Cost Analysis and Control

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.

Direct ExpensesThese 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.

Indirect ExpensesThese 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.

DifferencesDirect 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.

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.

Classification of Overheads• Function wise– Manufacturing overheads– Administrative overheads– Selling overheads– Distribution overheads

• Element wise – Indirect Material– Indirect Labour– Indirect Expenses

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

Classification of Overheads• Nature wise– Normal overheads• Expected overheads/expenses

– Abnormal overheads• Which are not expected

Allocation and Apportionment of

Overheads

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.

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.

Basis of ApportionmentBasis of Apportionment Items of Expenditure

Floor area or cubic contentRent, rates, taxes, maintenance of building, depreciation and insurance of building, lighting and heating, electricity.

Number of employeesExpenses associated with workmen such as supervision, canteen expense, recreation expense, timekeeping, ESIC, etc.

Capital valueDepreciation 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

Methods of Secondary Distribution

Direct Re-distribution Method

Step Method Reciprocal Service Method

Repeated Distribution Method

Simultaneous Equation Method

Trial and Error Method

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.

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.

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