COST CONCEPTS

DEFINITIONS AND TERMINOLOGIES

SOME DEFINITIONS
COST : It is the sum total of all expenses incurred
(direct) or attributable(indirect), actual or notional to
realize an objective.
FIXED COST : The part of cost that tends to be
constant in totality at all level of production within the
capacity of existing plant.
VARIABLE COST : The part of cost which is directly
proportional in totality to the volume of production
with in the capacity of the plant.
Note : A cost element may not be purely fixed or purely
variable in nature it is called semi variable and has
some fixed and some variable component.

SOME DEFINITIONS
PRICE : The consideration customer discharges for
the each unit of goods.
NET SALES REALISATION: (NSR) : Price
selling and distribution expenses statutory
payments.
CONTRIBUTION : NSR Variable Cost
GROSS MARGIN : Total contribution Total cost
(excluding interest and depreciation)
NET MARGIN : Gross Margin Depreciation
Interest

A TYPICAL PROFIT AND LOSS ACCOUNT

INCOME
SALES
LESS EXCISE DUTY
INTERNAL CONSUMPTION
INTEREST EARNED
OTHER REVENUES

EXPENDITURE

RAW MATERIAL
SALARY & WAGES
STORES AND SPARES
POWER AND FUEL
REPAIR AND MAINTENANCE
FRIEGHT OUTWARDS
OTHER EXPENSES
INTEREST
DEPRECIATION

PROFIT BEFORE TAX

PROVISIONS FOR TAXES

PROFIT AFTER TAX

A TYPICAL BALANCE SHEET

SOURCES OF FUND

SHARE CAPITAL
L.T. LOANS & DEBENTURES
SURPLUSES
CURRENT LIABILITIES
SHORT TERM LOANS
SUNDRY CREDITORS

APPLICATION OF FUND
FIXED ASSETS
Less DEPRECIATION
INVESTMENTS
CURRENT ASSETS
INVENTORY
SUNDRY DEBTORS
CASH & BANK
UNWRITTEN OFF LOSS

ELEMENTS OF COST- A COST SHEET

1.
2.

Material cost (V)

Operating cost :
a.
b.
c.
d.
e.
f.

3.
4.
5.

Lab our (F)

Power and fuel (V)
Operating consumable (V)
Repair and Maintenance (F)
Direct services (F) apportioned as per use
Stores /spares (F)
Over Heads : (F) apportioned on fixed basis
a. Works over head
b. Non works over head
Depreciation ( F) based on policy

Interest

a. On working capital
b. On long term investments
Note : CDBI = (1) + (2) + (3)

WORKS COST : CDBI + Int on WC

SOME FEATURE OF COST SHEET

PRODUCT WISE and PROCESS WISE
MATERIAL COST TRANSFERRED FROM
PREVIOUS UNIT CONTAINS ALL COST
UPTO PREV PROCESS
INTEREST AND DEPRECIATION IS
TRANSFRED WITHOUT ADDING
OVER HEAD APPORTIONMENT USUALLY
FIXED RATIO
SERVICES SHARE BASED ON ACTUAL USE
USING A PREDETMINED CRITERION

ELEMENTS OF MAINTENANCE COST

IN SAIL PLANTS
FOR A PRODUCT : EXPRESSED AS PER UNIT OUTPUT

MAINTENANCE LABOUR
MAINTENANCE SPARES
MAINTENANCE CONSUMABLES**
REPAIR AND LABOUR CONTRACTS
INTERNAL CONSUMPTION IN MAINT.
SHARE OF MAINTENANCE SERVICES

TOTAL MAINTENANCE COST OF A PLANT

SAIL POLICY
SPARES, CONSUMABLES (MAINT) ,
REPAIR CONTRACTS , JOB CONTRACTS
OF ALL PRODUCTION UNIT
and
TOTAL EXPENDITURE OF MANITENANCE
SERVICES (CENTRALIZED)
IS DIVED BY TOTAL CRUDE STEEL
PRODUCTION

NOTE ON SAIL
MAINTENANCE COST
EXPRESSED AS PER TON OF CRUDE STEEL
MAINTENANCE LABOUR IS EXCLUDED
COST OF MAINTENANCE IN UTILITY SERVICE
UNITS, POWER PLANT NOT INCLUDED
INTEREST ON SPARES INVENTORY NOT
AVAILABLE SEPARATELY
OVERHEADS DUE TO MAINTENANCE
DEPARTMENT NOT AVAILABLE SEPARATELY
AS SUCH SHARE OF OVERHEADS, INTEREST,
DEPRECIATION NOT CONSIDERED

COST CONTROL
AND
COST REDUCTION
IN
MAINTENANCE

COST CONTROL vrs COST

REDUCTION

COST CONTROL IS RESTRICTING THE

COST INCURRENCE WITH RESPECT TO
SOME NORM OR STANDARD COST
COST REDUCTION IS STRIVING FOR
REDUCTION IN COST WITHOUT ANY
REFERENCE TO ANY NORMS WITHOUT
SACRIFICING QUALITY, PRODUCTION,
DELIVERY,SAFETY AND MORAL
COST REDUCTION STARTS WHERE COST
CONTROL ENDS

COST CONTROL IN MAINTENANCE

BUDGETARY CONTROL
SEPARATE BUDGET FOR CONSUMPTION
AND PROCUREMENT.
DEPARTMENT WISE, MONTH WISE,
EXPENSE HEAD WISE DISTRIBUTION
AND CONTROL IN ISSUE AND INDENT
ANNUAL PLANNING AND CONTROL
COMPUTERIZED SYSTEM

SOME COST REDUCTION MEASURES

IN MAINTENANCE

CENTRALIZED PROCUREMENT OF COMMON

SPARES AND CONSUMABLES
STANDARDISATION AND RATIONALIZATION
MAKE OR BUY DECISION
IMPORT SUBSTITUTION
ECONOMIC PURCHASE
QUANTITY SELECTION
VENDOR SELECTION
LEAD TIME FOLLOW UP

INVENTORY MONITORING AND CONTROL

INTANGIBLE COST
IN
MAINTENANCE

IS THAT ALL ABOUT MAINTENANCE

COST?
WHO IS RESPOSIBLE FOR

THE COST OF DOWN TIME ?

COST OF BAD WORKMANSHIP?
MAINTENANCE INDUCED PROBLEMS?
(CAN WE DENY?)
STOCK OUT SITUATION OF ESSENTIAL
CONSUMABLES LIKE BEARINGS, LUB OIL
MISTIMED PROCUREMENT OF SPARES ?

HOW THESE COSTS ARE ACCOUNTED

FOR ?

COST
SHEET
COST OF DOWN
TIME
COST OF
QUALITY
DEGRADATION
COST OF SLOW
PROD RATE
COST OF OVER
MAINTENANCE

MAINTENANCE
COST
IN THE
COST SHEET
IS
JUST
TIP OF
AN ICE BERG

DOWN TIME ON ACCOUNT OF

MAINTENANCE
BREAK DOWN DUE TO LACK OF
PREVENTIVE MAINTENANCE
LACK OF OR WRONG INSPECTION
NON AVAILABILITY OF SPARES,
DEFECTIVE SPARE
MAINTENANCE INDUCED PROBLEMS
OVER MAINTENANCE- FREQUENT PMs

QUALITY COST AND SLOW PRODUCTION

RATE COST DUE TO MAINTENANCE

BAD WORKMANSHIP
WRONG ADJUSTMENT
DELAYED PM
DEFECTIVE SPARE
WRONG DIAGNOSIS

HOW TO CONTROL AND

REDUCE INTANGIBLE
MAINTENANCE COST?