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Three Cost Elements

3.

Cost

Direct Material 2. Direct Labour Production Over heads

1.

Direct material
The main material/components used for manufacturing a product is Direct material i.e. Wood used in chair ,traceable Other subsidiary materials used are included in OH i.e. glue, nails, polish etc, not traceable

Direct Labour

Direct human efforts for productions, traceable to specific products. Indirect labour are human efforts helping the productions process, not directly engaged on production, i.e. Helper,supervisor,watchman etc. Indirect labour is included in OH

Production Overheads: All manufacturing expenses other than DM and DL are POH i.e.
Supervisor salaries Inspection expenses Indirect expenses Depreciation of assets used in production Factory taxes Rent, rates and insurance of factory premises, power used in factory building, plant ect.etc. One of the tasks of Management Accountant is

To

control

Costs

Standard Cost
S t a n d a r d C o s t i n g a n d B u d g e t a r y c o n t r o l

What should be the cost of production What should be the cost of one unit produced Now we have a limit under which we have to spend. Standard cost to produced one unit Standard purchase price per unit of raw material Standard use/consumption of raw material to produce one unit of out put Standard Labour rate per hour Standard labour time used to produce one unit of output Standard POH

Types of Standards Efficiency Targets

Ideal

Standard=Achievable in only perfect working environment/conditions Attainable Standard=Ideal less estimated allowance for wastage and inefficiencies Current Standard=Attainable +/- Current allowance for wastage and inefficiencies Basic Standard=Changes in efficiencies in long period of time

Fixation of Responsibilities By calculating variances What variance is

The difference b/w what was expected cost and what actual cost incurred More technically speaking A variation of actual cost from that of standard cost

Variance Expressed
Unfavorable/Debit balance/Adverse Favorable/credit balance

When actual cost >Standard cost

When actual cost <Standard cost

Calculation of three cost variances Material price variance

(st. price per kg-Actual Price per Kg)X Actual Kg purchased

Material usage variance Material total cost variance

(st. Use on actual output Actual use on actual output)X units of actual output

St. cost of material on actual outputxxx Actual cost of material on actual output.xxx xxx Total variance may be known by adding price variance +,- usage variance

Calculation of three cost variances Labour Variances Labour rate variance

(st. rate per hour-Actual rate per hour)X Actual hours worked

Labour efficiency variance

(st. time allowed for actual output Actual time used on actual output)X St. rate per hour

Material total cost variance

St. cost of labour on actual output..xxx Actual cost of labour on actual output..xxx xxx Total variance may be known by adding price variance +,- usage variance

Calculation of three cost variances Production OH Variances There are two types of POH variances

Variable Production OH Variances VOH total variance

Fixed Production OH Variances FOH total variance

VOH expenditure Variance

VOH efficiency Variance

FPOH expenditure Variance

Volume Variance

Calculation of three cost variances Variable OH VOH expenditure variance

VOH efficiency variance
VPOH at standard rate.. xxx VPOH actually incurred..xxx

(St. hours allowed for actual output-Actual hours worked)x st. per hour rate
Or(it only an other expression)

St. hours x st.per hour rate.xxx Actual. hours x st.per hour rate.xxx

VOH total variance

(It can be calculated by adding above two variances) Or St. hours x st.per hour rate.xxx
Actual. hours x Actual per hour rate.xxx

Calculation of three cost variances Production Fixed OH Variances There are two types of PFOH variances

FOH expenditure Variance

FOH volume Variances

Budgeted FOH xxx Actual FOH xxx

FOH efficiency variance

FOH capacity variance

Calculation of FOH volume variances First FOH applied/absorbed rate will be calculated

FOH Applied rate=

Budgeted FOH Budgeted capacity (in hours, in units)

FOH efficiency variance

(Budgeted hours for actual out put Actual hours)x FOH applied rate

FOH capacity variance

(Total budgeted hours-Actual hours)x FOH applied rate