1. Module-II
Costing: Cost concepts, elements of cost. Methods
of distribution of overhead costs, unit costing, job
costing and process costing; Simple problems.
Accounts: Preparation of profit and loss account
and balance sheet.
4. Learning Outcomes
Learning Outcomes:
At the end of this unit, the student will be able to
list elements and types of costs. [L1]
apply cost analysis to determine profit. [L3]
classify accounts.[L2]
compose & interpret balance sheet for a given
enterprise. [L3]
5. COST
Cost refers to the amount of expenditure incurred in
acquiring a product.
The expenditure incurred to produce an output or
provide service.
Cost can be associated with raw material, labour, other
heads constitute the overall cost of production.
Output is an important factor which influences the
cost.
6. Types of Costs
Explicit Costs: Expenses
of production.
Implicit Costs: Producer's
efforts and sacrifices
incurred in production.
7. Types of costs
Total
cost/acquisition/outlay
cost,
Average cost
Marginal costs.
Fixed cost
Variable cost
Semi-variable cost
Incremental cost
Short run and long run
costs
Opportunity cost
Direct cost and indirect
costs
Selling costs
Life cycle cost
Sunk cost
Standard cost
Recurring and Non-
recurring costs
8. Costs
Fixed costs remain the same
regardless of production
output.
Ex. of fixed costs include rental lease
payments, salaries, insurance,
property taxes, interest expenses,
depreciation, and potentially some
utilities.
Variable costs vary based on
the amount of output
produced.
Ex. of Variable costs may include
labor, commissions, and raw
materials.
Fixed Costs +
Variable Costs = Total Cost.
9. Costs
Average Cost: The per
unit cost of production
obtained by dividing the
total cost (TC) by the total
output (Q).
Marginal Costs: It is the
change in the total cost that
arises when the quantity
produced is incremented by
one unit; that is, it is the
cost of producing.
10. costs
Total Cost=F.C+V.C= f(x)+a--------------------(EQ 1)
Where a- fixed cost
X- units produced
If x=0 it means firm is not employing any variable
factors of production.
TC=0+a=TFC(even at zero output level the firm has to
incur fixed cost)
A number of other cost functions may be derived from
equation-(1)
16. Incremental Cost
It refers to the total additional cost associated with the
decision to expand output or to add new variety of
product etc.
It refers to the difference between two alternatives.
It refers to the change in the total output as a result of
change in the methods of production or distribution or
use of improved technology or selection of additional
sales channels.
17. Opportunity cost
Opportunity cost can be defined as the loss or sacrifice incurred by making a
decision to take one action instead of an alternative action.
19. Selling Costs
In selling costs we include the salaries of sales persons, allowances to retailers to
display the products etc. besides the advertisements. Advertisement expenditure
includes costs incurred for advertising in newspapers and magazines, televisions,
radio, cinema slides etc.
22. Sunk Cost
A sunk cost refers to money that has already been
spent and which cannot be recovered.
https://tinyurl.com/y4d4u2ro
23. Standard Cost and its significance
Standard costs are estimates of the actual costs in a
company's production process, because
actual costs cannot be known in advance. This helps a
business to plan a budget.
28. Overheads
1. Manufacturing overhead/ Production
overhead/Factory overhead.
2. Distribution overhead
3. Selling Overhead
4. Administrative overhead
5. R and D Overhead.
29.
30. Formulas
Prime Cost= DMC+DLC+DE(Variable)
Factory cost= Prime Cost+ FOH(W.O.C)
Factory Overhead= ILC +IMC+ Other IE
Establishment Costs= Administrative cost+
Distribution costs +Advertisement costs
Production Cost (Total Cost) = Manufacturing costs
(FC) +Establishment costs.
Selling Price= Production costs + Profit
31. Problem-I
1. From the following data find a) Material cost b) Prime cost c) Direct
cost d) Factory cost e)administrative overheads f)cost of production g)
selling and distribution overheads h)Total cost i)selling price. (Assume
the net profit of Rs 10,000/-
1. Material in hand (April 1st 2019) 60,000
2. New material purchased 2,50,000
3. Directors fees 3,500
4. Advertising 12,000
5. Depreciation on sales department car 1,200
6. Printing and stationary charges 300
7. Plant Depreciation 5,000
8. Wages of direct workers 70,000
9. Wages of indirect workers 10,000
10. Rent on factory building 10,000
32. Problem-I
1. From the following data find a) Material cost b) Prime cost c) Direct
cost d) Factory cost e)administrative overheads f)cost of production g)
