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Chapter 3 Part 2 - Costing and Budgetary Control

The document discusses different elements of cost including material, labor, expenses which are further divided into direct and indirect costs. It also explains different methods of costing and budgetary control used to determine costs. Prime cost refers to the sum of direct material, direct labor, and direct expenses which represent the total direct costs of production.

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Suku Thomas Samuel
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239 views23 pages

Chapter 3 Part 2 - Costing and Budgetary Control

The document discusses different elements of cost including material, labor, expenses which are further divided into direct and indirect costs. It also explains different methods of costing and budgetary control used to determine costs. Prime cost refers to the sum of direct material, direct labor, and direct expenses which represent the total direct costs of production.

Uploaded by

Suku Thomas Samuel
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 3

COSTING AND BUDGETARY CONTROL

BY

PROF. SUKU THOMAS SAMUEL


DEPARTMENT OF MANAGEMENT
COST - MEANING
• Dictionary meaning – price paid for something
• Amount of resources given up in exchange for any goods or service

• “Cost is the amount of expenditure incurred or attributable to a given thing”


- CIMA, UK

• “Cost is a measurement, in monetary terms, of the amount of resources used


for the purpose of production of goods or rendering services”
- ICWA, India
COST VS. EXPENSE VS. LOSS

COST EXPENSE LOSS


Amount or equivalent paid or Cost used up in earning revenues Excess of expenditure incurred
charged for something over revenue earned
Used in present continuous Used in past context. Used in past context.
context.
Possibility to recoup. Recouped. No possibility to recoup and
expired.
COSTING & COST ACCOUNTING
COSTING
• Determination of cost.
• Executed with the use of simple techniques – arithmetic process,
memorandum statement etc.

COST ACCOUNTING
• Reference to the subject as a whole
• Comprises of the concepts, principles, methodologies, practices, formats,
statements etc.
COST ACCOUNTING
“The application of costing and cost accounting principles, methods and
techniques to science, art and practice of cost control and the ascertainment of
profitability”
- CIMA, UK

“Cost accounting is the application of accounting and costing principles,


methods and techniques in the ascertainment of costs and the analysis of
saving/or excess cost incurred as compared with previous experience or with
standards”.
- H.J. Wheldon

• Formal accounting mechanism by which the cost are identified.


• Include principles, conventions, techniques and systems.
• Helps to plan and control utilization of resources.
ADVANTAGES OF COST ACCOUNTING
1. Ascertainment of cost: Cost information is the basis for determination
of the price of product or service.
2. Cost control: Scientific judgment of the cost helps to have an effective
control over the expenses to be incurred by a business.
3. Cost reduction: Reduction of cost refers to permanent reduction in the
cost without compromising on the quality.
4. Assisting management: Decision making is a very important process for
the top-level management and its activities.
DISADVANTAGES OF COST ACCOUNTING
1. Lack of uniform procedures: Cost accounting lacks uniform practices and
processes and unified processes and practices.
2. Varies from industry to industry: Practices of cost accounting vary from
industry to industry.
3. Cost accounting practices are costly: Implementation of process,
procedures and methods are cost accounting is a costly affair for the
business.
4. Too many concepts and conventions: Has too many concepts and
conventions.
5. Data centric subject: Depends on the information.
METHODS OF COSTING
METHODS OF COSTING
• Refers to the techniques and processes employed in the
ascertainment of costs.
• Different methods of costing.
• Methods depend on:
– Nature and type of industry.
– Policy of the company.
– Managerial needs.
ELEMENTS OF COST
ELEMENTS OF COST
• Used in differentiating and bifurcating the cost.
• Elements of cost helps in recording cost.
• Helps in further reporting and analysis.
• Helps the management to control the costs better.
• Helps the management to implement decisions better.
• Provides with necessary data for management.

Three elements – Material, Labour and Expense.


Each element if further divided into direct and indirect.
MATERIAL COST
The cost of the commodities supplied to an undertaking is called as
Material Cost.

• Cost of material or the commodity used by the organization


• Consumed as a part for its production process.
• Further divided into direct or indirect.

Example: Milk, water, tea powder, sugar etc. for making tea.
MATERIAL COST
Direct Material
• Raw material/input from which a product is to be produced or
manufactured.
• Varies according to the level of output.
For example:Wood is the direct material for furniture.

Indirect Material
• Material required to produce a product.
• Does not form a part of a finished product.
• Needed as part of production process.
For example: Nails are used in furniture.
LABOUR COST
Labour is the cost incurred in the form of remuneration paid to the
employees or labours of the organization.

• Workforce required to convert material into finished product.


• Proportion to the total or overall cost - forms a major
component.
• Fair compensation needs to be paid & ensured by law.
• Compensation depends upon number of factors.
• Classified as Direct & Indirect cost.
Example: Milk, water, tea powder, sugar etc. for making tea.
LABOUR COST
Direct Labour Cost
• Cost incurred on those employees who directly take part in the
manufacturing process
• Easily identified with the individual cost center.
Example: Teachers in the department.

Indirect Labour Cost


• Cost incurred on those employees who do not directly take part
in the manufacturing process
• Cannot identified with the individual cost center.
Example: salary for college payroll employee.
EXPENSES
The cost of service provided to an undertaking and the national cost
of the use of owned asset.

• Costs of services provided to the organisation.


• Cost of all other material and labour.
• Needed to support the existing production process.

Example: Food for labour working in a factory

• Classified as direct or indirect.


EXPENSES
Direct Expenses
• Expenses directly identifiable with a process.
• Expenses which can be directly identified with the individual cost
centers.
Example: repair charges of machinery.

Indirect Expenses
• Expenses cannot be associated exclusively with a process.
• Expenses which cannot be directly identified with the individual
cost centres.
Example: telephone expenses.
ELEMENTS OF COST
DIVISION OF COST
Prime Cost
Direct Material + Direct Labour + Direct Expense

Overhead Cost
Indirect Material + Indirect Labour + Indirect Expense
DIVISION OF COST
ELEMENTS OF COST
DIVISION OF COST
Prime Cost

Direct Material + Direct Labour + Direct Expense

• Sum total of all the direct elements of costs.


• Signified the total direct costs of production.
• Businesses need to calculate the prime cost of each product.
• Ensures product lines are generating a profit.
DIVISION OF COST

DIRECT DIRECT DIRECT


PRIME COST
MATERIAL LABOUR EXPENSES
FACTORY
PRIME COST FACTORY COST
OVERHEAD
ADM. COST OF
FACTORY COST
OVERHEAD PRODUCTION
SELLING & DIST.
COST OF PRODCUTION OVERHEAD TOTAL COST

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