Cost :- Cost can be defined as the expenditure (actual or notional) incurred on or attributable

to a given thing. It can also be described as the resources that have been sacrificed or must be
sacrificed to attain a particular objective.
Costing :- Costing may be defined as the technique and process of ascertaining costs. According
to Wheldon, Costing is classifying, recording, allocation and appropriation of expenses for
the determination of cost of products or services and for the presentation of suitably arranged
data for the purpose of control and guidance of management.
Cost Accounting :- Cost Accounting primarily deals with collection, analysis of relevant of cost
data for interpretation and presentation for various problems of management. Cost accounting
accounts for the cost of products, service or an operation.
Cost Accountancy :- Cost Accountancy is a broader term and is defined as, the application of
costing and cost accounting principles, methods and techniques to the science and art and practice
of cost control and the ascertainment of profitability as well as presentation of information for the
purpose of managerial decision making.

Objectives of Cost Accounting :-

1. To ascertain the cost of production on per unit basis, for example, cost per kg, cost per meter,
2. Cost accounting helps in the determination of selling price.
3. helps in cost control and cost reduction.
4. helps in locating wastages, inefficiencies and other loopholes in the
production processes/services offered.
5. helps in presentation of relevant data to the management which helps in
decision making.
6. helps in estimation of costs for the future.
7. Ascertainment of division wise, activity wise and unit wise profitability becomes possible
through cost accounting.

Cost Center :- a cost center is nothing but a location, person or item of equipment for which cost
may be ascertained and used for the purpose of cost control. For example, a production
department, stores department, sales department

Profit Center :- Profit Center is defined as, a segment of the business entity by which both
revenues are received and expenses are incurred or controlled. (CEMA) A profit center is
any sub unit of an organization to which both revenues and costs are assigned.

Costing Systems :- There are different costing systems used in practice.

1.Historical Costing :-
2. Absorption Costing :- all fixed and variable costs are absorbed in the
products. It is based on the principle that costs should be charged or absorbed to whatever is
being costed, whether it is a cost unit, cost center.
3. Marginal Costing :- In Marginal Costing, only variable costs are charged to the products and
fixed costs are written off to the Costing Profit and Loss A/c.
4. Uniform Costing :- This is not a distinct method of costing but is the adoption of identical
costing principles and procedures by several units of the same industry or by several
undertakings by mutual agreement.

Classification of Costs :-

A. Classification according to elements :- Costs can be classified according to the elements.

There are three elements of costing, viz. material, labor and expenses.
B. Classification according to nature :- As per this classification, costs can be classified into
Direct and Indirect.
I. Direct and Indirect Material :- Direct material is the material which is identifiable
with
the product. For example, in a cup of tea, quantity of milk. Indirect material cannot
be identified with the product, for example lubricants, fuel, oil, cotton wastes etc
II. Direct and Indirect Labor :- wages paid to workers who are directly engaged in the
production can also be identified and hence they are direct wages. On the other
hand, wages paid to workers like sweepers, gardeners, maintenance workers etc are
indirect wages as they cannot be identified
III. Direct and Indirect Expenses :- Direct expenses are cost of drawing, design and
layout, royalties payable on use of patents, copyrights etc, consultation fees paid to
architects, surveyors etc. Indirect expenses cannot be traced to specific product, job,
process, service or cost center or cost unit like insurance, electricity, rent, salaries,
advertising etc.
C. Classification according to behavior :-
1.Fixed Costs :- The feature of these costs is that the total costs remain same while per unit
fixed cost is always variable. Examples of these costs are salaries, insurance, rent,

2. Variable Costs :- variable cost is that per unit variable cost remains same while the total
variable costs will vary. variable costs are direct materials, direct labor etc

3. Semi-variable Costs :- they contain the features of both types of costs. These costs are
neither totally fixed nor totally variable. Maintenance costs, supervisory costs etc are
examples of semi-variablecosts. These costs are also called as stepped costs.

