Variable cost : These are the costs which tend to vary directly with volume of output. These are also known as direct costs. These costs vary in total but remain fixed per unit.
Examples : a) Direct materials;
b) Direct labour;
c) Direct Expenses;
d) Variable overheads such as consumable stores, fuel etc.
Fixed Cost : It refers to the cost which tends to remain unaffected by variations in volume of output. This cost remains fixed during a given period and within a given range of activity. So, fixed cost is known as period cost. This cost remains fixed in total, but varies per unit.
Examples : a) Rent and rates of factory building;
b) Salary of works manager, General Manager or Sales manager;
c) Depriciation of buildings,
d) Insurance;
e) Interest on capital (if included in costs)
Semi-variable cost - Those are the costs which are partly fixed and partly variable. Both fixed and variable elements are present in semi-variable cost. This is also known as semi-fixed cost.
Examples :
a) Normal maintenance of building and plant;
b) Salary of supervisors;
c) Depreciation of plant and machinery;
d) Service department wages etc.
Saturday, October 25, 2008
PRODUCTION COST, FACTORY COST & ADMN. COST & SELLING & DISTRIBUTION COSTS
Production Cost : These are the costs incurred for sequence of operations in production. Production cost includes the following :
a) Direct materials
b) Direct labour
c) Direct Expenses
d) Factory overheads which include factory indirect materials, indirect labour and indirect expenses.
B) Administration cost.: These are the costs incurred for formulating policies, directing the organisation and controlling the operations of the undertaking. These costs are usually in the nature of indirect expenses and are not directly related to production or selling or distribution or research or development function of the organisation.
Administration cost generally includes the following :
a) Salaries of office staff, accountants, directors, etc,;
b) Maintenance of assets of office;
c) Rent, rates and depreciation of office building;
d) Postage, stationery, telephone etc.
e) Office supplies and expenses;
f) General Administration expenses.
C) Selling and Distribution Cost :
Selling cost is the cost of seeking to create and stimulate demand and of securing orders.
Distribution cost is the cost incurred in connection with the distribution or delivery of the goods to customers after manufacturing is completed.
Selling and Distribution Costs are in the nature of indirect cost and include the following :
a) Salaries and commission of salesman and sales manager;
b) Expenses on advertisement;
c) Salaries of warehouse staff and transport staff;
d) Rent & Rates of show room & Sales office;
e) Cost of insurance, freight out, export duty, packing, shipping etc.
f) Maintenance of transport vans;
a) Direct materials
b) Direct labour
c) Direct Expenses
d) Factory overheads which include factory indirect materials, indirect labour and indirect expenses.
B) Administration cost.: These are the costs incurred for formulating policies, directing the organisation and controlling the operations of the undertaking. These costs are usually in the nature of indirect expenses and are not directly related to production or selling or distribution or research or development function of the organisation.
Administration cost generally includes the following :
a) Salaries of office staff, accountants, directors, etc,;
b) Maintenance of assets of office;
c) Rent, rates and depreciation of office building;
d) Postage, stationery, telephone etc.
e) Office supplies and expenses;
f) General Administration expenses.
C) Selling and Distribution Cost :
Selling cost is the cost of seeking to create and stimulate demand and of securing orders.
Distribution cost is the cost incurred in connection with the distribution or delivery of the goods to customers after manufacturing is completed.
Selling and Distribution Costs are in the nature of indirect cost and include the following :
a) Salaries and commission of salesman and sales manager;
b) Expenses on advertisement;
c) Salaries of warehouse staff and transport staff;
d) Rent & Rates of show room & Sales office;
e) Cost of insurance, freight out, export duty, packing, shipping etc.
f) Maintenance of transport vans;
WHAT IS COST & WHAT ARE ITS COMPONENTS
In general, cost means the amount of expenditure incurred on a product or service attributable to it. To take an example, if furniture manufacturer makes a chair by spending Rs.1200/- for timber, Rs.100/- for wages to the carpenter and Rs.300/- as rent and other expenses, then we can say that the chair costs him Rs.1600/-
Meaning of Cost Classification :
Cost classification is the process of grouping costs according to their common characteristics. Costs can be classified according to:
a) Elements
b) Functions
c) Behaviour
Classification of cost by elements:
Costs are classified primarily according to the elements or factors upon which expenditure is incurred. These elements are:
a) Materials cost : It is the cost of commodities supplied to an undertaking.
b) Labour cost or wages: It is the cost of remuneration of the employees of an undertaking which includes wages, salaries, commission, bonus, etc.
c) Expenses: It is the cost of services provided to an undertaking.
