Cost Analysis and Control

1. Cost Analysis and Control

2. Cost, Expense and Loss Expense which is incurred after derived the benefit. Ex. Wages paid to worker, rent paid for using the building, etc. Cost is incurred before deriving the benefit. Ex. Prepaid insurance, advertising, etc. Loss when no benefit is derived by the incurrence of cost. Ex. Goods destroyed by fire, etc.

3. Direct Expenses These are those expenses, which are directly chargeable to a job or a process and become a part of prime cost. The aggregate of direct materials cost, direct wages and direct expense is called Prime cost. Examples are payment of royalty and patent fee, Salesmen’s commission, travelling expenses of particular job, etc.

4. Indirect Expenses These are expenses which cannot be directly, conveniently and wholly allocated to cost centers or cost units. Indirect materials cost, indirect wages and indirect expenses are collectively called overhead cost. The examples of indirect expenses are rent, rates, insurance, salaries, lighting charges, etc.

5. Differences Direct expenses Indirect expenses These are charged directly to a job or a cont center These expenses which cannot be charged to a specific job or a cost centre The benefit of such expenses is received by a specific job only and they are not to be apportioned The benefit of such expenses go to more than one job or cost centre, and they have to be apportioned These are included in prime cost These are included in factory overhead if they are related to factory, in administrative overheads if they related to administration, or in selling and distribution overhead if they related to SD.

6. OVERHEADS Indirect Materials These are those which cannot be traced as a part of the product. Examples: Lubricating oil, grease, fuel oil, etc. Indirect Labour /Wages It is the cost of labour which cannot be directly identified with the product manufactured. Examples: overtime, holiday pay, idle time, leave pay, etc. Indirect Expenses Which are incurred for the business as a whole. Examples: rent, tax, insurance, lighting, etc.

7. Classification of Overheads Function wise Manufacturing overheads Administrative overheads Selling overheads Distribution overheads Element wise Indirect Material Indirect Labour Indirect Expenses

8. Classification of Overheads Behavior wise Fixed overheads Variable overheads Semi-variable overheads Step overheads (it do not change when there is a small change in the level of activity but change considerably whenever there is a slightly bigger change.) Control wise Controllable cost Non-controllable cost

9. Classification of Overheads Nature wise Normal overheads Expected overheads/expenses Abnormal overheads Which are not expected

10. Allocation and Apportionment of Overheads

11. Allocation The allotment of whole item of cost to cost centers. The technique of charging the entire overhead expenses to a cost centre is known as cost allocation.

12. Apportionment The allotment of proportions of items of cost to cost centers or cost units. Example, rent of factory building is not allocated, but apportioned to various departments.

13. Basis of Apportionment Basis of Apportionment Items of Expenditure Floor area or cubic content Rent, rates, taxes, maintenance of building, depreciation and insurance of building, lighting and heating, electricity. Number of employees Expenses associated with workmen such as supervision, canteen expense, recreation expense, timekeeping, ESIC, etc. Capital value Depreciation and insurance of plant and machinery equipments and furniture. Value of materials Material handling Horse-power hours KWH Power No. of material requisitions Storekeeping expenses Direct machine hour, direct labour hr., direct wages Other overhead expenses

14. Methods of Secondary Distribution Direct Re-distribution Method Step Method Reciprocal Service Method Repeated Distribution Method Simultaneous Equation Method Trial and Error Method

15. Direct Re-distribution Method The cost of service department is directed to re-distribution to the production departments without considering the services rendered by one service department to another service department.

16. Step Method The cost of most serviceable department is first distributed to production departments and other service departments. Thereafter, the next service department is distributed and later the last service department until the cost of all the service departments are redistributed to the production department.

17. Reciprocal Service Method If a service department receives services from other department, the services should be charged in the receiving department. Thus, the cost of inter departmental services is taken into account on reciprocal basis. Simultaneous Equation Method : The true cost of total overhead of each service department