UNIT-III

LESSON
9
COST ACCOUNTING & PREPARATION OF COST
STATEMENT
CONTENTS
9.0 Aims and Objectives
9.1 Introduction
9.2 Meaning of Cost Accounting
9.2.1 What is a Cost of a Product?
9.3 Cost Classification
9.3.1 By Nature or Element or Analytical Segmentation
9.3.2 By Functions
9.3.3 Direct and Indirect Cost
9.3.4 By Variability
9.3.5 By Controllability
9.3.6 By Normality
9.3.7 By Time
9.3.8 For Planning and Control
9.3.9 For Managerial Decisions
9.4 Distinction between Financial Accounting & Cost Accounting
9.5 Unit Costing
9.5.1 Cost Sheet - Definition
9.5.2 Direct Material
9.5.3 Direct Labour
9.5.4 Direct Expenses
9.5.5 Indirect Material
9.5.6 Indirect Labour
9.5.7 Indirect Expenses
9.6 Direct Cost Classification
9.7 Indirect Cost Classification
9.8 Stock of Raw Materials
9.9 Stock of Semi Finished Goods
9.10 Stock of Finished Goods
9.11 Let us Sum up
9.12 Lesson-end Activity
9.13 Keywords
9.14 Questions for Discussion
9.15 Suggested Readings
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9.0 AIMS AND OBJECTIVES
In this lesson we shall discuss about cost accounting and preparation of cost statement.
After going through this lesson you will be able to:
(i) discuss meaning of cost accounting and distinction between financial accounting
and cost accounting.
(ii) analyse unit costing and direct, indirect and classification
9.1 INTRODUCTION
Cost accounting is that branch of the accounting information system, which records,
measures and reports information about costs. The primary purpose of cost accounting
is cost ascertainment and its use in decision-making and performance evaluation. It is
also useful in planning and controlling.
9.2 MEANING OF COST ACCOUNTING
It is the process of classifying, recording and appropriate allocation of expenditure for
the determination of costs of products or services through the presentation of data for
the purpose to take decisions and guide the business organization.
The next one important aspect is the differences between the cost accounting and
management accounting.
9.2.1 What is a cost of a product ?
Cost denominates the use of resources only in terms of monetary terms. In brief, cost is
nothing but total of all expenses incurred for manufacturing a product or attributable to
given thing. In clear, the cost is nothing but ascertained expression of expenses in terms
of monetary, incurred during its production and sale.
To ascertain a cost, the firm should atleast smallest division of activity or responsibility
for which costs are accumulated, at where the costs ascertained and controlled. In brief,
cost centre normally a location where a specified activity takes place.
Accumulation of all cost incurred for an activity leads to ascertainment of cost for the
specified activity, but the control is being done by the head or incharge of that activity is
responsible for control of costs of his centre.
Sl.No. Point of Difference Cost Accounting Management Accounting
1. Objectives Its main purpose is to
ascertain the cost and control
Its major objective is to take
decisions through supplement
presentation of accounting
information
2. Scope It deals only with the cost
and related aspects
It not only deals with the cost
but also revenue. It is wider
than the cost accounting
3. Utilization of Data It uses only quantitative
information pertaining to the
transactions
It uses both qualitative and
quantitative information for
decision making
4. Utility It ends only at the
presentation of information
But it starts from where the
cost accounting ends; means
that the cost information are
major inputs for decision-
making
5. Nature It deals with the past and
present data
But it deals with future
policies and course of actions
Cost Centre
Product Centre Service Centre
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Product centre is a centre at where the cost is ascertained for the product which
passes through the process.
Service centre is the centre or division which normally incurs direct or indirect costs but
does not work directly on products. Normally, Maintenance dept. and general factory
office are very good examples of the service centre.
Apart from the above classification, one more important centre is profit centre.
What is meant by profit centre?
It is a centre not only responsible for both revenue as well as expenses but also for the
profit of an activity.
9.3 COST CLASSIFICATION
The costs are classified into various categories according to the purpose and requirements
of the firm. Some of the most important classifications are as follows.
i. By nature or Element or Analytical segmentation
ii. By functions
iii. Direct and Indirect cost
iv. By variability
v. By controllability
vi. By normality
vii. By time
viii. According to planning and control
ix. For Managerial Decisions
9.3.1 By Nature or Element or Analytical segmentation
The costs are classified into three major categories Materials, Labour, and Expenses.
9.3.2 By Functions
Under this methodology, the costs are classified into various divisions or functions of the
enterprise. viz Production cost, Administration cost, Selling & Distribution cost and so on.
The detailed classification is that total of production cost sub classified into cost of
manufacture, fabrication or construction.
And another classification of cost is commercial cost of operations; which is other than
the cost of manufacturing and production.
The major components of commercial costs are known as administrative cost of operations
and selling and distribution cost of operations.
9.3.3 Direct and Indirect Cost
Direct cost: This classification of costs are incurred for the manufacture of a product or
service ; can be conveniently and easily identified.
Raw materials Cost centre Finished goods
Cost Ascertainment
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Material cost for the product manufacture- Direct material-For garments factory- cloth
is the direct material for ready made garments.
Labour cost for production- Labour who directly involved in the production of a product
as well as attributable to single product expenses and so on.
Indirect cost: The costs which are incurred for and cannot be easily identified for any
