Development cost is the cost of the proces

Development cost is the cost of the process which begins with the implementation of decision to produce a new or improved product or to employ a new or improved method and end with the commencement of formal production of that product or by that method. Development starts where research ends as development expenditure is incurred for putting the results of research on a practical commercial basis. In fact, research indicates whether it is scientifically and technologically possible to manufacture a product according to a specified design. Development is the next stage when a small unit of production is made on a trail or pilot run under practical conditions of production to see whether large scale manufacture would be commercially sound. If the concern gets success, then full scale production is undertaken. Thus development forms a bridge between the research and production though it is more close to the latter. The benefits of research are passed on to the development and the result obtained from development work are passed on to benefit production.

Special Features of Research and Development cost -

• Research and development cost is incurred ahead of actual production. therefore, it may not be charged to production
• The benefit on this cost is experienced over a number of future years; so it is deferred revenue expenditure.
• The amount of expenditure in research and development is huge; so it becomes difficult for a small concern to undertake the research and development work.
• Sometimes research being unsuccessful gives no tangible result and huge expenditure incurred on research is wasted.
• A great difficulty is experienced in fixing proper standards against which efficiency of research and development expenditure is to be measured.
• There are varied objects for which the research and development is undertaken. In order to meet the requirements of different circumstances, such cost requires different accounting treatments

Taking into consideration the prevailing competitive conditions, research and development is necessary not only for growth of the business but also for its survival. Large scale industries spend large sum on research and development in order to carry out this function on continuous basis.

Cost classification is the process of grouping costs

Cost classification is the process of grouping costs according to their common characteristics and establishing a series of special groups according to which costs are classified. Thus it involves two step first the determination of the class or groups in which the overhead costs are subdivided. Secondly the actual process of classification of the various items of expenses into one or the other of the groups. The method to be adopted for the classification of overhead costs depends upon the type and size of the business, nature of product or services rendered and policy of the management, the various classification are

1. Functional classification
2. Element wise classification
3. Classification according to nature of expenditure
4. Classification with regards to behavior of the expenditure

A concern may adopt one or more of the above classification. For example, the overhead expenses in a concern may be first divided according to functions i.e. manufacturing, administration, selling and distribution groups. The expenses pertaining to one group say manufacturing may further be classified into fixed, variable, semi variable. Each of these groups may then be grouped into the elements i.e. indirect material, indirect labour and indirect expenses and under each element, the expenses may be further subdivided according to their nature i.e. depreciation, salary, repair and maintenance.

Labor turnover denotes percentage change labor force organization

Labor turnover denotes the percentage change in the labor force of an organization. High percentage of labor turnover denotes that labor is not stable and there are frequent changes in labor force because of new worker engaged and workers who have left the organization. A high labor turnover is not desirable. There must be some labor turnover due to personal and unavoidable causes. It has been observed by the employers that a normal labor turnover, which is between 3% and 5% need not cause much anxiety. But a high labor turnover is always detrimental to the organization. The effect of excessive labor turnover is low labor productivity and increased cost of production, this is due to frequent changes in the labor force give rise to interruption in the continuous flow of production with result that overall production reduced. New workers take time to become efficient. So lower efficiency of new workers increases the cost of production. Selection and training cost of new workers recruited to replace the worker who have left increase the cost of production. New workers being unfamiliar with the work give more scrap, rejects and defective work which increase the cost of production.

New workers being inexperienced workers cause more depreciation of tools and machinery. Due to faulty handing of new workers, breakdown of tools and machinery may also occur very often and hamper production.Normal labor turnover is advantageous because it allows injection of fresh blood into the firm. But excessive labor turnover is not desirable because it shows that labor force is not contended. There fore, every effort should be made to remove the avoidable causes which give rise to labor turnover.

• Good working conditions which may be conducive to health and efficiency should be provided
• Fair rate of pay and allowances and other monetary benefits should be introduced
• Maximum non monetary benefits should be introduced

Labour cost major element of cost difficult reduce labor cost

Labor cost is a second major element of cost. Under the present political conditions with a restive labor in organized industry, it is very difficult to reduce the labor cost. Therefore, proper control and accounting for labor cost is one of the most important problems of a business enterprise. But control of labor cost presents certain practical difficulties unlike the control of material costs. The human element in labor makes difficult the control of labor cost whereas materials, being inanimate in nature, could be subjected to a rigid control. Labor is the most perishable commodity and as such should be effectively utilized immediately. Labor, once lost, cannot be recouped and is bound to increase the cost of production. On the other hand, materials, being durable, can be used as and when required and can be stored without having immediate loss. Labor are two types:

• Direct labor
• And indirect labor

Direct labor is that labor which is directly engaged in the production of goods or services and which can be conveniently allocated to the job, process or commodity unit. For example labor making the bricks in a kiln is the direct labor because labor charges paid for making bricks. Indirect labor is that labor which is not directly engaged in the production of goods and services but which indirectly helps the direct labor engaged in production of goods.

