Cost Accounting and Costing Methods
Cost Accounting and Costing Methods tests classification of costs, preparation of a cost sheet and selection of an appropriate costing method.
Cost concepts
Cost accounting ascertains and controls cost. Material, labour and expenses are direct when traceable to a cost unit and indirect when not. Prime cost = direct material + direct labour + direct expenses. Works cost = prime cost + factory overhead. Cost of production = works cost + administration overhead. Cost of sales = cost of production + selling and distribution overhead. Methods include job, batch, contract, process, unit and operating costing. Techniques include standard costing and marginal costing.
Worked example
Direct material Rs 40,000; direct labour Rs 20,000; direct expenses Rs 5,000. Prime cost = Rs 65,000. Factory overhead Rs 15,000 gives works cost Rs 80,000. Administration overhead Rs 10,000 gives cost of production Rs 90,000. Selling overhead Rs 5,000 gives cost of sales Rs 95,000. If profit is Rs 19,000, sales = Rs 1,14,000. The reasoning is sequential: each overhead is added only at its prescribed stage.
Traps
Do not add administration overhead to prime cost. Direct expenses are not the same as office expenses. Normal loss is absorbed in process costing; abnormal loss is valued separately. Contract costing uses retention money and work certified. Job costing suits customer-specific orders, not mass production.