Cost Accounting: Costing Concepts PDF

Lecture # 1 Cost Accounting COSTING CONCEPTS 1.1 Cost and Expense  Costs can be defined as money paid or spent to acquire an asset. It is mainly a one-time payment that is capitalized and reflected on a balance sheet. Cost is sacrifice of econom...

Lecture # 1 Cost Accounting COSTING CONCEPTS 1.1 Cost and Expense  Costs can be defined as money paid or spent to acquire an asset. It is mainly a one-time payment that is capitalized and reflected on a balance sheet. Cost is sacrifice of economic resources for example purchase of machinery etc.  Expense is expired cost that charged against revenue in particular accounting period say depreciation, rent etc.  The expense is an amount of money that must be spent especially regularly to pay for something. An expense is an ongoing payment, like rent, depreciation, salaries, and marketing.  The difference between cost and expense is that cost identifies an expenditure, while expense refers to the consumption of the item acquired. 1.2 Elements of Manufacturing Cost o Cost of production/manufacturing consists of various expenses incurred on production/manufacturing of goods or services sold. o These are the elements of cost which can be divided into three groups i.e. Material, Labor and Expenses. Elements of Cost 1.2.1 Direct material  Direct Material is that material which can be easily identified and related with specific product, job, and process  Timber is a raw material for making furniture, cloth for making garments, sugarcane for making sugar, and Gold/silver for making jewellery, etc. are some examples of direct material 1.2.2 Direct labor  Labor which takes active and direct part in the production of a product or providing services  Direct labor is that labor which can be easily identified and related with specific product, job and process  Direct labor cost is easily traceable to specific products  Direct labor varies directly with the volume of output  Cost of wages paid to carpenter for making furniture, cost of a tailor in producing readymade garments, cost of washer in dry cleaning unit are some examples of direct labor 1.2.3 Expenses  All cost incurred in the production of finished goods other than material cost and labor cost are termed as expenses  Expenses are classified into two categories i.e. Direct expenses, and Indirect expenses (Factory Overheads) 1.2.3.1 Direct expenses These are expenses which are directly, easily, and wholly allocated to specific cost center or cost units and charged to direct material section All direct cost other than direct material and direct labor are termed as direct expenses Some examples of the direct expenses are cost of wages, inward carriage and freight, cost of patents, royalties etc. For Solution Click www.accountancyknowledge.com/costing/ 1 Costing Concepts  Lecture # 1 Cost Accounting 1.2.3.2 Indirect expenses  These expenses cannot be directly, easily, and wholly allocated to specific cost center or cost units  All indirect costs are indirect material, indirect labor and indirect expenses  Thus, indirect expenses are treated as part of Factory Overheads 1.2.3.2.1 Indirect materials:  Grease, oil, lubricants etc.  Small tools, brushes for sweeping, sundry supplies etc.  Gum, nails, consumable stores  Factory printing and stationery 1.2.3.2.2 Indirect Labor:  Salary of factory manager, foremen, supervisors, clerks etc.  Salary of storekeeper, security staff, time keepers  Salary and fee of factory directors and technical directors  Contribution to pension fund, leave pay etc. of factory employee 1.2.3.2.3 Indirect expenses:  Rent of factory buildings and land  Insurance of factory building, plant, and machinery  Municipal taxes of factory building  Depreciation of factory building, plant and machinery, and their repairs and maintenance charges  Power and fuel used in factory  Factory telephone expenses Example # 1.1: The following information has been taken from company records. You are required to calculate Direct Material, Direct Labor and Factory Overhead? Items Amount Inventory at the start of year 8,000 Purchases of direct material 5,000 Payment for repair of machinery 3,000 Carriage inward 1,500 Purchase of supplies 6,000 Transportation inward 4,000 Payment to security staff 2,200 Stock at the end of year 2,900 Depreciation of factory machine 1,600 Salaries of Supervisor 1,400 Return to supplier 600 Payment to factory worker 10,000 Factory power 2.300 Wages of operators 7,000 Wages of oilmen 600 Wages of machine cleaners 900 Gum, nails and consumable stores 1,300 Insurance of factory 700 For Solution Click www.accountancyknowledge.com/costing/ 2 Costing Concepts  Lecture # 1 Cost Accounting Solution Direct Material Amount Amount Total Direct Labor Amount Total Factory Overhead Amount Total 1.3 Cost of Sales  The term cost of sales use for merchandising or trading business  The cost of sales involves the identification of the expenses that are related to the trading process  Opening stock plus net purchases (with any direct expense) minus closing stock For Solution Click www.accountancyknowledge.com/costing/ 3 Costing Concepts  Lecture # 1 Cost Accounting Example # 1.2: Test your understanding? a. Ascertain Cost of Sales from the following figures: Opening Inventory / Stock Rs. 3,700 Purchases 20,800 Closing Inventory / Stock 2,500 b. Ascertain Cost of Sales from the following figures: Opening Stock Rs. 8,500 Purchases 30,700 Direct Expenses 4,800 Marketing Expenses 5,200 Closing Inventory 9,000 c. Ascertain Purchases from the following figures: Cost of Sales Rs. 80,700 Opening Stock 5,800 Closing Stock 6,000 1.4 Gross Profit, Operating Profit and Net Profit  A company's net revenue minus its cost of goods sold or cost of sales  Operating profit is gross profit minus commercial expenses of the company  Net profit is operating profit minus (financial charges, taxes and other expenses) plus other income 1.4.1 Commercial Expenses  Marketing expenses and administrative expenses are combine called commercial expenses. Following are some examples for commercial expenses Marketing Expenses + Administrative Expenses Administrative and office salaries Sales salaries Employer payroll taxes Commission to sales staff Rent Advertisement Property tax Entertainment Office Depreciation Travel expenses Auditing expenses Freight out and cartage out Legal Expenses Miscellaneous marketing expense Uncollectable accounts Miscellaneous administrative expenses For Solution Click www.accountancyknowledge.com/costing/ 4 Costing Concepts  Lecture # 1 Cost Accounting Example # 1.3: Test your understanding? a) Calculate Gross Profit from the following figures: Cost of Goods Sold Rs. 70,800 Sales 130,200 b) Ascertain Gross Profit from the following figures: Opening Inventory Rs. 5,570 Purchases 13,816 Sales 15,284 Purchase Return 390 Return Inward 524 Closing Stock 8,880 c) From the following information extract Gross Profit and Net Profit: Beginning Inventory Rs. 2,400 Carriage in Rs. 524 Purchases 15,205 Wages 2,800 Sales 20,860 Wages Outstanding 96 Return Outward 185 Taxes 1,000 Return Inward 860 Interest Expenses 200 Closing Inventory 3,840 Video Lecture Costing Concepts https://youtu.be/765yrC6e7lY?si=lp3uzdqtGPsxfERy Workbook Solution Costing Concepts https://www.accountancyknowledge.com/costing/ Practice MCQs Costing Concepts https://www.accountancyknowledge.com/costing-mcqs/ Practice Problems with Solutions Costing Concepts https://www.accountancyknowledge.com/costing-problems-and-solutions/ For Solution Click www.accountancyknowledge.com/costing/ 5 Costing Concepts  Lecture # 1 Cost Accounting Facebook Page https://www.facebook.com/AccountancyKnowledge/ E-Books Exercises Past Papers www.accountancyKnowledge.com Problems OTQs Workbook For Solution Click www.accountancyknowledge.com/costing/ 6 Costing Concepts