Cost Accounting Fundamentals
Cost Accounting Fundamentals
This domain tests cost concepts, classification of costs and preparation of a cost sheet showing prime cost, works cost, cost of production and cost of sales.
Core rules
- Prime cost = direct material + direct labour + direct expenses.
- Works or factory cost = prime cost + factory overhead.
- Cost of production = works cost + administration overhead.
- Cost of sales = cost of production + selling and distribution overhead; profit = sales - cost of sales.
- Product costs attach to units; period costs are charged to the period.
Worked example
Direct material Rs.80,000; direct wages Rs.40,000; direct expenses Rs.10,000; factory overhead Rs.20,000; administration overhead Rs.15,000; selling overhead Rs.5,000. Prime cost = Rs.1,30,000. Works cost = Rs.1,30,000 + Rs.20,000 = Rs.1,50,000. Cost of production = Rs.1,50,000 + Rs.15,000 = Rs.1,65,000. Cost of sales = Rs.1,65,000 + Rs.5,000 = Rs.1,70,000. If sales are Rs.2,00,000, profit is Rs.30,000. Each overhead enters at its correct stage, not all in factory cost.
Traps
Including selling overhead in works cost; omitting direct expenses from prime cost; treating abnormal loss as a product cost; and ignoring opening or closing stock of finished goods while finding cost of sales.