cost is also known as inventorial cost.

 There are two methods of costing used to calculate product cost, they are:
a. Variable costing and
b. Absorption costing
 Variable Costing
 Variable costing is costing method which considers all variable
manufacturing costs in product cost.

 Therefore,

 Product cost = Prime cost + Variable manufacturing overheads

 Cost of goods sold = Product cost + value of opening stock – value

of closing stock.
 Absorption Costing
 Absorption costing is costing method which considers all
manufacturing costs in product cost.

 Therefore,

 Product cost = Prime cost + fixed manufacturing overheads

+ variable manufacturing overheads

Cost of goods sold = Product cost + value of opening stock – value

of closing stock.
 Calculations
a. Standard fixed manufacturing overheads rate
𝐹𝑖𝑥𝑒𝑑 𝑚𝑎𝑛𝑢𝑓𝑎𝑐𝑢𝑟𝑖𝑛𝑔 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
or, Fixed manufacturing overheads rate =
𝑁𝑜𝑟𝑚𝑎𝑙 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑛𝑖𝑡𝑠

Note : if normal capacity is not given, production units are the normal
capacity units.

b. Inventory valuation
Value of opening stock = Opening stock units x product cost per unit.
Value of closing stock = Closing stock units x product cost per unit.
 Calculations

c. Calculation of sales units

Sales units = Opening stock units + Production units – Closing stock

units.

𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

d. Variable selling overheads per unit =
𝑆𝑎𝑙𝑒𝑠 𝑢𝑛𝑖𝑡𝑠

𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑜𝑓𝑓𝑖𝑐𝑒 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

e. Variable office overheads per unit =
𝑆𝑎𝑙𝑒𝑠 𝑢𝑛𝑖𝑡𝑠
 Exercise

Page No. 169 from old edition book

Problem No. 4-2
 Exercise Problem No. 4-2
Required 1: Calculation of closing stock units
Sales units = Opening stock units + Production units – Closing stock units
= 1,000 units
Required 2: Calculation of prime cost
Prime cost = Direct materials + Direct wage + Direct expenses
= Rs. 55,000
Required 2: Calculation of product cost under AC and VC
AC VC
Prime cost Rs. 55,000 Rs. 55,000
Variable manufacturing overheads 15,000 15,000
Fixed manufacturing overheads 10,000 -
Total Product cost Rs. 80,000 Rs. 70,000
 Exercise Problem No. 4-2
Required 2: Calculation of product cost under AC and VC
AC VC
Prime cost Rs. 55,000Rs. 55,000
Variable manufacturing overheads 15,000 15,000
Fixed manufacturing overheads 10,000 -
Total Product cost Rs. 80,000 Rs. 70,000
Product cost per unit = Direct material per unit + Direct wage per unit + Direct
exp. per unit + V. Mfg. OH per unit + F. Mfg. OH per unit
Under AC = 25,000/5,000 + 20,000/5,000 + 10,000/5,000 + 15,000/5,000 +
10,000/Normal capacity = Rs. 16/unit

Under VC = 25,000/5,000 + 20,000/5,000 + 10,000/5,000 + 15,000/5,000 = Rs. 14/unit

 Exercise Problem No. 4-2
Required 2: Calculation of period cost under AC and VC
AC VC
Variable office and selling overheads Rs. 12,000 Rs. 12,000
Fixed office and selling overheads 13,000 13,000
Fixed manufacturing overheads - 10,000
Total period cost Rs. 25,000 Rs. 35,000
Required 4: Calculation of manufacturing and non-manufacturing overheads
Manufacturing OH = V. Mfg. OH + F. Mfg. OH = 10,000 + 15,000 = Rs. 25,000
Non-Manufacturing OH = V. Selling & Office OH + F. Selling & office OH.
= 12,000 + 13,000 = 25,000

Total OH = Mfg. OH + Non-mfg. OH = 25,000 + 25,000 = 50,000

 Exercise Problem No. 4-2
Required 5: Determination of value of inventory
AC VC
Opening stock [2,000 x 16, 2000 x14] Rs. 32,000 Rs. 28,000
Closing stock [1,000 x 16, 1000 x14] Rs. 16,000 Rs. 14,000
Required 6: Determination of cost of goods sold under AC and VC

Required 6: Determination of variable cost per unit and fixed cost