It may be mention that it may not always be possible to classify individual workers as direct labor or indirect labor. The difference between direct and indirect labor must be observed because payment of direct labor is a direct expenditure and is a part of prime cost whereas indirect labor is an item of indirect expenditure and is shown as works, office, selling and distribution expenditure according to the nature of the time spent by the indirect worker.

Purchase department plays important role

The purchase department plays a very important role in an organization because purchasing has its effect on every vital factor concerning the manufacture, quality, cost, efficiency and prompt delivery of goods to customer. Its function is to procure material, supplies, services, machines and tools at the most favorable terms consistent with maintaining the desired standard of quality. Purchasing is the most important function of materials management as the moment an order is placed for the purchase of materials, a substantial part of the company’s finance is committed which affects cash flow position of the company. Thus if the size of a business concern permits, there should be a separate purchasing department. The head of this department is usually known as the purchase manager or Supply manager or the Chief Buyer. The basic objectives behind establishing a separate purchasing department:

• To make continuous availability of materials so that there may be uninterrupted flow of materials for production.
• To make purchases competitively and wisely at most economical prices.
• To make purchase in reasonable quantities to keep investment in materials at minimum .
• To purchase proper quality of materials to have minimum possible wastage of materials and loss of production.
• To develop good supplier relationship which will ensure the best terms of supply of material.
• To develop alternate sources of supply so that materials may be purchased from those alternate sources if a particular supplier fail to supply the materials,
• To adopt the most advantageous method of purchase to ensure smooth delivery of materials from suppliers and to avoid risks of any disputes or financial loss.
• To serve as an information centre on the materials knowledge relating to prices, sources of supply, specification, mode of delivery etc.

The basic objective of setting up a separate purchasing department is to ensure continuous availability of requisite quality of materials, to avoid help up of production and loss in production and at the same time reduce the ultimate cost of the finished product.

Material control comprehensive framework

Material control can be defined as a comprehensive framework for the accounting and control of material cost designed with the object of maintaining material supplies at a level so as to ensure uninterrupted production but at the same time minimizing investment funds. In simple words material control is a systematic control over the purchasing, storing and using of materials so as to have the minimum possible cost of material. Because materials constitute such a significant part of product and since this cost is controllable, proper planning, purchasing, handling and accounting are great importance. Material control is accomplished through functional organization, assignment of responsibility, and documentary evidence obtained in various stages of operations from the approval of sales and production budgets to the completion of products which are ready for sale and shipment. Material control involves recording on printed forms all steps and movements which occur in the acquisition and utilization of materials. Effective control also requires the systematic preparation of periodic summaries and reports.

Level of material control: Two levels of material control exist quantity or unit control and financial control. Production executive and storekeeper are primarily interested in quantity control because their interest is to see that there should be no stock out problem. On the other hand, financial executives are interested that too much money should not be invested in material and dollar spent in material should be efficiently and effectively utilized. Keeping in view unit control and financial control, material control should meet these two conflicting objectives:

The main maintenance of sufficient quantity of every item of material for efficient operations Maintenance of an inventory that is not detrimental financially.

Aspect of material control there are two aspects of material control

1. Accounting aspect: in the accounting aspect of material control is concerned with maintaining documentary evidence of movement of materials at every stage right from the time sales and production budgets are approved to the point when materials are purchased and actually used in production operations.
2. Operation aspect: This aspect of material control is concerned with the maintenance of material supplies at a level so as to ensure that material is available for use in production and production services as and when required by minimizing investment in materials.

Cost sheet is a statement designed

Cost sheet is a statement designed to show the output of a particular accounting period along with breakup of cost.The data incorporated in cost sheet are collected from various statements of accounts which have been written in cost statement, either day to day or regular records. There is no fixed form for preparation of cost sheet but in order to make the sheet more useful it is generally presented in columnar form. The columns are for the total cost of current period, per unit for the current period, total cost and per unit cost for a preceding period and total and per unit cost for the budget period and so on. The information to be incorporated in cost sheet would depend upon the requirement of management for the purpose of control. Cost sheet is a memorandum statement. Therefore it does not form part of double entry cost accounting records. Inspite of this, the relationship between cost sheet and financial accounts which are maintained on double entry system is very important as cost sheet derives its data from financial accounting. In case predetermined rates are not used, the entire data required for preparation of cost sheet is derived from financial accounting. Therefore, periodically it becomes necessary to reconcile the information obtained from cost accounting and financial accounting separately.

