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    CAP ASSIGNMENT 1

    SUBMITTED BY:

    PIYUSH PATEL

    PUSHNEET SHAHDRA

    RITI M

    SAMEER PAURIYAL

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    MEANING OF COST

    COST represents a sacrifice of values, a foregoing or a release of something of value. It

    is the price of economic resources used as a result of producing or doing the thing costed. It isthe amount of expenditure incurred on a given thing. Cost has been defined as the amount

    measured in money or cash expended or other party transferred, capital stock issued, services

    performed or a liability incurred in consideration of goods and serviced received or to be

    received. By cost, we mean the actual cost i.e. historical cost. ICWA (UK) defines cost as the

    amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or

    activity.

    CLASSIFICATION OF COST

    Cost classification is the process of grouping costs according to their common features.

    Costs are to be classified in such a manner that they are identified with cost center or cost unit.

    ON THE BASIS OF BEHAVIOUR OF COST

    Behavior means change in cost due to change in output. On the basis of behavior cost is

    classified into the following categories:

    FIXED COST

    It is that portion of the total cost which remains constant irrespective of the output upto

    capacity limit. It is called as a period cost as it is concerned with period. It depends upon the

    passage of time. It is also referred to as non-variable cost or stand by cost, capacity cost orperiod cost. It tends to be unaffected by variations in output. These costs provide conditions

    for production rather than costs of production. They are created by contractual obligations and

    managerial decisions. Rent of premises, taxes and insurance, staff salaries constitute fixed cost.

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    VARIABLE COST

    This cost varies according to the output. In other words, it is a cost which changes accordingto the changes in output. It tends to vary in direct proportion to output. If the output is

    decreased, variable cost also will decrease. It is concerned with output or product. Therefore, it

    is called as a product cost. If the output is doubled, variable cost will also be doubled. For

    example, direct material, direct labour, direct expenses and variable overheads. It is shown in

    the diagram below.

    SEMI-VARIABLE COST

    This is also referred to as semi-fixed or partly variable cost. It remains constant up to a

    certain level and registers change afterwards. These costs vary in some degree with volume but

    not in direct or same proportion. Such costs are fixed only in relation to specified constant

    conditions. For example, repairs and maintenance of machinery, telephone charges,

    professional tax, etc.

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    ON THE BASIS OF ELEMENTS OF COST

    Elements means nature of items. A cost is composed of three elements, material, labour and

    expenses. Each of these elements can be direct and indirect.

    DIRECT COST

    It is the cost which is directly chargeable to the product manufactured. It is easily

    identifiable. Direct cost consists of three elements which are as follows:

    y DIRECT MATERIAL

    It is the cost of basic raw material used for manufacturing a product. It becomes a

    part of the product. No finished product can be manufactured without basic raw

    materials. It is easily identifiable and chargeable to the product. For example, leather in

    leatherwares, pulp in paper, steel in steel furniture, sugarcane for sugarcane etc. what is

    raw material for one manufacturer might be finished product for another. Direct

    material includes the following:

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    1. All materials specially purchased for production or the process.2. All components purchased for production or the process.3. Material transferred from one cost center to another or one process to another.4. Primary packing materials, wrappings, cardboard boxes etc, necessary for

    preservation or protection of product.

    Some of the items like nails or thread in the store are a part of finished product. They

    are not treated as direct materials in view of negligible cost.

    y DIRECT LABOUR OR DIRECT WAGES

    It is the amount paid to those workers who are engaged in the manufacturing line for

    conversion of raw materials into finished goods. The amount of wages can be easilyidentified and directly charged to the product. These workers directly handle raw

    materials, work in progress and finished goods on the production line. Wages paid to

    the workers operating lathes, drilling, cutting machines etc are direct wages. Direct

    wages are also as productive labour, process labour or prime cost labour.

    Direct wages include the payment made to the following group of workers:

    1. Labour engaged on the capital production of the product.2. Labour engaged in aiding the operations viz. Supervisor, Foreman, Shop clerks

    and Worker on internal transport.

    3. Inspectors, Analysts needed for such production.

    y DIRECT EXPENSES OR CHARGEABLE EXPENSES

    It is the amount of expenses which is directly chargeable to the product manufactured

    or which may be allocated to product directly. It can be easily identified with the product.

    For example, hire charges of a special machine used for manufacturing a product, cost of

    designing the product, cost of patterns, architects fees/surveyors fees, or job cost of

    experimental work carried out especially for a job etc. Cost of special drawings, cost of

    special layout designs, patents, patterns, cost of models, surveyors fees, Excise duty, royaltyon production, cost of rectifying defective work. Utility of such expenses is exhausted on

    completion of job.