single cost centre or cost unit known as indirect cost.
Indirect material cost, Indirect labour cost and Indirect expenses are the three different
components of the indirect expenses.
Indirect material- Cost of the thread cannot be conveniently measured for single unit of
the product.
Indirect Labour-Salary paid to the supervisor.
9.3.4 By Variability
The costs are grouped according to the changes taken place in the level of production or
activity.
It may be classified into three categories:
Fixed cost: It is cost which do not vary irrespective level of an activity or production
Rent of the factory, salary to the manager and so on.
Variable cost: It is a cost which varies in along with the level of an activity or production.
e.g. Material consumption and so on.
Semi variable cost: It is a cost which is fixed upto certain level of an activity, then later
it fluctuates or varies in line with the level of production. It is known in other words as
step cost. e.g. Electricity charges.
9.3.5 By Controllability
The cost are classified into two categories in accordance with controllability, as follows:
Controllable costs: Cost which can be controlled through some measures known as
controllable costs. All variable cost are considered to be controllable in segment to some
extent.
Uncontrollable costs: Costs which cannot be controlled are known as uncontrollable
costs. All fixed costs are very difficult to control or bring down; they rigid or fixed
irrespective to the level of production.
9.3.6 By Normality
Under this methodology, the costs which are normally incurred at a given level of output
in the conditions in which that level of activity normally attained.
Normal cost: It is the cost which is normally incurred at a given level of output in the
conditions in which that level of output is normally achieved.
Abnormal cost: It is the cost which is not normally incurred at a given level of output in
the conditions in which that level of output is normally attained.
9.3.7 By time
According to this classification, the costs are classified into Historical costs and
Predetermined costs:
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Cost Accounting &
Preparation of Cost Statement
Historical costs: The costs are accumulated or ascertained only after the incurrence
known as Past cost or Historical costs.
Predetermined costs: These costs are determined or estimated in advance to any
activity by considering the past events which are normally affecting the costs.
9.3.8 For Planning and Control
The following are the two major classifications viz standard cost and budgetary control:
Standard cost is a cost scientifically determined by way of assuming a particular level of
efficiency in utilization of material, labour and indirect expenses.
The prepared standards are compared with the actual performance of the firm in studying
the variances in between them. The variances are studied and analysed through an
exclusive analysis.
Budget: A budget is detailed plan of operation for some specific future period. It is an
estimate prepared in advance of the period to which it applies. It acts as a business
barometer as it is complete programme of activities of the business for the period covered.
The control is exercised through continuous comparison of actual results with the budgets.
The ultimate aim of comparing with each other is to either to secure individuals' action
towards the objective or to provide a basis for revision.
9.3.9 For Managerial Decisions
The major classifications are sunk cost and marginal cost.
Marginal cost is the amount at any given volume of output by which aggregate costs are
changed if the volume of output is decreased or increased by one unit.
9.4 DISTINCTION BETWEEN FINANCIAL ACCOUNTING
& COST ACCOUNTING
The next one important aspect is the differences in between the Financial accounting,
cost accounting and management accounting.
Check Your Progress
1. Fixed cost is the cost under the classification of
(a) Variability (b) Normality
(c) Controllability (d) Functions
Sl. No. Point of
Difference
Financial Accounting Cost Accounting
1. Objectives To determine the volume of
earnings and financial position
Its main purpose is to ascertain the
cost and control
2. Scope It deals with only the monetary
transactions of the business
It deals only with the cost and
related aspects
3. Utilization
of Data
It uses only the financial
transactions alone
It uses only quantitative information
pertaining to the transactions
4. Utility It reveals the capacity & status
of the firm
It ends only at the presentation of
information
5. Nature It deals only the past of the
firm
It deals with the past and present
data
Contd...
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2. Standard costing is brought under the classification of
(a) Controllability (b) Functions
(c) Planning and control (d) Both (a) & (c)
3. Marginal costing is classified on the basis of
(a) Variability (b) Managerial decisions
(c) Time (d) Both (a) & (b)
4. Electricity charges incurred by the firm is
(a) Fixed cost (b) Semi-Variable cost
(c) Variable cost (d) None of the above
9.5 UNIT COSTING
Under costing, the role of unit costing is inevitable tool for the industries not only to
identify the volume of costs incurred at every level but also to determine the rational
price on the commodities in order to withstand among the competitors. The determination
of the selling price is being done through the process of determining the cost of the
product. After having been finalized the cost of the product, the profit margin has to be
added in order to derive the final selling price of the product.
9.5.1 Cost Sheet - Definition
"It is a statement of costs incurred at every level of manufacturing a product or service".
"It is a statement prepared to depict the output of a particular accounting period alongwith
break up of costs".
How to find a total cost of the product or service ?
To find the total cost of the product or service, the costs incurred are grouped under
various categories.
The cost of the product or service should have to come across many stages. The
determination of the unit cost involves two different major stages viz Direct and Indirect
costs.

