The main advantages of cost sheet:

• It disclose the total cost and cost per unit of the units produced during the given period
• It enables the manufacturer to keep a close watch and control over the cost of production
• By providing a comparative study of the various elements of cost with the past results and standard costs, it is possible to find out the causes of variations in cost and to eliminate the advance factor and conditions which go to increase the total cost.
• It acts as a guide to the manufacturer and helps him in formulating a definite useful production policy.

Cost concept used in cost accounting

Cost concept used in cost accounting is the amount of resources given up in exchange for some goods or services. The resources given up are expressed in monetary terms. Cost is defined as “ the amount of expenditure incurred on or attributable to a given thing or to ascertain the cost of a given thing”. Thus cost is that which is given or is sacrificed to obtain something. The cost of an article consists of actual outgoings or ascertained charges incurred in its production and sale. Cost is generic term and it is always advisable to qualify the word cost to show exactly what is means e.g. prime cost, factory cost sunk cost etc. cost is also different from value as cost is measured in terms of money whereas value is measured in terms of usefulness or utility of an articles. The objective for which the cost are computed is also important. For example, if the purpose is to fix selling price, then total cost is considered. For valuation of stock, cost means cost of production only. If the objective is to measure efficiency, cost will have to be compiled differently than if the purpose is to quote or value the stock. So the term cost has different interpretations. A cost must always be studied with reference to its purpose and conditions. Different costsmay be ascertained for different purposes and under different conditions. For the valuation of work in progress, factory cost used but for valuation of finished goods, cost of production is used. If the purpose to the study of cost is the same, different conditions may lead in variation in cost. The cost per unit of a product changes with increase or decrease in volume of output as the amount of fixed expenses to be borne by each unit of output decreases or increases with increase with increase or decease in units of production.

segment of activity or area or responsibility for which costs are accumulated. Typically cost centers are departments but in some instances, a departments may contain several cost centres. These cost centres are the departments or sub departments of an organization with reference to which cost is collected for cost ascertainment and cost control.

Financial and cost accounting are the branches of accounting

Financial and cost accounting are the branches of accounting whose main aim is to provide information by recording the business transactions systematically and scientifically so that it may serve the purpose of the management for policy formulation and controlling and to provide necessary protection to the outsiders. Both are based on double entry system and their roles are supplementary. The ordinary trading account is a locked storehouse of most valuable information to which the cost system is the key. Financial accounting treats costs very broadly, while cost accounting does this much greater detail

Under Financial Accounting:

This reveals an apparently satisfactory profit of 300$ which represent 10% of Sales. However, the information is too general to be of great use of the management, who needs to know the profit or loss of each product so that policy decision can be made. With this end in view and assuming that three products A,B and C were manufactured, cost accounting records could reveal a position something like the following:

The statement clearly revels to management that product A and B are obtaining approximately 25% profit but the product C is Pulling down the total profit to 10%. Thus management may investigate thoroughly product C to find out possible economies or stop the production of product C.

Cost Accounting Ascertainment of Cost Fixation Selling Price

The objective of cost accounting are ascertainment of cost, fixation of selling price, proper recording and presentation of cost data to the management for measuring efficiency and for cost control. The aim is to know the methods by which expenditure on materials, wages and overhead is recorded, classified and allocated so that the cost of products and services may be accurately ascertained; these costs may be related to sales and profitability may be determined. Yet with the development of business and industry, its objectives are changing day by day. To ascertain the cost per unit of the different products manufacturing by a business concern. Cost accounting provides the correct analysis of cost both by process or operations and by different elements of cost. It discloses sources of wastage whether material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control wastage. It is used to provide requisite data and serve as a guide to price fixing a product manufactured or services rendered. Cost accounting ascertain the profitability of each of the product and advise the management as to how these profits can be maximized. It is help to organize cost reduction programmes with the help of different departmental managers. Cost accounting data is used to the management to take various actions financial decisions such as introduction of new products, replacement of labour by machine etc. it is used to guide management in the formation and implementation of incentive bonus plans based on productivity and cost saving. To organize an effective information system so that different level of management may get the required information at the right time in right form for carrying out their individual responsibilities in an efficient manner. It helps the management in the preparation of budgets and implementation of budgetary control. It advice management on future expansion policies and proposed capital projects. It is present the data to the management for management planning, decision making and control.

• Broadly speaking, the above objectives can be re-grouped; under the following three heads
• Ascertainment and analysis of cost and income by product, function and responsibility
• Providing useful data to the management for taking decisions.

Accumulation and utilization of cost data for control purposes to have the minimum possible cost consistent with maintenance of quality is achieved through fixation of targets.