NATURE AND SCOPE OF COST ACCOUNTING Wh pl ali Purposes of control and guidance of management. It includes the spproprisie. R done waive Of every order, job, contract, Process, service or unit as may be of such analysis an Classiicatgn auction, Selling and distribution. It is thus the provision uni of production or serview 0% ceenponatue fe will enable the total cost of any particular same time to disclose exa ined with re easonable degree of accuracy and at the icth grec ct used, the amount of labour arty 'OM, SUCH total cost 's constituted (i.e. the value of material our 2 According to Wheldon, «acd Other expenses incurred) so as to control and reduce its cost. » “Cost accountin i rinciples, methods 'g is the application of accounting and costing Senpior excess cont fpehniques in the ascertainment of costs and the analysis of standards”. Thus, cost accounting raeqcompared with previous experience o. with cost and its accounting and contig wastes © the collection, classification, ascarisiene’y “7 budgets and stander relat Cost. It establishes 79 to the various elements of d costs an products and the analysis or variances va C28 Of operations, processes, departments or itability and social use of funds. Thus, cost accounting has the following features : {0 Itis a process of accounting for costs, ia t He Sie bt &xpenditure relating to production of goods and services. Of the organisation," °” ©OSt of every product, job work order, process er operation (iv) It provides statistical data on th i i bi quotations are submitted °” 1? basis of which future estimates are prepared and (¥) It is concerned with cost ascertai es ‘ainment, cost presentation, cost control and cost (1) It establishes budgets and standards so that actual Cost may be compared to find out deviations or variances, (vi) Itinvolves the presentat that it may be helpful to and decision making. Objectives of Cost Accounting Objectives of cost accounting are ascertainmer recording and presentation of cost data to management for measuring efficiency and for onc control and cost reduction, ascertaining the profit tion of right information to the ri ight person at the right time so management for planning, evaluation of performance, control of each activity, assisting management in Cecision making and determination of break-even point. The aim is to know the methods by which expenditure on materials, wages and overheads is recorded, classified and allocsted So that the cost of products and services may be accurately ascertained : these costs may be related to sales and profitability may be determined. Yet with the development of business and industry, its objectives are changing day by day. Following are the main objectives of cost accounting : (i) To ascertain the cost per unit of the different products manufactured by a business concern; (ii) To provide a correct analysis of cost both by process or operations and by different elements of cost; o (ii). To disclose sources of wastage whether of material, time or expense or in the use machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage; ic fi oducts (iv) To provide requisite data and serve as a guide for fixing prices of pr manufactured or services rendered; — (V) To ascertain the profitability of each of the products and advise manag how these profits can be maximised; © scanned with OKEN Scannera NATURE AND SCOPE OF COST ACCOUNTING (V) To exercise effective control of stocks of raw materials, work-in-progress, con- sumable stores and finished goods in order to minimise the capital locked up in these stocks (vi) To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads; (vii) To advise management on future expansion policies and proposed capital Projects; (a) To present and interpret data for management planning, evaluation of performance and control; (§) To help in the preparation of budgets and implementation of budgetary control; (x) To organise an effective information system so that different levels of management May get the required information at the right time in right form for carrying out their ‘dividual responsibilties in an efficient manner. (xi) To guide management in the formulation and implementation of incentive bonus iy R2"S based on productivity and cost savings: (xii) To supply useful data to Management for taking various financial decisions such as : introduction of new products, replacement of labour by machine etc; (xiv) To help in supervising the working of data processing through computers; (x) To organise the internal audit system to ensure effective working of different departments; (ev) To organise cost reduction programmes with the help of different departmental managers; (xvii) To