Page 43 - DCOM202_COST_ACCOUNTING_I

Unit 2: Cost Elements and Classification

The cost of setting up such a plant (Having similar capacity and similar life) after five years Notes
would increase to ` 120 Million, variable cost of the product and the salvage value of the
plant remaining the same as above.
The appropriate rate of discounting for the projects of this risk class is 15%. Since this is
related to such a vide spread disease, the Government of India in order to promote such
products has the policy of not taxing such projects for the entire life of the project. The
product has huge demand and all the production of this company as well the competitors
is likely to be sold in the market. Assume all the cash inflows at the end of the year and the
compounding frequency is annual.
Self Assessment

Fill in the blanks:
6. ………………… are not included as part of the cost of either purchased or manufactured
goods and are usually associated with the selling function of the business or its general
administration.
7. ………………… are product costs consisting of Direct Material (DM), Direct Labor (DL)
and Manufacturing Overhead.

8. The major components of ………………… are known as administrative cost of operations
and selling and distribution cost of operations.
9. A ………………… is detailed plan of operation for some specific future period. It is an
estimate prepared in advance of the period to which it applies.

2.4 Summary

z z Cost denominates the use of resources only in terms of monetary terms.

z z In brief, cost is nothing but total of all expenses incurred for manufacturing a product or
attributable to given thing.
z z Costs which cannot be controlled are known as uncontrollable costs.

z z All fixed costs are very difficult to control or bring down; they rigid or fixed irrespective to
the level of production.
z z A budget is detailed plan of operation for some specific future period. It is an estimate
prepared in advance of the period to which it applies.

z z It acts as a business barometer as it is complete programme of activities of the business for
the period covered.

z z Under costing, the role of unit costing is inevitable tool for the industries not only to identify
the volume of costs incurred at every level but also to determine the rational price on the
commodities in order to withstand among the competitors.

z z Direct labour is the cost of the labour which is directly involved in the production of either
a product or service.
z z Indirect expenses are the expenses other than that of the direct expenses in the production
of a product.
z z The expenses which are not directly part of the production process of a product or service
known as indirect expenses.

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