Analysis of Variance - Material variance

Analysis of Variance:-

Control is a very important function of management analysis of variances is helpful in controlling the performance and achieving the profits that have been planned.

The deviation of the actual cost or profit or sales from the standard cost or profit or sales is known as “variance”.

1. Material variance:

In case of Materials, the following may be the variances:-

Material cost variance

i. Material price variance
ii. Material usage or quantity variance
a) Material Mix variance
b) Material yield variance

Material cost variance (MCV)

It is the difference between the standard cost of materials allowed (as per standards laid down) for the output achieved and the actual cost of materials used.

Material cost variance :

standard cost of materials for actual output.- Actual cost of materials used.

Material price variance (MPV)

It is that portion of the material cost variance which is due to the difference between the standard cost of materials used for the output achieved and the actual cost of materials used.

Material price variance = actual usage (standard unit price – actual unit price)

Here, actual usage = actual quantity of materials (in units) used

Standard unit priced = standard price of material per unit

Actual unit price = actual price of material per unit.

c) Material usage (or quantity) variance (MQV)

It is that portion of the material cost variance which is due to the difference between the standard quantity of materials specified for the actual output and the actual quantity of materials used.

Material usage variance = standard price per unit (standard quantity – actual quantity)

d) Material Mix variance (MMV):

It is that portion of the material usage variance which is due to the difference between standard and the actual composition of a mixture. It is calculated as the difference between the standard price of standard mix and standard price of actual mix.

i. Actual weight of mix and the standard weight of mix do not differ:-

Material mix variance is calculated with the help of the following formula:

Standard unit cost (standard quantity – actual quantity)

(Or)

Standard cost of standard mix – standard cost of actual mix.

If the standard is revised due to shortage of a particular type of material, the MMV is calculated as follows:

Standard unit cost (revised standard quantity – actual quantity)

(Or)

Standard cost of revised standard mix – standard cost of actual mix.

e) Material yield variance (MYV):

It is that portion of the material usage variance which is due to the difference between the standard yield specified and the actual yield obtained.

(i) When standard and actual mix does not differ:-

In such a case, yield variance is calculated with the help of the following formula:-

Yield variance = standard rate (actual yield – standard yield)

Standard cost of standard mix

Where standard rate = ----------------------------------------

Net stand output (i.e., Gross output – standard loss)

(ii) When actual mix differs from standard mix:-

In such a case, formula for the calculation of yield variance is almost the same.

Standard rate = standard cost of revised standard mix

---------------------------------------------

Net standard output

Formula for yield variance in such a case is:-

Yield variance = standard rate (actual yield – revised standard yield).

Standard Costing

Standard cost and standard costing

Standard cost:

Standard cost is a predetermined cost. It is a determination in advance of production of what should be the cost. When Standard costs are used for the purpose of cost-control, the technique is known as Standard Costing.

Eric L. Kohler has defined Standard cost as follows:

“Standard cost is a forecast or predetermination of what actual cost should be under projected conditions, serving as a cost control and as a measure of production efficiency or standard of comparison when ultimately aligned against

Actual cost. It furnishes a medium by which the effectiveness of current results can be measured and the responsibility for deviations can be placed.

Standard costing:

It is the preparation of standard costs and applying them to measure the variations from actual costs and analyzing the causes of variations with a view to

maintain maximum efficiency in production. It is a technique, which use standards for costs and revenue for the purpose of control through variance analysis.

Standard costing is a technique which is complimentary to the actual costing or historical costing system. The system of standard costing can be useful in all types of industries, but it is more commonly used in industries producing standardized products.

(ii) Standard costing Vs. Budgetary control:

Both Standard costing and Budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing predetermined standards, comparing actual performance with the predetermined standards and taking corrective measures, where necessary.

Though both are useful tools to the management in controlling costs, they defer in following respects:

1. To be able to establish standard costs, some form of budgeting is essential as there is the need to forecast the level of output and prescribed set of working conditions in the periods in which the standard costs are to be used.

