Costs can be classified based on the following

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Costs can be classified based on the following attributes : Based on Nature, Based on Degree of Traceability of the Product, Based on Controllability, Based on Relationship with Accounting Period, Based on Association with the Product, Based on Functions, Based on Change in Activity or Volume
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294 ELEMENTS OF COST : There are three broad elements cost :Material, Labour, Expenses . Material: - The substance from which the product is made is known as material. It may be in a raw or a manufactured state. It can be direct as well as indirect . Labour: - For conversion of materials into finished goods, human effort is needed such human effort is called labour. Labour can be direct as well as indirect. Expenses: - Expenses may be direct or indirect OVERHEADS : - It is to be noted that the term overheads has a wider meaning than the term indirect expenses overheads include the cost of indirect material, indirect labour besides indirect expenses. Components of total cost : Prime cost: - It consists of costs of direct material, direct labour and direct expenses. It is also known as basic, first or flat cost. Factory cost :- It comprises of prime cost and in addition works of factory overheads which includes costs of indirect material, indirect labour and indirect expenses of the factory. The cost is also known as works cost, production or manufacturing cost. Office cost: - If office and administrative overheads are added to factory cost office cost is arrived at this is also termed as administrative cost or the total cost of production. Total cost:- Office cost or total cost of production selling and distribution overheads are added to the total cost of production to get the total cost or the cost of sales. Cost of sales or total cost. Cost sheets are prepared for the use of management and consequently, they must include all the essential details which will assist the manager in checking the efficiency of production. 21.7 TERMINAL EXERCISE 1. …………………………………..is an analytical statement of expenses relating to production of an article which informs regarding total cost, per unit cost and quantity of production. 2. …………….. consists of costs of direct material, direct labour and direct expenses. It is also known as basic, first or flat cost. 3. The substance from which the product is made is known as …………………….. 4. For conversion of materials into finished goods, human effort is needed such human effort is called ……………………… 21.8 SUPPLEMENTARY MATERIAL 1. 2. 3. 4. 5. 6. 7.
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295 8. 9. basiccollegeaccounting.com/ 10. 11. 12. 21.9 ASSIGNMENTS 1. What are the main benefits that may be expected from installation of a costing system in a manufacturing business.
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