Unit I: Meaning and Scope of Cost Accounting & Materials Control

Basic Cost Concepts and Classification:

 Total Cost = Direct Materials + Direct Labour + Overheads
 Prime Cost = Direct Materials + Direct Labour
 Overheads = Indirect Materials + Indirect Labour + Indirect
Expenses
 Conversion Cost = Direct Labour + Overheads
 Cost of Goods Sold (COGS) = Opening Inventory + Purchases +
Direct Expenses - Closing Inventory (This is more relevant for financial
accounting but helps understand cost flow)
Materials Control:
1. Economic Order Quantity (EOQ):
EOQ=Carrying Cost per Unit per Annum2×Annual Demand×Ordering Cost per Or

der Where: * Annual Demand (D) = Total units required per year * Ordering
Cost per Order (S) = Cost incurred for placing each order * Carrying Cost per Unit
per Annum (H) = Cost of holding one unit of inventory for one year
2. Stock Levels:
 Maximum Level = Re-order Level + (Maximum Consumption Rate
× Maximum Re-order Period)
 Minimum Level = Re-order Level - (Normal Consumption Rate ×
Normal Re-order Period)
 Re-order Level = Maximum Consumption Rate × Maximum Re-
order Period
 Average Stock Level = (Maximum Level + Minimum Level) / 2
 Danger Level = Normal Consumption Rate × Maximum Lead Time
for Emergency Purchases
3. Inventory Valuation Methods:
 FIFO (First-In, First-Out): Assumes that the oldest inventory items are
sold first.
 LIFO (Last-In, First-Out): Assumes that 1 the newest inventory items are
sold first. 2

 Weighted Average Method: Weighted Average Cost=

Cost of Inventory in Stock / Total Number of Units in Stock weighted
average cost is recalculated after each purchase.
Unit II: Labour Cost & Overheads
Labour Cost:
1. Remuneration Systems:
 Earnings under Time Rate = Hours Worked × Rate per Hour
2. Incentive Schemes:
 Halsey Plan:
o Bonus = 50% × (Time Saved × Rate per Hour)

o Total Earnings = (Hours Worked × Rate per Hour) + Bonus

 Rowan Plan:
o Bonus = (Time Saved / Time Allowed) × (Hours Worked ×
Rate per Hour)
o Total Earnings = (Hours Worked × Rate per Hour) + Bonus

 Taylor's Differential Piece Rate System:

o Earnings below standard output = Low Piece Rate × Number
of Units
o Earnings at or above standard output = High Piece Rate ×
Number of Units
 Merrick's Differential Piece Rate System:
o Up to 83% of standard output: Normal piece rate

o Above 83% up to 100% of standard output: Higher piece rate

(e.g., 110% of normal)
o Above 100% of standard output: Still higher piece rate (e.g.,
120% of normal)
 Bedaux Plan:
o Bonus = 75% × (Bedaux Points Earned - Bedaux Points
Allowed) × Value of One Bedaux Point
o Value of One Bedaux Point = Rate per Hour / 60

o Total Earnings = (Hours Worked × Rate per Hour) + Bonus

 Emerson's Efficiency Bonus Plan: Bonus percentage increases with

efficiency level achieved. Total earnings = (Hours Worked × Rate per Hour)
+ (Bonus Percentage × Hours Worked × Rate per Hour)
3. Overtime Premium:
 Overtime Premium = (Overtime Hours × Overtime Rate) -
(Overtime Hours × Normal Rate)
  Total Overtime Wages = Overtime Hours × Overtime Rate
4. Idle Time Cost:
 Idle Time Cost = Idle Hours × Rate per Hour
Overheads:
1. Overhead Rate:
 Predetermined Overhead Rate = Estimated Total Overheads /
Estimated Activity Level (e.g., Direct Labour Hours, Machine
Hours)
2. Machine Hour Rate:
Machine Hour Rate=Total Machine HoursTotal Overheads Attributable to the Mac
hine
3. Under or Over Absorption of Overheads:
 Amount of Under/Over Absorption = Actual Overheads Incurred -
(Predetermined Overhead Rate × Actual Activity Level)
 A positive difference indicates under-absorption.
 A negative difference indicates over-absorption.
Basic Revision End-Moment Summary:
Unit I: Meaning and Scope of Cost Accounting & Materials Control
 Cost Accounting: Focuses on cost determination, analysis, and control
for internal decision-making. Broader than financial accounting (external
reporting) but narrower than management accounting (strategic
decisions).
 Cost Objects: Items for which costs are accumulated (products, services,
departments).
 Cost Units: Units of measurement for cost (per unit, per kg, per hour).
 Cost Centers: Locations or departments where costs are accumulated.
 Cost Classification: By nature (materials, labour, overheads), by
behavior (fixed, variable, semi-variable), by function (production,
administration, selling & distribution), by traceability (direct, indirect).
 Elements of Cost: Materials, Labour, Expenses (Direct and Indirect).
 Materials Control: Systematic control over the acquisition, storage, and
usage of materials to minimize costs and waste.
 Inventory Control Techniques:
o EOQ: Optimal order size to minimize ordering and carrying costs.

o FSND (Fast-Moving, Slow-Moving, Non-Moving, Dead):

Categorizing inventory based on consumption rate for better
control.
 o ABC Analysis: Categorizing inventory into A (high value), B
(medium value), and C (low value) items for prioritized control.
o Stock Levels: Setting minimum, maximum, re-order, and danger
levels to ensure optimal inventory.
o JIT (Just-In-Time): Receiving materials just when needed for
production to minimize inventory holding costs.
o VED (Vital, Essential, Desirable): Analyzing spare parts based
on criticality for production.
 Inventory Valuation: FIFO (oldest costs first), LIFO (newest costs first),
Weighted Average (average cost). Choice impacts COGS and ending
inventory value.
Unit II: Labour Cost & Overheads
 Labour Cost: Significant element of cost, requires careful management of
attendance, payroll, overtime, and idle time.
 Direct Labour: Directly involved in the production process.
 Indirect Labour: Supports the production process but not directly
involved (supervisors, maintenance).
 Remuneration Systems: Time rate (paid based on time worked), Piece
rate (paid based on output).
 Incentive Schemes: Aim to motivate workers to increase efficiency and
productivity (Halsey, Rowan, Taylor, Merrick, Bedaux, Emerson). Each
scheme has different formulas for calculating bonuses.
 Overtime: Hours worked beyond normal working hours, usually paid at a
higher rate. Needs proper authorization and control.
 Idle Time: Time when workers are paid but not engaged in productive
work. Needs to be minimized and analyzed for causes.
 Overheads: Indirect costs that cannot be directly attributed to specific
cost objects.
 Functional Analysis of Overheads: Categorizing overheads based on
the department or function they relate to (factory, administration, selling
& distribution, R&D).
 Behavioral Analysis of Overheads: Categorizing overheads based on
how they change with the level of activity (fixed, variable, semi-variable,
step cost).
 Overhead Absorption: Process of assigning overhead costs to cost units
using an overhead rate (predetermined based on estimated costs and
activity).
 Machine Hour Rate: Overhead rate calculated based on machine hours
used.
 Under/Over Absorption: Difference between actual overheads incurred
and overheads absorbed. Needs to be accounted for at the end of the
period.