D. Classification according to functions :-

i. Production Costs :-
ii. Administrative Costs :- Costs are office salaries, printing and stationery, office telephone,
iii. Selling and Distribution Costs :- research expenses, advertising, sales staff salary,
iv. Research and Development Costs :-
E. Classification according to time :-

I. Historical Costs :
II. Predetermined Cost :-
F. Classification of costs for Management decision making :-
1.Marginal Cost :- Marginal cost is the change in the aggregate costs due to change in
the volume of output by one unit. Marginal cost is also termed as variable cost and hence per unit
marginal cost is always same.
2. Differential Costs :-
3. Opportunity Costs :

4. Relevant Cost :
5. Replacement Cost :
6. Abnormal Costs :
7. Controllable Costs
8. Shutdown Cost
9. Capacity Cost
10. Urgent Costs

Costing Methods and Techniques :-

Costing methods are those which help a firm to compute the cost of production or services offered by
it. On the other hand, costing techniques are those which help a firm to present the data in a particular
manner so as to facilitate the decision making as well as cost control and cost reduction.
Methods of Costing :-
I. Job Costing :- This costing method is used in firms which work on the basis of job work.
There are some manufacturing units which undertake job work and are called as job order
units
II. Batch Costing :- This method of costing is used in those firms where production is made on
continuous basis. Each unit coming out is uniform in all respects and production is made
prior to the demand, i.e. in anticipation of demand.
III. Process Costing :- Some of the products like sugar, chemicals etc involve continuous
production process and hence process costing method is used to work out the cost of
production.
IV. Operating Costing :- This type of costing method is used in service sector to work out the
cost of services offered to the consumers. hospitals, power generating units, transportation
sector etc
V. Contract Costing :- This method of costing is used in construction industry to work out the
cost of contract undertaken. For example, cost of constructing a bridge, commercial complex,
Technique of Costing :-
I. Marginal Costing :- This technique is based on the assumption that the total cost of production
can be divided into fixed and variable. Fixed costs remain same irrespective of the changes in
the volume of production while the variable costs vary with the level of production, i.e. they
will increase if the production increases and decrease if the production decreases. Variable
cost per unit always remains the same. In this technique, only variable costs are taken into
account while calculating production cost. Fixed costs are not absorbed in the production
units. They are written off to the Costing Profit and Loss Account.
II. Standard Costing :- Standard costs are predetermined costs relating to material, labor and
overheads. Though they are predetermined, they are worked out on scientific basis by
conducting technical analysis. They are computed for all elements of costs such as material,
labor and overheads. The main objective of fixation of standard cost is to have benchmark
against which the actual performance can be compared
III.Budgets and Budgetary Control :- Budget is defined as, a quantitative and/or a monetary
statement prepared to prior to a defined period of time for the policies during that period
for the purpose of achieving a given objective. If we analyze this definition, it will be clear
that a budget is a statement, which may be either in monetary form or quantitative form or
both. For example, a production budget can be prepared in quantitative form showing the
target production, it can also be prepared in monetary terms showing the expected cost of
production. Some budgets can be prepared only in monetary terms, e.g. cash budget showing
the estimated receipts and payments in a particular period can be prepared in monetary
terms only.Budgetary control involves preparation of budgets and continuous comparison of actual with
budgets so that necessary corrective action can be taken. For example, when a production
budget is prepared, the production targets are laid down in the same for a particular period.

Cost Sheet for the period.........................................

Production ............................... units
Particulars Amount (Rs.) Amount (Rs.)
A. Direct Materials Opening Stock
+ Purchases
+ Carriage inwards
- Closing Stock
B. Direct Wages
C. Direct Expenses
I. Prime Cost ( A + B + C )
D. Factory Overheads- Indirect materials
Loose Tools
Indirect wages
Rent and Rates ( Factory)
Lighting and heating ( F )
Power and fuel
Repairs and Maintenance
Drawing office expenses
Research and experiment
Depreciation Plant ( F )
Insurance ( F )
Work Managers salary
II. Factory Cost/Works Cost ( I + D )
E. Office and Administrative Overheads
Rent and Rates office
Salaries office
Insurance of office building and equipments
Telephone and postage
Printing and Stationery
Depreciation of furniture and office equipments
Legal expenses
Audit fees
Bank Charges
III. Cost of Production ( II + E )
F. Selling and Distribution Overheads
Showroom rent and rates
Salesmens salaries and commission
Traveling expenses
Printing and Stationery Sales Department
Advertising
Bad debts
Postage
Debt collection expenses
Carriage outwards
Cost and Management Accounting
Depreciation of delivery van
Debt collection expenses
Samples and free gifts
IV. Cost of Sales ( III + F )
V. Profit/Loss
VI. Sales ( IV + V)