The above elements of cost can be further sub-divided as :
1. Direct Expenditure in
a) Materials, b) Labour, c) Experses
2. Indirect Expenditure in
a) Materials, b) Labour, c)Expenses.
Direct Expenditure means the expenditure which can be identified with and allocated to cost centres or cost units. On the other hand, the term “Indirect Expenditure” means that expenditure which cannot be allocated to or absorbed by cost centres or cost units. Thus the different elements of cost are:
a) Direct materials, b) Indirect materials, c) Direct labour, d) Indirect labour, e) Direct expenses and f) Indirect Expenses.
Each of the above elements of cost is discussed in brief as below :
a) Direct Materials :These are the materials which can be conveniently identified with a product or cost centre. These are the basic materials which enter into and form part of the product.
Examples : Clay in brick laying, wood in furniture making, leather in shoe manufacturing etc.
Direct materials also include the following :-
i) All materials specially purchased or requisitioned for a particular process, job or production order,
ii) All components used,
iii) All materials passing from one process or operation to the other,
iv) All primary packing materials like card board boxes, wrappings, cartoons etc.
b) Indirect Materials : These are the materials which cannot be traced as a part of the finished product. Indirect materials are also known as on cost materials or Expense materials.
Example : i) Fuel, lubricating oil etc. required for operating and maintaining plant and machinery;
ii) Small tools for general use;
iii) Materials consumed for repair and maintenance work;
iv) Sundry stores of small value used in the factory like thread in shirt making, nails in shoe-making etc.
c) Direct wages : It is the cost of wages paid to workers engaged directly in altering the construction, composition, conformation or condition of the product manufactured by a concern. It is that part of wages which is paid to workers who help in converting raw-materials into finished products. When a concern does not manufacture, but in stead renders a service, then the wages paid to those who directly carry out the service will be treated as direct wages. For example, in case of Transport services, wages paid to driver, conductor etc. will be treated as direct wages. Direct wages are also called direct labour, productive labour, process labour, operating labour, prime cost labour etc.
Sometimes, some indirect wages may be treated as direct wages. For example, a supervisor’s wages specifically incurred for a particular job only, shall be treated as direct wages.
d) Indirect wages : Wages which cannot be directly identified with a job, process or operation, are generally treated as indirect wages. It represents the cost of labour employed in the works ancillary to production.
Examples : i) Wages of Inspectors, supervisors,
ii) Wages of maintenance workers such as work shop cleaners, mechanics etc.
iii) Wages of internal transport men;
iv) Idle time wages, overtime premium, night shift and holiday work bonus;
v) Miscellaneous allowances to labour;
vi) Wages payable to store keeper, works clerical staff, watch and ward etc.
e) Direct Expenses : These are the expenses other than direct materials and direct labour, but are directly identifiable with a job, process or operation. Direct expenses are otherwise known as chargeable expenses or prime cost expenses or productive expenses.
Examples : i) Hire charge of a special concrete mixer required for civil engineering job;
ii) Cost of special pattern, drawing or lay out;
iii) Royalty payable on production;
iv) Cost of rectifying defective goods;
v) Maintenance costs of Special tools required for the execution of a job or contract.
f) Indirect Expenses : Expenses which cannot be charged to production directly and which are neither indirect materials cost nor indirect labour cost are regarded as indirect expenses.
Examples : i) Rent, rates and taxes;
ii) Insurance;
iii) Canteen expenses;
iv) Hospital and dispensary expenses;
v) Depreciation, repairs, maintenance etc. on plant and machinery;
vi) Power, lighting and heating etc.
Meaning of Cost Classification :
Cost classification is the process of grouping costs according to their common characteristics. Costs can be classified according to:
a) Elements
b) Functions
c) Behaviour
Classification of cost by elements:
Costs are classified primarily according to the elements or factors upon which expenditure is incurred. These elements are:
a) Materials cost : It is the cost of commodities supplied to an undertaking.
b) Labour cost or wages: It is the cost of remuneration of the employees of an undertaking which includes wages, salaries, commission, bonus, etc.
c) Expenses: It is the cost of services provided to an undertaking.
The above elements of cost can be further sub-divided as :
1. Direct Expenditure in
a) Materials, b) Labour, c) Experses
2. Indirect Expenditure in
a) Materials, b) Labour, c)Expenses.
