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Elements of costing
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Cost
A cost to any business, is the
emasurement of, in financial terms, of the
use of a business resources in order to
produce its output
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Cost
Cost is the total amount invested in a
product
Cost of goods represents all expenditure
associated with the manufacturers of the
product line including the material cost,
labor cost, factory and administrative
overhead expenses
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Cost
Costs have a major impact on a firms
success and thus must be managed
The key to succesful cost control is
information and the ability to use that
information to manage the firm
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Cost
Performance report provide comparisions
of the actual costs against the budgeted
costs
Effective managers utilize this information
to make appropriate business decisions
for the company
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Cost
Costing is the process of estimating the
total resources investment required to
merchandise, produce and market a
product
Or costing is the exact calculation by the
costing department using exact figures for
the materials, labor and other expenses
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Costing/ Cost Accounting
Its the process of:
1.Collecting
2.Classifying3.Calculating
4.Organising
5.Reporting and using costs
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Advantages of Cost Accounting
It reveals profitable and unprofitableactivities
It helps in controlling costs with special
techniques like standard costing andbudgetary control
It supplies suitable cost data and other
related information for managerial decisionmaking such as introduction of a new
product , replacement of machinery with
automatic plant etc..
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Advantages of Cost Accounting
It helps in deciding the selling price of productsesp. in depression when prices have to be fixed
below cost
It helps in Inventory control It helps in introduction of cost reduction
programme and finding out new and improved
ways of cost reduction
Cost audit which is a part of cost accountancy
helps in preventing manipulation and frauds
and thus reliable cost can be furnished to the
management
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Essentials of a good cost
accounting system Method of costing adopted should be
suitable to the industry
Costing method should be customized to the
requirements of the business
It must have optimum participation and
should have support of all executives
To reap maximum benefit out of the costing
system, there should be well defined cost
centres and responsibility centres
E ti l f d t
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Essentials of a good cost
accounting system
Controllable and uncontrollable cost of eachresponsibilty centre should be shown
seperately
Cost and financial accounts may be integratedto avoid duplication of accounts
Well trained and educated staff ..
Prepare an accurate report and promptly submitthe same to appropriate level of management
Resources should not be wasted on collecting
and compiling cost data not required
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Management accounting
Management accounting includes costing
but it goes beyond costing to include other
management information- budgets,
forecasts, capital requirements,evaluation, financial statistics, measures of
profitability etc.
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Financial Accounting
Financial Accounting is concerned with
recording of financial information for the
production of statuary financial accounts.
This includes cost sheet, balance sheet,profit and loss statement etc..
It also involves accounting for taxation
VAT etc..
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Why do we need costing??
1. To be able to establish a selling price for
garments
2. To control expenditure
3. To help measure profit of a business
4. To enable management to quote prices
5. To calculate staff wages6. To provide information to management
on effective use of resources
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Cont.. Why do we need costing??
7. To keep account & control of stock of
materials
8. To assist in planning & forecasting
9. To enable budgets to be prepared
10.To evaluate budgets and analyze
variances from them
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Classification of Cost
1. Material
2. Labour (essential wages/ Salary costs)
3. Other Expenses
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Elements of Costs
Three main resources categories in
classification of cost are called Elements
of Cost
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Elements of Costs
Prime Cost+
Factory
Overhead
= Production Cost
+Selling and Distribution Cost
+Admin and Finance cost
=Total cost
Direct materialsDirect labour
Direct Expenses
Indirect materials
Indirect labourIndirect Expenses
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Components of costing
Direct Materials Direct Expenses
Direct Labour
Prime Cost
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Direct Cost
Cost incurred by increasing the value of a
product (value addition)
Only Variable costlabour, Material
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Direct costs
1. Direct Material: its the actual cost of
materials required to make a finished
product
2. Direct Labouris the wage cost of those
employees who actually manufacture the
finished product
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Cont..Direct Cost
3. Direct Expenses : expenses that are
incurred without which a product could
not be made eg. Cost of designing a
garment, or hiring some specific machinerequired for a specific order. Generally
this cost is relatively small ( compared to
other costs), Eg royalties / payment to adesigner..
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Direct Materials
Fabrics
Buttons
Threads Zippers
Trimmings
Velcro Laces
Lining
Etc..
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Direct labor
Cutting room
Sewing room
Sewing operators/ feeders/Helpers/Floaters
Post Sewing : Button Hole , Button
Attatch, Overlock, Checkers Washing deptt..
Finishing and Packing dept..
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Indirect Cost
Cost not associated with any specific unit of
production
1.Indirect material: Materials used in factory,
not required to make the finished product
2.Indirect labor: wages and salary to people
in factory who work but do not work to
make the product
3.Indirect expenses : other factory expenses
Sum of all these three is Indirect cost
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Indirect Expenses
Building rent and rates
Electricity Power
Water Charges Cleaning and Maintenance
Transportation
Boiler and other maintenance Telephone
Wear and tear of machine
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Components of costing
Indirect Materials Indirect Expenses
Indirect Labour
Factory Overhead
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Indirect Costs
1. Indirect Materials: Materials used in the
factory which DO NOT form a part of the
finished Product
2. Indirect Labour: Wages and salary of
the people who work in the factory but do
NOT make the finished Product
3. Indirect Expensesare all other factory
expenses
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Prime cost & Overheads
Prime cost is the sum of all direct costs
Indirect cost/ manufacturing overhead/
factory overhead is the sum of all the
indirect costs
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Production Cost
The sum of prime cost and factory
overhead is the production cost
Prime cost
production cost
Factory overhead
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Total Cost
Production cost
Selling & Distribution costs & Overhead
Administration & Finance costs & Overhead
Total Cost
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Production Cost
Prime cost + Factory O/H = Production Cost
Production Cost + Selling and Distribution O/H +
Administration + Finance O/H = Total Cost
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Fixed and variable costs
Cost can also be analyzed in terms of their
behavior with the volume of production/
scale of production :
1.Fixed/ Non Variable
2.Variable
3.Semi Variable
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Fixed Costs
Fixed costs are those costs in a business
that are NOT affected by the output of the
business eg rent of factory ( not the
volume of production ..subject to thecase)eg. Salary, depreciation, tax,
security etc.
Period cost theyre referred to as periodcost because they relate toa period of
time
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Variable Cost
Variable cost : it increase with the output
of business ie. Has direct corelation to the
scale of production eg. Raw materials
required, other direct materials
Fixed cost, Variable cost & semi variable
cost are used in Marginal costing
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Semi- Variable/ Semi-Fixed
Costs These are the cost that dont fit either into
the category of fixed cost/ variable cost.They contain an element that is fixed, and
an element that is variable eg electricitycharge ( may be fixed for some time andlater be charged as per consumption..).
They have to be reallocated on a suitablebasis to fixed and variable cost categorieseg. Rent, rate, salary..
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General operating Expenses
Theyre indirect costs that include cost of
operating the general offices and
departments that are not directly invloved
with the product line but are essential tooperation of the firm
Administrative Overheads : engineering/
merchandising/ MIS, Clerical staff andHuman resources..
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overhead
Variable/ Non variable costs that cannot
be traced to specific nits of Production
1.Rents
2.Maintainence & machines
3.Wear and Tear of machines
4.Fuel-gas and oils5.Water
6.Telephone
7.Electricity
O h d R
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Overhead Recovery
Estmates Factory O/H
The total can be divided amongst products
on various base as per the estimated
production hour
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