Cost Centre
The term ‘cost’ means the amount of expenses incurred on or attributable to specified thing or activity
Cost is ‘measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services.
Cost represent an expenditure made to secure an economics benefit, generally that promise to produce
Cost can be define as the value attributed to a resources
cost unit a quantitative unit of product or service in relation to which cost are assertained
Cost Centre
A cost centre is the smallest segment for which cost may be ascertained and used for the purpose of cost control. The cost centre may be a location or a person or group of persons or equipment or group of equipment or operation or a process.
Types of Cost Centres
Personal Cost Centres: If a cost centre refers to a person or group of persons, it is a personal cost centre.
Impersonal Cost Centre: If a cost centre refers to a location or equipment or group of equipment, it is an impersonal cost centre
Production Cost Centre: In a manufacturing concern, a cost centre refers to machine shop, welding shop, grinding shop, polishing shop, painting shop, assembly shop and the like. Such cost centre is a production cost centre.
Service Cost Centre: In a manufacturing concern, some centres like stores, power, transport, accounts, personnel department etc., are rendering services to the production cost centre. Such centre is a service cost centre.
Operation Cost Centre: A centre is consisting of machines and/or persons carrying out similar operations.
Process Cost Centre: A centre is consisting of those engaged on a specific process of manufacture of a product.
Why are cost centre required?
There are two reasons for specifying the cost centre.
The first reason is to fix the responsibility. If responsibility is fixed, the cost control is very easy. Hence, cost centres are also called “Responsibility Centre”.
The second reason is facilitating the recovery of overhead. Overhead is recovered on the predetermined rate. Rate is predetermined on the basis of the nature of completion of work or the process followed
Elements of Cost
Direct Material: It refers to material out of which a product is to be produced or manufactured. The cost of direct material is varying according to the level of output. For example: Milk is the direct material of butter.
Indirect Material: It refers to material required to produce a product but not directly and does not form a part of a finished product. For example: Nails are used in furniture. The cost of indirect material is not varying in direct proportion of product
Direct Labour: It refers to the amount paid to the workers who are directly engaged in the production of goods. It varies directly with the output.
Indirect Labour: It refers to the amount paid to the workers who are indirectly engaged in the production of goods. It does not vary directly with the output.
Direct Expenses: It refers to the expenses that are specifically incurred by the company to produce a product. A product cannot be produced without incurring such expenses. It varies directly with the level of output.
Indirect Expenses: It refers to the expenses that are incurred by the organization to produce a product. But, these expenses cannot be easily found out accurately. For example: Power used for production.
Overhead: It is the combination of all indirect materials, indirect labour and indirect expenses.
Factory Overhead: It is otherwise called Production Overhead or Works Overhead. It refers to the expenses that are incurred in the production place or within factory premises. For example: Indirect material, rent, rates and taxes of factory, canteen expenses etc.
Administration Overhead: It is otherwise called Office Overhead. It refers to the expenses that are incurred in connection with the general administration of the company. For example: Salary of administrative staff, postage, telegram and telephone, stationery etc.
Selling Overhead: It refers to all expenses incurred in connection with sales. For example: Salary of sales department staff, travelers’ commission, advertisement etc.
Distribution Overhead: It refers to all expenses incurred in connection with the delivery or distribution of goods and services from the producer to the consumer. For example: Delivery van expenses. loading and unloading, customs duty, salary of deliverymen etc
CLASSIFICATION OF COST
1. ON THE BASIS OF ELEMENTS OF COST
MATERIAL COST
1. material cost may be direct material cost or indirect material cost
2. direct marial cost the cost of meterials enterning into and becoming consitutent elements of a product
3. inditect matrial cost cost other then direct material cost
LABOUR COST
1. it may be diect labour or indirect labour cost
2. direct labour the cost of remuneration or wages for employess
3. indirect labour cost or wage cost other than direct labour cost
EXPENSES
1. it may related to direct or indirect expenses
2. direct expenses cost other than materials or wages whichare incurred for specfic product or service
3. indirect expenses expenses other than direct expenses
OVERHEADS
1. The total cost of indirect materals, labour or wages and expenses
2. There are five types of overheads fatory ,administrative, selling, distreibution, reasearch and development overheads
2. ON THE BASIS OF NARURE ANE VERIABLITY
1. FIXED COST a cost which does not vary at all with volume
2. SEMI VERIABLE many cost include a combination of fixed cost and variable cost
3. VERIABLE COST A COST WHICH CHENGES IN STRICT PROPOETIONALITY WITH VOLUME
3. ON THE BASIS OF FUCTION
1. PRODUCTION OR MANUFACTURING COST cost incurred in fabricating and assembling units of production
2. ADMINISTRATIVE COST these are indirect cost and covers all expenditure incurred informulating the policy , directing the organisation and controlling the operations
3. SELLING AND DISTRIBUTION COST
selling cost is the cost of deekimng to create and stimulate demand
distribution cost is the expensiture incurred which begins with making the package produced available for dispatch and ends with making the erconditioned packages avilalbe for reuse
4. FINANCE COST are those cost associated with using external sources of fumds of the otaganisation to finances
5. RESEARCH AND DEVELOPMENT COST
reserch cost the cost of seeking new ot improved product, application of material or methods
development cost the cost of process which begins with the implementation of the decision to produce a new or improved method and ends wth the commemcement of formal production of that product
4. ON THE BASIS OF NORMALITY
1. NOTMAL COST cost which id notmalincurred at a given level of output in conditionin which that level of output is normal
2. ABNORMAL COST cost which is not normally incurred at a given level of outpit in condition in which that level of output is abnormal
5. ON THE BASIS OF CONTROLLABILITY
1. CONTROLLABLE COST cost chargeable to a cost center, which can be influernced by the action of personin whom control of the center is vested
2. NON CONTROLLABLE COST cost chargeable to a cost center, which cannot be influernced by the action of personin whom control of the center is vested
6. ON THE BASIS OF TIME ANE PERIOD
1. HISTORICAL COST which are incurred after the event takes place
2. PRODUCT COST which are directly associated with the product
3. PERIOD COST that can be associated with a perticular accounting period rather than with the product delivered to the customer
4. PREDERTMINED COST which is computed in advence od production on the basis of specification of all the factors affecting cost
7. ON THE BASIS OF DECISION MAKING
1. OPPERTUNITY COST the value of beneficial sacrificed in favour of an alternatived course of action
2. REPLACEMENT COST cost of replacing an asset at current market value
3. MARGINAL COST the variable cost of one unit of product
4. COVERSION COST aggregate of direct labour cost and overherads
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