Cost Control and Reduction

cost control means keeping the expenses within limits or control
reducing the cost per unit and the second one is increasing
productivity. Reducing wastages, improving efficiency, searching for alternative materials, and
a constant drive to reduce costs, can effect cost reduction. The following tools and techniques are
normally used for cost reduction.
A. Value analysis or value engineering.
B. Setting standards for all elements of costs and constant comparison of actual with standard
and analysis of variances.
C. Work study
D. Job evaluation and merit rating
E. Quality control
F. Use of techniques like Economic Order Quantity
G. Classification and codification
H. Standardization and simplification
I. Inventory management
J. Benchmarking
K. Standardization
L. Business Process Re-engineering.

cost management identifies, collects, measures, classifies and reports information

that is useful to managers and other internal users in cost ascertainment, planning, controlling
and decision making. Cost management aims to produce and provide information to internal
users and personnel working in the organization
The following factors should be taken into consideration while designing a costing system.
I. Size of the firm :-
II. Manufacturing Process
III. Nature and Number of Products
IV. Management Control Need
V. Raw Materials
VI. Organization Structure
VII. External Factors
material control
The material control is ensured by laying down proper procedures for Purchasing, Storing, Issuing and
minimizing material losses by identifying slow moving, obsolete, dormant material and also by
minimizing scrap, wastages, defectives and spoilages. These steps are discussed below.
A. Purchasing and Receiving
Purchase Requisition- format requesting the purchase department to purchase the required
material.,
Purchase Order, Receiving the Materials, Approval of invoice, Making the Payment
Important Issues in Material Procurement
Economic Order Quantity: it can be said that when an order is placed, the company has to incur certain
costs at the time of order. These costs include costs like handling and transportation costs, stationery
costs, costs incurred for inviting quotations and tenders etc. The more is the frequency of order,
the more are these costs.
the most desirable quantity to be ordered is that quantity at which both, the
ordering costs and carrying costs will be minimum. This quantity is called as Economic Order
Quantity. This quantity can be calculated with the help of the following formula.
Economic Order Quantity =2xUxO/IC

U = Annual demand / annual consumption in units

O = Cost of placing and receiving an order
IC = Carrying cost per unit per annum
The Economic Order Quantity is an important concept as it guides the Purchase Manager
regarding the quantity to be purchased of a particular material. However, this concept is based
on some assumptions. These assumptions are as follows.
The concerned material will be available all the time without any difficulty.
The price of the material will remain constant.
Ordering cost and carrying costs are variable.
Impact of quantity discounts on the prices is negligible.

Fixation of Level: levels of materials are fixed for achieving objectives like avoiding overstocking,
ensuring that the material is ordered at right time and also avoiding shortage of materials.
A. Maximum Level: Maximum Level = Re-order Level + Re-order Quantity [Minimum
Consumption Minimum Reorder period]
B. Minimum Level: Minimum Level = Ordering Level [Average rate of consumption Re-order
period]
C. Re-order Level: Re-order Level = Maximum Usage per Period Maximum Re-order Period
D. Average Level = Maximum Level + Minimum Level / 2
E. Danger Level: depending on the practices of the firm and circumstances prevailing, the danger
level is determined between the re-order level and minimum level
B. Storing of Materials:
I] Aspects of Stores Control:
Stores Layout, Classification and Codification of Materials, Stores Records, Inventory Control:
Inventory Control:
A.Perpetual Inventory System: means continuous stock taking
B. ABC System:
Items in class A constitute the most important class of inventories so far as the proportion in the total
value of inventory is concerned. The A items constitute roughly about 5-10% of the total items while
its value may be about 80% of the total value of the inventory.
Items in class B constitute intermediate position. These items may be about 20-25% of the total items
while the usage value may be about 15% of the total value.
Items in class C are the most negligible in value, about 65-75% of the total quantity but the value may
be about 5% of the total usage value of the inventory.
C. Just in Time Inventory: This is the latest trend in inventory management. This principle envisages
that there should not be any intermediate stage like storekeeping. Material purchased from supplier
should directly go the assembly line
D. VED Analysis:
V stands for vital items and their stock analysis requires more attention. The reason is that if
these items are not available, the resulting stock outs will cause heavy losses due to stoppage of
production. Thus these items are required to be stored adequately to ensure smooth operation of
the plant.
E means essential items. Such items are considered essential for efficient running but without
these items, the system will not fail. Care must be taken to see that they are always in stock.
D stands for desirable items, which do not affect production immediately but availability of
these items will lead to more efficiency and less fatigue
E. FSND Analysis:
I] F stands for fast moving items and stocks of such items are consumed in a short span of time.
Stock of fast moving items must be observed constantly and replenishment orders be placed in
time to avoid stock out position.
II] N means normal moving items and such items are exhausted over a period of time, i.e. say one
year. The order levels and quantities for such items should be on the basis of a new estimate of
future demand to minimize the risks of a surplus stock.
III] S indicates slow moving items, existing stock of which would last for two years or so. These
items must be reviewed carefully before eliminating them.
IV] D stands for dead stock which means that there will not be any further demand for the same. It
is necessary to identify these items and if there cannot be any alternative use for the same, should
be eliminated.