Cost
Material Labour Expenses
Direct
Indirect
. Direct
Indirect
. Direct
Indirect
O V E R H E A D S
Production
Overheads
Administrative
Overheads
Selling Overheads Distribution
Overheads
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Cost Accounting &
Preparation of Cost Statement
What is meant by direct cost ?
Direct cost is the cost incurred by the firm which can be ascertained and measured for
a product.
Direct cost of the product can be classified into three major categories.
9.5.2 Direct Material
Direct material which is especially used as a major ingredient for the production of a
product. For Example: The wood is a basic raw material for the wooden furniture. The
cost of the wood procured for the furniture is known direct material cost.
The cotton is a basic raw material for the production of yarn. The cost of procuring the
cotton is known as direct material for the manufacturing of yarn.
9.5.3 Direct Labour
Direct labour is the cost of the labour which is directly involved in the production of
either a product or service. For e.g. The cost of an employee who is mainly working for
the production of a product /service at the centre, known as direct labour cost.
9.5.4 Direct Expenses
Direct expenses which are incurred by the firm with the production of either a product
or service. The excise duty, octroi duty are known as direct expenses in connection with
the production of articles and so on.
Indirect cost is the cost whatever incurred by the firm can be ascertained but not measured
more specifically for a product.
9.5.5 Indirect Material
The material which is spent cannot be measured for a product is known as indirect
material. For e.g. the thread which is used for tailoring the shirt cannot be measured or
quantified in specific length as well as ascertained the cost.
9.5.6 Indirect Labour
Indirect labour is the cost of the labour incurred by the firm other than the direct labour
cannot be apportioned. For e.g: Cost of supervisor, cost of the inspectors and so on.
9.5.7 Indirect Expenses
Indirect expenses are the expenses other than that of the direct expenses in the production
of a product. The expenses which are not directly part of the production process of a
product or service known as indirect expenses. For e.g.: Rent of the factory, salesmen
salary and so on.
Advantages of preparing the cost sheet:
1. It is a only statement reveals the cost of the output as well as unit cost of the
output
2. It facilitates the manufacturer to access the control on the costs through breakups
in the cost
3. It extends room for the management to study the variations of the cost with the
help of an effective comparison of standard costs
4. The businessman is able to get an insight on the various components of cost as well
as able to exercise the control on the excessive costs incurred
5. It poses the firm to supply the goods against the orders with reasonable accuracy
in submitting the orders.
Check Your Progress
1. Cost is
(a) An expense incurred (b) An expenditure incurred
(c) An income received (d) None of the above
Contd...
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2. Cost is
(a) Direct cost only (b) Indirect cost only
(c) Both (a) & (b) (d) None of the above
3. Direct cost is
(a) Direct Materials (b) Direct labour
(c) Direct Expenses (d) Prime cost
To find out the unit cost of the product, the statement of cost plays pivotal role in
determining the cost of production, cost of goods sold, cost of sales and selling price of
the product at every stage.
During the preliminary stage of preparing the cost statement of the product, there are
two things to be borne in our mind at the moment of classification.
1. Direct cost classification
2. Indirect cost classification
9.6 DIRECT COST CLASSIFICATION
Under this classification, the direct costs of the product or service are added together to
know the volume of total direct cost. The total volume of direct cost is known as "Prime
Cost"
Direct Materials +Direct Labour+ Direct Expenses = Prime cost
The next stage in the unit costing to find out the factory cost. The factory cost could be
computed by the combination of the indirect cost classification.
9.7 INDIRECT COST CLASSIFICATION
Among the classification of the overheads, the first and foremost is factory overheads.
The factory overheads and work overheads are synonymously used. The factory
overheads are nothing but the indirect costs incurred at the factory site. To find out the
total factory cost or works cost incurred in the factory could be derived by adding the
both direct cost and indirect cost incurred during the factory process.
Factory overheads are nothing but the indirect expenses incurred during the industrial
process.