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    y INDIRECT COST

    It is that portion of the total cost which cannot be identified and charged directly to the

    product. It has to be allocated and apportioned and absorbed over the units manufactured on a

    suitable basis. It consists of the following three elements:

    y INDIRECT MATERIAL

    It is the cost of the material other than direct material which cannot be charged to the

    product directly. It cannot be treated as a part of the product. It is also known as expenses

    materials. It is the material which cannot be allocated to the product but which can be

    apportioned to the cost units. Examples are as follows:

    1. Lubricants, cotton waste, oil, grease, stationery etc2. Small tools for general use3. Some minor items such as thread in dress making, cost of nails in shoemaking etc

    y INDIRECT LABOUR

    It is the amount of wages paid to those workers who are not engaged on the

    manufacturing line, for example, wages of workers in administration department, watch n ward

    department, sales department, general supervision.

    y INDIRECT EXPENSES

    It is the amount of expenses which is not chargeable to the product directly. It is the

    cost of giving service to the production department. It includes factory expenses, administrative

    expenses, selling and distribution expenses etc.

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    y OVERHEADS OR ON COST OR BURDEN OR SUPPLEMNTARY COST

    Aggregate of indirect cost is referred to as overheads. It arises as a result of overall

    operation of a business. According to Weldon overheads mean, the cost of indirect

    material, indirect labour and such other expenses, including services as cannot convenientlybe charged direct to specific cost units. It includes all manufacturing and non-

    manufacturing supplies and services.

    These costs cannot be associated with a particular product. The principal feature of

    overheads is the lack of direct traceability to individual product. It remains relatively

    constant from period to period. The amount of overheads is not directly chargeable i.e. it

    has to be properly allocated, apportioned and absorbed on some equitable basis.

    CLASSIFICATION OF OVERHEADS

    y ON THE BASIS OF FUNCTIONS

    y FACTORY OVERHEADS

    It is the aggregate of all the factory expenses incurred in connection with

    manufacture of a product. These are incurred in connection with running of factory. It

    includes the items of expenses viz, factory salary, work managers salary, factory repairs,rent of factory premises, factory lighting, lubricants, factory power, drawing office salary,

    haulage (cost of internal transport) depreciation of plant and machinery unproductive

    wages, estimation expenses, royalties, loose tools w/ off, material handling charges, time

    office salaries, counting house salaries etc.

    yADMINISTRATIVE OR OFFICE OVERHEADS

    It is the aggregate of all the expenses as regards administration. It is the cost of

    office service or decision-making. It consists of the following expenses: Staff salaries,

    printing and stationery, postage and telegram, telephone charges, rent of office premises,

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    office conveyance, printing and stationery and repairs and depreciation of office premises

    and furniture etc.

    y SELLING & DISTRIBUTION OVERHEADSIt is the aggregate of all the expenses incurred in connection with sales and

    distribution of finished product and services. It is the cost of sales and distribution services.

    Selling expenses are such expenses which are incurred acquiring and retaining

    customers. It includes the following expenses:

    (a) Advertisement (b) Show room expenses (c) Traveling expenses (d) Commission toagents (e) Salaries of Sales office (f) Cost of catalogues (g) Discount allowed (h) Bad debts

    written off (i) Commission on sales (j) Rent of Sales Room (k) Sample and Free gifts (L) After

    sales service expenses (m) Expenses on demonstration and technical advice to prospective

    customers (n) Free repairs and servicing expenses (o) Expenses on market research (p)

    Fancy packing and demonstration.

    Distribution expenses include all those expense which are incurred in connection with

    making the goods available to customers these expense includes the following (a) Packing

    charges (b) Loading charges (c) Carriages on sales (d) Rent on warehouse (e) Insurance and

    lighting of warehouse (f) Insurance of delivery van (g) Expense on delivery van (h) Salaries of

    Godownkeeper, drivers and packing staff.

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    COST SHEET

    For determination of total cost of production a statement showing the various elements of

    cost is prepared. This statement is called as a statement of cost or costsheet. Cost sheet is a

    statement which provides assembly of the detailed cost of a cost center or a cost unit. It is a

    statement showing the details of a) total cost of job b) Cost of an operation or order. It brings

    out the composition of total cost in a logical order under proper classifications & sub-divisions.