C. Issue Control
The various methods of pricing of issues are given below.
1. First In First Out:- As per this method, material received first is issued first.
2. Last In First Out [LIFO]
3. Highest In First Out [HIFO]:- Under this method, the materials with highest prices are issued first,
irrespective of the date upon which they are purchased
4. Simple Average Cost Method:- Under this method, the issues are charged at the average price of
the material purchased without taking into consideration the quantities involved in the same
5. Weighted Average Method:- This method takes into consideration the prices as well as the quantities
of materials purchased. Thus weighted average is computed after each receipt by dividing the total
amount by the total quantity. The issue is charged at prices arrived at according to this calculation.
For example, if three consignments of materials are purchased at prices of Rs.10, Rs.12 and Rs.11 and
the quantities involved are respectively 1,000, 1,200 and 1,400. The weighted average price will be
calculated as shown below.
Rs.10 1,000 + Rs.12 1,200 + Rs.11 1,400 = Rs.10,000 + Rs.14,400 + Rs.15,400 = Rs.39,800 / 3,600
= Rs.11.05. The subsequent issue will be charged at this price. The main advantage of this method is
that it evens out the price fluctuations and reduces the number of calculations to be made
6. Periodic Average Cost Method:- Under this method, instead of recalculating the simple or weighted
average cost every time there is a receipt, periodic average is computed. The average may be calculated
for the entire period. The price may be calculated as given below.
Cost of Opening Stock + Total Cost of all receipts / Units in Opening Stock + Total Units received
during the period.
7. Standard Cost Method:- Under this method, material issues are priced at a predetermined standard
issue price. Any difference between the actual purchase price and the standard price is written off to
the Costing Profit and Loss Account.
8. Replacement Cost [Market Price]:- The replacement cost is the cost at which material identical to that
is to be replaced could be purchased at the date of pricing of the issues as distinct from the actual cost
price at the date of purchase.
9. . Next In First Method:- Under this method, the price quoted on the latest purchase order or contract
is used for all issues until a new order is placed. Thus this method is a variation of the Replacement
Cost Method
10. Base Stock Method:- Under this method, a certain quantity of materials is always held in stock and
any material over and above this quantity is priced according to any other pricing method

D. Material Losses:
Waste:- Normal Wastage, Abnormal Wastage: Scrap,:- Legitimate Scrap , Administrative Scrap ,
Defective Scrap :Spoilage: Defectives

E. Inventory Turnover Ratio: There are several items in the store which are slow moving which means
that they are issued to the production after a long time gap. Some items are such that they are never
issued to the production as they have become obsolete or outdated and need to be disposed off. For
identifying these items, it is necessary to compute the inventory turnover ratio. Inventory turnover
ratio enables the management to avoid the capital being locked in such items.
Inventory Turnover Ratio: Cost of material consumed/Cost of average stock held during the year
The cost of average stock here is taken as the average of opening stock and closing stock. The inventory
turnover ratio can also be calculated in days as below.
Days during the period/Inventory turnover ratio

Problems and Solutions Material Control

1. From the following figures relating to two components X and Y, compute Reorder Level, Minimum
Level, Maximum Level and Average Stock Level.

