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Discuss the treatment of various items in Cost Accounts.

Discuss the treatment of various items in Cost Accounts.

Owlgen
Course: B.Com

1 Answer
There are certain items of overheads the treatment of which vary from concern to concern depending upon the size of the concern, the method of production used and the policy followed by management. Let see such items more closely and study how they are to be treated in cost accounts.

Interest on Capital.

There is a great deal of controversy regarding the inclusion of interest on capital in the cost accounts. There are arguments both in favor and against it. These are summarized below:

For Inclusion.
  • Interest is as much a production cost as wages. Wages are the reward for labor and interest is the reward for capital.
  • If interest on capital is charged to cost units then real profit cannot be ascertained.
  • Interest helps in comparison of result of various activities.
  • The true of maintaining stocks cannot be ascertained without taking into account the interest on capital invested in stocks.
  • Where management has to make crucial decisions like: replacement of manual labor by machines, a true comparison cannot be made unless interest on capital investment in machine is taken into account.

Against Inclusion.

  • The argument that wages are reward of labor and interest is reward of capital holds well in economics and not in costing.
  • Interest is purely a matter of finance, not economics.
  • It is difficult to compute the exact rate. The actual amount on which interest is calculated is also not clearly known.
  • Calculated interest in cost account creates unnecessary complication in managerial decisions and comparisons involving interest can be done on separate statements.
After considering the above arguments both for and against inclusion of interest in cost accounts it can be concluded that:
  • Interest need not be rewarded in cost recount, and
  • It should be taken into consideration while making cost comparisons and submitting cost dates for managerial decisions.

Depreciation.

Depredation is the reduction in the value of the fixed asset due to constant use or passage of time. Depreciation affixed assets forms an important part in computing the exact cost of manufacture like machinery and factory building must be taken into account. In order to determine the account of depreciation changeable to production it is necessary to estimate the working life of the asset in terms of years or production hours and ascertain its total cost by adding installation charges to its original cost minus estimated scarp value.

There are various methods that can be used for calculating depreciation such as straight line method, written down value method, sum of year’s digits method, annuity method, production hours or production unit’s method. The method is adopted considering the nature of organization. But, in cost accounts, mostly straight line method or production hours method is used because of their simplicity and convenience.

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Research and Development Cost.

The cost incurred on discovery of new product or improved product ideas or improved methods are considered to be research costs. The cost incurred in implementing the decision to produce a. new or improved product is considered as development cost. Research is done for various purposes. If research is conducted in the method of production, the cost is , taken as production overheads and if it relates to administration the costs are treated as administration overheads. Market research expenses are charged to selling and distribution overheads. If research is conducted in bringing a new or improved product the costs are charged directly to the product. If research proves not to be successful, its cost is treated as deferred revenue expenditure and charged to Costing Profit and Charged Account.

The cost of regular research and development (R&D) activity incurred out of a separate financial provision is excluded from cost accounts.

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Royalties and Patent Fees.

Royalties are the rent /fees paid for the use of a patent or copyright. It should be regarded as direct expenses if it is paid on the basis of output. But if it is paid on the basis of units sold it should be regarded as a selling expense.

Drawings from Office.

Expenses on the work of drawings office is the preparation of production plans, drawings and designs if drawings are made from specific project they are regarded as direct expenses if they are made to educate the customers about the good or for quoting the price they are treated as selling expenses. But if the services are for the whole organization then such expenses are treated as production overheads and are to be apportioned on the basis of services rendered.

Fringe Benefits.

With addition to the salary and the allowance like DA, BRA, and CCA, some monetary benefits in indirect, form are also provided. There may be benefits like housing, medical facilities, free education of employees children etc. These expenses are incurred to boost the employee’s morale, loyalty and stability. The cost of such benefits must be charged as production overheads.

Costing Office Expenses.

These expenses are charged to administration overheads. They may be apportioned to various functions like production, administration and selling and distribution on the basis of estimated benefits obtained by each.

Defective/Spoiled, Work.

Where the defective work is incurred for the specific job its cost is charged to that respective job . otherwise these cost will be treated as works overheads expenses. If this defective work is due to abnormal factors like: fire, accident etc. then such loss should be transferred to costing P&L account. The cost of defective work sent to factory for correction must be treated as factory overheads.

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Packaging Expenses.

Packaging is essential for essential handling of products. Some goods cannot be sold without proper package. Their cost is included in direct material and is treated as production overheads. If packaging costs are incurred to make goods attractive and to attract customers towards goods, there cost are included in selling and distribution overheads.

Patterns and Dies.

If the patterns and dies prepared for a respective job or order, then their cost should be charged to the respective job. If these are incurred for production then their depreciation should be taken as an item of factory overheads.

Idle Capacity.

The unutilised capacity is termed as idle capacity. This may be due to factors like: defective planning, scheduling of work, seasonal fluctuations of demand etc. measures should be taken to utilize this unused capacity the overhead cost of avoidable idle capacity is charged to costing profit and loss account. The cost of normal idle capacity is considered while calculating the hourly rate of production.

Cash Discount.

Cash discount is provide or received for the quick payments. It should not form part of cost account as it is a purely financial element. The off-season discounts provide to increase the sales are treated as trade discount.

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October 8, 2019
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