Class 12 Accounting-II Notes | COST CLASSIFICATION | Principles of Accounting-II XII

Class 12 Accounting-II Notes, COST CLASSIFICATION,Principles of Accounting-II XII

COST CLASSIFICATION

42) What do you mean by cost?

Cost is the amount of expenditure incurred while manufacturing any products or rendering any services. It represents the resources that have been sacrificed while producing products or services. It can also be defined as the monetary value sacrificed for obtaining goods or services or converting raw material into finished goods.

43) Direct cost and Indirect cost

• Direct cost: A direct cost is a price that can be directly tied to the production of specific goods or services. Direct cost can be traced to the cost object, which can be a service, product, or department. For example, direct labour, direct material, etc.
• Indirect cost: Indirect costs are expenses that apply to more than one business activity. Unlike direct costs, you cannot assign indirect expenses to specific cost objects. For example, indirect material, indirect labour, etc.

 

44) Functional classification of cost

On the basis of function, the cost can be classified into production cost, administration cost, selling and distribution cost.

• Production cost is inclusive of all direct material, direct labor, direct expenses and manufacturing Expenses.
• Administrative cost is incurred for carrying the administrative function of the organization.
• Selling cost refers to the cost of selling function.

45) 1 Variable cost and Semi-variable cost.

• Variable cost: The variable cost is a cost that tends to vary in accordance with level of activity within the relevant range and within a given period. Direct materials, direct labor and direct expenses tend to vary in direct proportion to the level of activity.
• Semi-variable cost: Semi-variable costs are those costs, which are partly fixed and partly variable. Both fixed and variable costs are included in these cost. It is also known as semi-fixed cost. These costs remain constant up to certain level of production and increase beyond that level of production. Telephone charges, electricity charges, insurance charges are the examples of semi- variable costs.

46) Controllable cost and uncontrollable cost

• Controllable cost: A cost which can be influenced by the action of a specified number of an undertaking is known as controllable cost. For examples, direct material, direct labor.
• Uncontrollable cost: A cost which cannot be influenced by the action of specified number of an undertaking is known as uncontrollable cost. For examples, Rent, rates, taxes.

47) Fixed Cost

Fixed cost means that cost tends to be unaffected with the volume of output. It is also known as period cost. It is called fixed because the total cost remains constant in spite of any changes in output. Rent, Permanent staff salaries are the examples of fixed costs.

48) Variable Cost

Variable costs are costs that change as the quantity of the good or service that a business produces changes. For example, cost of direct materials.

ACCOUNTING FOR MATERIALS

49)  Material Control

Material refers to the commodities required to the manufacturing industry to manufacture the finished product or render service. Materials control is a system which ensures that right quality of material is available in the right quantity at the right time and right place with the right amount of investment.

50) Objectives of Material Control

• Reduce the cost of material
• Minimize wastage
• Ensure smooth flow of production
• Reduce under and over stocking of material

51) Duties of a storekeeper

• To periodically check bin card balance with physical balance.
• To maintain stores in a tidy manner.
• To accept materials after proper verification of documents.

52) What is bin card?

Bin card is the statement of all the receipts and issue of the stock from the store department. It is also called stock card or bin tag. It is the responsibility of the store keeper to write every in and out of stock from the store. The physical stock count and the stock quantity reported according to the bin card should be equal; otherwise internal audit department will have the right to investigate the matter with management.

 53) Specimen of a bin card.

ABC Company

Specimen Bin Card Format

Bin card #: Code #: Material name: Location : Stores ledger folio:					Maximum stock level: Minimum stock level: Recorder level: In charge:
Date	Receipts		Issues		Balance	Checked & Verified By
	G.R.N	Qty	Requisition#	Qty	Qty	Date	Name	Initial

54) What do you mean by classification and codification of materials?

Classification is the process of grouping of each material either on the basis of their nature or on the basis of their usages.

Codification is the process for assigning symbol for each item in accordance with a proper arrangement. So, except its name, an item of material is also known by the symbol allotted in it.

55) Material Purchase Process

The purchase department follows the following procedures to control at the time of purchase:

• Request for materials from the department requiring the material.
• Locating source of material and supplies
• Receiving of material.

 

56) Sketch a specimen of purchase requisition form?

Purchase Requisition Form is prepared by the storekeeper for regular store. A formal request made by the department concerned to the purchasing department to order goods in written form is known as purchase requisition form.

ABC Concern

Purchase Requisition Form

Date: ………………………

S No.
Department:
The Manager
Purchase Department

Please purchase the following items which are required latest by

Serial No.	Items Code no	Quantity	Description	Remarks

Requested by : ………………………  Approved by ……………………………………

 

For use in purchase Department

Date	Purchase Order No	Name of Supplier	Date of Delivery	Remarks

57) Perpetual Inventory System

A perpetual inventory system is an inventory management method that records when stock is sold or received in real-time through the use of an inventory management system that automates the process. A perpetual inventory system will record changes in inventory at the time of the transaction.

58) Decentralized Purchasing

Decentralized purchasing refers to purchasing materials by all departments and branches independently to fulfill their needs. Decentralized purchasing helps to purchase the materials immediately in case of an urgent situation.

Advantages

-    Materials can be purchased by each department locally as and when required.

-    Materials are purchased in right quantity of right quality for each department easily.

-    No heavy investment is required initially.

-    Purchase orders can be placed quickly.

-    The replacement of defective materials takes little time.

Disadvantages

-    Organization losses the benefit of a bulk purchase.

-    Specialized knowledge may be lacking in purchasing staff.

-    There is a chance of over and under-purchasing of materials.

-    Fewer chances of effective control of materials.

-    Lack of proper co-operation and co-ordination among various departments.

59) Centralized Purchasing

In this system, the other entire department should send purchase requisition to the centralized purchasing department to make timely and suitable purchases.