VARIOUS TYPES OF COST CLASSIFICATIONS

Basis Cost Concept Example

Material Bodies, motors
Nature of Expenses Labour Direct labour
Overhead Supervision, factory rent

Factory expenses, set-up labour,

Manufacturing
consumables

Marketing Advertising

Functional Classification Selling and Distribution Selling expenses

General and
CEO salary, office expenses
Administrative

Financing Interest paid

Fixed Cost Rent

Behavioural Variable Cost Labour, material
Mixed Cost Electricity, telephone

Product Cost Labour, material, drilling bits

Cost Inventory Basis
Selling, general, and administrative
Period Cost
expenses, finance charges

Direct Direct materials, factory electricity

Cost Object or
Traceability Finance charges, rent (for office and
Indirect
factory)

Marketing study, research and

Sunk Cost
development

Profits forgone from the previous business

Opportunity Cost
operation

Cost for Decision Accounting cost Wages, rent

Relevant Cost Objective cost of a business decision

Variable costs to manufacture one

Marginal Cost
additional unit

Note: CEO = chief executive officer

Source: Prepared by the case writers.
 Managerial Application

Expenses forming the primary

components of cost

For classification of product and

period costs, and the preparation
of financial statements

Relationship of cost to activity

volume: cost-volume-profit and
break-even point analysis

To assess the prime cost of a

cost object, which further helps in
inventory valuation

Analysis of product cost and

profitability

Managerial decision-making

For cost-benefit analysis

estimating economic profit

Estimating accounting profit

Accepting new orders; adding or

dropping product lines

Make or buy decision

HARSH ELECTRICALS COST CLASSIFICATIONS (IN ₹)

Traceability

Cost Note Total Cost Direct Indirect

Salary of Nagesh Contractual amount 600,000 a

Factory Rent 1,050 square feet @ ₹8 per a

month 100,800

Office Rent 150 square feet @ ₹8 per a

month 14,400
Raw Materials 3,260 Standard models @
(case Exhibit 4) ₹1,778 + 810 Baleno models @ a
₹2,185 7,566,130
Casual workers (for 3,260 Standard models 1 hour for Standard + 1.2 hours
a
and 810 Baleno models) for Baleno @ ₹25/hour 105,800
Indirect (Set-up) Labour 6 months @ ₹6,000/month 36,000 a
Procurement Expenses 0.5% of raw materials 37,831 a
Drilling bit ₹10 per unit of cooler 40,700 a
Products Power Consumption 1 unit for standard and 1.2 units 44,750 a
for Baleno@10/unit
Actual during working and pro-
Factory Electricity 71,100 a
rata during off-season

Office Electricity 16,500 a

Factory Insurance Contractual amount 25,000 a

Consumables May change after 5,000 units 45,000 a
Depreciation on Factory Machinery, ₹300,000 for 5 years and
64,000 a
Furniture ₹40,000 for 10 years
₹80,000 for 5 years and
Depreciation on office equipment 22,000 a
₹60,000 for 10 years
Selling Expenses ₹100 per cooler sold 400,000 a

Workshop Electricity

During the Season

Standard Coolers (During Production) 32,600.00
Baleno Coolers (During Production) 12,150.00
Maintenance (During Production) 600.00
Factory Lighting (During Production) 18,000.00
During Off-Season
Lighting and Maintenance 52,500.00
Total 115,850.00

Office Electricity
During the Season
Office Computer (During Production) 6,000.00
Office Lighting (During the Season) 3,000.00
During Off-Season
During Off-Season (1/8 based on space) 7,500.00
Total 16,500.00

Note: *During off production time, 1,000 unit of electricity per month are allocated to the office and factory, based on the space they occupy; 1 square
Source: Prepared by the case writers.
 Behavioral Inventoriable

Fixed Variable Mixed Product Period

a a

a a

a a

a a

a a

a a
a a
a a
a a

a
a

a a

a a
a a
a a

a a
a a
the space they occupy; 1 square foot = 0.09 square metres; ₹ = INR = Indian rupee; US$1 = ₹54.35 on April 1, 2013.
PRODUCT PROFITABILITY ANALYSIS UNDER THE CONVENTIONAL COST SYSTEM (IN ₹)

Particulars Regular
Direct Materials Consumed
Body 650.00
Motor 500.00
Pump 90.00
Blade, Clam, and Wiring 168.00
Pipe, Water Distributor, and Water Panel 190.00
Diverter 110.00
Packing (Carton and Labelling) 40.00
Wheel 30.00
Direct Materials Consumed 1,778.00
Direct Labour
1hr @25/hr;
Labour 25.00
1.2 hrs@25/hr
Direct Expenses
Drilling Bit ₹ 10/unit 10.00
Power 10.00
Procurement Charges 0.005 8.89
Prime Cost 1,831.89
Manufacturing Overheads
Supervisor's Salary (Nagesh) 600,000.00
Consumables 45,000.00
Rent (Factory) 100,800.00
Depreciation (Factory) 64,000.00
Factory Electricity 71,100.00
Factory Insurance 25,000.00
Indirect Labour 36,000.00
Total Manufacturing Overheads 941,900.00
Production of Standard Model 3,260.00
Production of Baleno Model 810.00
Total Direct Labour Cost 105,800.00
Cost Driver Rate / Overhead Recovery Rate 8.9026
Manufacturing Overheads 222.57
Product Cost 2,054.46
Revenue 2,500.00
Profit 445.54
Product Profitability (in %) 0.18

Note: ₹ = INR = Indian rupee; US$1 = ₹54.35 on April 1, 2013.