    The period is covered by the cost sheet may be by a week a month or so. Separate columns are

    provided to show total cost, cost per-unit etc. In case of different products there are different

    cost sheets for different products. A cost sheet is prepared under output or unit costing

    method.

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    PURPOSE OF COST SHEET

    1. It gives the break up of total cost under different elements.2. It shows total cost as well as cost per unit.3. It helps in comparison with previous years.4. It facilities preparation of tenders or quotations.5. It enables the management to fix up selling price.6. It controls cost.

    DIVISIONS OF COST

    y PRIME COST

    It comprises of all direct materials, direct labour and direct expenses. It is also known

    as flat cost

    Prime cost = Direct Materials + Direct Labour + Direct Expenses

    y WORKS COST

    It is also known as a factory cost or cost of manufacture. It is the cost of

    manufacturing an article. It includes prime cost and factory expenses.

    Works Cost = Prime Cost + Factory Overheads

    y COST OF PRODUCTIONIt represents factory cost plus administrative expenses.

    Cost of Production = Factory Cost + Administrative Expenses

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    TOTAL COST

    It represents cost of production plus selling and distribution expenses.

    Total Cost= Cost of Production + Selling & Distribution Expenses

    y SELLING PRICE

    It is the price which includes total cost plus margin of profit or minus loss, if any.

    Selling Price = Total Cost + Profit (-Loss)

    NON COST ITEMS

    Non-cost items are those items which do not form part of cost of a product. Such items

    should not be considered while ascertaining the cost of a product. These are items included in

    the Profit & Loss A/c.

    These will not come in the cost sheet

    a) Income taxb) Interest on capitalc) Interest on loand) Profit on Sale of fixed assetse) All the assetsf) Donationsg) Capital Expenditureh) Discount on shares & Debenturesi) Commission to Partners, Managers etcj) Brokeragek) Preliminary Expenses Written off.l) Wealth tax etcm)Bonus to directors and employees if it is based on profit, expenses of raising capital,

    penalties & fines.

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    UTILITY OF COST SHEET

    y DETERMINE THE TOTAL COSTA total cost sheet (statement) helps in determining aggregate cost of manufacturing a

    product or providing a service.

    y DETERMINING PRODUCT PRICE

    A cost sheet helps in identifying the total cost for a product or service which in turnhelps in properly pricing of products & services.

    y COST REDUCTION OR COST CONTROL

    Cost sheets helps in identifying the total cost stage wise & any unwanted cost can be

    curtailed.

    y PREPARE BUDGETS

    A cost statement helps in preparing budget for each department

    y PROFIT PLANNING

    It helps to minimize cost & increase profits.

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    1. STAGE WISE COST IDENTIFICATION

    Costs such as prime cost, factory cost, cost of production, cost of goods sold, total

    cost of sale etc.

    2. DETERMINE THE COST PER UNIT

    This helps in determining cost per unit on which u can predict further cost.

    DETERMINATION OF TOTAL COST

    Cost of product is determined as per cost attach concept. Total cost of a product consists of

    various elements of cost which have the quality of coherence. All the elements of cost can be

    grouped and regrouped. Grouping and regrouping of various elements of cost leads to

    significant divisions of cost. The logical process of determination of cost by grouping and

    regrouping various elements is illustrated as follows:

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    Product glasses

    Direct-Indirect Segregation

    Material

    Direct Material required

    y Glasses/fibrey Nose guardy Framey Plastic band for glass holdingy Boltsy Ear guardsy Holder (box)y Cleaning fabricy Printing material (label)y Small stud

    Indirect material required

    y Moulds for framey Gum/any sticking elementy Mould for glassy

    Screw drivers for boltsy Glass cuttery Machine for framey Machine for glassy Machine for printingy Cleaning materialy Printing ink

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    Labour

    Indirect labour

    y Nuts and bolts manufacturery Machine mechanicsy Transportation

    Direct labour

    y Frame manufacturery Glass manufacturery Spectacle manufacturery Glass cleaner

    Expenses

    Direct Expenses

    y Freight chargesy Wagesy Electricity (floor)y Cleaningy Securityy Maintenancey Certification

    Indirect Expenses (shop)

    y Securityy Shop renty Salaryy Electricity (shop)y Food and amusementsy Cleaningy Maintenancey Communication chargesy Stationary and other expenses

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    Fixed-Variable Segregation

    Fixed cost

    y Office/factory renty Machine costy Salaryy Registration chargesy Food and amusementsy Securityy Cost of mouldsy Certificationy Cleaning

