Calculation and classification of cost

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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

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