1. Cost
refers to consumption of resources in order to produce some goods or provide
some services.
2. Fixed
Cost remain unchanged even when there is a change in sales volume
3. Fixed
cost per unit increases with decrease in level of output and vice-versa.
4. Variable
cost varies with level of output i.e. increases with sales and decreases with
decrease in sales.
5. Variable
cost per unit remains constant despite change in sales.
6. Monthly
salary of office staff and monthly rent of building are examples of fixed cost.
7. Raw
material consumed and direct labour are examples of variable cost.
8. Relevant
cost is relevant to the decision making i.e. impacts the choice of various
alternatives.
9. Sunk
cost has already been incurred in past and does not affect future decision
making.
10. Opportunity
cost is in fact opportunity lost in the form of next best alternative use of
resources/funds.
11. Out-of-pocket
costs are real and explicit costs actually incurred.
12. Notional
or implicit costs are not real and do not involve actual outflow of funds.
13. Relevant
costs are present or future costs and which are different for different
alternatives. Thus, they definitely have an impact on future decisions.
14. Cost
accounting emerged to overcome the limitations of financial accounting.
15. Financial
accounting mainly aims to satisfy needs of outside stakeholders, while, cost
accounting primarily provide information to internal management for cost
ascertainment, control and decision making.
16. Product
costs are linked to output while period costs are linked to time period.
17. Cost
centre is any department, section, group of people, activity in respect of
which costs are accumulated, assigned and ascertained.
18. Cost
unit is any physical or logical quantity, which is generally accepted as a unit
of value both by seller/provider and buyer and in respect of which costs are
accumulated, assigned and ascertained.
19. 1
metre cloth, 1 litre diesel etc are example of simple cost units while, 1
Kilowatt-hour, 1 patient-day, 1 room-day, 1 passenger-km are examples of composite
cost units.
20. Composite
cost units are generally used in operating or service costing method.
21. Direct
costs have a direct cause and affect relationship with the core activity of
cost centre. Such costs are incurred to run that cost centre or in other words
such cost centre is directly benefitted by that cost.
22. All
other support costs having no direct bearing or relationship with the concerned
cost centre are indirect costs with reference to that cost centre.
23. Historical
costs are already incurred and are precisely known while predetermined costs
are yet to happen i.e. be incurred
24. Cost
sheet is a basic cost report presenting the total cost incurred as well as per
unit cost incurred in the production of any goods or services under suitable
classifications.
25. Prime
cost is sum total of direct material, direct labour and direct expenses.
26. Indirect
costs i.e. indirect material, indirect labour and indirect expenses are known
as overheads.
27. Total
cost = Prime cost + overheads
28. Also,
Total costs = direct costs + indirect costs
29. Indirect
costs may be indirect Factory cost + Indirect Office & Administrative cost
+ Indirect Selling and Distribution cost
30. Main
components of cost sheet are: Prime cost, Works cost, Cost of production, Cost
of goods sold, Cost of Sales and Sales
31. All
physical material subjected to conversion/manufacturing process(es) or consumed
in the process of provision of service is referred to as raw material i.e.
first component of cost.
32. Raw
material is purchased, stored and issued and consumed in the production
process.
33. Purchase,
store and production department are the three channels through which raw
material passes.
34. Production
department raises indent or requisitions for demanding raw material from
stores.
35. If
available, raw material is issued, otherwise referred to purchase department for
carrying out purchases from market.
36. Through
quotations from suppliers and issue of purchase order to the best supplier,
purchase department purchases requisite raw material in desired quantities.
37. A
purchase order contains various terms and conditions under which supplier
agrees to supply and buyer agrees to purchase the raw material. This may
include conditions with respect to: Material specifications, time limits,
price, discounts, transportation and other charges etc.
38. Other
documents in the purchase process are delivery challan, goods receive note,
inspection reports, debit and credit notes, copies of invoices etc.
39. Stores
generally issue raw material to production departments following either FIFO or
LIFO methods. There are, however, other methods too.
40. Bin
cards are affixed to bins, racks, containers etc as a ready reference showing
the name, code number, quantity in hand of the material contained in that bin,
rack, container etc.