Factory Cost =Prime cost + Factory overheads
Prime cost
Direct Material
Direct Labour
Direct Expenses
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Cost Accounting &
Preparation of Cost Statement
Check Your Progress
1. Direct materials is
(a) Opening stock + Purchases
(b) Purchases + Closing stock
(c) Opening stock + Purchases closing stock
(d) Purchases Closing stock
2. Salary paid to Supervisor
(a) Manufacturing overheads
(b) Administrative overheads
(c) Direct labour
(d) Selling & Distribution overheads
The next stage in the process of the unit costing is to find out the cost of the production
The cost of production is the combination of both the factory cost and administrative
overheads.
Administrative overheads is the indirect expenses incurred during the office administration
for the smooth flow production of finished goods.
Cost production = Factory cost + Administrative overheads



Factory cost
Factory overheads
Prime cost
Wages for foreman
Electric power
Storekeepers wages
Oil and water
Factory rent
Repairs and Renewals
Depreciation


Cost of Production
Administrative Overheads
Factory Overheads
Office Rent
Repairs Office
Office lighting
Depreciation-office
Manager salary
Telephone charges
Postage and telegram
Stationery
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Immediate next stage to determine in the process of unit costing is the component of
cost of sales. The cost of sales is the blend of both viz. Selling overheads and cost of
production.
What ever the cost involved in the production process in the factory as well in the
administrative proceedings are clubbed with the selling overheads to determine the cost
of sales.
Selling overheads are nothing but the indirect expenses incurred by the firm at the moment
of selling products. In brief, whatever the expenses in relevance with the selling and
distribution are known as Selling overheads.
The last but most important stage in the unit costing is determining the selling price of the
commodities. The selling price of the commodities is fixed by way of adding both the
cost of sales and profit margin out of the product sales.
Under the unit costing, the selling price of the product can be determined through the
statement form.
The cost sheet or cost statement is as follows in the determination of the selling price of
the product.
Check Your Progress
1. Overheads is
(a) Manufacturing expenses (b) Administrative expenses
(c) Selling & Distribution expenses (d) a,b, & c
2. Cost of the Cloth incurred at the moment of purchase made by the Ready
garments manufacturer is
(a) Direct materials (b) Indirect materials
(c) Direct expenses (d) Indirect expenses
Cost of sales = Cost of production + Selling overheads