provide specialised Services of cost audit in order to prevent the errors and frauds and to facilitate prompt and reliable information to management; and (xvii) To find out costing profit or loss by identifying with revenues the costs of those Products or services by selling which the revenues have resulted. Broadly speaking, the above objectives can be re-grouped under the following three heads : (1) Ascertainment and analysis of cost and income by product, function and responsibility. (2) Accumulation and utilisation of cost data for control purposes to have the minimum Possible cost consistent with maintenance of quality. This objective is achioved through fixation of targets, ascertainment of actuals, comparison of actuals with largets, analysis of reasons of deviations between actuals and targets and reporting deviations to management for taking corrective action. (3) Providing useful data to management for taking decisions, © Advantages of Cost Accounting Main advantages of cost accounting are given below : (9 Frofitable and unprofitable activities are disclosed and steps can be taken to eliminate or reduce those activities from which little or no benefit is obtained or to change the method of production in order to make such activities more profitable. (1) It enables a concern to measure the efficiency and then to maintain and improve it. This is done with the help of valuable data made available for the Purpose of comparison. For example, if material spent upon a pair of shoes in 2013 comes to € 160 and for a similar pair of shoes the amount is 7 180 in 2014, the increase may be due to increase in prices of material or more wastage in the use of materials or inefficiency at the time of buying or unnecessarily high prices paid. (iii) It provides information upon which estimates and tenders are based, In case of big contracts or jobs, quotations cannot be given unless the cost of completing the contracts can be found out. © scanned with OKEN ScannerNATURE AND SCOPE OF COST Accounting iy) Ht guides tuture production poticies, made in variou: Is lines of business and race basis of which production can be appropia (Y) It helps in ini ‘creasing profits by di closing the sources of loss or waste and by | Suggesting such contiols so that wastage | ages, leakages and inefficiencies of all | departments may be detected and prevented. M (vA It enables a periodical determination of profits or tosses without resort to stocktaking, (vid) I furnishes reliable dat i ‘a for comparing costs in different periods, for different estate Of Output, in different departments. ard Processes and in different establishments, This help: Ips in maintaining costs at the lowest point consistent with the most efficient operating conditions (vill) The exact cause of a decrease or an increase in profit or loss can be detected, Agoneern may suffer not because the cost of production high or prices are low but also because the output is much below the oapacty of tne cores oo fact is revealed by cost accounts only. () Cost Accounting discloses the relative efficiencies of different workers. and 19 thereby facilitates the introduction of suitable plang of wage pevirent to severd Stficiency and to provide adequate incentive to the less efficient workers, A sued System of costing promotes prosperity of the business and thus ensures greater security of service and adequate reward to workers (x) It enables the creditors and investors to judge the financial strength ang creditworthiness of the business. A sound business concern wit good system of costing can attract more investors than a similar concern witho adequate system of costing. ; 4 (xi) Helpful to the Government. It facilitates the assessment of Excise poate Income Tax and the formulation of policies regarding industry, expen impor, ional taxation etc. It also facilitates the preparation of nati ae development. It provides ready fgures for use by the Government for sppieaton problems like ‘rice fixation, price contro, tariff protection, wag Jayment of ¢ vidends or settlement of disputes. mm ite aim of costing is to reduce cost of production (xi) Helpful to Consumers. The ane le ofits of the business. A part of the benefit Se TSE SUE ITE usually passed on to consumers in the resulting from the reduction of the cos Peet eae ioe form of lower prices. Besides, the installation ofa costn Tesora i the fairness of confidence in the minds of hc So of a public sector can, therefor, ublic Enterprises. i ction of its “ bo ost aged by comparing its cost of production sack he perso witatve and counterpart in the private sector. Public enterprises eng Cecres ofient and interest of private enterprises. A good systet) ot