Various  Cost    In  Manufacturing

Main objective of cost accounting in any manufacturing unit are  a. Product costing ,b.
Planning performance evaluation and control ,c.Decision making

Cost Elements for  Product
Material Cost

These are Principal  raw material used in production  for  final product with help of direct
labor and factory overhead . Further classified into Direct and Indirect

Labor cost

The physical and mental  effort to convert raw material into final finished product. Further
classified  into  Direct and Indirect labor cost .

Factory Over head

It covers all indirect  material , indirect labour  and all other indirect manufacturing
cost which cannot be specified directly for production of the finished product

In Relationship with Volume

Fixed Cost

Fixed cost are those cost  which are associated  with inputs  which do not vary with changes
in volume  of output  or activity within specified range of activity  for a given budget period .
For example
factory  rents , insurance cost for factory , salaries  for senior executives , lease payments

Variable Cost

Cost that tends to vary in total in direct proportion  or in a one -to -one  relationship  to
change in production  activity , sales activity  or some other measures  of  volumes are
referred  to as variable cost
for examples  material cost , fuel cost  direct labour cost

Ability  to trace

Direct  Cost

These are costs that are  traceable  conveniently  and wholly  by management  to specific  
items/area .For examples  material cost and
direct labor cost

Indirect Cost

These are common  to many items  and cannot be traced  to any one
item/area on the basis  of allocation techniques .For example  indirect manufacturing cost  
allocated as part of factory overhead .

As Per Functional Area

Manufacturing Cost

Cost incurred while producing  finished product which includes material, labor and factory
overhead cost

Marketing cost

Cost incurred in promoting /advertisement and other services related to sales

Administrative Cost

It includes cost incurred while directing , controlling  and operating factory operations
salaries are included in admin cost

Financing Cost

These cost relates  to fund required for running factory operations such as  interest on
loans from bank  and cost of  credit  to the customers

Planning , Controlling and Decision Making

Standard and Budgeted  Cost

Standard cost  are those  cost which  should be incurred  in a particular  production  process
under normal condition .  Budget  is a
quantitative  expression of objectives  and a means to  monitor progress towards
achievement  of those objectives . Standard  costing  is usually  concerned with per unit
cost.Budgeted  cost  takes into  forecasted  activity  on a total basis rather than  on a unit
cost basis

Opportunity cost

When a decision  to pursue  one alternative  is made  the benefit s of the  other
options  are foregone . Benefits lost for rejecting  the next best  alternative  are the  
opportunity  cost of  the chosen option . Although opportunity cost  are not shown  in
accounting  records  but are revel ant for decision making

Shut Down Cost

The cost  of  production lost due to shut down in  production .For seasonal industry
management has to take decision whether to shut down operations  or to  run plants
in these seasons .

More on  Manufacturing Costing

Product Costing
Material Cost
Labor Cost
Factory  Overhead Cost

Cost Concept  In Manufacturing
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