Session 1 MFT Costing

8/12/2019 Session 1 MFT Costing

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Elements of costing


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Cost

A cost to any business, is the

emasurement of, in financial terms, of the

use of a business resources in order to

produce its output


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Cost

Cost is the total amount invested in a

product

Cost of goods represents all expenditure

associated with the manufacturers of the

product line including the material cost,

labor cost, factory and administrative

overhead expenses


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Cost

Costs have a major impact on a firms

success and thus must be managed

The key to succesful cost control is

information and the ability to use that

information to manage the firm


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Cost

Performance report provide comparisions

of the actual costs against the budgeted

costs

Effective managers utilize this information

to make appropriate business decisions

for the company


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Cost

Costing is the process of estimating the

total resources investment required to

merchandise, produce and market a

product

Or costing is the exact calculation by the

costing department using exact figures for

the materials, labor and other expenses


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Costing/ Cost Accounting

Its the process of:

1.Collecting

2.Classifying3.Calculating

4.Organising

5.Reporting and using costs


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Advantages of Cost Accounting

It reveals profitable and unprofitableactivities

It helps in controlling costs with special

techniques like standard costing andbudgetary control

It supplies suitable cost data and other

related information for managerial decisionmaking such as introduction of a new

product , replacement of machinery with

automatic plant etc..


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Advantages of Cost Accounting

It helps in deciding the selling price of productsesp. in depression when prices have to be fixed

below cost

It helps in Inventory control It helps in introduction of cost reduction

programme and finding out new and improved

ways of cost reduction

Cost audit which is a part of cost accountancy

helps in preventing manipulation and frauds

and thus reliable cost can be furnished to the

management


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Essentials of a good cost

accounting system Method of costing adopted should be

suitable to the industry

Costing method should be customized to the

requirements of the business

It must have optimum participation and

should have support of all executives

To reap maximum benefit out of the costing

system, there should be well defined cost

centres and responsibility centres

E ti l f d t


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Essentials of a good cost

accounting system

Controllable and uncontrollable cost of eachresponsibilty centre should be shown

seperately

Cost and financial accounts may be integratedto avoid duplication of accounts

Well trained and educated staff ..

Prepare an accurate report and promptly submitthe same to appropriate level of management

Resources should not be wasted on collecting

and compiling cost data not required


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Management accounting

Management accounting includes costing

but it goes beyond costing to include other

management information- budgets,

forecasts, capital requirements,evaluation, financial statistics, measures of

profitability etc.


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Financial Accounting

Financial Accounting is concerned with

recording of financial information for the

production of statuary financial accounts.

This includes cost sheet, balance sheet,profit and loss statement etc..

It also involves accounting for taxation

VAT etc..


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Why do we need costing??

1. To be able to establish a selling price for

garments

2. To control expenditure

3. To help measure profit of a business

4. To enable management to quote prices

5. To calculate staff wages6. To provide information to management

on effective use of resources


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Cont.. Why do we need costing??

7. To keep account & control of stock of

materials

8. To assist in planning & forecasting

9. To enable budgets to be prepared

10.To evaluate budgets and analyze

variances from them


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Classification of Cost

1. Material

2. Labour (essential wages/ Salary costs)

3. Other Expenses


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Elements of Costs

Three main resources categories in

classification of cost are called Elements

of Cost


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Elements of Costs

Prime Cost+

Factory

Overhead

= Production Cost

+Selling and Distribution Cost

+Admin and Finance cost

=Total cost

Direct materialsDirect labour

Direct Expenses

Indirect materials

Indirect labourIndirect Expenses


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Components of costing

Direct Materials Direct Expenses

Direct Labour

Prime Cost


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Direct Cost

Cost incurred by increasing the value of a

product (value addition)

Only Variable costlabour, Material


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Direct costs

1. Direct Material: its the actual cost of

materials required to make a finished

product

2. Direct Labouris the wage cost of those

employees who actually manufacture the

finished product


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Cont..Direct Cost

3. Direct Expenses : expenses that are

incurred without which a product could

not be made eg. Cost of designing a

garment, or hiring some specific machinerequired for a specific order. Generally

this cost is relatively small ( compared to

other costs), Eg royalties / payment to adesigner..


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Direct Materials

Fabrics

Buttons

Threads Zippers

Trimmings

Velcro Laces

Lining

Etc..


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Direct labor

Cutting room

Sewing room

Sewing operators/ feeders/Helpers/Floaters

Post Sewing : Button Hole , Button

Attatch, Overlock, Checkers Washing deptt..

Finishing and Packing dept..


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Indirect Cost

Cost not associated with any specific unit of

production

1.Indirect material: Materials used in factory,

not required to make the finished product

2.Indirect labor: wages and salary to people

in factory who work but do not work to

make the product

3.Indirect expenses : other factory expenses

Sum of all these three is Indirect cost


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Indirect Expenses

Building rent and rates

Electricity Power

Water Charges Cleaning and Maintenance

Transportation

Boiler and other maintenance Telephone

Wear and tear of machine


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Components of costing

Indirect Materials Indirect Expenses

Indirect Labour

Factory Overhead


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Indirect Costs

1. Indirect Materials: Materials used in the

factory which DO NOT form a part of the

finished Product

2. Indirect Labour: Wages and salary of

the people who work in the factory but do

NOT make the finished Product

3. Indirect Expensesare all other factory

expenses


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Prime cost & Overheads

Prime cost is the sum of all direct costs

Indirect cost/ manufacturing overhead/

factory overhead is the sum of all the

indirect costs


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Production Cost

The sum of prime cost and factory

overhead is the production cost

Prime cost

production cost

Factory overhead


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Total Cost

Production cost

Selling & Distribution costs & Overhead

Administration & Finance costs & Overhead

Total Cost


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Production Cost

Prime cost + Factory O/H = Production Cost

Production Cost + Selling and Distribution O/H +

Administration + Finance O/H = Total Cost


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Fixed and variable costs

Cost can also be analyzed in terms of their

behavior with the volume of production/

scale of production :

1.Fixed/ Non Variable

2.Variable

3.Semi Variable


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Fixed Costs

Fixed costs are those costs in a business

that are NOT affected by the output of the

business eg rent of factory ( not the

volume of production ..subject to thecase)eg. Salary, depreciation, tax,

security etc.

Period cost theyre referred to as periodcost because they relate toa period of

time


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Variable Cost

Variable cost : it increase with the output

of business ie. Has direct corelation to the

scale of production eg. Raw materials

required, other direct materials

Fixed cost, Variable cost & semi variable

cost are used in Marginal costing


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Semi- Variable/ Semi-Fixed

Costs These are the cost that dont fit either into

the category of fixed cost/ variable cost.They contain an element that is fixed, and

an element that is variable eg electricitycharge ( may be fixed for some time andlater be charged as per consumption..).

They have to be reallocated on a suitablebasis to fixed and variable cost categorieseg. Rent, rate, salary..


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General operating Expenses

Theyre indirect costs that include cost of

operating the general offices and

departments that are not directly invloved

with the product line but are essential tooperation of the firm

Administrative Overheads : engineering/

merchandising/ MIS, Clerical staff andHuman resources..


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overhead

Variable/ Non variable costs that cannot

be traced to specific nits of Production

1.Rents

2.Maintainence & machines

3.Wear and Tear of machines

4.Fuel-gas and oils5.Water

6.Telephone

7.Electricity

O h d R


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Overhead Recovery

Estmates Factory O/H

The total can be divided amongst products

on various base as per the estimated

production hour

Session 1 MFT Costing

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Transcript of Session 1 MFT Costing