working, It provides for graded affective control trough a proper anevows confit of author. the public ° enditure ant c ming in the public financial control over exp’ faking to justify its run “3 en i of the undertal f for the product Se ee carceanant in fixing reasonable seling prices eS. faced or services rendered by public enterpris mat (xiv) Helpful for the The aim of costing is to elimin i ting i the Economy. The ; ; there reducing and controlling cost. It ensures optint resol ane It aso helps increase the productivity. These fac lors 9 : level. st the economy and mark its place at the global boo: 't explains the cost incurred and profit "esses and thereby provides data on the ely planned, ate wasteful expends fi limi utilisation of Taotors go a long way t0 © scanned with OKEN ScannerElements of Cost i a Mere knowledge of total cost cannot satisfy the needs of mana’ i i ment is to be provid i$ managerial decisions, manage r conivge and Massty costs. For this purpose, the total cost is ana ° e el ie, by the nature of expense ing, cost are re three /-€., mal yd into different Ss. labour and other expense ° the following chart : tlements as illustrated in Hat ot cost Materials Labour Expenses ie —— 7 Direct Indirect Direct Indirect Direct LW —___—— ‘Overheads: 1 4 Distribution Overheads T Selling Overheads detail one by one. ified in the product and can be i" T production or Works Overheads Administration Overheads Now all these terms will be discussed in 4, Direct Materials are those materials which can be ident conveniently measured and directly charged to the product. Thus, these materials directly Stor the production and form a part of the finished product. For example, timber in furniture making, cloth in dress making and bricks in building a house. Following are normally classified as direct materials : 5 () All-raw materials like jute in the manufacture ‘of gunny bags, pig iron in foundry, and oe fruits in canning industry. 1 (i) Materials specifically purchased for a specific j i } als pecific job, process or order like glue for book-binding, starch powder for dressing yarn etc. st « Ai ioe 7 components purchased or produced like batteries for cars and tyres for (iv) Prim it Kea Primary eee, materiale lke cartons, wrappings, cardboard boxes, etc. used to prac rom climatic conditions or for easy handling inside the From the above discussio’ indi groan ie aes lec It beoames clesr that indirect materials are those materials Bee anlaaliiea conan Wace iGitest materials. Examples of indirect materials are : foagumables ihe canon waste, lubvicarts, brooms, rags, cleaning materials, materials for ssets, high speed diesel used in power generators etc. © scanned with OKEN ScannerCONCEPTS, CLASSIFICATIONS AND Cosr. SHEE, VALYSIS, SS i cosT—ANALYstS, C i terial control. Dire, we jals into direct and indent feclitates materia and neca ee eat high vale lems. as heat ler hand, simple contro} Tee ai Las Feducing their cost. On the oth conte te atioal analy ‘i , control and er finished Product yet it ig no ial is a part of the finishe eyetitis rases, though the materials a p ng and nal en eet materia fo example eee 8 Pa gress making and nas bate mating TMs i because the value is in Comparatively sm Charge. Such matey 8 erat onto make ah Snalysis of them for the purpose of elaborat ibility with € and the feasit 4d as indirect materials, Thus, it can be Concluded that the eas wich a material can be traced ing out of an the product or carrying (0 Labour engaged on the actual production of the pi Operation or process, the aggregate of the cost other expenses including sery as '0 specitic cost unite Thus ; f indire terials, indirect ices ag veniently be char led direct hus overh, id I &xpenses other than direct ex, meee In general terms, Overheads comprise all expenseg MNcurred for ‘ONNection wit the i Organisation of the whole or Part of the un, faking i.e, th t OF Perating su os ar Services Used by l@ undert king and including the intenance f capital asouie in gOUpS into which Overheads may Sub-divided are () Manutac turin heads a" sentation Overheads ty Sélin "(09 Distribution Ge overheads “ai Research and Develona’, Overheads “erheads and (yj © scanned with OKEN Scannerworks, expendi her 10 i engpatch elthel tion and insurance Che g asset 808 Oe iding, a rainten'ance olf ead faxes on WOKS, vices rates a ; welfare Se! artment expe nt ra tephone charses | Necpital and 82 ep rams i al services factory § oduction control ai ———_ Soe rast the i sot are the indiret | . THES? over all Indirect nan Ietion ready ntl its COME “of such Jassets like 5 like stores; fuel cl uel are : deP! it ments al coal and other tic equip" at charges | ‘i ost