Nature & Treatment of some items of Expenses in Cost Accounts part III
- Power Cost: Expenditure incurred on electricity, gas, steam
etc. are known as power cost. Power particularly, gas & electricity could be
produced internally or could be purchased from outside. On the basis of meter reading,
allocation of power purchased from outside should be done to the departments or
cost centers. However, if no separate meters are provided, allocation of cost should
be done on the basis of horse power, kWh, wattage etc. Use of other technical estimates
which aimed at providing rational apportionment should be made.
Power house is treated as a separate cost centre, when power is generated & therefore, to the power house, all expenses are charged. Then, to other cost centers, apportionment of power house cost is done.
- Warehouse Rent: Apportionment of this item of selling & distribution
expense should be made in the ratio of floor space or volume occupied by each item
of warehouse stock. Alternatively, on the basis of number of packets, when they
are of uniform size, the expenses should be apportioned. Technically estimation
of period of shortage & weight of the product may be done so that they can
be used as bases of apportionment.
- Market Research expenditure: For a continuous study of
the market for either a particular product or for all the products of the organization,
this expense is incurred. For the purpose of understanding the potential demand,
consumers’ behavior, taste & habit, future trends of the market, possibility
of entry of competitors, trading practices etc., this study may be undertaken.
- Discounts: Discounts are of two types- cash discount & trade
discount. Cash discount’s treatment depends upon how the interest on capital
is treated. Cash discount is nothing but a payment made for the compensation of
interest which is forgone by the party on making the cash payment. Cash discount
could be received from suppliers or may be allowed to customers. The former is
revenue & later is an expense. Cash discount should be included in cost, if
interest is included in cost.
Trade discount which is received on purchases should be deducted from the purchase price & trade discount allowed on sales should be deducted from gross selling price. So in cost accounts, trade discount does not enter.
- Bad debt: If goods are sold on credit, to some extent,
bad debt is almost unavoidable. Bad debt could be classified as normal bad debt
(limited up to a certain % of credit sales) & abnormal bad debt. In the selling
overhead, normal bad debt should be included, while the abnormal bad debt should
be written off to costing profit & loss account & should be excluded from
cost.
- Materials & store handling expenses: This expense is
quite different from storage expense. Expenses for raw materials handling, work-in-progress
handling & finished goods handling, expenses for materials movement from one
department to another department, expenses for weighing of materials at different
stages etc. are included in this expense. The expense should be treated as works
overhead & on the basis of value, volume, weight, or number of requisitions
handled, whichever appears to be rational, the apportionment of the same to the
various departments should be done.
- Loss on sale of machinery: Due to obsolescence or due to
under-depreciation in past, loss on sale of machinery may arise. If the loss arises
due to obsolescence, then the loss should be written off to the costing profit & loss
account but when the loss arises as a result of under-depreciation, then the loss
should be treated as carry forward loss hence the same should be included in works
overhead of the concerned period or of a number of periods to come.
- Profit on sale of depreciable assets: Due to rise in market
price or due to over-depreciation in the past, profit may arise. In cost, by crediting
the works overhead account of the concerned period or of a number of periods to
come, the profit to the extent of the difference between written down value & the
original cost should be included but profit exceeding this limit should be treated
as capital profit & has to be excluded from cost.
- Depreciation: Depreciation is diminution in fixed asset
value which arises as a result of its use &/or lapse of time is known as depreciation.
Every asset, in terms of working hours, has a definite life. So, if during any
period, any asset is used overtime or extra shift, the diminution amount should
be higher. If, during a particular period, any asset is not used at all, then due
to lapse of time, it will lose its value.
In cost accounts, to the cost of production, depreciation on assets is charged; because the cost of use of the asset is represented by it & after the useful life of the asset is over, a concern is enabled by it to provide funds for the replacement of the asset.
- Hire of Accounting Machine: On the basis of service rendered
by the machine to manufacturing, administrative, selling & distribution, the
apportionment of the cost may be done to the works overhead, administrative overhead & selling & distribution
overhead. The bases of apportionment are man-hours, machine-hours, number of cards
punched.
- Technical Director’s fees: As this expense is connected
with production, the treatment of the same should be done as works overhead. If
power-house, production department, maintenance department etc. is looked after
by the technical director, then on the basis of quantum of services rendered, to
these functions his fees should be apportioned & then to the production department,
the service departments’ share should be re-apportioned.
- Cost of patents: Patent fees may be paid on the basis of
units produced or units sold or as a fixed charge paid periodically. It should
be treated as factory overhead, if the payment of the same is on the basis of unit
produced or the payment is made periodically as a fixed charge. It could also be
treated as a direct charge to the cost of production, if the payment of the same
is on the basis of rate per unit produced. However, if the payment is on the basis
of units sold, then the same should be charged as selling overhead.
- Loss of stores: Loss of stores while in process may be
within normal limit which becomes unavoidable also & is referred to as normal
loss or it may arise due to abnormal reasons & is referred to as abnormal loss.
If the loss is normal, then it’s shared by the good output, on the other
hand, if its abnormal, then the same should be written off to the costing profit & loss
account.
Loss of stores in storage may also be normal or abnormal. If the loss is normal, it’s treated as stores overhead; however, if the loss is abnormal, then the same should be written off to the costing profit & loss account.
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- Administration Overhead
- Comparision between Production Overhead & Selling & Distribution overhead
- Nature & Treatment of some items of Expenses in Cost Accounts- Part I
- Nature & Treatment of some items of Expenses in Cost Accounts- Part II
- Over or Under absorption of Overhead
- Selling & Distribution Overhead