    Variable cost

    y Glass costy Frame costy Bolts costy Nose guardy Plastic band for glass holdingy Ear guardsy Holder (box)y Cleaning fabricy Printing material (label)y Small study Wagesy Maintenance

    Semi-variable cost

    y Factory electricityy Transportationy Communication chargesy Stationary and other expensesy Moulds for framey Moulds for glass

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    COSTING OF A SINGLE SPECTACLE

    y DIRECT MATERIAL COSTINGPRODUCT COST

    y Glasses/fibre Rs. 120 average for a spectacley Noseguard Rs. 3y Frame Rs. 70-100y Plastic band for glassholding Rs. 4y Bolts Rs. 1y Ear guards Rs. 3-4y Holder (box) Rs. 15y Cleaning fabric Rs. 2y Printingmaterial (label) Rs. 0.50y Smallstud Rs. 0.50

    y Indirectmaterial costingPRODUCT COST

    y Moulds for frame Rs.120-150 Per styley Gum/any stickingelement Rs. 4-5 per glassy Mould for glass Rs20-35 per styley Screwdrivers for bolts Rs.10eachy Glass cutter Rs.500y Machine for frame Rs.15000y Machine for glass Rs. 35000y Machine for printing Rs.2000y Cleaningmaterial Rs.2 per glassy Printing ink Rs.0.25 per glass

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    Labour cost

    Direct

    LABOUR COST

    y Framemanufacturer Rs.5000 p.my Glassmanufacturer Rs. 8000 p.my Spectaclemanufacturer Rs. 6000 p.m.y Glass cleaner Rs.2500 p.m.

    Indirect

    LABOUR COST

    y Nutsandboltsmanufacturer Rs. 4000 p.m.y Machinemechanics Rs. 3000 p.m.y Transportation Rs. 3500 p.m.

    EXPENSES

    Direct

    EXPENSE COST

    y Freight charges Rs.500-3000 per deliveryy Wages Rs.120 per day (eachworker)y Electricity (floor) Rs.1500 per monthy Cleaning Rs.200 per monthy Security Rs.5000 per monthy Maintenance Rs.1000 per monthy Certification Rs.10000 (once)

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    Indirect

    PRODUCT COST

    y Security(shop) Rs.2000 per monthy Shop rent Rs.5000 per monthy Salary Rs. 4000 per employeey Electricity (shop) Rs.500 per monthy Foodandamusements Rs.1000 per monthy Cleaning Rs. 300 per monthy Maintenance Rs.500 per monthy Communication charges Rs.500 per monthy Stationary and other expenses Rs. 300 per month

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    COST-SHEET

    ASSUMPTION: PRODUCTION OF 1000 PIECES OF GLASSES

    SELLING PRICE: Rs. 800 per glass

    Material cost

    y Glasses/fibre Rs. 120000y Nose guard Rs. 3000y Frame Rs. 80000y Plastic band for glass holding Rs. 4000y Bolts Rs. 1000y Ear guards Rs. 3500y Holder (box) Rs. 15000y Cleaning fabric Rs. 2000y Printing material (label) Rs. 500y Small stud Rs. 500

    Total: Rs.2,29,000

    y Moulds for frame Rs.15000y Gum/any sticking element Rs. 4500y Mould for glass Rs. 35000y Screw drivers for bolts Rs. 100y Glass cutter Rs. 500y

    Machine for frame Rs. 15000y Machine for glass Rs. 35000y Machine for printing Rs. 2000y Cleaning material Rs. 2000y Printing ink Rs. 250

    Total: Rs.99,350

    Labour cost

    y Frame manufacturer Rs.5000 p.my Glass manufacturer Rs. 8000 p.my Spectacle manufacturer Rs. 6000 p.m.y Glass cleaner Rs.2500 p.m.y Nuts and bolts manufacturer Rs. 4000 p.m.

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    y Machine mechanics Rs. 3000 p.m.y Transportation Rs. 3500 p.m.

    Total: Rs. 32,000

    GOE

    y Freight charges Rs.20000y Wages Rs. 48000y Electricity (floor) Rs.1500y Cleaning Rs.200y Security Rs.5000y Maintenance Rs.1000y Security(shop) Rs.2000y Shop rent Rs.5000y Salary Rs.12000y Electricity (shop) Rs.500y Food and amusements Rs.1000y Cleaning Rs. 300y Maintenance Rs.500y Communication charges Rs.500y Stationary and other expenses Rs. 3000

    Total: Rs.1,05,000

    Total sales: Rs. 8,00,000

    Total expense: Rs. 4,65,250

    Profit: Rs. 3,34,750

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