electric orp ecats ; elastic ors olfice printing, statone Ye clubs | , work’ ‘and 720 canteen and rect” These aS 6 an ike dispensary and Ii es of ee eet workers, indlrect materials 3 pplies, salaries and other costs T ind progress an undertaking. Tight, heat, salaries o' “vot an tivity or function. : SMa activity OF net coretarial, accounting AO a rent eg ‘gh collection and Sind wages of $ treasu machin xy (ili) g : eo Seasio Ye Ww) a ‘om the time it is ready for dispa ¢ rer's depal howroom expenses ; a Pots + after sales service a =. cost of marketing information syster ‘and costs of it roval, cas credit apPrOv"'iegal and accounting (excluding distribution) “salaries and commission | « ecigement charges ; fancy packing 10 attract sales ; samples and ‘expenses; demonstration and I ennice! acids to Deere ‘catalogues and price lists. rnese are the expenses incurred in handling a product toh until it reaches the ultimate consumer” These are the nerf making the packed product available for vin urn empty package, if any available for Distribution Overhead: ‘ed in the process which begins enses incurr eeatch and ends with making the recondltvone Seana Distribution overheads include all expense incurred from the time the product Is completed in the works until it reac Id be included pf warehouse rent ; - hes its destination. Under these wou nce etc.; expenses on delivery van and warehouse staff salaries, insural ; losses ial packing for bulk transport like bales, crates, chests etc. trucks ; expenses on speci ts paige stocks and finished goods. damaged in transit and cost of repairing and ‘conditioning of empties and wastage of finished goods. (v Research and Development Expenses. Researcl new and improved products, and improved methods. Development h cost is the cost of searching for new applications of materials or products, and new applications Cost is the cost of the process which begins with the implementation of the decision to produce a new i , product or use an improved meth oa with the commencement of formal production of that product or by thal wethod. an 3 grouping the above elements of cost, the following divisions of cost are obtained : eRe Direct Materials + Direct Labour + Direct Expe n nses Prime Cost + Works or Factory Overheads 7 wate Cost + Administration Overheads ost of Production + Sell i Cost of Pg ling and Distribution Prime Cost Works or Factory Cost Cost of Production Total Cost or Cost of Sales © scanned with OKEN Scanner,en the cost ind selling pi resents profit or loss, i resents profit a +t of sales and selling price repr ee soon the The diff botwe - he difference tal co; 7 eduction, tot a EXAMPLE: ime cost, works cost, cost of pr. " rime cost, tain the prime E armentioned figures n 71,000; Fa, ; Direct Expenses Facto, from the un 000 ; Direct Labour feed ‘gating Extenses % 700 ang Sale! poe Material <5: istration Expenses ? 800 ; ‘ Direct Mater cin jenses & ! & 18 ,000. SOLUTION + Direct Expenses Cost = Direct Materials + Direct Labour a p . 5,000 + 2,500 +2 1,000 = ae bee usnoe soe, sam = Pri Expenses = € 8,600 + ¥ 1, ceo Seto Productions Works Coste Administration Expenses = @ 10, Cost of Production = otal Ce 7 Pr + Sellin Bee OU ea cae 10, i it S t of Sales = Cost of Production + Selling Expense’ tal Cost or Cost ot = ng Profit = Sales - Total Cost = € 15,000 - & 11,500 = = 3,500. EXAMPLE. A company manufacture ing. You are required to gro, y and retails clothing. iasefoatae | tn re listed below and namie 1 to 20, into the following classifications F the costs which are lis ee Ea a) ie a conv (e) Selling & Distribution Costs (a) Direct Materi (f Research & Development Costs is : 8 Dice ee (9) Finance Costs inistration Costs. : ts. (A) Administrat (0) Indirect Production Cost security guard for factory, (3) Wages of i (1) Telephone rentals plus metered ane cuting department, (5) Developing anew Parcel sent to customers, dle raw Materials, (7) it (9) Cost of painting Ttising on television, fearetals, (18) Royalty paid on number ef units Heences for delivery vehicles, (20) throughout the factory, ing music SOLUTION Numbers Numbers (2) Direct Materials 7 (€) Selling a Distribution Costs 3,9, 11, 16, 19 (2) Direct Labour 4 (A Research & Development Costs 5 < © Direct Expenses 18 (9) Finance Costs 15 Indirect Production Costs 26,7, 12 29 (4) Administration Costs 1, 8, 10, 13, 14, Overheads can also be Classified as /) indirect il) indi mace, empenene (i materials, (i) indirect () Indirect mate labour and (iii) Materials, Such @ Part of the fini Materials refer to those materials which do not normal form which ca Be apr ett Ithas been defined as aterials which cannot be allocated but a be ain o ed t0 oF abso, bed by cost Centres or cost Units”, Materials, the Cost of A Selly attributed toa Particular object, These are; , ‘ores used jr Mainte . bricks and coments t°"2"C@ of ey, Stores useq building ete. like lub epartments 4@. non teen eto, and the Service house, boiler house and can} © scanned with OKEN ScanneroO OE COST—ANALYSIS, CONCEPTS, G1 ASSIFICATIONS AND COST SHEET Mate’ 's which due to thi ted as direct Materials, nples of indirect materials ar 'S are stores sundry stores of small value expended f s of or factory u oil, losses, deficiencies ang deterioration of stores ete, aon (i) Indirect Labour. 