Direct Expenditure means the expenditure which can be identified with and allocated to cost centres or cost units. On the other hand, the term “Indirect Expenditure” means that expenditure which cannot be allocated to or absorbed by cost centres or cost units. Thus the different elements of cost are:
a) Direct materials, b) Indirect materials, c) Direct labour, d) Indirect labour, e) Direct expenses and f) Indirect Expenses.
Each of the above elements of cost is discussed in brief as below :
a) Direct Materials :These are the materials which can be conveniently identified with a product or cost centre. These are the basic materials which enter into and form part of the product.
Examples : Clay in brick laying, wood in furniture making, leather in shoe manufacturing etc.
Direct materials also include the following :-
i) All materials specially purchased or requisitioned for a particular process, job or production order,
ii) All components used,
iii) All materials passing from one process or operation to the other,
iv) All primary packing materials like card board boxes, wrappings, cartoons etc.
b) Indirect Materials : These are the materials which cannot be traced as a part of the finished product. Indirect materials are also known as on cost materials or Expense materials.
Example : i) Fuel, lubricating oil etc. required for operating and maintaining plant and machinery;
ii) Small tools for general use;
iii) Materials consumed for repair and maintenance work;
iv) Sundry stores of small value used in the factory like thread in shirt making, nails in shoe-making etc.
c) Direct wages : It is the cost of wages paid to workers engaged directly in altering the construction, composition, conformation or condition of the product manufactured by a concern. It is that part of wages which is paid to workers who help in converting raw-materials into finished products. When a concern does not manufacture, but in stead renders a service, then the wages paid to those who directly carry out the service will be treated as direct wages. For example, in case of Transport services, wages paid to driver, conductor etc. will be treated as direct wages. Direct wages are also called direct labour, productive labour, process labour, operating labour, prime cost labour etc.
Sometimes, some indirect wages may be treated as direct wages. For example, a supervisor’s wages specifically incurred for a particular job only, shall be treated as direct wages.
d) Indirect wages : Wages which cannot be directly identified with a job, process or operation, are generally treated as indirect wages. It represents the cost of labour employed in the works ancillary to production.
Examples : i) Wages of Inspectors, supervisors,
ii) Wages of maintenance workers such as work shop cleaners, mechanics etc.
iii) Wages of internal transport men;
iv) Idle time wages, overtime premium, night shift and holiday work bonus;
v) Miscellaneous allowances to labour;
vi) Wages payable to store keeper, works clerical staff, watch and ward etc.
e) Direct Expenses : These are the expenses other than direct materials and direct labour, but are directly identifiable with a job, process or operation. Direct expenses are otherwise known as chargeable expenses or prime cost expenses or productive expenses.
Examples : i) Hire charge of a special concrete mixer required for civil engineering job;
ii) Cost of special pattern, drawing or lay out;
iii) Royalty payable on production;
iv) Cost of rectifying defective goods;
v) Maintenance costs of Special tools required for the execution of a job or contract.
f) Indirect Expenses : Expenses which cannot be charged to production directly and which are neither indirect materials cost nor indirect labour cost are regarded as indirect expenses.
Examples : i) Rent, rates and taxes;
ii) Insurance;
iii) Canteen expenses;
iv) Hospital and dispensary expenses;
v) Depreciation, repairs, maintenance etc. on plant and machinery;
vi) Power, lighting and heating etc.
VARIOUS TYPES OF COSTS
We have various types of costs like opportunity cost, financial cost, accounting cost, cost as per cost accounting etc. Let us look at total cost from cost accounting perspective. Total cost of a product is the combination of direct costs and indirect costs. The direct costs are termed as prime cost and indirect costs are termed as overheads. However, the total cost incurred in relation to a product can be analysed into the following components which are discussed below:
1) Prime cost : It is the sum of all direct costs, i.e. direct materials, direct labour and direct expenses. It is also known as flat cost, basic cost or first cost. The following models are useful in the calculation of prime cost.
a) Prime cost : Direct materials + Direct Labour + Direct Expenses.
b) Direct materials or Materials consumed = opening stock of raw-materials + Net purchase of raw-materials - closing stock of raw-materials.
2) Factory cost : Factory cost is otherwise known as works cost or mill cost or production cost or manufacturing cost. Factory cost is calculated by adding factory overheads to prime cost. Factory overheads or factory indirect expenses usually cover the following :
a) Cost of indirect materials used in the factory such as lubricants, oil, cotton, spare parts etc.
b) Indirect labour such as works manager’s salary, foreman’s wages, supervision charges etc.
c) Indirect factory expenses such as factory rent, factory insurance, factory lighting etc.
