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Direct materials + Direct labour + Direct expenses = Prime cost or Direct cost
Factory cost: It is the aggregate of prime cost and factory overheads. Factory cost is also termed as works cost or
production cost or manufacturing cost.
Prime cost + Works (Factory) overheads = Works cost or Factory cost or Manufacturing cost
or Production cost
Office cost: It is the aggregate of factory cost and office and administration overheads. This is also known as
administrative cost or total cost of production.
Total cost: It is the aggregate of office cost and selling and distribution overheads. This is also called cost of sales
Office cost + Selling and Distribution overheads = Cost of sales or Total cost
Opening stocks of Direct material + Purchase of direct material Closing stock of direct material
Work-in-progress: It has to be adjusted with works cost (i.e., after computation of prime cost but before
determining works cost)
Finished goods: It has to be adjusted with cost of production (i.e., after computation of works cost but before
determining cost of production)
Formula:
Sometimes, stock holding cost may be given in percentage (i.e., the inventory-carrying charges). In such
cases the formula differs a little, which is shown below:
Minimum level = Re-order level (Normal consumption Average period to obtain delivery)
Safety stock level = Ordering level (Average rate of consumption Re-order period)
(or)
= (Maximum rate of consumption Average rate of consumption) Lead time
Formula:
T: Time Taken
R: Rate
Conversion cost means that cost of direct labour, direct expenses and factory overheads are all included.
Gross profit means the profit before administration, selling and distribution overheads.
The bases which lay emphasis on the selling function, namely Net saeles value, Selling costs and Number of
units sold are more equitable than the other bases. A predetermined overhead absorption rate can be used.
It is important to note that administration overhead must not be added to the cost of units in stock (finished goods
or work-in-progress).
Formula:
1. In case the value of work certified is less than 25% or 1/4th of the contract price, then no profit has to be
taken into consideration. The entire profit has to be kept as a reserve for meeting the contingencies.
3. In case the value of work certified is 50% of the contract price [ 1/2]:
Formula:
4. In case the contract is nearing completion < 100% of the contract price:
Formula:
(i) 1/3 of profit after adjusting the percentage of cash received from the customer (contractee) to be
credited to P&L A/c.
(ii) (ii) Balance amount of profit is kept as a reserve.
(i) 2/3 of profit after adjusting the percentage of cash received from the customer to be credited to P&L
A/c.
(ii) (ii) Balance amount of profit is kept as a reserve.
(i) Estimate the total cost of completing contract and then calculate the estimated profit.
(ii) (ii) Estimate the profit after adjusting for percentage of cash received and percentage of work certified.
NOTE: Instead of machine hour, any other base, that is, labour or wages may be used.
For instance,
For direct wages, the percentage of direct wages may be determined as follows:
The material cost variance may be determined by using the following formula:
15.1 Material-Usage Variance (or) Quantity Variance
The formula for the computation of variance is:
Direct labour cost variance = Standard cost for actual output Actual cost
(or)
[Standard wage rate per hour Std direct labour hrs. produced] [Actual wage rate per hrs Acutal direct
labour hrs]
Formula:
Labour cost variance = (Std rate Std time for actual output) (Actual rate Actual time).
The direct labour (wage) rate variance is calculated by using the following formula:
Direct labour rate variance = Actual hours or time (Std wage rate Actual wage rate)
Direct-labour idle-time variance = Std wage rate per hour Abnormal idle hours
(or)
= (Actual hours paid for Std wage rate) (Actual hours worked Std wage rate).
Direct labour mix variance = Std rate (Revised std labour hours Actual labour hours)
Labour-mix variance = (Actual hrs at Std rate of actual gang Actual hrs at Std rate of std gang)
Directlabour-yield variance = Standard cost per unit (Standard production for Actual mix Actual production)
Variable-overhead variance = (Std. variable-overhead rate Actual production) Actual variable overhead.
Fixed-overhead variance = (Std. fixed overhead rate Actual output) Actual fixed overheads
(or)
(Std. hours produced Std. fixed overhead rate per hour) Actual fixed overheads.
Std. fixed-overhead rate (Actual hours worked Output in terms of std. hours).
where, the output in terms of std. hours = Actual output Std hours per unit of output.
Sales-price variance] = Actual quantity sold (Standard profit per unit Actual profit per unit)
(or)
Sales-mix variance = (Std. value of actual mix Std. value of revised standard mix).
Selling-price variance = Actual quantity sold (Budgeted selling price Actual selling price)
Sales-volume variance = Std. selling price per unit (Std. quantity of sales Actual quantity of sales)Sales-
volume variance may be further classified into:
Sales-mix variance = (Std. value of actual mix Std. value of revised std mix).
(or)
Revised std sales value Budgeted sales value.
(or)
Sales = Marginal costs + Fixed costs + Profit
The level of sales required to earn a particular level of profi t can be determined by using the formula:
17.2 Margin of Safety
Formulae
[Pertaining to P/ V ratio, break-even and CVP analysis]