7; he wages of that labour which can i t NOt be allocated but w' ws a Svauee " absorbed by cost Centres or cost units is known s indirect \abour sl one ie Pad to labour which is employed other than on production con indirect ae S. The employee cost which Cannot be directly attributed to a particular ' cost object. Examples of such labour are : charge-hands and supervisors - maintenance workers ; departmental coolies : men employédin sence oe ndling and internal tfansport; apprentices. trai i S NOTKS chev ee naming an } in ae + @pp! ces, trainees and instructors; works clerical staff and | ut ’ employed in time office and Security office, holiday Pay, leave pay, eiiployer’s contribution to funds, miscellaneous allowances to labour. Qeaeuive pTOOVA ocever eshwy (iii) indirect Expenses. Expenses which cai object. Such expenses which cannot be allocated but can be apportioned to or absorbed by cost centres or cost units such as rent, ates, insurance, municipal taxes, general manager's salary, Canteen and welfare expenses, power and fuel, cost of training new employees, lighting and heating, telephone expenses etc. So, under indirect expenses two types of expenses are included : (a) such type of expenses in respect of which payments are made for services rendered or supplies made. Amount in respect of such expenditure will be found from the voucher registers on the dates on which they are incurred, (b) such items wihich do not involve any payments and are mere adjustment transactions e.g., depreciation. eit cost being small, are not considered worthwhile to be consumed for 1 Not be directly attributed to a particular cost + @ Exnenses Fyeludad fram Cacte (GB scanned with oxen scannerNOON Magic es 668t, which can be used fo obtain 4 re ISON Aba degrag of ane {ole the ey. curacy - ac Hi Expense. Expenses are Costs Which have heen applied against revenue ot particular auntino period in accordance with the Principle of matching cost to ray 8NUE 8g, cost af a sold, Office salaries of the Period in which tr e-S goods 1ey are incurred ¢) Loss. It represents diminuation in ow ( “ership equity other th capital for which no compensating value has been received 6 . Thus the central idea of the cost ¢ gomething oF value to acquire some oth eactifices which are assigned to a part which there is no corresponding return accompanied by, the securin (a) Cost U an from withdrawal of 9., destruction 6 Ht property bY ONCEDL is that er thing Or v; ticular accor wher 1g of some other Itis a device for the purpose of breaking up or separating cost Int? ibutable to products and Services. It is the unit of quantity of proc » tonne in case of 67" Nt e.g., number, weight, area, » tarte Process of cost finding can 0¢ ., Mall and must be so Selected that expenditure can Pee, of the business, For instance, in case of a by which 7 Normally, it is the same vice, usually Cee transactions are entered into, | of industrie: ing ceaningless. For exasrs e compound of two measures since the single measure may be meaning’ case of goods transport the unit : ne tonne sd in carrying will be tonne-krm—the effort involved in goods for a distance of one kilometre, Of giving Up, parting with or s ‘alue; expense ri unti aS cost j Value. efer to that portion of @ for | "9 period. Loss denotes sac of ; sake 7 mplies sacrifices for the 54 c 4, volur the uF in, not be each brick but 4, pete IN Case © scanned with OKEN ScannerN \ST—ANAL T's” wis or fferent Ind, ~ for Diffel lust Units and Methods of costing ly Table Showing Cost UM jpethod of Costing Enterprises Cost Unit _ sopeescosting enterprise | Pro “IndustryenterP Tonne process costing Cement Tonne, Quintal process 005 ee Suget Metres, Yards Muttiple oe * in ae Manufacturing Number Job ea or Service Costing Bis Number ypied per dayfout | OPE Aircral cou it bed 0 Hospital/Nursing Home ratte siail process coat , Cubic Foo! | operating Timber fonne Kilometer, Passende Transpo Kilometer process Costing Tonne, Kilogram Batch Costing com mee ber Job Costing or Contract Cost Readymade Garments ee or Avea or Square Foot | Process Casting