Cost of sales
Selling Overheads
Cost of production
Salesman salary
Carriage outward
Salesmen commission
Travelling expenses
Advertising
Free samples
Ware housing
Delivery charges

Sales = Cost of sales + Margin of Profit
Contd...
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Cost Accounting &
Preparation of Cost Statement
3. Salesman salary given by the firm to promote the sales is
(a) Direct labour (b) Indirect expenses
(c) Direct expenses (d) Indirect labour
4. Selling price is
(a) Cost of sales (b) Cost of production
(c) Profit margin + Cost of goods sold (d) Profit margin + Cost of sales
Illustration 1
Calculate the prime cost, factory cost, cost of production cost of sales and Profit form
the following particulars:
Rs. Rs.
Cost statement /Cost Sheet
Direct Materials 2,00,000 Office stationery 1000
Direct wages 50,000 Telephone charges 250
Direct expenses 10,000 Postage and telegrams 500
Wages of foreman 5,000 Salesmens salaries 2500
Electric power 1,000 Travelling expenses 1,000
Lighting :Factory 3,000 Repairs and renewal Plant 7,000
Office 1,000 Office premises 1,000
Storekeepers wages 2,000 Carriage outward 750
Oil and water 10,00 Transfer to reserves 1,000
Rent: Factory 10,000 Discount on shares written
off
1000
:Office 5,000 Advertising 2,500
Depreciation Plant 1000 Warehouse charges 1000
office 2,500 Sales 3,79,000
Consumable store 5,000 Income tax 20,000
Managers salary 10,000 Dividend 4,000
Directors fees 2,500
Particulars Rs Rs
Direct Materials 2,00,000
Direct wages 50,000
Direct expenses 10,000
PRIME COST 2,60,000
Factory Overheads:
Wages of foreman 5,000
Electric power 1,000
Lighting :Factory 3,000
Storekeepers wages 2,000
Oil and water 1000
Rent:Factory 10,000
Depreciation Plant 1000
Consumable store 5,000
Repairs and renewal Plant 7,000
35,000
Factory cost 2,95,000
Administration overheads
Rent Office 5,000
Depreciation office 2,500
Contd...
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The Next stage in the preparation of the cost statement is to induct the stock of raw
materials, work in progress and finished goods.
9.8 STOCK OF RAW MATERIALS
The raw materials stock should be taken into consideration for the preparation of the
cost sheet. The cost of the raw materials is nothing but the direct materials cost of the
product. The cost of the materials is in other words cost of the materials consumed for
the production of a product.
9.9 STOCK OF SEMI FINISHED GOODS
The treatment of the stock of semi finished goods is mainly depending upon the two
different approaches viz prime cost basis and factory cost basis. The factory cost basis
is considered to be predominant over the early one due to the consideration of factory
overheads at the moment of semi finished goods treatment. The indirect expenses are
the expenses converting the raw materials into semi finished goods which should be
relatively considered for the treatment of the stock valuation rather than on the basis of
prime cost.
Managers salary 10,000
Directors fees 2,500
Office stationery 1000
Telephone charges 250
Postage and telegrams 500
Office premises 1,000
Lighting Office 1,000
23,750
Cost of production 3,18,750
Selling and distribution overheads
Carriage outward 750
Sales mens salaries 2500
Travelling expenses 1,000
Advertising 2500
Warehouse charges 1000
7,750
Cost of sales 3,26,500
Profit 52,500
Sales 3,79,000
Particulars Rs
Opening stock of Raw materials XXXXX
(+)Purchases of Raw materials XXXXX

