Costing Made easy -Session-1

Introduction to Costing

– By Rahul Jain

Money doesn't create man but it is the man who created money.

-Warren Buffet

Aim of the Module

To develop an understanding of the relationships among cost, costing and pricing, to examine different methods and techniques of costing.

Course Guidelines

Basics of CostingMaterial costingLabour costingCost Sheet Break Even Analysis

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Cost

Any amount incurred during the operations for providing the good or service to get the output into the hands of the customer

Controlling costs is essential to business success

A sacrifice of resources.

Costing

A field of accounting that provides economic and financial information for managers and other internal users.

Computing the cost of providing a service or manufacturing a product

Determining the behavior of costs and expenses as activity levels change

Profit planning and budgeting Controlling Management decision making

Need of Costing

Examples of Decisions

Suppose you manufacture five type of garments. Should you add another product line, or drop a line, and underwhat

circumstances? What information do you need?

Suppose you are planning for the upcoming year, and you need to determine how many units to sell to breakeven, or to make a target profit figure. What information do you need?

Learning outcomes

Calculate profits for a product taking into consideration all costs both direct and indirect cost, involved in producing a garment and selling it at a profit.

Apply break even analysis to evaluate new products and processes.

COURSE GUIDELINES

Costing Basics and Cost sheetMaterial CostingLabour and Overheads CostingPricing

Goals

Performance EvaluationDecision making

Pricing Product Mix Change methods Others

Basic elements of Cost

Material

Labor

Expense

Key terms

Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars.

Intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms.

Direct costs are costs that can be directly related to producing the products and services .

Indirect costs are costs that are not directly related to the products or services , but are indirectly related to them.

Key terms

Opportunity cost What you give up for certain in exchange for a chance at

something better.

Interest The cost of borrowed money

Cost Driver Any factor whose change “causes” a change in the total cost

of a related cost object.Note: Cost drivers can be factors other than volume

Key terms

Cost Object Any activity or item for which a separate measurement of costs is desired. Cost objects are the “something” in the statement: “We

need the cost of ‘something’”!

Product costs = Sum total of Direct costs and Indirect Allocated cost

Costs Fixed – are not influenced

by the amount produced but can change in the long run e.g., insurance costs, administration, rent, some types of labour costs (Salaries)

Variable– vary directly with the amount produced, e.g., raw material costs, some direct labour costs.

Semi-fixed – where costs not directly attributable to either of the above, for example, some types of energy and labour costs

COST OF THE GARMENT

Direct Costs Indirect Costs

Direct Material Cost(Fabric, trims, packaging

material)

Direct Labor Costs(Wages paid to operating labor i.e.workers associated directly

to the production)

Other expenses (Cost of outsourcing, inward

carriages etc.)

Indirect Material Cost(Printing, stationery & etc.)

Indirect Labor Cost(Wages paid to store keeper, supervisors, and salaries of

other officials)

Indirect expenses(Rent, Depreciation, lighting,

insurance charges)

Prime Cost

Direct Material Consumed+ Direct Labor+ Direct Expense

Prime cost -ExampleCONTENT AVG. CONSUMPTION/ SHIRT AVG.PRICE/UNIT

(Rs.)TOTAL COST(Rs.)

Fabric 2.10mts. 56 117

Thread 200mts. 9/spool 4.5

Button 11pcs. 0.25 2.75

Label 3pcs 0.20 0.60

Polybag 1pcs 2.10 2.10

Collar band card board 1pcs 0.10 0.10

Card board 1pcs 0.80 0.80

Clips 4 pcs 0.10 0.40

Pin 8 pcs. 0.05 0.40

Butterfly 1 pcs. 0.35 0.35

collarbone 2 pcs. 0.25 0.50

fusing 25 cm 30/mt 7.50

Direct Labor cost35.66 35.66

Direct expenses 11 11

Prime cost 219.21

Exercise-IClassify the cost items as direct or indirect , fixed or variable or semi fixed.

a. Salary of the production department manager who oversees manufacturing.

b. Salaries of company founders.

c. Cardboard trays used to package sets of garmentsd. Salary of the Web graphics designer who prepares the online illustrations and layout. e. Annual maintenance service agreement for the conveyer belt. f. Wages paid to laborg. Utilities such as water, electricity, waste for the warehouse. h. Cost of ingredients

Assignment

Individual Assignment

Write Key learnings/Reflections of the class, Ex 1 of PPT Questions of the Costsheetassignment.xls (Excel

file): Up till Prime cost only.

Some important points

Academic Honesty Reference Any Source When Confused Ask InstructorContact me: Rahul Jain (9811228852,

rahulkjain16@gmail.com ) www.learningcosting.pbworks.com