ing sett) Cases of 24 bottles each oF P Soft Drinks bottle of different weights Process Costing ctioneny Per Kg. Job Costing Tovmaking Units/Batch Operating or Service Costing Toy mi | kw Contract Costing Generation - Sv Bulg Per Ship/Project Process Costing Automobile ‘Number vices Output Costing Birick-kin (or Works) Per ‘00 ri eco aoe en Single or One Operation or Output Coal Per Tonne ee Hotel Room day/per bed Cet Costing Interior Decoration Per Job ee oa 3 Pharmaceutical Per 1,000 Tablets, Ampulses ato! 9 Furiture Per Unit Multiple Costing Advertsing Per Job dob Costing Oi Refining Per Tonne/Quintal Process Costing Steel Per TonnelPer MT Process Costing/Single Costing (e) Cost Centre. A cost centre is the smallest segment of activity or area or responsibilty for which costs are accumulated. Typically cost centres are departments but in some instances, a department may contain several cost centres. These cost centres are the Gepartments or sub-departments of an organisation with reference to which cost is collected {or cost ascertainment and cost control. For example, although an assembly department may be supervised by one foreman, it may contain several assembly lines.. Sometimes each eid I is regarded as a separate cost centre with its own assistant foreman. A cost ao 4 ace oa i. an area such as department, storeyard or sales area or an item Ei ecole eo, eI '@ machine, delivery vehicle or a person, e.g., salesman, foreman. unit in relation to which costs are Same Mm of equipment, group of persons or any other The determination of a suitable cost centre i of cost. The manager incharge of a cost contr: Wo, mportant for ascertainment and control Centre is held responsible for control of cost of his cost centre. It enables the ic eo of TSeovaty may be use ation of all such costs at one place for which a common © scanned with OKEN ScannerCONCEPTS, CLASSIFICATIONS AND COST SHEET W219 Types of Cost Centres. Cost Centres may be classified as under : () Personal and impersonal cost cer i hich consists ntres. Personal cost centre is one wi machine 8 ep grouP OF ersons. “On th consists of a machine, a department or plant yey OM Other hand, impersonal cost cente (i) Operation and process c persons andlor machines carrying ost he Operation cost centre consists of those ae Kind of operation. On the other hand a cent a Beat os Set fe Loe aren is ‘called process cost centre. whieh product poses bet 8 bost cthitres. Product Centre refers to a centre through coriras, raw mate and generally corresponds to a Production department. In such CUTS Tee etted into Finished goods. Serves conc is a department or indirect: bea rau not work directly on products. Clory office are examples of such centres. Such work of product emaeie res to Reon Centres to enable them to Carry out the organisation. In engineering industry, the cost & tres may beget hop) Wor shop, (ii) Assemb i ly shop, (iv) department ; (i) o (i) centres 4 cost centres. 7 General administrative (W) centres are service Poher dexp units for which costs are to be isation of the factory ; condition of ty of the unit or cost centre for cost regarding making a particular choice cost ; requirements Purpose ; availability of informati ives. Of costing, i.e., suitabil from several alternati ion ; management policy @ Difference Between Cost Unit and Cost Centre (@) Cost unit is a unit of product or service in relation to which costs are ascertained. Cost centre is the smallest regment of activity or area or responsibility for which costs are accumulated. (6) Cost unit is a quantity or measure in terms of which cost is calculated. Cost centre is one of the convenient units into which the whole organisation is divided tor the Purpose of cost ascertainment and control. (2) cost unit is usually a unit of physical measurement ke number, length, time etc. Cost centre consists of a department equipment or machinery or a person or group of persons. (2) Some of the examples of cost unt are : per yard of cloth in textile industry, per ton of Coal raised in collieries, per passenger km. in transport industry. Some of the examples of cost centre are : Assembly department, Processing department, Finishing department, Stores department, Repairs and Maintenance department, a lathe machine, a supervisor. » weight, area, volume, i, @ Sub department, or an item, (f Profit Centre. A profit centre is that segment of activity of a business which is responsible for both revenue and expenses and discloses the profit of a particular segment of activity. Profit Centre is defined as a segment of business entity by which both revenues are teceived and expenses are incurred or controlled. A profit Centre is any sub-unit