costing systems & classification
TRANSCRIPT
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Costing Systems &
Classification of Cost
Lincy Rinil
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Costing Systems
The most popular systems of costing that are used by the organizations are:• Absorption Costing• Marginal Costing• Standard Costing• Activity-based Costing• Uniform Costing
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Absorption Costing
• It is a costing system which recognizes all costs that have actually been incurred in producing a product.
• The system, in fact considers both fixed as well as variable cost while ascertaining the cost of the product.
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Marginal Costing
• It is the ascertainment of marginal cost by differentiating between fixed and variable cost.
• It is used to ascertain the effect of changes in volume or type of output on profit.
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Standard Costing
• A comparison is made of the actual cost with a pre-arranged standard and the cost of any variation (called variances) is analysed by causes.
• This permits the management to investigate the reasons for these variances and to take suitable corrective action.
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Activity-Based Costing
• The Activity-Based Costing (ABC) system is a system based on activities linking spending on resources to the products/ services produced delivered to customers.
• The ABC system, first accumulates indirect costs for each of the activities of a particular plant, department of an organisation and then assigns costs of activities to the products, services and other cost objects that require the activity.
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Uniform Costing
• It is the use of same costing methods, techniques, principles and practices by several undertakings for common control and comparison of costs.
• Such an arrangement, in fact, encourages the member organisations to use the performance of different units/firms within the industry as a benchmark for the purpose of having comparative study of their performance.
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Classification of cost
According to:1. Nature/ Elements2. Function 3. Degree of traceability to product4. Change in Activity / Volume5. Controllability6. Normality
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Classification of cost contd….
7. In relationship with accounting period8. Time9. Planning & control10. Association with the product11. Managerial decisions
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The Product
MaterialsMaterials LabourLabour ExpenseExpense
1. Elements of Costs
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Direct Materials
Those materials that become an integral part of the product and that can be conveniently traced
directly to it.
Example: A radio installed in an automobileExample: A radio installed in an automobile
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Indirect Material
Those materials that do not become an integral part of the product but which helps in
production.
Example: indirect materialsExample: indirect materials
Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.
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Direct LaborThose labor costs that can be easily traced to
individual units of product.
Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers
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Indirect Labour
Those labor costs that cannot be easily traced to individual units of product.
Examples: Indirect labor Examples: Indirect labor
Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards.
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Expense
• The cost of services provided to an undertaking and the notional cost of the use of owned asset.
• Expenses are of two types: Direct expense Indirect expense
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Expense
• Direct expense is an expense which is incurred with manufacture of a product.
Eg: Purchase of raw materials, factory labour, factory wages, electricity
• Indirect expense also called as overhead are additional expenses which are incurred on bringing a product to final customer.
Eg: Sales and Distribution, Office Salary, office electricity, office water, printing and stationery, outsourcing expenses, advertising expenses etc.
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2. Function
i. Manufacturing & Production Costii. Commercial Cost
a. Administrative Costb. Selling & Distribution Cost
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3. Degree of traceability to product
Direct costsCosts that can beeasily and conveniently traced to a unit of product or other cost objective.
Examples: direct material and direct labor
Indirect costsCosts cannot be easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overheads like oil, cotton, etc.
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4. Change in volume
How a cost will react to changes in the level of business activity.
– Total fixed costs remain unchanged when activity changes.
– Total variable costs change when activity changes.
– Semi-variable costs are those which are partly fixed and partly variable
How a cost will react to changes in the level of business activity.
– Total fixed costs remain unchanged when activity changes.
– Total variable costs change when activity changes.
– Semi-variable costs are those which are partly fixed and partly variable
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5. Controllability
Controllability
Uncontrollable Cost
Controllable Cost
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6. Normality
Normality
Normal cost Abnormal cost
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7. In relationship with accounting period
• Capital Expenditure• Revenue Expenditue
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8. Time
Time
Historical cost Predetermined cost
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9. Planning & Control
Planning & Control
Standard cost Budgeted Cost
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10. Association with the product
Product costs include direct materials, direct
labor, and manufacturing
overhead.
Period costs are not included in product
costs. They are expensed on the
income statement.
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11. For Managerial decisions
• Marginal Cost• Out of Pocket Cost • Differential Cost• Opportunity Cost• Sunk Cost
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Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.
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Sunk Costs Sunk costs cannot be changed by any decision. They are not
differential costs and should be ignored when making decisions.
Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.