(-)Closing stock of Raw materials XXXXX
Cost of Materials consumed XXXXX
Particulars Rs
Prime cost XXXXXX
(+)Factory overheads incurred XXXXXX
(+)Opening work in progress XXXXXX
(-)Closing work in progress XXXXXX
Factory cost XXXXXX
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Cost Accounting &
Preparation of Cost Statement
9.10 STOCK OF FINISHED GOODS
The treatment of the stock of finished goods should carried over in between the opening
stock and closing stock and adjusted among them before the finding the cost of goods
sold.
Illustration 2
The following data has been from the records of Centre corporation for the period from
June 1 to June 30, 2005
Draft the cost sheet
Cost Sheet
Particulars Rs
Cost of production XXXXX
(+)Opening stock of finished goods XXXXX
(-)Closing stock of finished goods XXXXX
Cost of goods sold XXXXX
2005
1
st
Jan
2005
31
st
Jan
Cost of raw materials 60,000 50,000
Cost of work in progress 24,000 30,000
Cost of finished good 1,20,000 1,10,000
Transaction during the month
Purchase of raw materials 9,00,000
Wages paid 4,60,000
Factory overheads 1,84,000
Administration overheads 60,000
Selling overheads 40,000
Sales 18,00,000
Particulars Rs Rs
Opening stock of raw materials 1sr Jan 60,000
(+)Purchase of raw materials 9,00,000
()Closing stock of raw materials 31
st
Jan 50,000
Raw materials consumed during the year 9,10,000
(+)Wages paid 4,60,000
Prime cost 13,70,000
Factory overheads 1,84,000
(+)Opening stock of semi goods 24,000
()Closing stock of semi goods 30,000
Factory overheads 1,78,000
Factory or Works cost 15,48,000
(+)Administration overheads 60,000
Cost of Production 16,08,000
(+)Opening stock of finished goods 1,20,000
()Closing stock of finished goods 1,10,000
Cost of goods sold 16,18,000
(+)Selling overheads 40,000
Cost of Sales 16,58,000
Net profit 1,42,000
Sales 18,00,000
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Check Your Progress
1. The cost classifications in the cost sheet is
(a) Functions (b) Variability
(c) Controllability (d) Functions
2. Rs.10,000 paid on every month to the owner of the factory site is
(a) Fixed cost (b) Semi-Variable cost
(c) Variable cost (d) Semi-Fixed cost
Illustration 3
From the following information extracted from the records of the M/s sundaram &co
Stock position of the firm
Prepare cost statement of the M/s Sundaram & Co
Cost Sheet
Contd...
Particulars Rs 1-4-1994 Rs 31-3-1995
Stock of raw materials 80,000 1,00,000
Stock of finished goods 2,00,000 3,00,000
Stock of work in progress 20,000 28,000
Particulars Rs Particulars Rs
Indirect labour 1,00,000 Administrative expenses 2,00,000
Oil 20,000 Electricity 60,000
Insurance on fixtures 6,000 Direct labour 6,00,000
Purchase of raw materials 8,00,000 Depreciation on Machinery 1,00,000
Sale commission 1,20,000 Factory rent 1,20,000
Salaries of salesmen 2,00,000 Property tax on building 22,000
Carriage outward 40,000 Sales 24,00,000
Particulars Rs Rs
Opening stock of raw materials 1
st
April,1994 80,000
(+)Purchase of raw materials 8,00,000
(-)Closing stock of raw materials 31
st
Jan 1,00,000
Raw materials consumed during the year 7,80,000
(+)Direct labour 6,00,000
Prime cost 13,80,000
Factory overheads:
Indirect labour

1,00,000

Oil 20,000
Insurance on fixtures 6,000
Electricity 60,000
Depreciation on machinery 1,00,000
Factory rent 1,20,000