Particulars Component X Component Y

Maximum consumption per week 75 units 75 units

Average consumption per week 50 units 50 units

Minimum consumption per week 25 units 25 units

Reorder period 4 to 6 weeks 2 to 4 weeks

 Reorder quantity 400 units 600 units

Solution: The
computation of various levels is shown below.
A] Reorder Level = Maximum Consumption Maximum Reorder Period
Component X = 75 units 6 weeks = 450 units
Component Y = 75 units 4 weeks = 300 units.
B] Minimum Level = Reorder Level Average Consumption Average Reorder Period
Component X = 450 units [50 units 5 weeks] = 200 units
Component Y = 300 units [50 units 3 weeks] = 150 units
C] Maximum Level = Reorder Level + Reorder Quantity [Minimum Consumption Minimum
Reorder Period]
Component X = 450 units + 400 units [25 units 4 weeks] = 750 units
Component Y = 300 units + 600 units [25 units 2 weeks] = 850 units
D] Average Level = [Ma
ximum Level + Minimum Level]
Component X = [750 units + 200 units] = 475 units
Material Control
37
Component Y = [150 units + 850 units] = 500 units
2. From the following particulars, compute Economic Order Quantity
Annual consumption = 8, 10, 000 units
Order placing and receiving costs: Rs.10 per order
Annual stock holding stock: 20% of consumption
Solution: Economic Order Quantity = 2 /= 2*180000*10/0.2=9,000
Check Economic Order Quantity-problems in youtube
FIFO,LIFO,Weighted average,perpetual inventory and periodic inventory method.

Various aspects of labor cost control

Classification of labor cost, Production Planning, Labor Budget, Labor Standards, Labor Performance
Report, Incentive Schemes, Labor Cost Accounting
the activities of these departments are discussed in detail in the
subsequent paragraphs.
I. Personnel Department: recruitment , training, transfer, termination, implementation of incentive
schemes and maintaining records regarding the labor force.
I.I Labor Turnover,
I.II Measurement of Labor Turnover
-Additions Method:Labor Turnover = Number of additions/Average no of workers during the periodX100
- Separations Method: Labor Turnover = no of separations/Average number of workers during the
periodX100
- Replacement Method: Labor Turnover = Number of replacements/Average number of workers during
the period 100
- Flux Method:Labor Turnover = [Number of additions + Number of separations] /Average number of
workers during the period x 100
Labor Turnover = [Number of replacements + Number of separations] /Average number of
workers during the period x 100
I.III Causes of Labor Turnover
Avoidable Causes: These causes include the following.
Dissatisfaction with the job
Dissatisfaction with the working hours
Dissatisfaction with the working environment
Unavoidable Causes: These causes include the following.
Personal betterment
Retirement
Death
I.IV Cost of Labor Turnover: If labor turnover is very high, it will result in high cost and hence efforts
should be made to prevent the same.
Preventive Costs, Replacement Costs,
II. Time Keeping: The methods of time keeping are explained below.
1. Time Recording Clocks or Clock Cards: 2. Disc Method3. Attendance Record
4. Time Booking: 1) Daily Time Sheet, 2) Weekly Time Sheets, 3) Job Ticket,4 ) Labor Cost Card, 5) Time
and Job Card
III. Work Study:
III.I Method Study: Method Study is done to improve the methods of production and to
achieve the most efficient use of the resources like, manpower, machines and materials.
III.II Work Measurement: The Work Measurement aims at determining the effective time
required to perform a job. The ineffective, wasteful or avoidable time is separated from
effective required time to complete the work factors or characteristics
III.III Job Evaluation: Point Ranking Method: In this method each job is analyzed in terms of various
job: Ranking Method: Grading Method: Merit Rating
III.VII Time And Motion Study: The study of time and motion is essential for designing an
incentive system.
V. Payroll Department
VI. Cost Accounting Department
3.4 Methods of Wages Payment: One of the important components of labor cost control is the wages
system. A system of wage payment, which takes care of both
I] Time Rate System
A] At ordinary levels.
B] At high wage levels and
C] Graduated time rate
II] Piece Rate: This method is also called as payment by results where the workers are paid as
per the production achieved by them.
A] Straight piece rate
B] Piece rate with guaranteed day rates and
C] Differential piece rates:.
I] Taylors Differential Piece Rate System: Taylor is regarded as father of scientific management and he
has recommended a system of differential piece rate. According to him, there are only two classes of
workers, efficient and inefficient. He suggests that while efficient workers should be encouraged to the
maximum possible extent, the inefficient workers should be penalized. In order to do this, he has
suggested two rates for the two classes of workers. Thus according to Taylor, if the workers are efficient,
they should be paid @ 120% of the normal piece rate and if they are inefficient, they should be paid @
80% of the normal piece rate.
II] Merrick Differential Piece Rate System: Merricks system is modification of Taylors system and
is comparatively less harsh on the workers. The scale of remunerations is as follows.
Production Rates of Payment