The following models are useful in the calculation of factory cost.
a) When there is no opening or closing balances of W.I.P.
b) When there is opening and closing balances at WIP,
Factory Cost = Prime Cost + Factory Over heads
Factory cost = Prime cost + Factory Overheads + Opening balance of W.I.P - Closing balance of W.I.P.
3) Cost of production : Cost of production is otherwise known as Gross Cost Or Office cost. This cost is calculated by adding Office and Administration Overheads to Factory Cost. Administration overheads or Office Expenses include the following expenses :
a) Indirect materials used for office such as printing and stationery materials;
b) Indirect labour such as salary payable to clerks and office staff;
c) Indirect Expenses such as rent, insurance, lighting of office premises etc.
The following model is useful in the calculation of cost of production
Cost of production = Factory cost + Administration overheads
4) Cost of goods sold : Cost of goods sold means the cost of production of the quantity of goods sold. Its calculation becomes necessary only when there is opening stock and closing stock of finished goods. These stocks of finished goods must have to be adjusted with cost of production to arrive at cost of goods sold.
The following model is useful for this purpose.
Cost of goods sold = Cost of production + Opening stock of finished goods - Closing stock of finished goods
5) Total cost : This cost is otherwise known as Final cost or Selling cost or Cost of Sales. Total cost can be calculated by adding selling and distribution overheads to cost of production or cost of goods sold. Selling and Distribution overheads include the following expenses :
a) Indirect materials used in selling and distribution such as packing materials;
b) Indirect labour such as salaries of salesmen;
c) Indirect Expenses such as advertisement, etc.
The following models are useful in the calculation of Total Cost :-
a) When there is no opening stock and closing stock of finished goods :-
Total cost = Cost of production + Selling and Distribution overheads
b) When there are opening stock and closing stock of finished goods: :
Total cost = Cost of goods sold + Selling and Distribution overheads
Items not included in cost :
There are some expenses which are considered under financial accounting for calculation of profit or loss, but these expenses are excluded from the purview of cost as these are not related to production either directly or indirectly.
The expenses of following natures are excluded from cost accounting :
a) Capital expenditure
b) Capital losses
c) Distribution of profits
d) Pure financial items
The examples of expenses excluded from cost are given as below:
i) Expenses relating to issue of shares such as Brokerage, Underwriting commission, Discount on issue of shares etc.
ii) Income tax
iii) Expenditure to acquire fixed assets like land and building, plant & machinery etc.
iv) Loss on sale of fixed assets
v) Abnormal losses relating to materials or labour
vi) Transfer to reserves and funds;
vii) Interest on capital;
viii) Dividends;
ix) Writing off goodwill, preliminary expenses etc.
x) Interest on debentures
xi) Bonus payable to directors or managers on profit;
There are some items of incomes which are considered under financial accounting but excluded from cost accounting. These are :
i) Interest received on investment
ii) Discount received
iii) Transfer fees
iv) Rent received
v) Dividend received
1) Prime cost : It is the sum of all direct costs, i.e. direct materials, direct labour and direct expenses. It is also known as flat cost, basic cost or first cost. The following models are useful in the calculation of prime cost.
a) Prime cost : Direct materials + Direct Labour + Direct Expenses.
b) Direct materials or Materials consumed = opening stock of raw-materials + Net purchase of raw-materials - closing stock of raw-materials.
2) Factory cost : Factory cost is otherwise known as works cost or mill cost or production cost or manufacturing cost. Factory cost is calculated by adding factory overheads to prime cost. Factory overheads or factory indirect expenses usually cover the following :
a) Cost of indirect materials used in the factory such as lubricants, oil, cotton, spare parts etc.
b) Indirect labour such as works manager’s salary, foreman’s wages, supervision charges etc.
c) Indirect factory expenses such as factory rent, factory insurance, factory lighting etc.
The following models are useful in the calculation of factory cost.
a) When there is no opening or closing balances of W.I.P.
b) When there is opening and closing balances at WIP,
Factory Cost = Prime Cost + Factory Over heads
Factory cost = Prime cost + Factory Overheads + Opening balance of W.I.P - Closing balance of W.I.P.
3) Cost of production : Cost of production is otherwise known as Gross Cost Or Office cost. This cost is calculated by adding Office and Administration Overheads to Factory Cost. Administration overheads or Office Expenses include the following expenses :
a) Indirect materials used for office such as printing and stationery materials;
b) Indirect labour such as salary payable to clerks and office staff;
c) Indirect Expenses such as rent, insurance, lighting of office premises etc.