Property tax on factory building 22,000 4,28,000
(+)Opening stock of semi goods 2,0,000
()Closing stock of semi goods 28,000
Factory cost 18,00,000
(+)Administration overheads 2,00,000
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Cost Accounting &
Preparation of Cost Statement
Note: Property tax on the plant is to included under the factory overheads. The tax is
paid by the firm on the plant which is engaging in the production process.
Illustration 4
Prepare the cost sheet to show the total cost of production and cost per unit of goods
manufactured by a company for the month of Jan, 2005. Also find the cost of sale and
profit.
The number of units produced during Jan 2005 was 6,000
The stock of finished goods was 400 and 800 units on 1st Jan, 2005 and 31st Jan, 2005
respectively. The total cost of the units on hand on 1st Jan 2005 is Rs. 5,600. All these
had been sold during the month.
The first and foremost step is to find out the cost per unit i.e. cost production per unit.
The opening stock and their values are given, but at the same time the value of the
closing stock is ascertained by Rs. 3. The total number of units are almost
Contd...
Cost of Production 20,00,000
(+)Opening stock of finished goods 2,00,000
(-)Closing stock of finished goods 3,00,000
Cost of goods sold 19,00,000
Selling overheads:
Sales commission



1,20,000
Salaries of salesmen 2,00,000
Carriage outward 40,000
Cost of sales 22,60,000
Profit margin 1,40,000
Sales 24,00,000
Particulars Rs Partiuclars Rs
Stock of raw materials1.1.2005 6,000 Factory rent and rates 6,000
Raw materials procured 56,000 Office rent 1,000
Stock of raw material31.1.2005 9,000 General expenses 4,000
Direct wages 14,000 Discount on sales 600
Plant depreciation 3,000 Advertisement expenses 1,200
Loss on the sale of plant 600 Income tax paid 2000
Sales Rs.,1,50,000
Particulars Units Rs
Stock of Raw materials 1.1.2005 6,000
(+)Raw materials procured 56,000
()Closing stock of raw material 9,000
Materials consumed 71,000
Direct wages 14,000
Prime cost 85,000
Factory overheads:
Depreciation on plant



3,000
Factory rent and rates 6,000
Factory cost 94,000
Office and Administration overheads:
Office rent

1,000
General expenses 4,000
Cost of production =Rs. 3 per unit 3,000 99,000
(+)Opening stock of finished goods 400 5,600
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Illustration 5
XYION Co Ltd., is an export oriented company manufacturing internal -communication
equipment of a standard size. The company is to send quotations to foreign buyers of
your product. As the cost accounts chief you are required to help the management in the
matter of submission of the quotation of a cost estimate based on the following figures
relating to the year 1984
Total output (in units ) 20,000
Note:
i. Local raw materials now cost 10% more
ii. A profits margin of 20% on sales is kept
iii. The government grants subsidy of Rs. 200 per unit of exports
Prepare the cost statement in columnar form
Cost Statement of XYION Ltd.
Rs Rs
(-)closing stock of finished goods 800 2,400
Cost of goods sold 1,02,200
Selling and distribution expenses
Advertisement expenses

600
Cost of sales 1,02,800
Net profit 47,200
Sales 1,50,000
Rs. Rs.
Local Raw materials 20,00,000 Excise duty 4,00,000
Imports of raw materials 2,00,000 Administrative office expenses 4,00,000
Direct labour in works 20,00,000 Salary of the managing director 1,20,000
Indirect labour in works 4,00,000 Salary of the joint managing
director
80,000
Storage of raw materials and
spares
1,00,000 Fees of directors 40,000
Fuel 3,00,000 Expenses on advertising 3,20,000
Tools consumed 40,000 Selling expenses 3,60,000
Depreciation on plant 2,00,000 Sales depots 2,40,000
Salaries of works personnel 2,00,000 Packaging and distribution 2,40,000
Particulars Cost Rs Rs Unit/Price
Cost20,000
Local raw materials 20,00,000
(+) Increase in local raw materials 2,00,000
22,00,000
(+)Imports of raw materials 2,00,000
Direct Materials 24,00,000
Direct labour 20,00,000
Prime cost 44,00,000
Factory overheads:
Indirect labour in works