Up to 83% Normal piece rate

83% to 100% 110% of ordinary piece rate

Above 100% 120% of ordinary piece rate

As mentioned earlier, this method is less harsh on the workers as compared to Taylors system
III] Gantt Task Bonus Plan: In this method, there is a combination of time rate, bonus and piece rate
plan. The remuneration is computed as shown below.
Production Payment

Production below standard Guaranteed time rate

Production at standard Bonus of 20% [normally] of time rate

Production above standard High piece rate for the entire output

This method assures minimum wages even too less efficient workers and hence is a preferred
method of payment of wages. It also offers reasonably good incentive to efficient workers.
However, the main limitation is that the method is complicated to understand by the workers
and hence may create confusion amongst them.
Solution:
Taylor Plan: High task is 100 units
Worker X: 96 units Rs.4 = Rs.384 [X will get the wages at low piece rate as his output is
below the high task]
Worker Y: 111 units Rs.6 = Rs.666 [Y will get the wages at high piece rate as his output is
above the high task i.e. standard]
Worker Z: 126 units Rs.6 = Rs.756 [Z will also get the wages at high piece rate as his output
is above the high task, i.e. standard]
Merrick Plan:
Worker X = High task is 100 units, actual output is 96, this means that the efficiency level is
96%. As per Merrick Plan, wages of X will be 110% of normal piece rate which is Rs.6.60 per
unit = Rs.6.60 96 = Rs.633.6
Worker Y = High task is 100 units, actual output is 111 units, efficiency level is 111%. Y will
be entitled for wages @ 120% of normal piece rate i.e. @ Rs.7.20 per unit. His wages will be,
Rs.7.20 X 111 = Rs.799.2
Worker Z = High task is 100 units, actual output is 126 units, efficiency level is 126%. Z will
get at higher piece rate @ Rs.7.20 per unit. His wages will be Rs.7.20 126 units = Rs.907.2
Gantt Task and Bonus Plan:
Worker X = Rs.10 40 hours = Rs.400 [X will get guaranteed time rate as his output is below
the high task]
Worker Y = Rs.6 111 units = Rs.666 [High piece rate as output is above standard]
Worker Z = Rs.6 Rs.126 = Rs.756 [High piece rate as output is above standard]