2. Standards are based on technical assessments whereas budgets are leased on past actual adjusted to future trends.

3. Budgetary control deals with the operations of a department of business as a whole while standard costing is applied to manufacturing of a product, process or processes or providing a service.

4. Standards are set mainly for production and production expenses where as budgets are compiled for all items of income and expenditure.

5. Budgets set up maximum limits of expenses above which the actual expenditure should not normally exceed.

6. Budgets are projection of financial accounts, standard costs are projection of cost accounts because budgetary control adopts a more general approach of giving service to the management than does standard costing.

7. Budgets are anticipated or expected costs meant to be used for forecasting requirements of material, labour, cash, etc.

8. In budgetary control, variances are not revealed through the accounts but are revealed in total.

Both standard costing and budgetary control are complimentary to each other and for maximum efficiency both should be used simultaneously.

Standard costing Vs. Estimated cost

Standard costs and estimated costs are predetermined costs, but their objectives are different.

1. The object of estimated cost is to have a reasonable assessment of what a cost ‘will be’ whereas standard cost aims at what a cost ‘should be’.

2. Estimated costs are calculated on the basis of past performance adjusted in the light of anticipated changes in the future standard costs, on the other hand, are determined on a scientific basis keeping in view certain factors and conditions of efficiency.

3. Estimated costs are used by the concerns for fixing selling prices of products, for taking a decision to manufacture or to buy, for quoting the selling price of a job, etc.

4. Estimated costs are used by the concerns which adopt historical costing system of ascertaining cost where as standard costs are used by the concern, which follow standard costing system.

5. Standard costs are used as a regular system of accounts from which variances are found out. Whereas use of estimated cost as a statistical data only.

6. Standard costs are to be fixed for each element of cost where as estimated cost can be for a part of the business and also for a particular purpose.

(iv) Standard costing and Marginal costing.

Standard costing is a system of accounting in which all expenses (fixed and variable) are considered for the determination of standard cost for a prescribed set of working conditions on the other hand, Marginal costing is a technique in which only variable expenses are taken to ascertain the marginal cost. Both standard costing and marginal costing are completely independent of each other and may be installed jointly. This system of joint installation may be named as marginal standard costing or standard marginal costing system.

Break - Even Analysis

Break even analysis is a vital tool for the management accountant. In a very narrow interpretation of the term, break even analysis is understood as a system of determination of that level of activity where total cost is equal to total sales. However, break even analysis also involves determination of probable profit at any given level of activity.

Break even point:

A business is said to ‘break even’ when its total sales are equal to its total costs. It is a point of ‘no profit no losses. Break even point can be calculated ‘in units’ or ‘in value’. (i.e.) it can be expressed as the number of units to be produced and sold to ‘break-even’, or the sales required to be attained in rupees, so that there is a situation of “no profit – no loss”.

Cost- volume profit analysis (relation ship):

Cost volume profit (CVP) analysis is often misunderstood to be same as break- even analysis. Break even analysis, however, is only a part of CVP analysis studies the relationship between cost, number of units produced and sold, selling price and profit individually and collectively taken.

The scope of CVP analysis covers the study of behavior of cost in relation to volume, sensitivity of profits to variation in output, break even analysis, price formulation, etc. and provides valuable insight into effects of profit on account of various management decisions.

The scope of CVP analysis covers the study of behavior of cost in relation to volume, sensitivity of profits to variation in output, break even analysis, price formulation, etc. and provides valuable insight into effects on profit on account of various management decisions.

The main objectives of cost volume- profit analysis are given below:

i) The analysis helps to forecast profit fairly and accurately as it is essential to know the relationship between profits and costs on the one hand and volume on the other.

ii) This analysis is useful in setting up flexible budget which indicates costs at various levels of activity.

iii) This analysis assists in evaluation of performance for the purpose of control.

iv) This analysis also assists on formulating price policies by showing the effect of different price structures on cost and profits.

