Calculation and Classification of Cost
Cost classification is the process of grouping costs according to their common characteristics. They are to be classified suitably to identify with cost Centre or cost unit. Following are some of the costs:
Direct and Indirect cost
Direct costs are those which can be identified with the cost Centre or cost unit, and can conveniently be wholly connected with any cost unit whereas expenses incurred on those items which are not directly chargeable to production are known as indirect costs. Salaries of timekeeper, storekeeper, and foreman are paid; expenses for running the administration are incurred. They are called indirect cost.
Historical and budgeted
Budgeted cost is determined and recorded before actual performance while historical cost is recorded after the actual performance. Budgeted cost is pre-determined cost related to future while historical cost is related to the past. Budgeted cost serves as a measure of evaluation of efficiency. Historical cost does not provide any such technique; it only indicates the total cost of product or service. Budgeted cost is more important for cost control. Historical cost fails to provide any yardstick for comparison and not point out the individual responsible for rise.
Standard and Budgeted
The technique of determining both standard and budgeted cost is the same and accounting procedures are also equally the same. But these two differ in many respects. Standard cost is ascertained on the assumption that free movement in cost will not be allowed and to the extent possible, cost will be controlled to confirm to standards set. On the other hand, budgeted cost is upon the assumption of free movement of cost and best estimate is being made taking into account cost situations in the future. Standard cost is used only when complete cost data are available but, budgeted cost can be used in every situation.
Relevant and sunk cost
The term relevant means pertinent to decision at hand. Costs are relevant if they guide the executive towards the decision that harmonizes with top management’s objectives. On the other hand, a cost which was incurred in the past and is not relevant to the particular decision making is a sunk cost. It may be variable or fixed or both. It is only historical cost and as such irrelevant for decision making.
Imputed (hypothetical) and opportunity cost
These types of costs are not actually incurred but are to be considered in making decision. But in costing, they are charged while ascertaining the cost of a product. Opportunity cost means the expected return or benefit foregone in rejecting one course of action for another. When rejecting one course of action, the rejected alternative becomes the opportunity cost for the alternative accepted.
Overheads Cost Allocation
Overheads cost are allocated under various heads as follows:
Prime Cost: The prime cost of any product comprises of all direct costs. It includes direct material, direct labor and direct expenses. Prime cost is also known as direct cost.
Works Cost: Works cost represent the total of all items of expenses incurred in the manufacturing of an article. It is described as prime cost works on cost. It is also known as factory cost or cost of manufacture.
Cost of Production: Cost of production means prime cost plus works cost plus administrative expenses. It is also known as office cost.
Total Cost: Total cot means the sum of all items of expenditure incurred in producing, manufacturing and selling & distribution expenses. It comprises of cost of production plus selling and distribution expenses.
Selling Price: It is the price which includes cost of sales plus a margin of profit or minus loss if any.
Calculation and Classification of Cost
Performa of Cost Sheet
| Particulars | Total Cost | Cost per unit |
| Opening stock of material | ||
| Add Purchases of material | ||
| Less Closing stock of material | ||
| Material Consumed | — | —- |
| Direct Labor | — | —- |
| Direct expenses | —- | —- |
| Prime Cost | — | —- |
| Add Works overhead | —– | —- |
| Add Opening Work in Progress | ||
| Less Closing work in Progress | ||
| Works cost or Factory cost | — | — |
| Add General or Administrative expenses | —- | —- |
| Cost of Production | ||
| Add Opening Finished Goods | —- | —- |
| Less Closing Finished Goods | — | — |
| Cost of Goods Sold | ||
| Add Selling & distribution expenses | ||
| Total Cost or Cost of sale | — | —- |
| Selling Price | — | —- |
| Profit or Loss | —- | —– |
Calculation and Classification of Cost Problems:
Q.1. Calculate Prime Cost, Factory Cost, Cost of Production, Cost of sales and Profit from the following details:
| Direct Material | SR 10,000 |
| Direct Labor | SR 4,000 |
| Direct Expenses | SR 500 |
| Factory Expenses | SR 6,500 |
| Administrative Expenses | SR 1,000 |
| Selling Expenses | SR 300 |
| Sales | SR 20,000 |
Q.2. A factory produces 100 units of a commodity. The cost of production is as follows;
| Direct Material | SR 10,000 |
| Direct wages | SR 5,000 |
| Direct Expenses | SR 1,000 |
| Factory Overheads | SR 6,500 |
| Opening work in progress | SR 7,000 |
| Closing work in progress | SR 5,500 |
| Administrative Overheads | SR 3,400 |
| Distribution Expenses | SR 1,500 |
| Profit | 25% of Cost of sale |
Calculate Sales Price and sales price per unit.