selling and distribution overheads h)Total cost i)selling price. (Assume
the net profit of Rs 10,000/-
1. Material in hand (April 1st 2019) 60,000 (DMC)
2. New material purchased 2,50,000 (DMC)
3. Directors fees 3,500 (AOH)
4. Advertising 12,000 (SOH)
5. Depreciation on sales department car 1,200 (SOH)
6. Printing and stationary charges 300 (AOH)
7. Plant Depreciation 5,000 (FOH)
8. Wages of direct workers 70,000 (DLC)
9. Wages of indirect workers 10,000 (FOH)
10. Rent on factory building 10,000 (FOH)
33. Problem (Contd.)
11. Postage, telephone and telegraph 200 (AOH)
12. Water and electricity for factory 1000 (FOH)
13. Office salaries 2,000 (AOH)
14. Rent of office 500 (AOH)
15. Rent of the showroom 1,500 (SOH)
16. commission on salesmen 2,500 (SOH)
17. Sales department car expenses 1,500 (SOH)
18. Material in hand (March 31st 2020) 50,000 (DMC)
19. Variable direct expenses 750 (DE)
20. Plant repair and maintenance 3,000 (FOH)
21. Heating, lighting and water for office use 2,500 (AOH)
22. Cost of Distributing goods 2,000 (DOH)
34. 1. Material cost = Cost of material in hand (April 1st)-Cost
of material in hand (March 31st) + Cost of new material
purchased .
= 60,000-50,000+2,50,000=2,60,000.
2. Prime Cost = DMC+ DLC+DE (variable expenses)
= 2,60,000+70,000+750 = 3,30,750.
3. Direct cost = Prime cost
4. Factory cost= Prime cost +Factory overheads
= 3,30,750+ (7,9,12,20)
= 3,30,750 +5,000 +10,000+5,000+1,000+3,000
= 3,54,750
35. 5. Administrative overheads (3,6,11,13,14 &21)
= 3,500+300+200+2,000+500+2,500
= 9,000
6. Cost of Production = Factory cost +administrative
overheads
= 3,54,750+9,000
= 3,63,750
7. Selling and Distribution overhead (4,5,15,16,17 & 22)
= 12,000+1,200+1,500+2,500+1,500+2,000= 20,700
36. 8. Total Cost = Cost of production+ Selling and
Distribution overheads.
= 3,63,750+ 20,700
= 3,84,450
9. Selling Price = Total Cost +Profit (10,000)
= 3,84,450+10,000
= Rs 3,94,450/-
37. Problem-II
A factory producing 150 electric bulbs a day, involves direct material cost
of Rs 250, direct labour cost of Rs 200 and factory overheads of Rs 225.
Assuming a profit of 10% of the selling price and selling on cost
(overhead) 30% of the factory cost, calculate the selling price of one
electric bulb.
Solution: Factory cost= DMC+DLC+FOH
= 250+200+225
= Rs 675
Total cost = Factory cost +selling overheads
= 675+675(30/100)= 877.50-------------------eq(1)
Also Total Cost= S.P-Profit
S.P- S.P(10/100) ------------------------eq(2)
Equating 1 and 2 equations
S.P= Rs 975/150=Rs 6.5
38. Problem-III
Two molders can cast 25 gears in a day. Each gear weight
3kg and the gear material cost Rs 12.50per kg. If the
overhead expenses are 150% of direct labor cost and two
molders are paid Rs 70per day.
Calculate the cost of producing one gear.
Solution: Total cost= MC+LC+OH
= (25 x 3 x 12.5)+(70) + (70 x (150/100))
= Rs 1042.5______
Cost per gear = Total Cost/ No. of gears
( 1042.5 )/ 25
=Rs __41.7_______
39. Allocation of Overhead Costs
1. Percentage of Direct Labour cost
2. Percentage of Direct Material cost
3. Prime cost percentage rate
4. Labour hour rate
5. Machine hour rate
6. Production unit method.
40. Percentage of Direct Labour cost
Percentage of Direct Labour cost= (FOH for budget
period/ Direct Labour cost for budget period) x 100
Advantages:
1. very economical and easy to apply.
2. Highest degree of efficiency and uniformity in Wage
rates, Skills of workers, Equipment used and work
performed.
Disadvantages:
1. Ignores variation in the equipment's used.
41. Problem
A fabrication concern had factory overheads of Rs
4,000 and Direct labour cost Rs 12,000.
A)Find the percentage overhead using percentage of
direct labour cost.
