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WBCHSE Costing & Taxation study materials
WBCHSE Costing & Taxation study resources

WBCHSE Costing & Taxation: Introduction to Costing and Cost Concepts

WBCHSE Costing & Taxation · Work through your exam, one topic at a time.

All guide sections

Introduction to Costing and Cost Concepts

What this domain tests

Costing ascertains the cost per unit and supplies figures for control and decisions. Questions here ask you to separate cost accounting from financial accounting, name and classify the elements of cost, define cost unit and cost centre, and use the concepts of prime cost, works cost, conversion cost, sunk cost and opportunity cost with precision. These are definition marks - easy to earn, easy to lose.

Core rules

  • Elements of cost: materials, labour and expenses; each is direct (traceable to the cost unit) or indirect, and indirect costs are grouped as overheads by function - factory, office, selling and distribution.
  • Cost unit is the unit for which cost is found (per tonne, per metre, per passenger-km). Cost centre is a location, person or item of equipment for which costs are collected, such as a machine shop or a depot.
  • Classification: by behaviour (fixed, variable, semi-variable), by function (production, administration, selling, distribution), by controllability (controllable, uncontrollable), by normality (normal, abnormal).
  • The concept ladder: prime cost → works cost → cost of production → cost of sales. Conversion cost = direct wages + factory overheads. Sunk cost is irrelevant to decisions; opportunity cost is the benefit foregone and is often recorded as an imputed cost.

Worked example

A bakery reports for the month: flour ₹20,000, bakers' wages ₹10,000, bakery rent ₹5,000, oven depreciation ₹2,000 and sales commission ₹3,000. Flour and bakers' wages are direct, giving prime cost of ₹30,000. Rent and depreciation are factory overheads, so works cost is ₹37,000. Commission is a selling overhead, so cost of sales is ₹40,000; if sales were ₹46,000 the profit would be ₹6,000.

Traps

  • Writing 'overhead' for every indirect cost without naming its function.
  • Confusing a cost centre with a cost unit.
  • Treating depreciation as variable; it is fixed unless charged per machine hour.
  • Forcing a semi-variable cost into either the fixed or the variable class.