There are three types of materials in cost accounting.
They are raw materials, work in progress and finished goods.
Raw materials are the primary physical inventory for manufacturing company.
Without raw materials, products cannot be produced.
When other materials are added in raw materials and labour do something with raw materials, it is called work in progress (WIP).
WIP increases the value of raw materials.
But volume of raw materials may be increase or decrease.
Finished goods are near about ready to sales.
In other words, finished goods or stock mean complete the manufacturing process and ready to sales to customers in trading concern, unsold goods for accounting period is finished closing goods.
It becomes opening finished goods for new accounting period.
Keep in Mind (KIM)
General principles of cost accounting |
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Cost accounting is based on estimation before starting the production or service. Cost should be include or charged only after incurred. Cost accounting statement should give fact data; if there is any contingency or reserve, it should be shown separately. Past losses should not be recovered from present or future profit. Principle of double entry system of book keeping should be followed if possible. |
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Materials |
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Raw materials: woods, rubber, glass, iron, steel, paper, cloth, leather, cotton etc Components: accessory (extra pieces of equipment) etc Consumable materials: soap, detergent, cleaning brush, cotton waste etc Maintenance materials: spare parts, tools etc |
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Some cost units under manufacturing or service |
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Vehicle |
per units |
Gas |
per cubic meter or per cylinder |
Screws manufacturing |
per 1,000 |
Brick work |
per 1,000 |
Transport |
per passenger km or per ton km |
Electricity |
per megawatt, kilo watt or unit |
Textile |
per meter or per pound weight (Ib) |
Collieries |
per tone |
Petroleum or water |
per cubic liter |
Electrical/electronic |
per unit |
Cost accounting is based on estimation.
In cost accounting, something release for obtaining something.
The amount is released for specific activity.
The specific activity may be a product, job, service, process or other activity.
A cost is compound of three elements.
They are material, labour, expenses or overhead.
are the most important parts in manufacturing company.
All types of goods that are used in the process of production are called material.
The expenses incurred for material is termed as material cost.
It also includes all those cost related with the purchase and storing of material.
There are two types of materials.
They are direct materials and indirect materials.
Large part of materials in finished goods is known as direct materials.
These material cost can be identified easily from finished product.
Sometimes value of direct materials may be less than labour cost.
Small part of materials in finished goods is known as indirect materials.
Without indirect materials, finished goods cannot be completed.
Sometimes value of indirect materials cannot be directly identified from a particular product.
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To convert raw materials into finished goods, manpower is essential.
Such manpower needs expenses.
Wages paid for workers are known as labour cost.
These expenses are wages, salary, bonus and provident funds etc.
There are two types of labour.
They are direct labour and indirect labour.
The wages paid to the workers directly engaged in manufacturing process goods in knows as direct labour cost.
Such wage can be easily identified from job or process cost.
The labour who does not direct engaged with production is known indirect labour.
But he plays important role in production.
Sometimes indirect labour cannot be easily identified from a job or process cost.
All the expenses other than materials and labour costs are known as expenses or overheads.
They are royalty, rent, training expenses of new employees etc.
There are two types of expenses.
They are direct expenses and indirect expenses.
Expenses other than direct material and direct labour are known as direct expenses.
It is also known as chargeable expenses, prime cost, process expenses or productive expenses.
Some direct expenses are cost of plant hiring, cost of designing, royalty, excise duty, cost of rectifying defective work etc.
Expenses other than indirect material and indirect labour are known as indirect expenses.
These expenses cannot be identified for a particular job or product.
Indirect expenses are rent of building, insurance premium, depreciation, repairs and maintenance, welfare and medical expenses etc.
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