COST. Labour. Direct

Size: px
Start display at page:

Download "COST. Labour. Direct"


1 COMMERCIAL STUDIES STD: X Chapter 10. Fundamental Concepts of Cost Concept of Cost The term cost generally means the amount of expenditure (actual or notional) incurred on, or attributable to, a given thing. However, the term cost cannot be exactly defined. Its interpretation depends on a) The nature of the business of industry. b) The context in which it is used. To a producer Cost may mean cost of producing an article. To a consumer cost means the price which he pays for the article. Elements of Cost COST Materials Labour Expenses Overheads Factory Overheads Office and administrative Selling and distribution overheads ( 1 )

2 Elements of Cost 1. Material - The substance from which a product is made is material. material is traceable to one particular process, job or product identified with each unit of product. 2. Labour - The human efforts required for converting raw materials into finished goods. Example: engineers, technicians, labourers etc. 3. Expenses expenses directly related to a product. Example 4. Overheads - All indirect costs are overheads. Overheads includes indirect material, indirect labour, indirect expenses. Material - Material used in manufacturing processes which does not become an integral part of the product. Examples: tools, cleaning supplies, lubricating oil, carton, wrapping, cardboard, boxes, etc. Labour not directly involved in production process. They Provide service to labour. Examples watchman, electrician, sweepers. expenses common expenses not related to a particular job and can be apportioned to various jobs. Overheads are of three types: I) Factory Overheads a) materials used in factory. Eg: Lubricants, oil, consumable stores etc. b) labour such as gatekeeper s salary, timekeeper s salary, works manager salary. c) expenses such as factory rent factory insurance, factory lightening etc. II] Office and Administrative overheads a) material used in the office such as printing and stationery, brooms and dusters etc. b) labour such as salaries payable to office manager, office accountant, clerks etc. c) expenses- rent insurance, office lighting etc. III] Selling and Distribution Overheads a) Materials Packing materials, printing and stationery, materials used for selling and distribution. b) labour Salaries of sales manager and salesman etc. c) expenses- rent and insurance of sales office, advertising expenses etc. ( 2 )

3 Classification of Cost It may be classified into many categories 1. and costs 2. Fixed and Variable Costs 3. Controllable and Uncontrollable costs 4. Outlay and Opportunity cost 5. Product cost and Replacement costs Q. Explain Cost. Ans: cost means the expenses incurred on the items which cannot be directly charged to anyone unit of production. Salary paid to the store-keeper or foreman is an indirect cost. Q. Distinguish between and costs. Basis of Distinction costs Costs 1. Meaning Costs which are directly attributable to a particular cost unit or cost centre. 2. Elements labour, direct material and direct expenses. 3. Examples Sugarcane used to manufacture sugar. Costs which are not directly attributable to a particular cost unit or cost centre. material, indirect labour, indirect expenses. Salary of sugar mill manager. Q. Distinguish between Fixed cost and Variable costs. Basis of Distinction Fixed Cost Variable Cost 1.Behaviour or Nature Fixed costs remain constant within a given range of activity and a given time period inspite of the changes in the volume of output. Variable costs vary in proportion to changes in the volume of the output. 2.Basis Fixed costs are time based. Variable costs are activity based. 3.Total and per unit cost 4.Control 5.Example Fixed costs are fixed in total but vary per unit. These decrease with increase in the volume of output. Fixed costs are not controllable in the short term. Rent, insurance, salary, property tax etc. Variable costs are fixed per unit but vary in total. These increase with the increase in the volume of output. Variable costs are controllable in the short run. Cost of Raw material, direct labour, power consumption. Q. Explain controllable and uncontrollable costs. Ans: Controllable Costs are those costs which can be controlled or regulated by an organization and its management. Eg: Inventory costs can be controlled. ( 3 )

4 Uncontrollable costs are those costs which cannot be controlled or beyond the control of an organization. Eg: Depreciation on machinery etc. Q. Distinguish between Shut down cost and Sunk cost. Shut Down Cost 1. Shut down costs are the expenses that have to be incurred during the shutdown or stoppage of business operations. 2. Rent and insurance of the factory during closure is a shutdown cost. Sunk Cost 1. Sunk Costs are the expenses which have been committed and cannot be changed. 2. Investment already made in factory is a sunk cost. Q. Distinguish between Variable Cost and semi-variable cost. Variable cost 1. Variable cost is any expense that can directly be charged to any one unit of output. 2. Cost of raw materials, direct labour are variable cost. Semi- Variable Cost 1.Semi-variable cost does not vary in direct proportion to volume 2. Telephone bill is a semi-variable cost consisting of fixed (rent of telephone) and variable (call charges) elements. Q. Explain Outlay costs and Opportunity costs. Ans: Outlay costs or actual costs which a firm incurs while producing or acquiring a product or service. It is also called acquisition costs or out of pocket costs. Opportunity or alternative costs are the benefit from second best alternative use of the firm s resources which are foregone in order to avail of the return from the best use of resources. Eg: X Ltd. Can either buy Machine A or Machine B with its limited resources. It can earn Rs annually from Machine A or Rs from Machine B. It acquires Machine A which is outlay cost and let goes of Machine B which is opportunity cost. Q. What are Historical costs and Replacement costs? Ans: Historical or original costs means the price at which an asset was originally acquired. Replacement cost means the cost which the firm would have to incur to replace or acquire the same asset now. Difference between original cost and replacement arises due to increase in price level or inflation. ( 4 )

5 Q. Distinguish between labour cost and Labour cost. Labour Cost 1. Costs spent on labour who take an active and direct part in the production of a particular commodity is known as direct labour cost. 2. labour costs are specifically and conveniently traceable to specific products. Labour Cost 1. Costs spent on labour who is employed for the purpose of carrying out tasks incidental to production of goods and services are known as indirect labour costs. 2. labour costs cannot be easily traceable to the specific products. 3. Examples: Wages paid to the carpenters in a furniture workshop are direct labour costs. 3. Examples: Salary paid to watchman, salesmen s salaries, director s fees etc. ******************************************************************************** ( 5 )