Q.3. From the following information calculate profit and sales:
| Material Consumed | SR 16,000 |
| Direct Labor | SR 9,000 |
| Carriage Inward | SR 4,000 |
| Opening Finished Goods | SR 9,500 |
| Depreciation of Factory Plant | SR 8,000 |
| Factory Insurance | SR 6,500 |
| Closing Finished Goods | SR 5,000 |
| Office Insurance | SR 5,500 |
| Telephone Charges | SR 2,000 |
| Sales Promotion Expenses | SR 7,000 |
| Profit | 20% of Sales |
Q.4. From the following information calculate profit and sales:
| Material Purchased | SR 18,000 |
| Direct Wages | SR 9,000 |
| Opening Stock of Raw Material | SR 7,400 |
| Freight Charges | SR 4,000 |
| Closing Stock of Material | SR 6,000 |
| Opening Finished Goods | SR 9,500 |
| Depreciation of Factory Plant | SR 8,000 |
| Opening Stock of Work in Process | SR 10,000 |
| Factory Insurance | SR 6,500 |
| Closing Stock of Work in Process | SR 8,600 |
| Closing Finished Goods | SR 5,000 |
| Office Expenses | SR 4,500 |
| Telephone Charges | SR 2,000 |
| Selling & Distribution Expenses | SR 5,200 |
| Profit | 25% of Cost of Sale |
Q.1. Cost Sheet
| Particulars | Amounts (SR) |
| Direct Material Direct Expenses Direct Labor Prime Cost Add Factory expenses/ works expenses (overhead) Works Cost / Factory Cost Add Administrative expenses Cost of Production Add Selling expenses Total Cost Sales | 10,000 400 4,000 14,400 6,500 20,900 1,000 21,900 300 22,200 20,000 |
| Loss | 2,200 |
Q.2. Cost Sheet of 100 Units
| Particulars | Cost per Unit(SR) | Amounts (SR) |
| Direct Material 10,000 / 100 = SR 100 Direct Labor Direct Expenses Prime Cost Add Factory overhead Add Opening work in progress Less Closing Work in progress Factory Cost / Works Cost Add Administrative overhead Cost of Production Add Distribution Expenses Total Cost / Cost of Sale Add Profit 28,900 x 20 / 100 = 5,780 | 100 50 10 160 65 70 (55) 240 34 274 15 289 57.80 | 10,000 5,000 1,000 16,000 6,500 7,000 (5,500) 24,000 3,400 27,400 1,500 28,900 5,780 |
| Sales | 346.80 | 34,680 |
Q.3. Cost Sheet
| Particulars | Amounts |
| Material Consumed Direct Labor Carriage Inward Prime Cost Depreciation on Plant Factory Insurance Factory Cost / Works Cost Office Insurance Telephone Charges Cost of Production Add Opening Finished Goods Less Finished Goods Cost of Goods Sold Sales Promotion Expenses Total Cost Profit ( 20 x 62,500 ) / 100-20= 20 x 62,500 /80= 15,625 | 16,000 9,000 4,000 29,000 8,000 6,500 43,500 5,500 2,000 51,000 9,500 (5,000) 55,500 7,000 62,500 15,625 |
| Sales | 78,125 |
Q.4. Cost Sheet
| Particulars | Amounts |
| Opening Stock of Raw Material Add Material Purchased Less Closing Stock of Raw Material Material Consumed Direct Wages Freight Charges Prime Cost Depreciation of Factory Plant Factory Insurance Opening Stock of Work in Process Less Closing Stock of Work in Process Factory Cost / Works Cost Office Expenses Telephone Charges Cost of Production Add Opening Stock of Finished Goods Less Closing Stock of Finished Goods Cost of goods Sold Add Selling and Distribution Expenses Total Cost / Cost of Sale Profit; ( 25 x 64,500 ) / 100 = 16,125 | 7,400 18,000 (6,000) 19,400 9,000 4,000 32,400 8,000 6,500 10,000 (8,600) 48,300 4,500 2,000 54,800 9,500 (5,000) 59,300 5,200 64,500 16,125 |
| Sales | 80,625 |
Production and Costs Assignment
Calculation and classification of cost