Cost and Management Accounting HTML version

Cost & Management Accounting (MGT-402)
b) Direct labor costs are the specific costs of the workforce used to produce a product or
rendering a service.
c) Other direct production costs are those expenses that have been incurred in full as a
direct consequence of producing a product, or rendering a service.
Indirect Cost/Overhead Cost
An indirect cost or overhead cost is a cost that is incurred in the course of producing product or
rendering service, but which cannot be traced in the product or service in full.
Expenditure incurred on labor, material or other services which cannot be economically identified
with a specific cost product or service (cost unit).
Examples include:
Material Cost Labor Cost Other Production Cost Total Production Cost
Price Cost
Factory Overhead Cost
1. Prime Cost
Direct Material
+Direct Labor
+Other direct production cost
Prime cost .
3. Conversion Cost
Direct labor cost
+Factory overhead cost
Conversion cost .
Cost behavior is the way in which total production cost is affected by fluctuations in the activity
(production) level.
Activity level
The activity level refers to the amount of work done, or the number of events that have occurred.
Depending on circumstances, the level of activity may refer to the volume of production in a
period, the number of items sold, the value of items sold, the number of invoices issued, the
number of invoices received, the number or units of electricity consumed, the labor turnover etc.
Basic principle
The basic principle of cost behavior is that as the level of activity rises, costs will usually raise. For
example; it will cost more to produce 500 units of output than it will cost to produce 100 units; it
will usually cost more to travel 10 km than to travel 2 km. Although the principle is based on the
common sense, but the cost accountant has to determine, for each cost elements, whether which
cost rises by how much by the change in activity level.
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Wages of supervisor, cleaning material, workshop insurance.
2. Total Production Cost
Prime Cost
+Factory overhead cost
Total production cost .