Source: Prepared by the case writers.
)

Baleno Model

830.00
630.00
110.00
205.00
210.00
110.00
50.00
40.00
2,185.00

30.00

10.00
15.00
10.93
2,250.93

267.08
2,518.00
3,000.00
482.00
0.16
HARSH ELECTRICALS STATEMENT OF COST OF GOODS SOLD (IN ₹)

Particulars Amount Amount

Opening Inventory of Raw Material 0.00
Add: Purchase of Raw Material 7,566,130.00
3,260 Standard models @ ₹1,778 and 810 Baleno
0.00
models @ ₹2,185
Direct Material (Consumed) 7,566,130.00
Direct Labour 105,800.00
Drilling Bit Expenses 40,700.00
Procurement Exp 37,831.00
Power Expenses 44,750.00
Prime Cost 7,795,211.00
Manufacturing Overhead:
Nagesh's Salary 600,000.00
Consumables 45,000.00
Rent (Factory) 100,800.00
Depreciation 64,000.00
Electricity 71,100.00
Factory Insurance 25,000.00
Indirect Labour 36,000.00 941,900.00
Cost of Production 8,737,111.00
Add Opening WIP 0.00
Less Closing WIP 0.00
Cost of Goods Manufactured 8,737,111.00
Add Opening Inventory of Finished Goods 0.00

Less Closing Inventory of Finished Goods (60 Standard

148,447.41
models @ ₹2,054.46 and 10 Baleno models @ ₹2,518)

Cost of Goods Sold 8,588,663.59

Note: ₹ = INR = Indian rupee; US$1 = ₹54.35 on April 1, 2013; WIP = work in progress
Source: Prepared by the case writers.
HARSH ELECTRICALS PROJECTED INCOME STATEMENT FOR CALENDAR YEAR 2014 (IN ₹)

Particulars Amount Amount

Revenue 10,400,000.00
COGS 8,588,663.59
Gross Profit 1,811,336.41
Operating Expenses
Office Rent 14,400.00
Office Electricity 16,500.00
Selling and Distribution 400,000.00 430,900.00
EBITDA 1,380,436.41
Depreciation and Amortization on Computer and
22,000.00
Furniture Used for Office
EBIT 1,358,436.41
Less: Interest 0.00
Add: Interest Earned on Bank Deposit 8,000.00
Net Income/Profit before Tax 1,366,436.41
Less: Tax 163,972.37
Profit after Tax 1,202,464.04

Note: ₹ = INR = Indian rupee; US$1 = ₹54.35 on April 1, 2013; COGS = cost of goods sold; EBITDA = earnings before interest, taxes, depreciation, a
Source: Prepared by the case writers.
AR YEAR 2014 (IN ₹)

Classification

Product Cost

Period cost

Period cost

Period cost

Period cost

EBITDA = earnings before interest, taxes, depreciation, and amortization; EBIT = earnings before interest and taxes.
CALCULATION OF HARSH ELECTRICALS COST-VOLUME-PROFIT ANALYSIS (IN ₹)

Particulars Standard Model Baleno Model Total

Variable Costs
Direct Materials Used 1,778.00 2,185.00
Direct Labour 25.00 30.00
Drilling Bits 10.00 10.00
Distribution 100.00 100.00
Electricity 10.00 15.00
Procurement Cost 8.89 10.93
Per Unit Variable Cost 1,923.00 2,340.00
Selling Price 2,500.00 3,000.00
Contribution per Unit 577.00 660.00
Units Sold 3,200.00 800.00
Total Contribution 1,846,400.00 528,000.00 2,374,400.00
Total Fixed Costs for Standard and Baleno Models 994,800.00
Total Earnings before Interest and Tax 1,379,600.00

Calculation of Fixed Costs (in ₹)

Salary of Nagesh 600,000.00
Factory Rent 100,800.00
Office Rent 14,400.00
Indirect Labour 36,000.00
Electricity 87,600.00
Factory Insurance 25,000.00
Consumables 45,000.00
Depreciation Workshop 64,000.00
Depreciation on Office Equipment 22,000.00
Total 994,800.00

Note: ₹ = INR = Indian rupee; US$1 = ₹54.35 on April 1, 2013

Source: Prepared by the case writers.

CALCULATION OF HARSH ELECTRICALS BREAK-EVEN POINT (IN ₹)

Contribution of
Model Sales Mix Contribution
the Bundle
Standard 4.00 577.00 2,308.00
Baleno 1.00 660.00 660.00
Total 2,968.00
Fixed Cost 994,800.00
BEP in bundles Fixed Costs / Contribution 335.18
BEP in units
Standard 335.175 x 4 1,341
Baleno 335.175 x 1 335
BEP in revenue
Standard 1341 units @ 2500 3,352,500.00
Baleno 335 units @ 3000 1,005,000.00
Total 1676 units 4,357,500.00

Note: ₹ = INR = Indian rupee; US$1 = ₹54.35 on April 1, 2013; BEP = break-even point

Source: Prepared by the case writers.

EXHIBIT TN-9: HARSH ELECTRICALS SALES REQUIRED FOR THE DESIRED PROFIT

Desired Profit (as in 2010–11) ₹859,846.00

Desired EBIT (as in 2010–11) ₹977,780.00
Desired Contribution ₹1,972,580.00
Required Sales in Bundles ₹664.62
Sales of Standard Model (in units) 2,659.00
Sales of Baleno Model (in units) 665.00
Total Sales of Both Models (in units) 3,324.00
Sales of Standard Model ₹6,647,500.00
Sales of Baleno Model ₹1,995,000.00
Required Revenue for profit desired ₹8,642,500.00

Note: ₹ = INR = Indian rupee; US$1 = ₹54.35 on April 1, 2013; EBIT = earnings before interest and taxes
Source: Prepared by the case writers.