Analysis of break even chart:

A break even chart explains about the break even point, angle of incidence and margin of safety for a particular product of a business.

i) The lower the break even point, the better it is:

A low break even point implies that the organization can survive even if it is operating at lower level of activity.

ii) The larger the angle of incidence, the greater is the benefit:

Angle of incidence represents the difference between total sales and total cost. The larger the angle, the greater is the spread. The profits increase in a greater proportion with the increase in production. However, a fall in number of units produced will also have an adverse

iii) The larger the margin of safety the better it is:

Margin of safety reflects the cushion the organization has against a possible fall in sales. The greater the margin of safety, the more comfortable the organization will be. It has a greater capacity to with stand recessionary phases.

Break even chart:

The break even chart is a graphic representation of cost and revenue data which brings out their inter relationship, at different levels of activity.

Steps to construct break even graph:

i) Let the X-axis represent the volume or level of activity and the Y-axis represents the costs and revenue in rupees.

ii) Draw the fixed cost line parallel to X-axis, from the point in Y-axis which represents the amount of fixed cost.

iii) With the help of the data given, construct the total cost line. The total cost is the total of variable costs at any given level of activity and the fixed cost. The total cost line will intersect the Y- axis at the point of fixed cost, as total cost is equal to fixed cost at ‘zero’ level of activity.

iv) With the help of data given construct the ‘total revenue’ chart. The total revenue cost will pass through the origin as the revenues at ‘zero’ level of activity is nil.

v) The break even point is the point of intersection of the total cost line and the total revenue line.

vi) The angle between the two lines of total cost and total revenue is called ‘angle of incidence’.

Assumptions underlying break even chart:

i) All costs can be separated into fixed and variable costs.

ii) Fixed costs will remain constant and will not change with the change in level of output.

iii) Variable costs will fluctuate in the same proportion in which the volume of output varies. In other words, prices of variable cost factors i.e., wage rates; price of material, etc. will remain unchanged.

iv) Selling price will remain constant even though there may be competition or change in volume if production.

v) The number of units produced and sold will be the same so that there is no opening or closing stock.

vi) There will be no change in operating efficiency.

vii) There is only one product or in the case of many products, product mix will remain unchanged.

viii) Product specifications and methods of manufacturing and selling will not change.

Marginal Costing

Marginal costing definition:

According to ICMA London “marginal cost is the amount for any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit”. Marginal costing is the technique of applying the concept of marginal cost in decision making process. Marginal costing is a technique that distinguishes between fixed and variable costs. The “marginal” cost of a product is its variable cost.

Applications of marginal costing: marginal costing is a very useful tool for management because of its following applications and merits:

A. Cost control:

Marginal costing divides the total cost into fixed and variable cost. Fixed cost can be controlled by the top management and that to a limited extent. Variable costs can be controlled by the lower level of management. Marginal cost by concentrating all efforts on the variable costs can control and thus provides a tool to the management for control of total cost.

In marginal costing fixed costs are not eliminated at all. These are shown separately as a deduction from the contribution instead of merging with cost of sales and inventories. This helps the management to have a control on fixed costs.

B. Profit planning:

Marginal costing helps the profit planning, i.e., planning for future operations in such a way as to maximize the profits to maintain a specified level of profit. Absorption costing fails to bring out the correct effect of change in sale price, variable cost are product mix on the profits of the concern but that is possible with the help of marginal costing.

Profits are increased or decreased as a consequence of fluctuations in selling prices, variable costs and sales quantities in case there is fixed capacity to produce and sell.

C. evaluation of performance:

The different products, departments, markets and sales divisions have different profit earning potentialities. Marginal cost analysis is very useful for evaluating the performance of each sector of a concern.

Performance evaluation is better done if distinction is made between fixed and variable expenses

D. Decision making:

The information provided by the total cost method is not sufficient in solving the management problems. Material costing techniques is used in providing assistance to the management in vital decision making, especially in dealing with the problems requiring short-term. Decisions where fixed costs are excluded.

The following are the important areas, where managerial problems are simplified by use of the marginal costing:

i. Fixation of selling price.

