Accounting: Basic Cost Concept: And Classification of Costs Selling and Distribution Overheads

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In order to make profits out of products we need to sell them in the market. For creating awareness and attracting customers company spend lot of money on selling and distribution activities. These overheads include costs for procuring orders and costs for executing the order.

Selling Overheads

Costs incurred for procuring orders for sales.

Indirect Material

  • Catalogues, price list

  • Printing and stationery

  • Postage and stamps

  • cost of sample

Indirect Wages

  • Salaries of sales managers, clerks and other employees

  • Salaries and commission of salesmen and technical representatives

  • Fees of sales directors

Indirect Expenses

  • Advertising

  • Bad debts

  • Rent and insurance of showroom

  • Legal charges incurred for recovery of debts

  • Travelling and entertainment expenses

  • Expenses of sending samples

  • Market research expenses.

Distribution Overheads

Costs incurred for execution of sales order.

Indirect Material

  • Cost of packing material

  • oil, grease, spare parts etc. for maintaining delivery vans

Indirect Wages

  • Salaries of godown employees

  • Wages of drivers of delivery vans

  • Wages of packers and dispatch staff.

Indirect Expenses

  • Packing expenses

  • Godown rent, insurance, depreciation, and repair etc.

  • Freight carriage outwards and other transport charges.

  • Running expenses of delivery vans, repair, and depreciation.

  • Insurance in transit etc.

Classification of Costs

Classfication of costs

Classfication of Costs

Cost Behavior Basis

Fixed Cost

It is the cost incurred on machinery, buildings and other fixed assets. It remains constant for a period of time in spite of its fluctuations in production. The total fixed cost remains same but fixed cost per unit may change. If the production increases, fixed cost per unit will decrease and vice versa.

Fixed cost curve

Fixed Cost Curve

Variable Cost

  • The variable cost is directly proportional to the change in volume of production/output. The cost which increases or decreases in the same proportion in which the units produced.

  • Examples: Cost on direct labour, direct material and direct expenses and variable overheads.

  • Total variable cost is same but variable cost per unit may increase or decrease.

  • Variable Cost =

Semi-Variable Cost

It contains both fixed and variable components thus partly affected by fluctuations in the activity. Cost will be constant for some part at the given level of production and other part varies with the volume of production but not in the same proportion.

Semi Variable Cost = Fixed Cost + Variable Cost

Semi variable cost

Semi Variable Cost

Example: Cost of production of 2000 units is Rs.26,000 and 2500 units is Rs.30,000 Calculate Variable cost and fixed and total cost.

Solution:

Variable cost per unit =

=

= .

Variable cost of 2000 units =

=

Fixed cost of 2000 units = Total cost- variable cost

=

=

Cost by Inventory

Product Cost

The cost of manufacturing a product. Product cost includes direct material, direct expenses and manufacturing overheads. Which are charged and identified with the product and included in stock value.

Period Costs

These costs are not charged to products but are written off as expenses against revenue of the period during which these are incurred. They are charged against revenue of the relevant period. Period costs include all fixed costs, administration costs and selling & distribution costs.

Cost Relation to Cost Centre

Direct Costs

Costs which are easily and directly allocated to products or units are termed as direct cost. They are traceable costs and they include cost of raw material, wages paid and other direct expenses.

Indirect Costs

The expenses incurred on those items which are not directly charged to a single product because they are incurred for many products are termed as indirect costs. They include rent, depreciation etc.

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