B) If the production order “X” had a direct labour cost
of Rs 60 find the overhead cost for the production
order.
Solution: % overhead= (4,000/12,000) x 100= 331/3%
Overhead cost for the production order “X” is
=60 x (331/3)/100 =Rs 20
42. Percentage of Direct Material cost
Percentage of Direct Material cost=(Factory Overhead for a
budget period/ Direct Material cost for a budget period) x
100
Pr: A sugar mill had its overheads of Rs 60,000 while it
purchased sugar cane worth 2,40,000. find the percentage
overhead using Percentage of Direct Material cost method.
If a particular batch had a direct material cost of 30,000.
determine its overheads.
Solution: % overhead = (60,000/2,40,000) x 100= 25% of
direct material cost.
Overheads= (25/100) x 30,000= Rs 7,500/-
43. Prime cost percentage rate
Prime cost percentage rate= (Factory overhead for a budget
period/Prime cost for budget period) x 100
Pr: A fabrication and an assembly shop had its total
overheads of Rs10,000. It used direct material cost worth Rs
10,000 and paid Rs 15,000 as direct labour charges.
Calculate the % overhead.
B)If one product as its prime cost as Rs 5,000 determine the
overheads.
Solution: % overhead=[10,000/(10,000+15,000)] x 100
= 40% of prime cost.
Overhead = (40/100) x 5,000 = Rs 2,000/-
44. Labour hour rate
The rate per hour of direct labour=(Factory overhead for a
budget period/Direct labour hours for budget period)
Pr: A fitting and assembly shop had its factory overheads of
Rs 1,20,000 and the production for the period in terms of
direct labour was 24,000hours. Find the rate per direct
labour hour.
B) If a particular job takes 20 labour hours, calculate the
overhead applied.
Solution: The rate per hour of direct labour=
(1,20,000/24,000) =Rs 5
Overhead= Rs 20 x 5= Rs100
45. Machine hour rate
Machine hour rate= =(Factory overhead for a budget period/ Machine hours for budget period)
Pr: A machine shop has 10 lathes, 6 drill presses and 2 milling machines. Calculate the machine hour
rate for lathe if the factory expense for a particular period and other data as follows:
Area occupied by Lathe = 10 sq m
Area occupied by Drill presses= 3 sq m
Area occupied by Milling machines= 2 sq m
Cost of indirect material and labour=1,20,000
Rent of building= 36,000
Insurance = 15,000
Depreciation = Rs 20,000 for Lathes
= Rs 15,000 for Drill press
= Rs 20,000 for Milling machines
Power Consumed= Rs 18,000 for Lathes
= Rs 6,000 for Drill press
= Rs 900 for Milling machines
Repair and Maintenance = Rs 10,000 for Lathes
= Rs 4,000 for Drill press
= Rs 4,000 for Milling machines
Machine hours = 10,000 for Lathes
= 6,000 for Drill press
= 2,000 for Milling machines
46. Solution: Cost of Indirect material and labour= Rs
=(1,20,000 x 6)/10+3+2 = Rs 48,000
Rent of building = (36,000 x 6)/ 10+3+2 =Rs 14,400
Insurance = (15,000 x 6)/ 10+3+2 =Rs 6,000
Depreciation =Rs 15,000
Power consumed =Rs 6,000
Repair and maintenances= Rs 4,000
Total overhead = Rs 93,400/-
The rate of machine hour = 93,400/6000 = Rs 15.5/-
47. Solution: Cost of Indirect material and labour= Rs
=(1,20,000 x 10)/10+3+2 = Rs 80,000
Rent of building = (36,000 x 10)/ 10+3+2 =Rs 24,000
Insurance = (15,000 x 10)/ 10+3+2 =Rs 10,000
Depreciation =Rs 20,000
Power consumed =Rs 18,000
Repair and maintenances= Rs 10,000
Total overhead = Rs 1,62,000/-
The rate of machine hour = 1,62,000/10,000 = Rs 16/-
48. Production unit method.
Overhead rate per unit = (Factory overhead for a
budget period/Production in terms of units for budget
period)
Pr: If the estimated overhead costs of a factory making
two head transistor radios is 8,000 in a particular
period and if the transistor radios produced during
that period is 400. calculate the overhead rate per
transistor radio. B) If a production order ‘Z” schedules
making 100 such radios determine the factory
overhead to be applied to produce order “Z”
49. Solution: Overhead rate per transistor radio= Rs
8,000/400 = Rs 20/-
Factory overhead for production order “Z”
=Rs 20 x 100= Rs 2,000/-