III] Bonus Systems

A] Individual Bonus for Direct Workers
These methods are discussed below.
I] Halsey Premium Plan: This plan was introduced by F.A. Halsey, an American engineer. In this
plan, bonus is paid on the basis of time saved. Standard time is fixed for a job and if the actual
time taken is less than the same, the worker becomes eligible for bonus. However bonus is paid
equal to wages of 50% of the time saved. A worker is assured of time wages if he takes longer
time than the allowed time. The formula for computing the total wages is as follows.
Total Earnings = H R + 50% [S H] R
Where, H = Hours worked, R = Rate per hour, S = Standard time
Illustration: Time allowed for a job is 48 hours; a worker takes 40 hours to complete the
job. Time rate per hour is Rs.15. Compute the total earnings of the worker.
Solution: Total Earnings = H R + 50% [S H] R
Total Earnings = 40 Rs.15 + 50% [48 40] Rs.15
Total Earnings = Rs.600 + Rs.60 = Rs.660
II] Halsey Weir Plan: Under this method, there is only one difference as compared to the
Halsey Plan and that is instead of 50% bonus for the time saved, it is 331/3rd % of the time
saved. Accordingly the formula for this method is modified as follows.
Total Earnings = H R + 33 1
3 % [S H] R
H = Hours worked. R = Rate per hour. S = Standard time
III] Rowan Plan: This premium bonus plan was introduced by Mr. James Rowan. It is similar to
that of Halsey plan in respect of time saved, but bonus hours are calculated as the proportion
of the time taken which the time saved bears to the time allowed and they are paid for at time
rate. The formula for computation of total earnings is as follows.
Total Earnings = H R + [S H]/S H R
Where H = Hours worked, R = Rate per hour, S = Standard time,
IV] Barth Variable Sharing Plan: In this system, the total earnings are calculated as follows:
Total Earnings = Rate per hour / Standard hours Actual hours worked
B] Group Bonus for Direct Workers
Budgeted Expenses Bonus
Cost Efficiency Bonus
Pristman System: In this method, production standards are set in units or points and actual
production is compared with the standards. If the actual production exceeds the standard,
the workers are paid additional wages equal to the percentage in output over standard.
Obviously no bonus is payable if actual production does not exceed the standard production.
Towne Profit Sharing Plan
Waste Reduction Bonus
Rucker Plan: value added is the total of labor, overheads and profits. Under this plan, employees
receive a constant proportion of value added.
Scanlon Plan: This method is similar to the Rucker plan as discussed above except that the ratio
of labor cost to the sales is taken instead of direct labor cost to added value: Bonus System for Indirect
Workers: Indirect Monetary Incentives:* Profit Sharing*Co-partnership*Non-Monetary Incentives-Free
education and training, Medical benefit
C] Bonus for Indirect Workers
IV] Indirect Monetary Incentives
A] Profit Sharing
B] Co-partnerships
V] Non monetary incentives like job security, social and general welfare, sports, medical facilities etc.
Overhead
A. Collection, Classification and Codification of Overhead
I. Collection of Overheads: Stores Requisition, Wages Sheet, Cash Book
II. Classification of Overheads: i. Classification according to Elements*Indirect Material*Indirect
Labor*Indirect Expenses; ii. Functional Classification*Manufacturing Overheads*Administrative
Overheads*Selling and Distribution Overheads*Research and Development Overheads iii. Classification
according to Behavior: Fixed Overhead*Variable Overheads*Semi-variable Overheads
III. Codification of Overheads
B. Allocation, Apportionment and Reapportionment of Overheads
*Departmentalization means creating departments in the firm so that the overhead expenses can be
conveniently allocated or apportioned to these departments
*allocation is the process by which cost items are charged directly to a cost unit or cost center.

*,Apportionment : if it is not possible to charge the overheads to a particular cost center or cost unit,
they are to be apportioned to various departments on some suitable basisPrimary Distribution Summary
*Reapportionment of Overhead Secondary Distribution Summary
*Non Reciprocal Methods :- Under this method, the assumption is that while service
departments render services to the production departments, they do not render services to
each other.*Services Rendered*Ability to Pay*Survey or analysis Method*Reciprocal
Method*Repeated Distribution Method*Simultaneous Equation Method
C. Absorption of Overheads: absorption means charging equitable share of overhead expenses to the
products
Overhead Absorption Rate = Overhead Expenses/ Units of the base selected.
*Direct Material Cost*Direct Labor Cost Method
*Prime Cost Method:Budgeted or Actual Overheads/ Prime CostX 100
Production Unit Method, Direct Labor Hour Method, Machine Hour Rate, Selling Price Method
Under/Over Absorption of Overheads
, a rate of absorption is computed and then the overheads are charged to the products. The rate of
absorption may be either predetermined or historical
Administration Overheads
general office expenses, office salaries, printing and stationery, office lighting, audit fees, insurance of
office equipments, depreciation of office equipments and building, rent, legal charges,
Selling and Distribution Overheads
Advertising expenses, sales promotion costs, salesmens salaries and commission, discounts offered are
some of the examples of selling overheads. Warehouse rent, transportation
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Methods of Costing
I] Job Costing: The objective of this method of costing is to work out the cost of each job by preparing the
Job Cost Sheet. A job may be a product, unit, batch, sales order, project, contract, service, specific
program or any other cost objective that is distinguishable clearly and unique in terms of materials and
other services used.
Methodology used in Job Costing:* Direct Material Costs:* Direct Labor Cost*Direct
Expenses*Overheads*Work in Progress
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II] Batch Costing: batch costing is used where units of a product are manufactured in batches and used
in the assembly of the final product. Thus components of products like television, radio sets, air
conditioners and other consumer goods are manufactured in batches
2AS
Economic Batch Quantity = C
Where A = Annual requirements of the product
S = Setting up cost per batch
C = Carrying cost per unit of inventory per annum.
III] Contract Costing: Contract Costing is used by concerns like construction firms, civil
engineering contractors, and engineering firms