Page 40 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 2: Unit and Output Costing

The total factory cost or works cost incurred in the factory could be derived by adding the Notes
both direct cost and indirect cost incurred during the factory process.
The cost of production is the combination of both the factory cost and administrative
overheads.
The cost of sales is the blend of both, selling overheads and cost of production.

The selling price of the commodities is fi xed by way of adding both the cost of sales and

profit margin out of the product sales.
The cost of the raw materials is nothing but the direct materials cost of the product. The
cost of the materials is in other words cost of the materials consumed for the production
of a product.

The indirect expenses are the expenses converting the raw materials into semi-fi nished
goods which should be relatively considered for the treatment of the stock valuation rather
than on the basis of prime cost.

The treatment of the stock of finished goods should carried over in between the opening

stock and closing stock and adjusted among them before the finding the cost of goods
sold.
2.5 Keywords

Cost of Production: It is the combination of cost of manufacturing an article or a product and
administrative cost.
Cost of Sales: It is the entire cost of a product.

Cost Sheet: It is a statement prepared for the computation of cost of a product/service.
Direct Cost: Cost incurred which can be easily ascertained and measured for a product.
Factory Cost: It is the total cost incurred both direct and indirect at the work spot during the
production of an article.
Indirect Cost: Cost incurred cannot be easily ascertained and measured for a product. The
combination of various overheads.
Prime Cost: Combination of all direct costs viz direct materials, direct labour and direct
expenses.
Selling Price or Sales: The summation of cost of sales and profi t margin.

2.6 Review Questions

1. Define cost unit. Give five examples of cost unit applicable to different industries.
2. Distinguish between direct cost and indirect cost.
3. What are the components of total cost? Draw a format of cost sheet.
4. Prepare the cost sheet to show the total cost of production and cost per unit of goods

manufactured by a company for the month of Jan. 2005. Also find the cost of sale and
profi t.

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