Ii. Key or limiting factor

iii. Make or by decisions

iv. Selection of a suitable product mix.

v. Effect of change in price.

vi. Maintaining a desired level of profit

vii. Alternative methods of production

viii. Diversification of products.

ix. Closing down or suspending activities.

x. Alternative course of action

The important areas where managerial problems are simplified by use of the marginal costing are:

1. Fixation of selling Price:

Although the prices are more controlled by market conditions and other economic factors than by decisions of management yet fixation of selling prices is one of the most important functions of management. This function is to be performed:

(a) Under normal circumstances

(b) In times of competition

(c) In times of trade depression

(d) In accepting additional orders for utilizing idle capacity

(e) In exporting and exploring new markets.

2. Key (or limiting) factor:

A key factor that factor which puts a limit on production and profit of a business. Usually the limiting factor is sales. A concern may not be able to sell as much as it can produce. But sometimes a concern can sell all it produces but production is limited due to the storage of materials, labour and plant capacity or capital.

3. Make or buy decision:

A concern can utilize its idle capacity by making component parts instead of buying them from market.

Factors that influence make or buy decision:

In a make or buy decision, the following cost and non-cost factors must be considered specifically.

Cost factors:

a) Available of plant facility

b) Quality and type of item which effects the production schedule.

c) The space required for production of item

d) Any special machinery or equipment required.

e) Any transportation involved due to the location of the product, i.e., the “feeder point”.

f) Cost of acquiring special know-how required for the item.

4. Selection of a suitable product mix:

When a factory manufacturers more than one product, a problem is faced by the management as to which product mix will give the maximum profits. The best product mix is that which yields the maximum contribution.

5. Effect of change in sales price:

Management is confronted with the problem of cut in prices of products from time to time on account of competition, expansion programmed or government regulations. It is therefore, necessary to know the effect of a cutting price of the products. The effect of cutting selling price per unit will be that contribution per unit will reduce.

6. Maintaining a desired level of profits:

Management may be interested in maintaining a desired level of profits. The volume of sales needed to have a desired level of profits can be ascertained by the marginal costing technique.

7. Alternative methods of production:

Marginal costing is helpful in comparing the alternative methods of production (i.e.,) machine work or hand work. The method which gives the greatest contribution is to be adopted keeping of course, the limiting factor in view. Where fixed expenses change, the decision will be taken on the basis of profit contributed by each.

8. Diversification of products:

Sometimes it becomes necessary for a concern to introduce a new product to the existing product or products in order to utilize the idle capacity or to capture a new market or for other purposes. General fixed costs will however, be charged to the old product/products.

9. Closing down all suspecting activities:

Sometimes it becomes necessary for a firm to temporary suspends or closes the activities of a particular product, department or factory as a whole due to trade recessions. The decision to close down or suspend its activities will depend on whether products are making a contribution towards fixed costs or not.

10. Alternative course of action:

When deciding between alternative courses of action, it shall be kept in mind that whatever course of action is adopted, certain fixed expenses will remain unaffected. The criterion, therefore, which weighs is the effect of alternative course of action upon the marginal costs in relation to the revenue obtained. The course of action which yields the greatest contribution is the most profitable to be followed by the management.

Process Costing

Definition of process costing:

Process costing is that form of operation costing which is used to ascertain the cost of the product at each process or stage of manufacture.

Application of process costing

The industries in which process costs may be used are many. In fact a process costing system can usually be devised in all industries except where job, batch or unit operation costing is necessary.

Examples of industries, where process costing is applied are:-

1. Chemical works – Textile, weaving, spinning, etc.

2. Paper mills – Paint, Ink and varnishing, etc.

Advantages of process costing

The following are the main advantages of process costing:

1. It is possible to determine process costs periodically at short intervals. Unit cost can be computed weekly or even daily if overhead rates are used on predetermined basis.