of an organisation in which both revenues and costs are assigned. Profit centres are created to delegate responsibility to individuals and measure their performance. Profit centre is used e evaluate the managerial performance. A division of an organisation may be called as a bro centre. The performance of profit centre is evaluated in terms of the fact whether the cone has achieved its budgeted profits. Thus, the profit centre concept is used for evaluation performance. Profit centre is different from cost centre. © scanned with OKEN ScannerHULNVEE UL QU verre ae change made in any of the cost drive management to see whether any change In view the cost benefit analysis of the change In © Cost Classification Cosi classification is the process of groupin acteristics. It is the placement of like items toget istics. A suitable classification of costs is of vital importan ied accor . haracteristics. The same cost figures ar¢ co. 7 : A abou tres or cost units. Cost may be classifi and expenses and a number of other c Classifi a t and requiregcording to different ways of costing depe! ements of a particular concern. The importan (1) By Nature or Elements (2) (3) By Degree of Traceability to the Product (4) (5) By Controllability (6) (7) By Relationship with Accounting (8) Period. (Capital and Revenue) (9) _ (40) By Association with the Product (41) rg Will CAUSE @ Urterrgy we - Sour ye ein any cost driver Is to be made or not keepin the the cost driver. ig g costs acco! ) her according to their common characte. 'n rding to their common gh, ce in order to identify the cost with ding to their nature, i.€., materi nding upon the purpose to be achievey it ways of classification are : By Functions By Changes in Activity or Volume By Normality By Time According to Planning and Control For Managerial Decisions. © scanned with OKEN Scanneree p cost SHEE” a ccordin n will be discu! ; ; sification) ‘Analytical Class and &X Elements, (0" terials. Ll 0 raw py Nature OF re divided into three catagories ia Mal re 1 rerial nto fae + ation, the COS | fication of CC oleme! material ean eats Jonsumavle ives, pact ponents, Spe ‘i ne total cost compare tant as it helps 10 find ou Eification |S Tees class valuation of work in-progres cording to consti anion Oo Cinssitication)- neal ‘activities #4 ‘t he ifferent aspects of asic raaersts according re divided husiness undertaking it leads to gr0 ee ion, administration, sf Mreiness undertaking 1% pod lows ‘osts invol each classification » this ola involve" to the velling am ons of a t wang ived in manufacture: atic ming oF func! 9 to this aivisio - jon. Accordin gigtibution ane facturing and Production we "S rication of units Of production inoured consti | of costs ino F . rcial Cost. This 1s the total a mmerci ¥ manufacturing and production. Oo on cost sto rative cost operation of 2 OUsineSs ial cost may These 1). According to this nos? ture ave this chapter: arms have already been explained in . . en By pearee of Traceability to the Product | (iret and ing tar if Yotal cost is divided into irect casts and : eee ve i jicular cost cen! jentified with a part iar classificatiO™ red for and may be CO yientiog tT anufac toyed Ot at got costs are nose Coste Inch whieh Materials used and labowr employe ne mit. MarFoduction are common exam ; poate rosie forthe benefit of a number i cost centres of cost UNIS ane, cannot be whic’ iently ientiied with @ particular cost centre oF COSL tai. Examales of Maree coe vert of bulging, management ae raries, machinery depreciation aic. The nature of Te business and the ‘cost unit chosen will determine which costs are direct ant i] fat For example, the hire of a mobile crane fe it woul ye crane ‘Mfart ofthe services of a factory, the hire it more than one Girect cost but ifthe crane is us ied as indirect cost because it will Pro i ‘1 indirect lies in the fact the distinction o' ‘ed while indirect costs Charges would be regal be accurately determin cost centre. The importance of t that direct costs of @ product or activity can have to be apportioned on certain assumptions as regards their incidence. is By Changes in Activity or Volume. ‘According to this classification, costs are classified according Their behaviour jn relation to changes in the level of activity or volume of production. 