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