Improved way of Cost Classification for Cost Accounting system
The expenditure in a Business activity could be classified into,
1) Non Recurring expenditure
Non Recurring expenditure includes all the expenditure incurred prior to commencement of business ( commercial production ) viz,
1) Purchase of Land, Building and Machines ( or ) Leasing of Land, Building and Machines
2)Preliminary and Pre operative expenses like business establishment expenses, Licenses, Advertisement expenses, Salary during construction period, Consultancy expenses, Samples, etc
3) Misc Fixed Assets like furniture, computer, office equipments, etc
4) Margin money for working capital ( which has to be shown as Margin money for working capital to avail loan from commercial bank towards working capital funds )
The expenditure incurred towards Non Recurring expenditure becomes a cost burden while producing the Product which are actually included in the Recurring expenditure.
2) Recurring expenditure
Recurring expenditure includes all the expenditure incurred after commencement of business.
For arriving at the Cost of the Product the burden of the Non Recurring cost ( not the entire cost but the off shoot burden of the investment cost ) is included with the Recurring cost and this is done in the following manner.
Step 1
On the basis of input resources used in the business functional operation viz,All the functional departments will have both Off shoot cost of Non recurring expenditure and Recurring expenditure.
Marketing,
Production,
Finance and
Human Resource department
The cost are apportioned.
Step 2
On the basis of input resources used the cost are apportioned viz, All the functional departments will be using all the input resources.
The expenditure incurred while employing the resource inputs viz Land, Building, Machines, Men, Material, utilities, logistics, etc for the production of the Product are accounted separately ( functional operation wise ).
Step 3
On the basis of nature of the expenditure the costs are apportioned viz, All the functional departments will have Maintenance and Operational costs.
Recurring expenditure includes both the expenditures incurred viz,
1) Maintenance expenditure
2) Operational expenditure
1) Maintenance expenditure
Off shoot of the expenditure incurred towards maintenance of Non Recurring items is classified as Maintenance expenditure. Examples for Maintenance expenditure are Maintenance of Machines, Maintenance of Building, etc.
The Maintenance expenditure is similar to Fixed expenditure / Fixed cost.
Some of the expenditure that could be brought under this category are,
Salary and wages ( towards maintenance of men )
Repairs and maintenance ( towards maintenance of machines )
Depreciation ( towards future maintenance of machines )
Interest on Term loan for purchase and owning of Land
Interest on Term loan for purchase and owning of Building
Interest on Term loan for purchase and owning of Machines
Interest on Term loan for purchase and owning of inventory
2) Operational expenditure
Expenditure incurred towards operations of the activity is classified as Operational expenditure ( ie )The expenses incurred in performing the activity is classified as Operating expenditure.
The Maintenance expenditure is similar to Variable expenditure / Variable cost.
Some of the expenditure that could be brought under this Operational cost / Operational expenditure category are,
Raw materials, other materials, chemicals, etc
Electricity, etc
Step 4
On the basis of either Actual cost or Opportunity cost the costs are apportioned, All the functional departments will have both Actual cost and Opportunity cost.
Actual cost
Actual money spent is taken out from the books cost is arrived.
Opportunity cost
Based on the market value the cost is apportioned.
Conclusion
The above mentioned method developed by the author if implemented will definitely result in more accuracy and clarity.
Author - Prof V.S.Rangarajan, M.B.A department, D.G.Vaishnav college, Chennai
The expenditure in a Business activity could be classified into,
1) Non Recurring expenditure
Non Recurring expenditure includes all the expenditure incurred prior to commencement of business ( commercial production ) viz,
1) Purchase of Land, Building and Machines ( or ) Leasing of Land, Building and Machines
2)Preliminary and Pre operative expenses like business establishment expenses, Licenses, Advertisement expenses, Salary during construction period, Consultancy expenses, Samples, etc
3) Misc Fixed Assets like furniture, computer, office equipments, etc
4) Margin money for working capital ( which has to be shown as Margin money for working capital to avail loan from commercial bank towards working capital funds )
The expenditure incurred towards Non Recurring expenditure becomes a cost burden while producing the Product which are actually included in the Recurring expenditure.
2) Recurring expenditure
Recurring expenditure includes all the expenditure incurred after commencement of business.
For arriving at the Cost of the Product the burden of the Non Recurring cost ( not the entire cost but the off shoot burden of the investment cost ) is included with the Recurring cost and this is done in the following manner.
Step 1
On the basis of input resources used in the business functional operation viz,All the functional departments will have both Off shoot cost of Non recurring expenditure and Recurring expenditure.
Marketing,
Production,
Finance and
Human Resource department
The cost are apportioned.
Step 2
On the basis of input resources used the cost are apportioned viz, All the functional departments will be using all the input resources.
The expenditure incurred while employing the resource inputs viz Land, Building, Machines, Men, Material, utilities, logistics, etc for the production of the Product are accounted separately ( functional operation wise ).
Step 3
On the basis of nature of the expenditure the costs are apportioned viz, All the functional departments will have Maintenance and Operational costs.
Recurring expenditure includes both the expenditures incurred viz,
1) Maintenance expenditure
2) Operational expenditure
1) Maintenance expenditure
Off shoot of the expenditure incurred towards maintenance of Non Recurring items is classified as Maintenance expenditure. Examples for Maintenance expenditure are Maintenance of Machines, Maintenance of Building, etc.
The Maintenance expenditure is similar to Fixed expenditure / Fixed cost.
Some of the expenditure that could be brought under this category are,
Salary and wages ( towards maintenance of men )
Repairs and maintenance ( towards maintenance of machines )
Depreciation ( towards future maintenance of machines )
Interest on Term loan for purchase and owning of Land
Interest on Term loan for purchase and owning of Building
Interest on Term loan for purchase and owning of Machines
Interest on Term loan for purchase and owning of inventory
2) Operational expenditure
Expenditure incurred towards operations of the activity is classified as Operational expenditure ( ie )The expenses incurred in performing the activity is classified as Operating expenditure.
The Maintenance expenditure is similar to Variable expenditure / Variable cost.
Some of the expenditure that could be brought under this Operational cost / Operational expenditure category are,
Raw materials, other materials, chemicals, etc
Electricity, etc
Step 4
On the basis of either Actual cost or Opportunity cost the costs are apportioned, All the functional departments will have both Actual cost and Opportunity cost.
Actual cost
Actual money spent is taken out from the books cost is arrived.
Opportunity cost
Based on the market value the cost is apportioned.
Conclusion
The above mentioned method developed by the author if implemented will definitely result in more accuracy and clarity.
Author - Prof V.S.Rangarajan, M.B.A department, D.G.Vaishnav college, Chennai
SHARE