2. It is simple and less expensive to find out the process cost.

3. It is possible to have managerial control by evaluating the performance of each process.

4. It is easy to allocate the expenses to processes in order to have accurate cost.

5. It is easy to quote the prices with standardization of process. Standard costing can be established easily in process type of manufacture

Fundamental principles of process costing:

The following are the fundamental principles of process costing:-

1. Cost of materials, wages and overhead expenses are collected for each process or operation in a period.

2. Adequate records in respect of output and scrap of each processor operation during the period are kept.

3. The cost per finished output of each process is obtained by deviating the total cost incurred during a period by the number of units produced during the period after taking into consideration the losses and amount realized from sale of scrap.

4. The finished product along with its cost is transferred from one process to the next process just like raw materials of that process.

Elements of production costing

The following are the main elements of production cost in process costing:-

1. Materials:

Generally in process costing, all the material required for production is issued to the first process, where after processing it is passed to the next process and soon. Some operation on the material is performed in each process which has been passed from the first process.

2. Labour:

Generally, the cost of direct labour is very small part of the cost of production in industries adopting process costing. The direct labour element becomes smaller and smaller while the overhead element increases with the introduction of more and more automatic machinery.

3. Production overhead:

The overhead element of total cost is generally very high in process costing great care is required to ensure that each process is charged with a reasonable share of production overhead. The actual overheads are debited to each process account.

In process costing, the four main aspects which are to be discussed are;

1. Process losses

2. Inter process profits

3. work-in-progress and effective or equivalent production.

4. Joint and by-products.

Normal process loss:-

If the loss is unavoidable on account of inherent nature of production processes. Such loss can be estimated in advance on the basis of past experience or data. The normal process loss is recorded only in items of quantity and the cost per unit of usable production is increased accordingly, where scrap possesses some value as a waste product or a raw material for an earlier process, the value thereof is credited to the process account. This reduces the cost of normal output; process loss is shared by usable units.

Abnormal process loss:-

Any loss caused by unexpected or abnormal conditions such as plant break down, sub-standard materials, careless, accident etc. or loss in excess of the margin anticipated for normal process loss should be regarded as abnormal process loss. The unit of abnormal loss is calculated as under.

Abnormal loss = actual loss – normal loss.

The valuation of abnormal process loss should be done with the help of the following formula.

Value of abnormal loss

Normal cost of normal output

= ------------------------------------ x units of abnormal loss

Normal output

All cases of abnormal process loss should be thoroughly investigated and steps taken to prevent these recurrence in future. Abnormal process loss should not be allowed to affect the cost of production as it is caused by abnormal or unexpected conditions. Such loss representing the cost of materials, labour and overhead incurred on the wastage should be transferred to an abnormal loss account. If this abnormal loss has got any scrap value, it should be credited to abnormal loss account and the balance is ultimately written off to costing profit and loss account.

COST CONCEPTS

Cost:

The Institute of Cost and Management Accountants (ICMA) has defined cost as “the amount of expenditure, actual or notional, incurred on or attributable to a specified thing or activity”. It is the amount of resources sacrificed to achieve a specific objective. A cost must be with reference to the purpose for which it is used and the conditions under which it is computed. To take decisions, managers wish to know the cost of something. This something is called a “cost unit”.

2. Cost unit:

A cost unit is any thing for which a separate measurement of costs if desired. A product, service, department, project or an educational course can all be cost units. Cost units are chosen not for their own sake but to aid decision making. Thus a cost unit is a “quantitative unit or product or service in relation to which costs are ascertained”. The cost unit to be used at any given situation is that which is most relevant to the purpose of cost ascertainment.

3. Cost centre:

According to ICMA London, cost center is “a location, person or items of equipment in respect of which costs may be ascertained and related to cost units for cooses”. It is simply a method by which costs are gathered together, according to their incidence, usually by means of cost center codes. It is the smallest element of an organization in respect of which costs are charged and ascertained.

Maintenance department, a public relation office, a printing machine are all examples of cost centers.

The establishment of cost centers serves two important purposes. Firstly cost ascertainment is made possible by collecting and charging cost to each cost center. Secondly, cost control is ensured as costs can be more closely looked at and more easily monitored by a responsible official. The setting up of a cost centers depends on numerous factors such as organization of factory, requirement of the costing system and management policy.