41. Stores
ledger are either maintained at the stores or cost accounting department
showing detailed quantitative and financial information i.e. value in rupees
with respect to each item in the stores.
42. ABC
analysis is based on the principle to closely monitor costly and sensitive
items. Lesser attention is given to small value items. This reduces wastages,
mishandling, thefts etc in case of costly items.
43. Perpetual
inventory system ensures constant efforts in maintaining correct balances of
stock items both in physical and value terms. This helps in providing value of
stock readily.
44. Periodic
inventory system takes quantity and valuation of stock at periodic rests,
generally a year.
45. Economic
Order quantity tries to achieve a balance between ordering and carrying costs
associated with size of the order.
46. Economic
order quantity is arrived at the order size, where ordering and carrying costs
are equal and at this point total of these costs is least.
47. Incidence
or amount of carrying and non-carrying costs of inventory decides the level of
inventory to be maintained by the stores manager.
48. Carrying
costs include rent of warehouse, cost of bins, handling, loading and unloading
costs, costs associated with mishandling, theft and pilferage.
49. Ordering
costs include all costs of placing the order i.e. costs related to purchase
process and implicit costs of not having the material, causing production
department to remain idle.
50. Material processing losses include waste,
scrap, spoilage and defectives.
51. Labour
cost represent compensation in whatever form of human efforts directed towards
production of goods or provision of services.
52.
labour costs include both monetary payments and
Non-monetary benefits. Examples of monetary benefits include: (i) Basic Wages
(ii) DA (iii) Production or profit bonus (iv) ESI/PF benefits (v) Gratuity
(vii) Pension (viii) Holiday pay (ix) Allowances (x) Commissions
Non-monetary benefits include: (i)
Recreation facilities (ii) Medical & Health facilities (iii) Canteen, free
or subsidized (iv) Educational facilities to children of employees (v) Training
and development programmes (vi) Housing facilities (vii) other free benefits
like car, cell phone etc.
53. Job Evaluation is the
assessment of the relative worth of jobs within a business enterprise and Merit
Rating is the assessment of the employees with respect to a job.
54. Method
study, Time study and Motion study are part of work study carried out by
engineering and work study department to improve overall working performance of
employees.
55. Number
of workers, their attendance and time spent or devoted on a job is recorded by
Time Keeping department.
56. Major
wage system for arriving at the wage amount of an employee include either time
rate, piece rate or incentive plans.
57. Inventive
plans based on time saved are Halsey, Halsey-wier, Rowan, Emmerson efficiency
plan etc.
58. Incentive
focussing on increased production include Taylor’s differential piece rate,
Merrik’s plan, Gantt’s task an bonus plans etc.
59. Labour turnover means the rate at which
existing employees leave and new employees join an organization with in a given
time period. High labour turnover is not desirable as it reduces productivity.
60. Time during
which worker does no work but for which payment of wages/salary has to be made
by employer is known as Idle time.
61. Work done
beyond normal working hours is known as Overtime.
Overtime is extra time devoted by worker on production process during the
course of day. Overtime is generally rewarded by a higher wage rate than normal
wage rate.
62. Costs
of normal idle time and overtime should be added to production process.
Abnormal instances be recorded and checked and not allowed to affect routine
production process. Instead, they should be charged to costing profit and loss
account.
63. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
64. Overhead
cost is the aggregate of all indirect costs, i.e. indirect materials, indirect
wages and indirect expenses.
65. Overhead
costs may be classified according to function i.e. production, office &
administration and selling & distribution overheads, or according to
variability i.e. fixed, variable and semi-variable overheads, or according to
elements of cost i.e. indirect material, indirect labour and indirect expenses
66. For
distribution of overheads, departments are classified as production departments
i.e. engaged in core business activity and service departments i.e. departments
engaged in providing support facilities to production departments.
67. The
main steps in dealing with overheads are: (i) collection and classification of
overheads(ii) Allocation and apportionment of overheads to production and
service departments also known as primary distribution (iii) Re-apportionment
of total overheads of service departments to production departments also known
as secondary distribution (iv) Absorption of overheads.
