Question

1. What are the three major elements of product costs in a manufacturing company?
2. Explain the difference between a product cost and a period cost.
3. Distinguish between (a) a variable cost, (b) a fixed costs, and (c) a mixed cost AND provide an example of a product/service that contains each of the three different types of costs

Answer 1

COST

Cost is termed as the amount of expenditure incurred on a thing. It represents that the resources that have been or must be sacrificed to attain a particular thing. Every manufacturing concerns, when its engaged in manufacturing of goods or providing of services, has to incur expenses. Such expenses forms the basis of cost.

The elements of cost are-

1. Direct material- Identified as product and can be charged to the product.

2. Direct labour- Labour refers to the human efforts required to perform an activity and the compensation paid for their efforts.

3.Direct expenses- Expenses other than direct material and direct labour which specifically incurred for a particular product.

4. Indirect expenses- All expenses which are not classified as direct are brought under indirect cost.

Difference between Product Cost and Period Cost

Product cost- Its a cost which tends to vary directly with the change in level of output. It is also referred as a Variable Cost (VC) also.

Period cost.- A cost associated with time. In a manufacturing business,that has no production activities it will incurr no product costs, but will still incur period costs.

Fixeds cost, Variable cost and Mixed cost

a) Fixed costs (FC)- Those cost which remains constant or same. It remains the same in total irrespective of the level of activity

Examples:

1. Rent of business premises. It remains constant atleast within a stated period of time.

b) Variable cost (VC)- Its a cost which tends to vary directly with the change in level of output. It is also referred as a product cost also.

examples:

• If timber required for the manufacture of tables and is of the cost Rs. 1500. For two table would cost Rs.3000. If 10 tables are produced, it would be Rs.15000. It shows that the direct material cost varies proportionately to the variation in output.
• A carpenter is given Rs.1200 for the manufacture of one of the tables, Rs.2400 for two tables and Rs.12000 for 10 tables.

The above both example, the foll. difference between FC and VC are:

a. FC remains constant while VC varies with variation in the volume of production.

b. FC per unit varies with variation in the level of activity. VC per unit remains constant.

c) Mixed cost- A cost which includes both fixed cost and variable cost is called Mixed cost.

Examples: Supervisors salary, Advertisement charges,etc