In this article we will discuss about the formulas used to determine cost.
1. Calculation of the Cost of Materials Consumed:
Raw materials which become part and parcel of the commodity manufactured are known as direct materials.
If opening stock of raw materials, purchase of raw materials, loss of raw materials, transfer of raw materials are given, then cost of raw materials consumed may be calculated as under:
Expenditure on productive labour or labour directly engaged in manufacturing the articles is called direct wages.
Direct wages chargeable to production should be computed as under:
The incomplete units of production is termed as work-in-progress. In respect of the valuation of work-in-progress different authors have different opinions. According to someone, it should be considered in the calculation of Prime Cost.
In other words, opening stock of work- in-progress is added to the aggregate cost of raw materials and wages and closing stock of work-in-progress is deducted from it then resultant is called Prime Cost. On the other hand, according to other opinions it should be considered in calculating Works Cost.
If opening and closing balance of work-in-progress is given then its valuation will be made with the help of any one of the following methods:
The value of ‘scrap’ realised is to be deducted from works overhead. This is so because all the elements of costs are incurred on scraped units also.
Any extra expenses incurred on rectifying ‘defectives’ is added to works cost. However, if the cost of rectifying is high due to abnormal reasons then it should be transferred to separate ‘Defective Account’.
Cost of production is valued as under:
For its valuation the following process is adopted:
It is ascertained as follows:
It is valued as under:
It is computed as under: