5.1 Classification of costs, Cost of Sales, Cost Centre, Cost Unit, Profit Centre and Investment Centre

Cost Concept:

According to the Association of Certified Management Accountants, costs are "expenditures (actual or hypothetical) incurred or resulting from a particular thing or activity." Similarly, according to Anthony and Wilsch, "cost is a monetary measure of the amount of resources used for several purposes."

Costs have been or may be incurred by the Cost Terminology Committee of the American Accounting Association, "in the realization of the management objectives mentioned above, which may be the manufacture of products or the provision of services.

From the above, it can be said that the cost is the sum of all the costs of a product or service. Therefore, the cost of a product means the actual shipment or confirmed change that occurred in its manufacturing and sales activities. In short, it is the amount of resources that have been exhausted in exchange for some goods and services.

So-called resources are expressed in money or currency units. What is said above does not make sense until it is used only as an adjective, that is, when it conveys its intended meaning.

Therefore, when we talk about prime cost, works cost, fixed cost, etc., we want to explain the specific implications that are essential when calculating, measuring, or analysing different aspects of cost.

Costing collects and analyses expenses, measures the production of products at various stages of manufacturing, and measures the link between production and expenses. Therefore, calculate or check past or actual costs, estimated costs, standard costs, and so on.

It also associates production with costs using a variety of costing methods, such as marginal costing methods, total costing methods, and direct costing methods.

The following types of costing are typically used to determine costs:

1. Uniform costing

If many companies in the industry agree to follow the same costing system in detail and adopt common terms for different items and processes, they are said to follow a uniform costing system. In such cases, you can compare the performance of each company to the performance of other companies, or to the average performance of the industry. Under such a system, it is also possible to determine the production cost of goods that apply to the entire industry. This is useful if your government requires tax cuts or protection.

2. Marginal cost:

This is defined as a confirmation of marginal costs by distinguishing between fixed and variable costs. It is used to see the impact of changes in production volume or type of production volume on profits.

3. Standard costing and variance analysis

This is the name given to the method in which the standard cost is pre-determined and then compared to the recorded actual cost. Therefore, this is a cost verification and cost management technique. This technique can be used in combination with any costing method. However, it is especially suitable when the manufacturing method involves the production of repetitive standardized products.

4. Historical cost principle

Confirmation of costs after incurred. The usefulness of this type of costing is limited.

5. Direct costing

This is the practice of charging all overhead costs to operations, processes, or products and amortizing all overhead costs to the profits they generate.

6. Absorption costing

This is the practice of charging all operational, process, or product costs, both variable and fixed. This is different from the marginal cost excluding fixed costs.

Cost classification

To refer to costs in a cost center, proper classification of costs is absolutely necessary. Costs are usually categorized according to their nature: materials, workforce, overhead, and so on. The same cost figures can be categorized in different ways depending on the needs of the company.

(A) According to the Function:

The general price is split into diverse segments in step with the cause of the enterprise. Therefore, fees are grouped in step with enterprise necessities with a purpose to nicely examine the functioning of the enterprise. In different words, the overall price consists of all fees, from cloth fees to product packaging fees.

Direct cloth fees, direct hard work fees, paid fees, and all overhead fees are born with the aid of using the top of production / production fees.

At the equal time, administrative fees (associated with clerical and administrative) and income and distribution fees (i.e. associated with income) are categorised one after the other and introduced to discover the overall price of the product. If those useful classifications aren't completed nicely, the real price of the product cannot be as it should be decided.

(B) According to volatility:

These fees consistent with quantity may be subdivided as follows:

1. Fixed fees;

2. Variable fees;

3.  Semi-variable price.

In different words, we keep constant fees (earnings, rent, etc.) as much as a sure restriction no matter manufacturing quantity. It is thrilling to word that if greater gadgets are products, the constant price consistent with unit might be reduced, and if fewer gadgets are produced, the constant price consistent with unit will manifestly boom.

On the alternative hand, variable fees vary in share to manufacturing quantity. s of manufacturing quantity. In different words, modifications in manufacturing (uncooked cloth prices, hard work, etc.) do now no longer have a right away effect on price consistent with unit. On the contrary, semi-variable fees are in part constant and in part variable (e.g. Constructing repairs).

(C) According to controllability:

Costs may be extensively divided into categories, relying at the overall performance of the participants of the enterprise.

They are:

(I) Manageable fees. And

(II) Uncontrollable fees.

Manageable fees are fees that can be suffering from choices made with the aid of using sure participants of the control of the enterprise, or fees which are as a minimum in part control-structured and practicable with the aid of using control. All direct fees, direct cloth fees, direct hard work fees, and billable fees (a thing of top fees) are practicable at a decrease stage of manipulate and are accomplished accordingly.

Uncontrollable fees are fees which are unaffected with the aid of using the movements taken with the aid of using a selected member of control. For example, constant fees, this is, constructing rent, earnings payments, and so on.

(D) According to normality:

Under this condition, fees are categorised in step with the everyday desires of a selected stage of output for the everyday stage of interest generated for such output.

They are divided as follows.

(I) Normal price; and

(II) Unusual price.

Normal price is the price this is usually required for everyday manufacturing at a selected output stage and is a part of manufacturing.

Anomalous fees, on the alternative hand, are fees that aren't usually required to efficaciously produce a selected stage of output, or aren't a part of the manufacturing price.

(E) According to time:

Costs also can be categorised in step with the time aspect inside them. Therefore, fees are categorised as follows:

(I) Acquisition price; and

(II) Prescribed fees.

Acquisition fees are fees which are taken into consideration when they occur. This is possible, specifically if manufacturing for a selected unit of output has already taken place. They have handiest ancient fee and cannot assist control fees.

On the alternative hand, the given price is the predicted price. Such fees are pre-calculated primarily based totally on beyond revel in and records. Needless to say, if it's miles scientifically decided, it will likely be the usual price. Comparing those general fees to real fees well-known shows the motives for the variations and facilitates control take suitable steps to make adjustments.

(F) According to traceability:

Costs may be recognized with the aid of using a selected product, process, department, and so on. Costs are categorised as follows:

(I) Direct (traceable) fees; and

(II) Indirect (untraceable) fees.

Direct / traceable fees are the fees that may be without delay tracked or assigned to a product. That is, it consists of all traceable fees, this is, all fees related to without problems traceable fees of uncooked materials, hard work, and different offerings used.

Indirect / non-traceable fees are fees that cannot be without delay tracked or assigned to a product. That is, it consists of all untraceable fees. Shopkeeper earnings, well-known and administrative expenses, this is, matters that cannot be nicely allotted without delay to the product.

(G) According to making plans and control:

Costs also can be categorised as follows:

(I) Budget fees; and

(II) Standard price.

Budget price refers back to the predicted production price calculated primarily based totally at the facts to be had previous to the real manufacturing or purchase. In reality, finances fees consist of general fees. Both are pre-decided fees and the quantities might also additionally match, however for one-of-a-kind purposes. It offers a medium which can degree the validity of present-day consequences and preserve derivation responsibilities.

Standard fees are pre-decided for every detail: materials, hard work, and overhead fees. The general fees are:

(I) the price consistent with unit is decided to supply the predicted general output for the subsequent period.

(A) Material;

(B) Labor; and

(C) Overhead.

(II) Costs need to rely upon beyond revel in and experimentation, and technical personnel specifications.

(III) Expenses have to be expressed in rupees.

(H) According to control's selection: Under this, fees can be categorised as follows:

(A) Marginal price:

Marginal price is the price of manufacturing extra gadgets with the aid of using isolating constant fees (this is, capability fees) from variable fees (this is, manufacturing fees) that assist us recognize profitability. In addition, we recognize that sure fees (constant) might not boom in any respect to boom manufacturing, and just a few fees associated with cloth fees, hard work fees, and variable fees will boom. Therefore, the overall price so elevated with the aid of using the manufacturing of 1 or greater gadgets is the price of the marginal unit, which price is referred to as the marginal price or the incremental price.

(B) Difference price:

The differential price is because of the extra functions and is a part of the price of the functions that may be recognized with the aid of using the extra functions. That is, a price extrudes because of a extrude in interest stage or manufacturing method.

(C) Opportunity price:

This is the anticipated price extrude related to the adoption of opportunity machines, processes, uncooked materials, specifications, or operations. In different words, it's miles the biggest opportunity sales you can have earned in case your present capability changed into modified to every other opportunity.

(D) Replacement price:

This is the price of replacing an object or institution of property on the present-day rate in a selected place or marketplace place.

(E) Implicit price:

This is the price used to suggest the presence of an arbitrary or subjective detail of product price this is greater critical than usual. This is likewise referred to as notional price. For example, hobby on capital, however no hobby is paid. This is specifically beneficial whilst making choices approximately opportunity capital funding projects.

(F) Sunk price:

This is a beyond price because of a selection that cannot be changed at gift and is related to specialised gadget or different centers that cannot be without problems tailored to present day or destiny objectives. Such fees are regularly visible as forming a small aspect in destiny-impacting choices.

Cost of Sales

Cost of products sold is that the cumulative sum of all costs won’t to create a product or service sold. Cost of products sold is a crucial a part of a corporation 's performance indicators because it measures the power of a company to style, procure, and manufacture goods at an inexpensive cost. This term is most ordinarily employed by retailers. Manufacturers are more likely to use the term cost of products sold. The value of products sold item appears near the highest of the earnings report as a deduction from income. The results of this calculation are that the gross profit margin earned by the reporting company.

The various costs of sales fall under the overall subcategories of direct labor, direct materials, and overhead costs, and may even be thought of as including the value of commissions related to the sale. Cost of products sold is calculated as first stock + purchase-end stock.

Cost of sales doesn't include general administration costs. It also doesn't include sales and marketing department costs.

Example of cost of sales

Suppose a corporation has $ 10,000 available at the start of the month, he spends $ 25,000 on various inventory items that month, and he has $ 8,000 available at the top of the month. What was the value of products sold for the month? the solution is:

Beginning inventory                                          $10,000

+ Purchases                                                                      25,000

- Ending inventory                                                             8,000

= Cost of sales                                                          $27,000

How to record cost of sales

If your company uses a periodic inventory system, this is often expressed within the cost of products sold formula, where the value of products sold is first stored within the purchasing account. This is often usually a debit to the acquisition account and a credit to the accounts payable account. At the top of the reporting period, the balance of the purchasing account is shifted to the inventory account, the inventory account is debited, and therefore the purchasing account is credited. Finally, the book balance of the inventory account is compared to the particular end-of-term inventory. The difference is amortized to cost of products sold and debited to the value of products sold account and credited to the inventory account. This is often an easy cost of sales accounting that works well for little organizations.

Unit Costing

What is the Unit Price?

Unit costing is understood as "output" or "single output" costing. Following unit costing, there are concerns about the continual production of one product on an outsized scale. The value unit is that the same cost. Additionally, the merchandise has uniform and homogeneous properties. This product isn't manufactured during a continuous process. This is often the most difference between unit costing and process costing.

In some cases, concerns generate quite one grade of a product. Therein case, single costing or output costing is performed. Once a product is produced, cost collection and price verification are very easy.

In this method, the entire cost incurred is split by the entire production to work out the value per unit. Additionally, costs are collected for every element, and therefore the cost for every element is split by the entire output to work out the value per unit for every element.

A cost statement is made containing the figures for the previous period to supply comparison and control. We’ve successfully calculated unit costs within the manufacture of homogeneous products like bricks, pencils, pens, books, computers and laptops.

Cost accumulation procedure in unit costing

Cost details for the varied elements of cost are collected from financial records. Thereto end; you'll properly design your financial records. Therefore, you are doing not got to maintain a separate set of books to gather costing information. The subsequent costing information is required for unit costing:

1. Value of raw materials consumed

Material request documents are the idea for collecting the worth of staple consumption. Materials are only issued supported approved material request documents.

Approval documents provide details on the quantity of fabric with different grade and sort values. If the fabric is broken during storage and handling, we'll increase and adjust the difficulty price of the fabric to point normal loss. Unusual losses should be charged to the costing of the earnings report.

2. Labor costs

Labor is often divided into two categories: direct labor and indirect labor. If workers are engaged in direct manufacturing activities, they're treated as direct labor and may identify and calculate direct labor with the assistance of production details. Several workers engaged generally factory activities. They will be placed in several categories of wage tables.

3. Overhead

Overhead is assessed on a functional basis for unit costing purposes. Factory overhead or production overhead, office and management overhead, and sales and distribution overhead are categories of overhead. These overhead costs are collected at a given rate for costing purposes.

The actual overhead incurred is collected from the financial records. Cost statements are made at short intervals with the assistance of certain overhead costs.

Unit of measure in unit costing

Units of measure are a crucial factor for cost confirmation on the cost method. There are many units of measure. They’re units, litres, dozens, yards or meters, square feet, gloss, tones, veils, millilitres, kilograms, bags and more.

The company may choose or adopt one among the above units of measurement, counting on the character of the industry

Confirmation of cost per unit in unit costing

The main purpose of unit costing is to ascertain the value per unit. The aim is then to research the value of every element and its share in total cost. For this purpose, costs are cumulative and analysed under various factors of cost.

Financial records are wont to collect direct costs and costs. Costing records are wont to collect overhead and expenses. Cost records like material summaries, wage summaries, time records, and price ledgers are a part of the records used for cost confirmation purposes.

Use the subsequent formula to work out the value per unit.

Cost Per Unit = Total Cost / Number of Units Produced

Costing is an accounting method that records and analyses all costs associated with the execution of a process, project, or product. Such analysis helps management make strategic decisions.

Costing uses a variety of techniques to make your organization cost-effective. Everything you need to know about the different costing methods. The term "costing method" can be used to refer to the various processes or procedures used to determine and display costs.

There are different costing methods in different industries, depending on the nature of the job.

Costing methods can be studied under the head below. –

1. Method based on the principle of job costing

2. Method based on the principle of process costing.

Some of the methods based on the principles of process costing are:

In addition, some other costing methods are: -

Different types of costing methods: job costing, contract costing, batch costing, process costing, and operating costing

Different methods of costing – individual costing, contract costing, batch costing, process costing, unit costing, operating costing, operating costing, and multiple costing

The costing method refers to the cost confirmation and costing system. Industries differ in their nature, the products they produce, and the services they provide. Therefore, different costing methods are used in different industries. For example, the costing method used by building contractors is different from that of shipping companies.

Job costing and process costing are two basic methods of costing. Job costing is suitable for industries that manufacture or perform work according to customer specifications. Process costing is suitable for industries where production is continuous and the units of production are the same. All other methods are a combination, extension, or improvement of these basic methods.

Let's take a closer look at how to calculate costs.

Method # 1 Job costing:

This is also known as specific order costing. There is no standard product and each job or work order is adopted in a different industry. The work is done strictly according to the customer's specifications, and the work is usually completed in a short time. The purpose of job costing is to see the cost of each job individually. Job costing is used in printing presses, motor repair shops, car garages, movie studios, the engineering industry, and more.

Method # 2 Contract Costing:

This is also known as terminal costing. Basically, this method is similar to job costing. However, it is used when the work is large and it takes a long time. The work will be done according to the customer's specifications.

The purpose of contract costing is to see the costs incurred in each contract individually. Therefore, a separate account is provided for each contract. This method is used by companies engaged in the construction of ships, buildings, bridges, dams and roads.

Method # 3 Batch Costing:

This is an extension of job costing. A batch is a group of identical products. All units in a particular batch are uniform in nature and size. Therefore, each batch is treated as a cost unit and is costed separately. The total cost of the batch is checked and divided by the number of units in the batch to determine the cost per unit. Batch costing is adopted by manufacturers of biscuits, ready-made garments, spare parts medicines and more.

Method # 4 Process Costing:

This is called continuous costing. In certain industries, raw materials go through various processes before they take the form of final products. In other words, the finished product of one process becomes the raw material for the next process. Process costing is used in these industries.

A separate account is opened for each process to see the total cost and cost per unit at the end of each process. Process costing applies to continuous process industries such as chemicals, textiles, paper, soaps and foam.

Method # 5-unit costing:

This method is also known as single costing or output costing. It is suitable for industries with continuous production and the same unit. The purpose of this method is to see the total cost and the cost per unit. Create a cost sheet considering material costs, labor costs, and overhead costs. Unit costing applies to mines, oil rig units, cement factories, brick factories and unit manufacturing cycles, radios, washing machines, etc.

Method # 6 Operating cost:

This method is followed by the industry that provides the service. To determine the cost of such services, use composite units such as passenger kilometres and tone kilometres to determine the cost. For example, for a bus company, operating costs represent the cost of carrying passengers per kilometre. Operating costs are used in air railways, road transport companies (commodities and passengers) hotels, movie theatres, power plants, etc.

Method # 7 Operating cost:

This is a more detailed application of process costing. It includes costing by all operations. This method is used when there is a repetitive mass production with many operations. The main purpose of this method is to see the cost of each operation.

For example, manufacturing a bicycle handlebar involves many operations such as cutting a steel plate into appropriate strips, forming, machining, and finally polishing. The cost of these operations can be viewed individually. Operating costs provide a detailed analysis of costs to achieve accuracy and apply to industries such as spare parts, toy manufacturing, and engineering.

Method # 8 Multiple Costing:

Also known as compound costing. This refers to a combination of two or more of the above costing methods. It is used in the industry where multiple parts are manufactured separately and assembled into a single product.

Different methods of costing – single costing, job costing, contract costing, batch costing, process costing, operating costing, operating costing, and a few others

The term "costing method" can be used to refer to the various processes or procedures used to determine and display costs. There are different costing methods in different industries, depending on the nature of the job. For example, the chemical industry follows a continuous production process in which raw materials are processed at various stages. There are other industries that undertake different types of work. For example, motor workshops accept a variety of jobs.

In industries such as transportation, banking and insurance, the entire activity is centred on a particular service operation. Similarly, many other industries may produce only one product. The nature of the manufacturing process and the way it works varies from industry to industry, making it essential to use different costing methods.

Cost Center

Definition

The London Association of Cost Management Accountants has described the Cost Center as "a business-related or business-related place, person, or equipment item (or of these) whose costs have been identified and may be used for a purpose. Group) ”is defined. Cost management "

Or

A cost center can be defined as a place, person, or device (or group of these) that can review costs and use them for cost control purposes. A cost center is any place, person, machine, section, part, activity or function within an organization or business that collects or accumulates costs and assigns costs.

Therefore, a cost center is a natural division of business to measure the cost of a particular operation and apply this cost to a product. Cost centers within an organization are formed with cost accumulation, comparability, and cost control convenience in mind. If costs are accumulated for each person, department, or machine, such person, department, or machine is treated as a cost center.

In the business, the cost center he may be divided into two parts.

A manufacturing cost center is a cost center engaged in normal production, that is, converting raw materials into final products. Service cost centers are centers that are not engaged in normal production but help carry out the activities of the production cost center, such as the store department, human resources department, and maintenance department.

Cost centers can also be divided into operational cost centers and process cost centers. Personal cost center and non-personal cost center. An operational cost center is a cost center that consists of machines and / or people who perform similar operations, and a process cost center is a process or sequence of operations.

A personal cost center is a cost center consisting of individuals or groups such as department managers, salesmen, supervisors, and factory managers. These groups, such as machines, departments, vehicles, etc.

Factors for choosing the right and effective cost center

Choosing the right cost center depends on the following factors:

Cost Center Classification

The cost center, next he can easily categorize under three big heads.

1. Productive, unproductive, center of mixed costs.

The factory may choose a productive cost center, the management department may choose a non-productive cost center, and the tool department may use a mixed cost center.

2. Personal and Non-Personal Cost Centers.

When a plant or machine is considered a unit, it is a non-personal cost center, and when an individual or group of individuals is a unit, a personal cost center is implied. "A personal cost center consists of equipment locations, but a personal cost center consists of individuals or groups of individuals," asserts his I.C.M.A. In London.

3. Operations and Process Cost Center.

According to I.C.M.A., London is "a work cost center is a center of machines and / or people who perform the same work" and "a process cost center is a cost center of a series of tasks.

Cost Unit

After costs are identified, accumulated, classified, and recorded, they need to be associated with a convenient measure of the quantity of products or services. This measure of the quantity of a product or service is known as a "cost unit".

A cost unit is defined as "a unit of quantity of goods, services, or time (or a combination of these) that can see or represent costs." That is, a cost unit is a standard or unit of measure for the services that are manufactured or provided. Cost units are expressed in terms of number, length, area, weight, volume, time, and value.

Cost Unit Characteristics

The unit of cost must have the following characteristics:

Cost Unit Type

The cost unit can be divided into two parts.

The measurement terms used in cost units are:

The cost unit is always carefully selected according to the nature of the business operation. The cost unit of steel is naturally confirmed in terms of per ton. The cost of transporting passengers by the carrier shall, of course, be confirmed in units of kilometers.

Differences between Cost Centers and Cost Units:

The main differences between cost centers and cost units are:

(i) Costs are accumulated by the cost center, which are measured and expressed in terms of cost units.

(ii) The cost center can be used as a criterion for classifying costs. However, cost units are not the basis for cost classification.

(iii) Different cost centers may be involved in the production of a product, but the product has only one cost unit in which that cost is represented.

(iv) The formation of cost centers depends on the nature and technology of the production process, the size of the organization, and the nature of the organizational structure. The determination of cost units depends on the nature of the final product or product and general trade practices.

(v) A cost center is created to assist in budgeting and managing management functions. But that's not the case with cost units.

The differences between Cost Centre and Cost Unit are as follows:

Profit Center

The Profit Center is where both costs and revenues are identified.

As mentioned above, the profit center looks like this:

The difference here is that in addition to being responsible for costs, the person responsible for the profit center is also responsible for revenue.

Revenue can be sales to an external organization or internal sales to other parts of the organization. For example, if you want to allow IT users to charge for services provided by your IT department, you can change your IT department from a cost center to a profit center.

Being responsible for a profit center is usually more interesting and demanding than being responsible for a cost center. Many people can get great satisfaction by not exceeding their profit budget, rather than being very satisfied with keeping costs not exceeding their budget (the responsibility of the cost center manager). (Responsibility of the profit center manager).

What is Profit Center?

A profit center is a department or branch of a company that is considered an independent entity. Profit centers are responsible for producing their own results, and managers typically have decision-making authority related to products, pricing, and operating costs. Profit Center managers are involved in all profit and cost related decisions except investment. Investment decisions such as the acquisition and sale of capital assets are made by the top management of the head office. Profit centers make it easier for top management to compare results and identify how much each profit center contributes to corporate profits.

For example. JKT Company is a multinational company that manufactures high-end cosmetics. JKT operates in 20 countries around the world. Cosmetics are produced in manufacturing plants in all 20 countries. Each business in each country operates as a profit center, with department managers responsible for all revenue and expense related decisions.

The concept of a profit center allows company management to determine the best way to allocate resources to maximize profitability.

Investment center

Investment centers are where costs, revenues, and capital expenditures are identified.

Costs, revenues, and capital expenditures all need to be identified individually, so an investment center typically looks like this:

The head of the investment center is responsible for cost income and capital investment. In fact, that person is responsible for all financial aspects of the investment center.

Performance measures suitable for cost centers

It is important to monitor costs, profits and investment center performance to determine how both centers are functioning economically and how managers are functioning as managers. It is important not to judge a manager by performance factors that the manager is not responsible for.

Cost center performance measurements include:

Cost compared to budget

Cost / unit

Efficiency, availability, production ratio

Cost compared to budget:

This simple comparison is very helpful because cost centers usually have a budget to work on. However, nothing is said about what the cost center has achieved. At a cost 10% less than your budget, you can produce only 50% of your expected output.

What is an Investment Center?

An investment center is a profit center that is responsible for making investment decisions in addition to revenue and cost related decisions. An investment center is a business unit that can utilize its capital to directly contribute to the profitability of a company. Companies need to make different decisions about investing in capital assets that enable long-term viability. This includes decisions on purchasing, disposing of, and upgrading capital assets. Continuing from the same example,

For example. In addition to making revenue and cost decisions, JKT department managers have the authority to decide which new capital assets to buy, which assets to upgrade and which assets to dispose of.

The main valuation criterion for an investment center is to evaluate the amount of revenue it produces as a percentage of its investment in capital assets. Companies can use one or a combination of the following financial metrics to assess the performance of their investment center:

What is the difference between Profit Center and Investment Center?

Summary – Profit Centers and Investment Centers

The main difference between a profit center and an investment center is that decisions regarding the purchase and disposal of capital assets are mainly made by the top management (profit center) of the head office or by the department manager (investment center) of each entity. It depends on whether or not. Investment center department managers may be more motivated than profit center managers because of their decision-making authority. Whether or not a business unit operates as a profit center or investment center often depends on the attitude of top management, the nature of the business, and industry practices.

Key takeaways:

3.   Unit costing is understood as "output" or "single output" costing.

4.   Cost details for the varied elements of cost are collected from financial records.

5.   Units of measure are a crucial factor for cost confirmation on the cost method.

6.   The main purpose of unit costing is to ascertain the value per unit.

7.   The costing method refers to the cost confirmation and costing system.

8.   All other methods are a combination, extension, or improvement of these basic methods.

9.   A cost center may be a function within a corporation that doesn't directly contribute to profits, but is expensive to work, like accounting, human resources, and IT departments.

10.   The main use of the value center is to trace actual costs for comparison with budget.

11.   Cost centers indirectly contribute to a company's profits through operational excellence, customer service, and increased product value.

12.   The cost center manager is merely liable for keeping costs in line with the budget and not for revenue or investment decisions.

13.   After costs are identified, accumulated, classified, and recorded, they have to be related to a convenient measure of the number of products or services. This measure of the number of a product or service is understood as a "cost unit.

14.   Cost of goods sold (COGS) includes all costs and expenses directly related to the production of goods.

15.   COGS excludes overhead costs such as overhead costs and sales and marketing.

16.   Calculate gross profit and gross profit by subtracting COGS from sales (sales). The higher the COGS, the lower the margin.

17.   The value of COGS depends on the accounting standard used in the calculation.

18.   Both cost of goods sold and cost of goods sold (COGS) measure the amount of money a company spends producing goods and services.

19.   These terms are interchangeable and include labor costs, raw material costs, and overhead costs associated with the operation of the production facility.

20.   Service providers, such as lawyers, use cost of goods sold because service-only businesses cannot list tangible things as operating expenses. Auto parts manufacturers use cost of goods sold.

21.   Both terms are important readings about profitability. High costs but constant revenue can mean poor control of costs, high costs and high profits, or high costs and high profits, management May mean that is appropriate.

22.   An investment center is a business unit that a company uses on its own capital to generate profitable returns for the company.

23.   The lending sector of car makers and department stores is a common example of an investment center.

24.   Investment centers are becoming more and more important to companies as monetization drives them to profit from investment and lending activities in addition to core production.

25.   A profit center is a branch or division of a company that adds directly to the company's ultimate profitability.

26.   Profit Centers are treated as independent businesses and revenues are accounted for independently.

27.   The opposite of profit centers is cost centers, corporate departments, or departments that do not generate revenue.

5.2 Cost Sheet, Total Costs and Unit Costs, Different Costs for different purpose

Cost Sheet

A cost sheet is a statement created to show the detailed cost of total output during a period. It provides information on the cost per unit at various stages of total production cost. Creating a cost statement is one of the important and key functions of cost accounting. The cost sheet is not an account. There is a prescribed form for creating a cost statement. A cost sheet is a statement that shows the cost over a period of time in a way that makes the various factors of cost as clear as possible. Cost sheets help you understand total production costs per unit, develop production plans, determine selling prices, and minimize production costs. Standard cost data may be provided to facilitate comparison with the increased actual cost. To prepare a cost sheet, you need to understand how to handle the following items:

Costs excluded from the cost sheet:

There are certain costs / costs that do not form part of the cost sheet. Part of these costs is the distribution of profits. Examples of these costs are:

1. Dividends to shareholders,

2. Income tax,

3. Loan interest,

4. Payment of donations,

5. Capital investment,

6. Capital loss due to asset sale.

7. Outsourcing to a partner / Representative director.

8. Discount on issuance of stocks and corporate bonds.

9. Underwriting fee.

10. Book of goodwill and non-performing loans.

11. Allowance for taxation, bad debt, or any kind of fund or reserve.

Specimen of Cost Sheet

Cost Sheet for the period

(Production ------ Units)

Total Cost

Definition: Total cost is an economic indicator of all costs paid for the production of a product, the purchase of an investment, or the purchase of equipment, including not only the initial cash outlay but also the opportunity cost of choice. I will.

What does the Total Cost mean?

What is the definition of total cost? The meaning of this term varies slightly depending on the content. For example, if you use it to define production costs, you measure the sum of fixed, variable, and overhead costs associated with the production of goods. This is a basic concept for business owners and managers. This allows you to track the total cost of your business. This allows individuals to make pricing and revenue decisions based on whether total costs are increasing or decreasing. In addition, interested individuals can delve into the total cost figures into fixed and variable costs and adjust operations accordingly to reduce total production costs. Management also uses this idea when considering capital investment.

However, investors use this concept differently by considering the funds needed to buy an investment and the opportunity costs associated with choosing one investment from another.

Let's look at an example.

Jane is the Chief Operating Officer of the world's largest automobile manufacturer. The company recently confirmed that total costs increased by 15% year-on-year, and Jane is in charge of analysis to correct this trend.

She sees the overall cost of the company as she rose from $ 100,000 to $ 132,250 in her two years. This proves an extreme increase in cost. After looking at the numbers, she was surprised to find that fixed costs weren't really increasing, and she was down from $ 70,000 to $ 65,000. In addition, she noticed that the company's variable costs, especially salaries and benefits, swelled from her $ 30,000 to $ 67,250.

What is the Total Cost Formula?

The total cost formula is used to determine the total by combining variable and fixed costs to provide the goods. The formula is:

Total cost = (Average Fixed Cost X Average Variable Cost) x Production Volume

To use this formula, you need to know the fixed and variable cost numbers.

Fixed costs are fixed project costs regardless of the number of units produced. This includes monthly costs such as rent, insurance, payroll taxes, office supplies, wages for staff who are not directly involved in the provision of services or the production or manufacture of products sold.

Variable costs are costs that increase or decrease depending on the number of products produced and the number of customers who need services. It can also change due to other factors, such as rising material prices and rising heating costs during the winter. Variable costs include materials used for manufacturing, costs for packing and shipping products, labor costs for staff directly engaged in the purchase, rental and maintenance of equipment used for production, service or delivery of goods, and production. Contains the utilities used for. Work area.

Total Cost Factor

Costs are categorized under various headings that represent successive stages of cost flow.

Cost

Prime cost consists of costs that can be traced back directly to it. The main costs consist of direct material costs, direct labor costs, and direct costs. Direct costs include special costs that can be identified by the product or work and are charged directly to the product as part of the main costs. For example, the cost of hiring a special plant or machine, the cost of a special mold, the cost of a design or pattern, the cost of an architect, royalties, license fees, etc.

Construction Cost:

The work cost of a product is the basic cost plus a portion of the work or factory costs incurred on production. Work or factory costs include overhead and overhead costs for indirect materials. Indirect materials are the materials needed to complete a product, but the consumption of these materials is very low or complex and it is not appropriate to treat them as direct materials. These are consumables that cannot be conveniently and economically charged for a particular output unit. For example, lubricants, lint, stationery for work, etc.

Indirect labor is labor that does not affect the structure or composition of the finished product. This is the labor cost of production-related activities that cannot

Be easily associated with or easily tracked to a particular product by physical observation. For example, the salary of a foreman or the salary of an employee engaged in maintenance or service operations. Indirect costs cover all expenses incurred by the manufacturer at the rate of the product from the time of manufacture to the completion of delivery to the customer. Expenses that cannot be allocated but can be allocated or absorbed by a cost center / cost unit are called indirect expenses. These costs are incurred for the benefit of multiple products, jobs, or activities and must be allocated to different features or products according to appropriate criteria. For example, lighting / heating, salary of maintenance shop manager, salary of clock / ward department, etc.

Production cost:

The production cost is the work cost plus the office cost and management cost. This includes all costs associated with management functions such as planning, organizing, directing, coordinating and managing the operation of the manufacturing business. For example, office rent, salary, lighting, stationery, office building repair and maintenance and depreciation, audit costs, legal costs, etc.

Cost Per Unit

The cost per unit is usually calculated when a company mass-produces the same product. Then compare this information with your budget or standard cost information to see if your organization produces goods in a cost-effective way.

The cost per unit is derived from the variable and fixed costs incurred in the production process divided by the number of units produced. Variable costs such as direct materials fluctuate approximately in proportion to the number of units produced, but this cost should decrease somewhat as the unit quantity increases due to the large quantity discounts, such as building rent. Fixed costs should remain the same no matter how many units are produced, but can increase as a result of the need for additional capacity (known as step costs, reaching a certain unit volume). Examples of step costs include the addition of new or production equipment, the addition of forklifts, or the addition of a second or third shift. When a step cost is incurred, the new step cost is added to the total fixed cost, increasing the cost per unit. Depending on the size of the gradual cost increase, the manager may want to leave the capacity as it is and outsource additional production instead. This is a wise choice if the need to increase capacity is unclear.

Calculation formula of cost per unit

Within these limits, the cost per unit calculation is as follows:

(Total fixed costs + Total variable costs) ÷ Total production volume

The cost per unit should declines as the number of units produced increases. This is mainly because the total fixed costs are spread across more units (affected by the step costing issue above). Therefore, the cost per unit is not constant.

Example of Unit Price

ABC Company's total variable costs for May are $ 50,000 and fixed costs are $ 30,000. This happened when producing 10,000 widgets. The cost per unit is as follows:

($ 30,000 fixed cost + $ 50,000 variable cost) ÷ 10,000 units = $ 8 cost per unit

The following month, ABC will produce his 5,000 units at a variable cost of $ 25,000 and the same fixed cost of $ 30,000. The cost per unit is as follows:

($ 30,000 fixed cost + $ 25,000 variable cost) ÷ 5,000 units = $ 11 / unit.

Key takeaways:

Solved Examples

Q.1. Bombay Manufacturing Company submits the following information on 31-3-2010.

Solution:

Bombay Manufacturing Company

Statement of cost for the year ended 31-3-2010.

Q.2.  From the following information prepare a statement showing (i) Prime cost (ii) Works cost (iii) Cost of Production (iv) Cost  of  Sales (v) Net profit of X Ltd. Which produced and sold 1000 units in June 2009.

Solution:

Cost Statement for June 2009

Q.3. NRC Ltd. Manufactured and sold 1000 Radio sets during the year 2009. The summarized accounts are given below:

Mfg. / Trading & Profit & Loss A/c

It is estimated that output and sales will be 1200 Radio Sets in the year 2010. Prices of Materials will rise by 20% on the previous year’s level. Wages per unit will rise by 5% Manufacturing expenses will rise in proportion to the combined cost of materials and wages. Selling and distribution expenses per unit will remain unchanged. Other expenses will remain unaffected by the rise in output. Prepare cost sheet showing the price at which the Radio Sets should be sold so as to earn a profit of 20% on the selling price.

Solution:

Cost Sheet

Q.4. A factory can produce 60,000 units per year at its 100% capacity. The estimated cost of production are as under:-

Direct Material- Rs. 3 per unit

Direct Labour- Rs. 2 per unit

Indirect Expenses:

Fixed- Rs. 1,50,000 per year

Variable- Rs. 5 per unit

Semi-variable- Rs.50,000 per year up to 50% capacity and an extra  expenses of Rs.10,000 for every 25% Increase in capacity or part thereof.

The factory produces only against order and not for stock. If the Production programme of the factory is as indicated below and the management desires to ensure a Profit of Rs. 1,00,000 for the year, work out the average selling price at which per unit should be quoted:

First 3 months of the year 50% of capacity remaining  9 months 80% of the capacity. Ignore selling, distribution and administration overheads.

Solution:

Q.5. In a factory two types of T.V sets are manufactured i.e. black & white + color. From the following particulars prepare a statement showing cost and profit per T.V Set sold. There is no opening or closing stock.

Works overhead is charged at 60% of Prime cost and Office overhead is taken at 20% at Works cost. The selling price of B & W is Rs.60,00 and that of color is 10000. During the period 200 B & W and 400 color T.V. Sets were sold.  The selling expenses are Rs. 50 per T.V.Set.

Solution:

Statement of Cost and Profit