68. Allocation
is the allotment of whole of directly
related overheads to cost centres or departments.
69. Apportionment
is the allotment of parts or portions of overheads to various cost centres or
departments based on some suitable criteria say on the basis of share of
benefit derived by the department or cost centre.
70. Reapportionment
is the distribution or transfer of overheads of service departments to
production departments
71. Absorption
of overheads is the process of charging of all the overhead expenses to the
product or output of that department.
72. When
overheads are absorbed on the basis of pre-determined overhead absorption rate,
there may arise a situation of over or under absorption of overheads.
73. When
absorbed overheads are greater than actual overheads, it is said that overheads
are over absorbed or over-recovered. Similarly, when absorbed overheads are
less than actual overheads, it is said that overheads are under absorbed or
under-recovered.
74. When
difference between absorbed overheads and actual overheads is minor or due to
abnormal reasons, it is written off to costing profit and loss account.
However, if the difference is significant, supplementary rates are used to
adjust the amount of work-in-progress, finished stock and cost of sales.
75. Capacity
of a factory or production unit is the potential or ability of the production
unit expressed either in terms of number of units it can produce or number of production hours it
can operate in a given period of time.
76. Licensed
capacity is the capacity for which license is given by an appropriate authority
and operations beyond which are legally invalid.
77. Installed
capacity (also maximum capacity) is the capacity representing the strength of
machines or plant or infrastructure installed.
78. Practical
or Operating capacity is the maximum capacity less output or time lost due to
unavoidable factors like normal repair & maintenance, setting up time etc.
79. Normal
capacity is the long-term average of the capacity based on operating capacity,
sales expectancy and other surrounding factors. This is generally used for
deriving pre-determined overhead absorption rates.
80. Interest
on capital is not considered routinely in costing records except for special
reports.
81. Depreciation
is an example of implicit or notional cost which is routinely included as an
expense while costing.
82. Depreciation
on working assets retained in use after being fully depreciated is charged as
an expense in costing, however equivalent credit is given to costing profit and
loss account.
83. Loss
on condemning an asset which is not fully depreciated, is not charged to
production and the difference between cost of the asset and depreciated value
of the asset is treated as an abnormal loss to be transferred to costing profit
and loss account.
84. Rent
on building or machinery is a cost. Notional rent on owned building or
machinery is also charged as a cost to maintain comparability and arrive at
fair costing.
85. Cash
discount being a form of interest on capital is generally not considered in
costing.
86. Primary
packing is treated as part of cost of production i.e. added to the cost of
direct material.
87. Secondary
packing is generally treated as part of distribution overheads.
88. Royalties
payable for using a patented process are direct expenses while royalties
payable on the basis of sales quantity are treated as selling overheads.
89. Drawings
and designs prepared for specific jobs are direct expenses and charged to
production. If treated as service activity then allocation or apportionment on
some suitable basis needed.
90. Subsidized
canteen or mess is an overhead and should be distributed on the basis of either
number of employees or wage bill of benefitted departments.
91. Directors’
fees and salaries is an administrative overhead to be apportioned suitably.
92. Research
and Development costs are charged to production if they are of small amount. If
the amount is large then proportionate amount is charged over a number of
years. If the R&D costs are unsuccessful, then entire amount is charged to
costing profit and loss account.
93. Statutory
bonus payable to workers is treated as direct labour cost. Any additional or
excess bonus or bonus payable to administrative staff is treated as labour
overhead.
94. Advertisement
expenses is a selling overhead. Costs of heavy advertisement campaigns are
deferred over a number of years during which benefit is supposed to spread.
Advertisement for recruitment, purchase tenders, legal notices are
administrative overheads.
95. After
sales service is generally treated as selling overhead. After sales guarantees
involving huge expenditure are charged to costing profit and loss account.
96. Bad
debts are generally excluded from costing. However, if bad debts are included,
they are treated as selling overheads. Abnormal and exceptional bad debs are
excluded and charged to costing profit and loss account.
97. Output
costing is also known as Single Costing or Unit Costing. It is used where
output is same or identical to one another and the process of production is of
continuous nature.