COSTING - Job Costing

JOB COSTING

Job-costing is the system of costing used to find out the cost of non-standing jobs. These jobs are generally made according to customer’s specifications. It is followed in business connected with printing, binding, repairing machine tool manufacturing, etc. In such concerns, it is necessary to keep a separate record of each job from the time the work on the job begins till is completed. A separate job card or cost sheet is maintained for each job or product in which all expenses of materials, labour, over-heads are recorded and cost of completing a job or manufacturing a product is found. The method of ascertainment or estimation of costs is similar to that of unit costing.

While preparing the job cost sheet, in the absence of specific information, quotation for a job must absorb factory over-heads as a percentage of direct wages. If different departments are involved, over-head absorption rates must be separately calculated for each department, office, selling and distribution over-heads must be absorbed as a percentage of factory cost.

Fixed expenses are spread over normal; production or total number of hours available for work, as they are incurred irrespective of whether or not production activity is carried out. Actual output or actual hours are not considered.

PROFORMA OF JOB COST SHEET

Job cost sheet of ___________ for the period ended ___________

Particulars	Rs.	Rs.	Cost per unit (Rs.)
Direct materials consumed
Opening stock of raw material	xxx
Add: purchase of raw materials	xxx
Add: Carriage on purchases	xxx
	xxx
Less: C/stock of raw materials	xxx	xxx	xxx
Direct wages		xxx	xxx
Direct expenses		xxx	xxx
Prime cost		xxx	xxx
Add: factory over-heads		xxx
		xxx
Less: sale of scrap		xxx
		xxx
Add: work in progress (beginning)		xxx
		xxx
Less: work in progress (closing)		xxx
works cost or factory cost		xxx	xxx
Add: Administration over-heads		xxx
Cost of production of goods sold		xxx
Add: opening stock of finished goods		xxx
		xxx
Less: closing stock of finished goods		xxx
Cost of goods sold		xxx	xxx
Add: selling and distribution over-heads		xxx
Cost of sales or total cost		xxx	xxx
Net Profit		xxx	xxx
Sales		xxx	xxx

Cost sheet or a statement of cost.

A cost sheet or a statement of cost is a statement that is prepared to present information regarding the various elements of cost incurred in production during a defined period of time. The cost sheet is generally prepared at short intervals (weekly or monthly) and presents the total cost as well as cost per unit of products manufactured during the period.

The cost sheet does not have a statutory format. It is not part of the accounting system. The purpose of cost sheet is to present the elements of cost. Cost sheet may have information pertaining to the previous year in an additional column. Alternatively, standard costs may also be provided.

Cost sheet shows the breakup of total cost into various elements, sales value of goods and profit earned (or loss incurred) during a period.

Treatment of certain items in preparation of cost sheet.

1. Expenses not included in cost sheet:-

Cost sheet includes only such expenses that are a charge against profit. Expenditure incurred towards servicing of debt (interest payments), acquisition of assets (capital expenditure) appropriation of profits and payments representing distribution of profits are not included in the preparation cost sheet.

The following is the proforma of cost sheet:

Job cost sheet of ___________ for the period ended ___________

Particulars	Rs.	Rs.	Cost per unit (Rs.)
Direct materials consumed
Opening stock of raw material	xxx
Add: purchase of raw materials	xxx
Add: Carriage on purchases	xxx
	xxx
Less: C/stock of raw materials	xxx	xxx	xxx
Direct wages		xxx	xxx
Direct expenses		xxx	xxx
Prime cost		xxx	xxx
Add: factory over-heads		xxx
		xxx
Less: sale of scrap		xxx
		xxx
Add: work in progress (beginning)		xxx
		xxx
Less: work in progress (closing)		xxx
works cost or factory cost		xxx	xxx
Add: Administration over-heads		xxx
Cost of production of goods sold		xxx
Add: opening stock of finished goods		xxx
		xxx
Less: closing stock of finished goods		xxx
Cost of goods sold		xxx	xxx
Add: selling and distribution over- heads		xxx
Cost of sales or total cost		xxx	xxx
Net Profit		xxx	xxx
Sales		xxx	xxx

Interest on capital, income-tax paid, advance payment of income-tax, sales tax paid, provision for doubtful debts provision for discount on debtors, expenses incurred for raising capital such as underwriting commission, and brokerage, goodwill/preliminary expenses written off, abnormal losses, transfer to sinking fund, profit or loss on sale of an asset, debenture interest, discount received, dividends received, etc.

