2MATypes of Cost
2MATypes of Cost
2MATypes of Cost
• Semi-fixed costs are fixed within specified activity levels, but they eventually
increase or decrease by some constant amount at critical activity levels.
• Semi-variable costs include both a fixed and a variable component (e.g telephone
charges).
The Trend Toward Fixed Costs
The trend in many industries is toward greater
fixed costs relative to variable costs.
• Relevant costs and revenues are those future costs and revenues that will
be changed by a decision,whereas irrelevant costs and revenues will not be
changed by a decision.
The cost which differs between two alternatives for decision making is called
relevant cost. It is a future cost that differs between two alternative courses
of action. For example, a garment exporter plans to manufacture either
of two types of garments and export. The following are the cost related to
the alternatives I and II. Assume that the garments will have the same selling price.
Cost Alternative I Alternative II
Designing cost Rs. 50000 Rs. 50000
Material (per meter) Rs. 500 Rs. 600
Labour (per unit) Rs. 350 Rs. 200
Other expenses Rs. 500 Rs. 520
Here designing cost is irrelevant for decision making as the cost between
the two alternatives is the same.
Other costs are relevant since there is a difference in costs between
the alternatives. The exporter should go ahead with alternative II as the total cost per
unit is Rs. 1320 as compared to Rs.1350 in alternative I.
Fixed cost is an irrelevant cost for decision making up to a
relevant range.
For example, a plant has the maximum operational capacity to produce
20000 units of a product per annum. At present the plant produces
12000 units and has a spare unused capacity of 8000 units.
Current selling price of each unit is Rs. 100, the
variable cost (direct material, labour and variable overhead)
is Rs. 50 and the total fixed cost incurred is Rs. 300000.
If the manufacturer gets a onetime order from the neighbouring state to supply
6000 units at Rs. 80. Should he accept the order?
A. Total Sale (Rs.) 1200000 (12000 x Rs. 100) 1680000 (12000 x Rs. 100 + 480000
6000 x Rs. 80)
Less Total cost
• Sunk costs are the costs of resources already acquired and are
unaffected by the choice between the various alternatives are irrelevant for
decision-making.
Opportunity costs
• A cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative course of action
be given up.
Manufacturing Versus
Nonmanufacturing Costs
Manufacturing Costs
Costs incurred in the factory
or plant
Nonmanufacturing Costs
Costs that are incurred outside the
plant or factory and typically
categorized as selling and
administrative costs.
Manufacturing Costs
Direct Direct Manufacturing
Materials Labor Overhead
•Various •Labor costs •Indirect materials
materials that of assembly- such as welding
can be directly line workers. material, glue,
and screws, etc.
conveniently •Indirect labor such
traced to a as factory
product. maintenance
workers and
factory janitors
•Other factory costs
Nonmanufacturing Costs
Also called Period
Costs.
Nonmanufacturing Costs
are not directly incurred
in the production of
products. They are
typically selling and
administrative costs.
Expensed on
the income
statement.
Nonmanufacturing Costs
Examples of
Nonmanufacturing
Costs include:
Rent
Expense
Product Cost
Since product costs are initially assigned to inventories, they are also
known as inventoriable costs.
Period Costs
Prime cost is the sum of direct materials cost and direct labour cost.
At any given volume of output, the amount by which aggregate cost changes
with the change in volume of output by one unit, is termed as marginal cost.
The unit may be a single article, or an order, or level of production capacity,
or process of a department.
By definition, only total variable cost changes with the volume of production
or sales and total fixed cost remains fixed, irrespective of the changes in the
activity level. In practice, therefore, marginal cost is the total of all items of
variable cost.
Sucheta Toys produces a very attractive toy named ‘Devdas’.
The following is the break down of costs incurred by the company in the year 2017.
Particulars Cost (Rs’000)
Raw materials and components 1,00,000
Direct wages paid on piece rate basis 25,000
Depreciation of the plant 1,000
Depreciation of other fixed assets 500
Supervisors’ salary 2,500
Power 550
Lighting expenses 50
Corporate office expenses 1,000
Marketing expenses (fixed) 500
Salespersons’ commission 1,000
The company produced and sold 50,000 units in the year 2017.
What is the marginal cost of sales?
Note: The cost of power is a semi-variable cost. It was INR 2,50,000
in the year 2016, when the company produced and sold 20,000 units.
COMMITTED AND DISCRETIONARY FIXED COSTS
Controllable costs are those which can be influenced by the action of a specified
member of an enterprise.
“Those costs which can be identified with an activity or sector of a business and
which would be avoided if that activity or sector did not exist” (CIMA Terminology).
Finished
Storeroom Factory Goods Customer
Warehouse
Period Costs
A Schedule of Cost of Goods Manufactured
NORTHERN LIGHTS CUSTOM CABINETS
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 2010
Beginning Raw Materials Rs.500,000
Add: Raw Materials purchased 2,000,000
Raw Materials Available 2,500,000
Deduct: Ending Raw Materials 250,000
Raw Materials Used in Production Rs.2,250,000
Direct Labor 3,250,000
Manufacturing Overhead 4,250,000
Total Manufacturing Costs 9,750,000
Add: Beginning Work-In-Process 750,000
10,500,000
Deduct: Ending Work-In Process 1,000,000
Cost of Production Rs.9,500,000
Schedule of Cost of Goods Sold
Rs.
Raw material purchased during the year 500000
Indirect material consumed 20000
Opening inventory of raw material 50000
Closing inventory of raw material 62000
Direct labour cost 300000
Manufacturing overheads 250000
Administration and selling overheads 100000
Opening Work- in - progress 100000
Closing Work- in - progress 120000
Apart from the information of Pritvi Raj Enterprises given above,
the following additional information is also given for the year
ending 31st March 2013. Prepare a cost of goods Sold and an
income statement for the same year.
Rs.
Opening Finished goods
200000
Closing Finished goods
130000
Sales
1400000
Rahul Agarwal is thoroughly confused as he has lost some of the records of his expenses and
inventory for the year ending December 31st 2013.
Operating expenses
6500000