4,00,000

Storage of raw materials and spares 1,00,000
Fuel 3,00,000
Tools consumed 40,000
Contd...
165
Cost Accounting &
Preparation of Cost Statement
9.11 LET US SUM UP
Cost denominates the use of resources only in terms of monetary terms. In brief, cost is
nothing but total of all expenses incurred for manufacturing a product or attributable to
given thing. In clear, the cost is nothing but ascertained expression of expenses in terms
of monetary, incurred during its production and sale. Service centre is the centre or
division which normally incurs direct or indirect costs but does not work directly on
products. Normally, Maintenance dept. and general factory office are very good examples
of the service centre. Costs which cannot be controlled are known as uncontrollable
costs. All fixed costs are very difficult to control or bring down ; they rigid or fixed
irrespective to the level of production. A budget is detailed plan of operation for some
specific future period. It is an estimate prepared in advance of the period to which it
applies. It acts as a business barometer as it is complete programme of activities of the
business for the period covered. Under costing, the role of unit costing is inevitable tool
for the industries not only to identify the volume of costs incurred at every level but also
to determine the rational price on the commodities in order to withstand among the
competitors. Direct labour is the cost of the labour which is directly involved in the
production of either a product or service. For e.g. The cost of an employee who is
mainly working for the production of a product /service at the centre, known as direct
labour cost. Indirect expenses are the expenses other than that of the direct expenses in
the production of a product. The expenses which are not directly part of the production
process of a product or service known as indirect expenses. For e.g.: Rent of the factory,
salesmen salary and so on.
9.12 LESSON-END ACTIVITY
Once standard costs are established, what conditions would require the standards to be
revised? Give your opinion.
9.13 KEYWORDS
Cost: Expense incurred at the either cost centre or service centre.
Cost sheet: It is a statement prepared for the computation of cost of a product/service.
Depreciation on plant 2,00,000
Salaries of works personnel 2,00,000
Excise duty 4,00,000 16,40,000
Works cost 60,40,000
Administrative & office Expenses 4,00,000
Salaries of Managing director 1,20,000
Salaries of Joint Managing Director 80,000
Fees of directors 40,000 6,40,000
Cost of Production 66,,80,000
Selling & Distribution expenses
Expenses of Advertising

3,20,000

Selling expenses 3,60,000
Sales depots 2,40,000
Packaging and distribution 2,40,000 11,60,000
Cost of sales 80% 78,40,000
Profit Margin 20% 19,60,000
Sales 100% 98,00,000/20,000units 98,00,000 490
Export subsidy per unit 40,00,000 200()
Selling price for local market
sales
58,00,000/20,000units 58,00,000 290
166
Accounting and Finance
for Managers
Direct cost: cost incurred which can be easily ascertained and measured for a product.
Indirect cost: cost incurred cannot be easily ascertained and measured for a product.
Cost centre: The location at where the cost of the activity is ascertained.
Product centre: It is the location at where the cost is ascertained through which the
product is passed through.
Service centre: The location at where the cost is incurred either directly or indirectly
but not directly on the products.
Profit centre: It is responsibility centre not only for the cost and revenues but also for
profits for the activity.
Prime cost: combination of all direct costs viz Direct materials, Direct labour and Direct
expenses.
Factory cost: It is the total cost incurred both direct and indirect at the work spot during
the production of an article.
Cost of production: It is the combination of cost of manufacturing an article or a product
and administrative cost.
Cost of sales: It is the entire cost of a product.
Selling price or Sales: The summation of cost of sales and profit margin.
9.14 QUESTIONS FOR DISCUSSION
1. What is cost classification? Classify it, in detail.
2. What do you mean by unit costing?
3. Explain Direct and Indirect Costing.
4. What is cost-sheet definition?
5. Express Indirect and Direct Expenses.
9.15 SUGGESTED READINGS
R.L. Gupta and Radhaswamy, Advanced Accountancy
V.K. Goyal, Financial Accounting, Excel Books, New Delhi.
Khan and Jain, Management Accounting.
S.N. Maheswari, Management Accounting.
S. Bhat, Financial Management, Excel Books, New Delhi.
Prasanna Chandra, Financial Management Theory and Practice, Tata McGraw
Hill, New Delhi (1994).
I.M. Pandey, Financial Management, Vikas Publishing, New Delhi.
Nitin Balwani, Accounting & Finance for Managers, Excel Books, New Delhi.