24 this basis, costs are cl fixed, variable and semi-variab) (i Ged Costs are ineibeéé or decrease in the volume of outpul assified into three groups ViZ., h remain fixed in total amount with tutor productive activity for @ given period of time. Fed cost et unt sr sereases as production increases and increases as production declines. Eras of ed costs ae Sa Prange of factory building, factory manager's salary 2c ese fixed costs are constant in total amount But Tr quate per unit as production s. These Fret ve known as period costs because these are dependent on tine rather than on cut ‘Such costs remain constant per unit of time such as factory rent of = 10,000 per month remaining same for every month irrespective of output of every month. oo ® Fixed costs can be classified into the following categories = meecomnite regia These costs are the result of inevitable consequences of cements prevoust made o re inured to maintain cota facilities and cannot be . fas little or no di man Ssprecaton on ‘building or equipment Ce a ol oe ‘olicy and Managed Costs. Poli n nai) Poly and Managed Coste. Fotc) costs are incurred for implem: tive develoy ir Plementngleome pment, housing etc. and are often discretionary. - Ld © scanned with OKEN Scanner commonly described as those whiclLASSIFICATIONS: AND COST. ‘SHEET 2-22 COST-ANALYSIS, CONCEPTS: ©! — e.g. Staff yxistence of the company Managed costs are incurred 10 ensure the operating ex! oe eration but Song Discretionary Costs. Tene costs are not related opera ne (o) Diety the management. These costs. nise (OM comme aP tte disertion ne contri ete, and can be eliminated oF scored 1,4 opiate do28ion ie manager at arise FFOM Per lear cause and Ofer! 0 et jeriodic decisions regarding bie relations, training, Ciara reflect top management policies. These CO Grefinehip between inputs and outputs They de themaximum outlay to be incurred: ‘examples incl ee constant for @ gi (@ Step Costs. Such costs are a fixed amount at a higher level of output. . ixed he term relevant range is used i" COS accounting in retation to ine behaviour of fixed cost, The term fixed cost is defined a8 4 Sat which does nat change within a TOE oo op of output, Relevant range refers (0 the range of output in which fixed cos ema Unchanged output is outside the relevant range, the fixed cost wi also cl ge. whine ot vrable costs are those which Vary M ‘otal in diet proportion fo the SOIT: Seep ests pet unit remain relatively constant with changes in pro . Sew rose petuate in total amount but tend to rena constant per uni researrament, These include fixed cosis that are re not i \dvertising, PU wven level of output and then increas? by Examples are direct material costs, .ctivity changes. * . oduct costs because they depend on the quan! SNe oe socampl, one fool Fioom is controllable by the than on time. For example, expenditure incurred by, Say, foreman incharge of that section but the share of the tool-room expen apportioned t tnachine shop is not to be controlled by the machine shop foreman. Pe riable Costs are those which are partly fixed and partly variable. For emmy telephone expenses include a fixed portion of ‘annwal charge plus variable according to calls ; thus total telephone expenses are semi-variable. Other examples of such costs are Sepreciation, repairs and maintenance of building and plant etc. 5. By Controllability. Under this, costs are classified according to whether or not they are influenged by the action of a given member of the undertaking. ‘On this basis costs are classifieg/nto two categories = Controllable Costs are those which can be influenced by the action of a specified member of an undertaking, that is to say, costs which are at least partly within the control of management. An organisation is divided into a number of responsibility centres and Cuatollable costs incurred in a particular cost centre can be influenced by the action of the manager responsible for ie centre. Generally speaking, all direct costs including direct 3 Qu mmanayenent ir and some of the overhead expenses are controllable by lower level of (i)/Uncontrollable Costs are i fied member of an Godel, that ‘Se fr wh SS A qi ay, which are not within the control of 5 management. Most of the fixed costs are unct ontrollable. For exé { i ; ample, rent of | lable and so is manageri s. Overhead cost, hid ue arate service section and Is apportio eee ia portioned to another which receives the service is also not The distinction between controllable and uncontr imes left to individual - ot llable and uncontrollable is sometimes left to individual ly maintained. I toa particular lev i fed. In fact, no cost is cor ete aaeeea iscontolable or uncon eae a an individual manager that een say eee point of view of one level oc pr paticular item of cost which ether a cos! Moreover, theve sna vel of management, may be may be controllable from the + be an it , uncontrollal : 1 Ucanete may be an tem of cost which scontolabe lable from another point of view point of view. This party so inthe cave oftmed eonte se of fixed costs. © scanned with OKEN Scanner