The following model is useful in the calculation of cost of production
Cost of production = Factory cost + Administration overheads
4) Cost of goods sold : Cost of goods sold means the cost of production of the quantity of goods sold. Its calculation becomes necessary only when there is opening stock and closing stock of finished goods. These stocks of finished goods must have to be adjusted with cost of production to arrive at cost of goods sold.
The following model is useful for this purpose.
Cost of goods sold = Cost of production + Opening stock of finished goods - Closing stock of finished goods
5) Total cost : This cost is otherwise known as Final cost or Selling cost or Cost of Sales. Total cost can be calculated by adding selling and distribution overheads to cost of production or cost of goods sold. Selling and Distribution overheads include the following expenses :
a) Indirect materials used in selling and distribution such as packing materials;
b) Indirect labour such as salaries of salesmen;
c) Indirect Expenses such as advertisement, etc.
The following models are useful in the calculation of Total Cost :-
a) When there is no opening stock and closing stock of finished goods :-
Total cost = Cost of production + Selling and Distribution overheads
b) When there are opening stock and closing stock of finished goods: :
Total cost = Cost of goods sold + Selling and Distribution overheads
Items not included in cost :
There are some expenses which are considered under financial accounting for calculation of profit or loss, but these expenses are excluded from the purview of cost as these are not related to production either directly or indirectly.
The expenses of following natures are excluded from cost accounting :
a) Capital expenditure
b) Capital losses
c) Distribution of profits
d) Pure financial items
The examples of expenses excluded from cost are given as below:
i) Expenses relating to issue of shares such as Brokerage, Underwriting commission, Discount on issue of shares etc.
ii) Income tax
iii) Expenditure to acquire fixed assets like land and building, plant & machinery etc.
iv) Loss on sale of fixed assets
v) Abnormal losses relating to materials or labour
vi) Transfer to reserves and funds;
vii) Interest on capital;
viii) Dividends;
ix) Writing off goodwill, preliminary expenses etc.
x) Interest on debentures
xi) Bonus payable to directors or managers on profit;
There are some items of incomes which are considered under financial accounting but excluded from cost accounting. These are :
i) Interest received on investment
ii) Discount received
iii) Transfer fees
iv) Rent received
v) Dividend received
HOW TO PREPARE COST SHEET
A cost sheet is a memorandum statement of cost. It shows the total cost as well as the cost per unit for a given period. A cost sheet is prepared usually for a period which may be a week or a month or a quarter or a year. Logical arrangement of costs is made in the cost sheet along with proper classification and sub-division of costs. As such, cost sheet is accepted as a statement to show various components of total cost in a classified manner i.e. Prime cost, Works Cost, Cost of production, Cost of goods sold and Total cost. Cost sheet is otherwise known as statement of cost.
Nature of cost sheet :
i) It is a statement designed to show output and costs incurred for the output during a period.
ii) A cost sheet does not follow any fixed form to prepare it.
iii) It is a memorandum statement & does not follow the rules of double entry.
iv) It incorporates data from financial accounting for ascertainment of total cost.
v) It also uses pre-determined rates for preparation of cost sheet.
Purposes of cost sheet :
The purposes of preparing a cost sheet can be studied from its advantages which are given as below :
i) It reveals total cost and unit cost of output.
ii) It shows the logical division of the total costs into different elements of cost.
iii) It facilitates control over cost of current year’s cost data in relation to that of the previous year element wise.
iv) It helps in the estimation of costs for preparation of tenders and quotations.
v) It helps in fixation of selling price.
vi) It helps the manufacturer in formulating a definite useful production policy.
vii) It helps to minimise the cost of production in a competitive market.
Proforma of a Cost Sheet :
COST SHEET OR STATEMENT OF COST OF ___________
for the month ending _______________ 2008
Output : ___________ units
Total Cost Cost per unit
Rs. Rs.
Direct materials ________ _______
Direct labour ________ _______
Direct Expenses _______ ______
PRIME COST ________ _______
Add: Factory /works
overheads ________ _______
FACTORY COST /
WORKS COST ________ _______
Add : Administration
overheads _______ _______
COST OF PRODUCTION _______ _______
Add: Selling and
Distribution overheads ______ ______
TOTAL COST (OR
COST OF SALES) _______ _______
Add: Profit (or minus loss) ______ ________
SALES __________ ________
Nature of cost sheet :
i) It is a statement designed to show output and costs incurred for the output during a period.
ii) A cost sheet does not follow any fixed form to prepare it.
iii) It is a memorandum statement & does not follow the rules of double entry.
iv) It incorporates data from financial accounting for ascertainment of total cost.
v) It also uses pre-determined rates for preparation of cost sheet.