98. The
main objective of output costing is to arrive at the total cost of production
on one hand and to calculate the per unit cost on the other.
99. Output
or Unit costing is generally applied in case of brick works, stationery, FMCG,
breweries, dairies, distilleries, steel, cement, paper etc.
100. Job
costing is a method of cost used where production is against the specifications
of customer, where each job is different from one another and flow of
production process is not uniform.
101. Examples
of industries where job costing is generally used include printing,
advertising, customised software, furniture, interior decoration, with or with
out material events like catering, food preparation etc.
102. Contract
costing is applied to large scale contracts which are logically long-time jobs
encompassing many years. Like jobs, they are also unique and are carried out as
per the specification of the customer.
103. Jobs
are different from contracts on following counts i.e. jobs are small while
contracts are big. Jobs take less time to complete while contracts take long times
for completion. Jobs are carried out in factory premises while contracts are
executed on sites outside factory premises.
104. Contract
price is generally a large amount and is released in phases on the basis of
certification of architects or engineers. Depending upon the percentage of
completion, work is certified by the architect or engineer and is known as
‘work certified’
105. Work
uncertified represent work done on the contract but for which certificate by
architect or engineer is not issued yet.
106. Escalation
clause is used in contracts to cover increase in costs on account of inflation
on account of long periods of execution involved in the contracts.
107. Retention
money represent security against bad work and is equal to excess of value of
work certified over actual money paid by the contractee i.e. customer. This is
usually released once the customer is satisfied about the quality of the work
done.
108. Notional
profit on contract is equal to value of work-in-progress certified less cost of
work-in-progress.
109. When
% of completion of contract is less than 25% OR work certified is less than 25%
of the contract price: No profit is recognized.
110. Cost-plus
contracts is a pricing method of contracts where pricing is done by adding a
suitable percentage to cost of contract i.e. for arriving at the profit on the
execution of contract. This method is suitable where contract is undertaken for
a new task and it is very difficult to estimate the costs.
111. Process
costing is used for ascertaining cost of various process through which a product
passes and ultimately ascertaining the cost of the product itself.
112. Process
costing is most widely used costing method where mass scale of standard
(identical) products takes place through a series of continuous and
standardized processes such that output of one process becomes the input of next
process.
113. Process
costing differs from unit costing on account of separately ascertaining the
cost of every process through which the final product passes. This feature
makes process costing more analytical.
114. Generally,
process costing is used in textile, metal, chemical, oil refining, sugar, paper
and the like.
115. Normal
process loss refers to natural and unavoidable loss which is inherent with the type
of raw material or to the processing.
116. Normal
loss is spread over the cost of good units rateably and as a result cost of
production of good units inflates.
117. Abnormal
loss is either due to human error i.e. avoidable or contingencies like fire,
theft, flood etc. i.e. unavoidable. Thus, abnormal loss can both be avoidable
as well as unavoidable.
118. Abnormal loss is charged to costing profit and
loss account and not to production account.
119. Equivalent
production is a method to value work-in-progress by treating it as equal to
finished units. It substitutes unfinished units notionally with finished units
by applying percentage of completion with respect to material, labour and expenses.
120. Products
derived from same raw material and same manufacturing process are known as
Joint product if they are equal or equivalent in terms of output value or
quantity.
121. Products
derived from same raw material and same manufacturing process are known as
bye-product if they are inferior to the main product in terms of output value
or quantity.
122. Examples
of Joint products are Petroleum, Diesel, Kerosene, LPG etc as all these
products are derived while refining crude petroleum oil.
123. Bagasse
and Molasses are examples of by-product which are produced while deriving white
cane sugar.
124. Operating costing is a method of costing used
in those undertakings which are engaged in providing services such as transport,
electricity distribution, telephone services, hospitals, hotels, banking etc.
125. Operating
costing is also known as service costing.
126. In
service industry cost units are generally composite cost units and not simple
cost units as in the case of manufacturing units. For example, an electricity
distribution company uses its cost unit as Kilo-watt-hour.
127. Under
operating costing, operating cost sheet is prepared and costs are generally
classified as standing or fixed charges and running or variable charges.
