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Unit 12: Process Costing and its Applications

indirect labour costs. Examples of indirect labour are: charge hands and supervisors, Notes
maintenance workers, labour employed in service departments, material handling and
internal transport, apprentices, trainees and instructors, factory clerical staff and labour
employed in time and security office etc.
(v) Direct or Chargeable Expenses: They include all expenditures other than direct material and
direct labour that are specifically incurred for a particular product or job. Such expenses
are charged directly to the particular cost account concerned as part of the prime cost.
Examples of direct expenses are: excise duty, royalty, surveyor’s fees, cost of rectifying
defective work, travelling expenses to the job, experimental expenses of projects, expenses
of designing or drawings, repairs and maintenance of plant obtained on hire and hire of
special equipment obtained for a contract.

(vi) Indirect Expenses: Indirect expenses are expenses which can not be allocated but which can
be apportioned to or absorbed by cost centres or cost units as rent, insurance, municipal
taxes, salary of manager, canteen and welfare expenses, power and fuel, cost of training for
new employees, lighting and heating, telephone expenses, etc.
(vii) Overheads: Overheads may be defined as the cost of indirect materials, indirect labour and
such other expenses including services as cannot conveniently be charged direct to specific
cost units. Thus overheads are all expenses other than direct expenses. Overheads may be
divided into following categories:
(a) Factory or works overheads cover all indirect expenditure incurred by the
undertaking from the receipt of the order until its completion is ready for dispatch
either to the customer or to the finished goods store depreciation on plant and
machinery, buildings and equipments, insurance charges on fixed assets, repairs
and maintenance of fixed assets, electricity charges, coal and other fuel charges, rent,
rates and taxes of works, etc.
(b) Office and administrative overhead consists of all expenses incurred in the direction,
control and administration of a factory. Examples are the expenses in running
the general office e.g., office rent, light, heat, salaries, salary to secretaries and
accountants, general managers, directors, executives, investigations and experiments
and miscellaneous fixed charges.

(c) Selling overheads comprises the cost of products or distributors of soliciting and
recurring orders for the articles of commodities dealt in and of efforts to find
and retain customers. It includes sales office expenses, salesmen’s salaries and
commission, show room expenses, advertisement charges, fancy packing, samples
and free gifts, after sales service expenses and demonstration and technical advice to
potential customers.
(d) Distribution overheads comprise all expenditure incurred from the time the product
is completed in the work until it reaches its destination. Its includes warehouse rent,
warehouse staff salaries, insurance, expenses on delivery vans and trucks, expenses
on special packing for bulk transport, losses in warehouse stocks and finished goods
damaged in transit and cost of repairing, etc.
Illustration: A certain product passes through three processes before it is completed. The
output of each process is charged to next process at a price calculated to give a profit of 20% on
transfer price (i.e. 25% on the cost price). The output of Process III is charged to finished goods
stock account on a similar basis. There was no work in progress at the beginning of the year
and overheads had been ignored. Stocks in each process have been valued at prime cost of the
processes.

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