Purposes of cost sheet :
The purposes of preparing a cost sheet can be studied from its advantages which are given as below :
i) It reveals total cost and unit cost of output.
ii) It shows the logical division of the total costs into different elements of cost.
iii) It facilitates control over cost of current year’s cost data in relation to that of the previous year element wise.
iv) It helps in the estimation of costs for preparation of tenders and quotations.
v) It helps in fixation of selling price.
vi) It helps the manufacturer in formulating a definite useful production policy.
vii) It helps to minimise the cost of production in a competitive market.
Proforma of a Cost Sheet :
COST SHEET OR STATEMENT OF COST OF ___________
for the month ending _______________ 2008
Output : ___________ units
Total Cost Cost per unit
Rs. Rs.
Direct materials ________ _______
Direct labour ________ _______
Direct Expenses _______ ______
PRIME COST ________ _______
Add: Factory /works
overheads ________ _______
FACTORY COST /
WORKS COST ________ _______
Add : Administration
overheads _______ _______
COST OF PRODUCTION _______ _______
Add: Selling and
Distribution overheads ______ ______
TOTAL COST (OR
COST OF SALES) _______ _______
Add: Profit (or minus loss) ______ ________
SALES __________ ________
ACCOUNTING AND RECORDING OF OVERTIME PAYMENTS & ANALYSIS
Overtime occurs when a worker works beyond his normal working hours. Generally, over time is paid at a higher rate than the normal time rate. The additional amount paid on overtime work is known as “overtime premium.”
Causes of overtime work :
Generally overtime work is required for the following reasons.
a) To complete a work within a specific period as requested by the customer.
b) To make up the time Lost due to breakdown of machinery, power failure or any other unaviodable reasons.
c) To work as a matter of policy e.g due to general rush of work, labour shortage etc.
d) For completing the work delayed due to departmental inefficiency.
Treatment of overtime :
The treatment of overtime depends on the reason for which overtime premium has been paid. However the following treatments are recommended by cost accountants:
It should be directly charged to the job concerned and treated as direct wages. But in case reason of overtime is not known, then the premium paid should be treated as excess cost . It should be treated as overhead which would be allocated and recovered from the jobs completed during the period. If the overtime premium has been paid due to causes known, then the premium should be treated as a part of labour cost. In case of known causes, the excess cost is charged directly to the concerned department.
When overtime is worked on account of abnormal conditions like strikes, flood etc. the premium payable should be charged to costing profit and loss account.
Control of Overtime :-
Overtime work should be avoided because job done in overtime cost more as compared to the jobs done during normal hours. Moreover, the overtime work is done at late hours when the efficiency of the worker is generally falling after working normal hours. The workers may also develop the tendency of postponing the normal work to be done in overtime. So, overtime work should be strictly controlled and practice of working overtime should be discouraged. Overtime should be permitted only in emrgency situation. Overtime work if necessary, must have a prior permission and sanction of the competent authority.
Causes of overtime work :
Generally overtime work is required for the following reasons.
a) To complete a work within a specific period as requested by the customer.
b) To make up the time Lost due to breakdown of machinery, power failure or any other unaviodable reasons.
c) To work as a matter of policy e.g due to general rush of work, labour shortage etc.
d) For completing the work delayed due to departmental inefficiency.
Treatment of overtime :
The treatment of overtime depends on the reason for which overtime premium has been paid. However the following treatments are recommended by cost accountants:
It should be directly charged to the job concerned and treated as direct wages. But in case reason of overtime is not known, then the premium paid should be treated as excess cost . It should be treated as overhead which would be allocated and recovered from the jobs completed during the period. If the overtime premium has been paid due to causes known, then the premium should be treated as a part of labour cost. In case of known causes, the excess cost is charged directly to the concerned department.
When overtime is worked on account of abnormal conditions like strikes, flood etc. the premium payable should be charged to costing profit and loss account.
Control of Overtime :-
Overtime work should be avoided because job done in overtime cost more as compared to the jobs done during normal hours. Moreover, the overtime work is done at late hours when the efficiency of the worker is generally falling after working normal hours. The workers may also develop the tendency of postponing the normal work to be done in overtime. So, overtime work should be strictly controlled and practice of working overtime should be discouraged. Overtime should be permitted only in emrgency situation. Overtime work if necessary, must have a prior permission and sanction of the competent authority.