Cash discount and bad debts:-

There is a difference of opinion in the treatment of cash discount allowed and bad debts. Bad debts in the cost of taking a credit risk. However, some other experts opine that these expenses are a normal part of selling efforts by any business and hence must be considered as selling and distribution over-heads.

Incomes not included in cost sheet:-

The cost sheet does not include any incomes. The only exceptions are sales and sale of scrap. For Ex.:- interest income, dividend income, rent, transfer fees, etc., are not included in cost sheet.

Scrap:

Scrap is incidental residue. Scrap can be of direct material itself (remnants of cost, wood pieces or it may refer to the remains after the production process. In the first case, the amount realized from the sale of such scrapped material must be deducted from the cost of direct material consumed. In the second case, the value of scrap must be deducted from the total of factory over-heads.

Defectives: -

Defectives are finished or semi-finished products that have a defect in them. Such defects need to be rectified. This process is done in the factory. It is quite normal to have defectives. If the cost of rectification is normal, then such costs are taken as part of factory over-heads. However, if the number of defectives is very large, then such abnormal expenses are not taken in cost sheet.

Drawing office: -

It is a part of factory where drawings, designs etc., are made. Expenses on drawings made specifically for a product are direct expenses. However, all other expenditure is part of factory over-head. Unless specifically mentioned, it must be treated as factory over-head.

Calculation of cost per unit:

The following steps must be followed:

All elements of cost, starting from direct materials consumed to cost of production, must be divided by number of units produced.

The value of opening stock and closing stock of finished goods should not be divided with any figure. Hence, cost of production per unit and cost of goods sold per unit will be same. Selling and distribution over-heads should be divided by number of units sold.

Work-In-Progress:

The value of work-in-progress at the end of the period for which the cost sheet is being prepared is added to the total of factory over-heads. The closing value is deducted from the total. The net figure goes to the outer column of cost sheet. If work-in-progress is valued at prime cost, then the opening value of work-in-progress is added to the total of Direct Material, Direct Wages and Direct Expenses. The closing value is deducted from the same. The final figure obtained is the ‘price cost’.

Value of closing stock:-

If the value of closing stock of finished goods is not available, it can be found from the following formula:

Value of c/stock = closing stock (in units) x cost of production per unit.

Apportionment of expenses:

If an expense has been incurred jointly towards two or more heads, it must be apportioned amongst such heads on a reasonable basis. The salary of General Manager will have to be apportioned amongst factory, office and selling and Distribution over-heads in the ratio of time spent by him on the issues pertaining to the three heads.

Outstanding Expenses:

In preparation of cost sheet, even outstanding expenses are included.

For ex.: If direct wages paid are Rs. 10000 and direct wages outstanding are Rs.1000, then the cost sheet will show a cost of Rs.11000 towards Direct expenses.

Subsidy:-

Subsidy is a concession given by the government. The organization receiving subsidy can afford to reduce its desired selling price of its products to the extent of subsidy received.

Dual pricing:

If the industry is subject to dual pricing, the open market price must recover the loss in revenue on account of supplying part of the goods at levy price.

Percentage of some other expenses:

If the information is not provided for number of units, factory overheads are estimated and charged on the basis of its percentage to direct wages in the previous year. Similarly, administration, selling and distribution overheads are changed on the basis of their percentage to works cost in the previous year.

Fixed and variable costs:-

Variable expenses are expenses that vary in direct proportion to number of units produced. Fixed expenses remain fixed in amount irrespective of the number of units produced.