Cost of production and worker's idle time
It is important to record cost data, analyse them and prepare proper cost records. Workers time on production should be analysed and proper cost should be identified.
Time keeping should be distinguished from time booking. While time keeping is the recording of attendance time or gate time, time booking is the recording of time spent on a job or process and is also known as work time or activity time.
Every worker engaged on a job or activity of direct nature, must allocate his time to jobs, products, service or some other cost units which should still be job or operation, while indirect workers are engaged on work of indirect nature such as supervision cleaning, maintenance, etc. Sometimes, even a diret worker may be engaged on work of indirect nature for a part of the work. There may also be occasions when a direct worker is unable to do any work at all because he is waiting for materials or instructions. In any case, the whole of a direct worker’s time should be analysed. This is done by time booking or recording activity time.
OBJECTS OF TIME BOOKING
The various objects of time booking are :
a) Ascertainment and Allocation of labour cost.
In order to arrive at the true cost of products or jobs, it is necessary to ascertain the labour time spent on it and evaluate in terms of money. Labour time in terms of money is the labour cost of the job or product.
b) Proper Utilisation of Attendance Time.
Since workers are paid on the basis of clock time, the employer is interested in knowing whether the whole of attendance time is utilised for a job or product. In other words, attendance time should be equal to activity time as otherwise, the employer stands to lose since he is paying for the time not utilized on production.
c) Ascertainment of idle Time.
In practice, time clocked will seldom be equal to the time spent on production. The difference between the two is known as idle time. While idle time usually occurs for various reasons, the management is interested not merely in its ascertainment but control also. Time booking helps in the ascertainment of idle time and its control.
d) Apportionment of Overhead.
Activity time, or time spent on production in terms of labour hours, is one of the methods of approtioning factory overheads amongst jobs or departments. Time booking facilitates computation of overhead rates on the basis of labour hours.
e) Introduction of Incentive Wage Schemes.
Time booking becomes necessary for computing wages for the time taken and bonus for the time saved under the incentive systems of wage payment.
f) Comparison of Labour Cost
For cost control and cost reduction, every employer would like to study the incidence of wages on the cost of jobs. Similarly, for evaluation of labour performance, actual labour time may be compared with the standard or the budgeted time.
IDLE TIME
Idle time is that time for which the worker has been paid without giving any production to the employer. For example, if a worker is supposed to work for eight hours in the factory, but his job card shows only seven hours spent on jobs, one hour will be the idle time in such a case.
Causes of Idle Time :
For effective control over labour costs, it is necessary for the management to identify the reasons for the idle time. Idle time usually arises due to
i) Normal causes
ii) Abnormal causes
i) Nromal causes:
Whatever precautions may be taken, some idle time is unaviodable. Normal causes for which idle time arises are
a) Time lost between factory gate and place of work.
b) Time taken in picking up the work for the day.
c) The interval between completion of one job and commencement of another job.
d) Time taken for personal needs and tea breaks.
e) Time taken for maintenance of machines.
II) Abnormal Causes:
Idle time may also arise due to some abnormal factors which can be avoided if proper precautions are taken. The abnormal causes are :
a) Power failure,
b) Breakdown of machinery
c) Non-availability of Raw materials
d) Waiting for instructions.
e) Strikes, lock-outs, floods, fire etc.
Treatment of idle time cost :
The treatment of idle time in cost accounting depends on the nature of idle time.
Treatment of normal idle time costs can be made in the following two ways in the cost accounting :
a) The labour cost of normal idle time can be treated as a part of the cost of production. Normal idle time cost of direct workers is treated as direct wages.
b) The entire normal idle time cost can be treated as an item of factory expenses and can be recovered as indirect charges. For example, if a worker is engaged for eight hours in a factory @ Rs.50 per hour and out of this eight hours, two hours are the normal idle time, Rs.100/- (Rs.50 x 2) which is normal idle time cost, is treated as factory expenses, Rs. 300 is treated as direct wages. But in the first method, normal idle time cost Rs.100 was treated as direct wages.
Treatment of Abnormal idle Time Cost :
Abnormal idle time costs do not form a part of cost of production. It can be treated in the following two ways:
a) The abnormal idle time cost can be treated as an item of factory expenses.
b) The abnormal idle time costs are transferred to the Costing Profit and Loss Account. In this method abnormal idle time costs are not treated as a cost but treated as a loss.
The choice of the method of treatment of idle time depends much on the policy of the Management.
Time keeping should be distinguished from time booking. While time keeping is the recording of attendance time or gate time, time booking is the recording of time spent on a job or process and is also known as work time or activity time.
Every worker engaged on a job or activity of direct nature, must allocate his time to jobs, products, service or some other cost units which should still be job or operation, while indirect workers are engaged on work of indirect nature such as supervision cleaning, maintenance, etc. Sometimes, even a diret worker may be engaged on work of indirect nature for a part of the work. There may also be occasions when a direct worker is unable to do any work at all because he is waiting for materials or instructions. In any case, the whole of a direct worker’s time should be analysed. This is done by time booking or recording activity time.
OBJECTS OF TIME BOOKING
The various objects of time booking are :
a) Ascertainment and Allocation of labour cost.
In order to arrive at the true cost of products or jobs, it is necessary to ascertain the labour time spent on it and evaluate in terms of money. Labour time in terms of money is the labour cost of the job or product.
b) Proper Utilisation of Attendance Time.
Since workers are paid on the basis of clock time, the employer is interested in knowing whether the whole of attendance time is utilised for a job or product. In other words, attendance time should be equal to activity time as otherwise, the employer stands to lose since he is paying for the time not utilized on production.
c) Ascertainment of idle Time.
In practice, time clocked will seldom be equal to the time spent on production. The difference between the two is known as idle time. While idle time usually occurs for various reasons, the management is interested not merely in its ascertainment but control also. Time booking helps in the ascertainment of idle time and its control.
d) Apportionment of Overhead.
Activity time, or time spent on production in terms of labour hours, is one of the methods of approtioning factory overheads amongst jobs or departments. Time booking facilitates computation of overhead rates on the basis of labour hours.
e) Introduction of Incentive Wage Schemes.
Time booking becomes necessary for computing wages for the time taken and bonus for the time saved under the incentive systems of wage payment.
f) Comparison of Labour Cost
For cost control and cost reduction, every employer would like to study the incidence of wages on the cost of jobs. Similarly, for evaluation of labour performance, actual labour time may be compared with the standard or the budgeted time.
IDLE TIME
Idle time is that time for which the worker has been paid without giving any production to the employer. For example, if a worker is supposed to work for eight hours in the factory, but his job card shows only seven hours spent on jobs, one hour will be the idle time in such a case.
Causes of Idle Time :
For effective control over labour costs, it is necessary for the management to identify the reasons for the idle time. Idle time usually arises due to
i) Normal causes
ii) Abnormal causes
i) Nromal causes:
Whatever precautions may be taken, some idle time is unaviodable. Normal causes for which idle time arises are
a) Time lost between factory gate and place of work.
b) Time taken in picking up the work for the day.
c) The interval between completion of one job and commencement of another job.
d) Time taken for personal needs and tea breaks.
e) Time taken for maintenance of machines.
II) Abnormal Causes:
Idle time may also arise due to some abnormal factors which can be avoided if proper precautions are taken. The abnormal causes are :
a) Power failure,
b) Breakdown of machinery
c) Non-availability of Raw materials
d) Waiting for instructions.
e) Strikes, lock-outs, floods, fire etc.
Treatment of idle time cost :
The treatment of idle time in cost accounting depends on the nature of idle time.
Treatment of normal idle time costs can be made in the following two ways in the cost accounting :
a) The labour cost of normal idle time can be treated as a part of the cost of production. Normal idle time cost of direct workers is treated as direct wages.
b) The entire normal idle time cost can be treated as an item of factory expenses and can be recovered as indirect charges. For example, if a worker is engaged for eight hours in a factory @ Rs.50 per hour and out of this eight hours, two hours are the normal idle time, Rs.100/- (Rs.50 x 2) which is normal idle time cost, is treated as factory expenses, Rs. 300 is treated as direct wages. But in the first method, normal idle time cost Rs.100 was treated as direct wages.
Treatment of Abnormal idle Time Cost :
Abnormal idle time costs do not form a part of cost of production. It can be treated in the following two ways:
a) The abnormal idle time cost can be treated as an item of factory expenses.
b) The abnormal idle time costs are transferred to the Costing Profit and Loss Account. In this method abnormal idle time costs are not treated as a cost but treated as a loss.
The choice of the method of treatment of idle time depends much on the policy of the Management.
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