Cost Analysis For Entrepreneurs

COST ANALYSIS FOR
ENTREPRENEURS
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – CSE & PGPSE STUDENTS
(CSE & PGPSE are free online programmes
open for all, free for all)
mobile : 91+9414430763
5 DECEMBER 09 www.afterschool.tk 1
My word.....
My purpose here is to give a few ideas about strategic

management for intrapraneurs. Read a lot. Be an
intrepreneur, change the society, change the world. Go
with positive spirit. Please pass this presentation to all
those who might need it. Let us spread knowledge as
widely as possible. I welcome your suggestions. I also
request you to help me in spreading social
entrepreneurship across the globe – for which I need
support of you people – not of any VIP. With your help, I
can spread the ideas – for which we stand....
WHAT ARE DIRECT
EXPENSES ?
costs, other than materials or wages, which are

incurred for a specific product or salable
service
WHAT ARE INDIRECT
EXPENSES ?
expenses which cannot be directly,

conveniently and wholly allocated to cost
centres or cost units
COST OF PREPARING A
MOULD – A DIRECT /
INDIRECT ?
IT IS A DIRECT EXPENSE
RENT OF THE OFFICE ?
It is indirect expenses – as it cant be attibuted

to any product (the company may be making
many products).
What are overheads?
cost of indirect material, indirect labour and

such other expenses, including services, as
cannot be conveniently charged direct to
specific cost centres or cost units
Types of overheads?
1. Function wise classification (manufacturing,

administrative and selling overheads)
2. behaviour based classification (fixed,
variable and semi-variable).
3. Element based overheads (material, labour
and expenses)
What is allocation?
Allocation of overheads is the process of

charging the full amount of overhead costs to a
particular cost centre
What is absorption ?
allotment of proportions of items of cost to cost

centers or cost units on some logical basis
What is the difference between
allocation and absorption of
overhead ?
Allocation refers to charging overhead to a

particular head – because it belongs to that.
Absorption = when we take up an equitable
basis and try to divide overhead expenses to
different departments on that basis, it is called
absorption of overhead
Example of absorption ?
The expenses of maintenance department can

be absorbed by different production
departments on the basis of amount of
investments in plant and machinery (or any
other logical basis)
What is machine hour rate?
overhead cost for operating the machine for

one hour
What is primary distribution of
overhead?
When overhead expenses are divided among
all the departments, it is called primary
distribution. Here distribution is also made to
service department.
Example : Factory building rent is distributed
to 5 departments equally, so Rs. 1000 is
distributed to A,B,C,D,E department and each
department gets Rs. 200
What is secondary distribution of
overhead?
After primary distribution, the expenses of

service department is distributed to production
departments. In the previous slide, we have E
department which is a service deparment and
gets Rs. 200. this amount has to be again
distributed between A,B,C,D. So now A,B,C,D
get 50 each. This is called secondary
distribution.
What is standing order number?
Standing order number is a code number given

to a factory overhead item
How to control overheads?
There are two possibilities :

1. fix standards regarding fixed and variable
expenses
2. fix standards regarding range of activities
and accordingly prepare flexible budgets and
give executives responsibilities to minimise
these
What are the ways to make people
responsible to reduce overheads?
Adopt responsibility accounting, responsibility

costing, cost centre approach and other tools of
management, which can enable you to control
expenses
What are selling and distribution
overheads?
These expenses help us in increasing sales. So
they must be carried out but in proper manner.
They include expenses on sales promotion,
publicity, dealer awareness programmes, sales
executive motivation programmes etc.
They can be standardised as follows :
1. as % of works cost 2. as % of selling price
3. as fixed rate per unit sold etc.
What are administrative costs...
Cost of office staff, office maintenance

expenses, general administrative expenses like
correspondence, etc.
They are not directly related to manufacture or
sale of a product, but they have to be incurred.
Thus they have to be standardised.
How to standardise administrative
expenses?
Administrative overheads can be standardised as follows :

as % to Works cost basis
as Sales value/quantity basis
as % to Gross profit on sales
as a fixed rate to Units manufactured
as a % of conversion cost
etc.
Example : fix standard for office
overheads
Materials Consumed 400
Direct Labour 300
Factory Overheads 240
Office and Administrative Expenses 94
Sales =1240
You have to apply for a project. It is estimated that the project
will require materials costing Rs. 300 and direct wages for it
will be Rs. 450. What should be the quotation?
solution...
Prime cost = (material+labour +direct expenses) =
(400+300) = 700
add :factory overhead = 240 (34% of prime cost)
works cost = 940
administrative overhead = 94 (10% of works cost)
cost of production = 1034
sales = 1240
profit = 206 (20% of cost of production)
Quotation ....
Material = 300
labour 450
prime cost = 750
add factory overhead = 34% =255
works cost = 1005
add : administrative overhead 10% = 100
=1105
add profit 20% = 220
price to quote = 1325 answer
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Download more material...
http://www.scribd.com/doc/13094880/Economics-A
http://www.scribd.com/doc/23407782/26-july-Econ
http://www.scribd.com/doc/23393466/10-July-Econ
http://www.scribd.com/doc/6584113/Business-Econ
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COST ANALYSIS FOR

My purpose here is to give a few ideas about strategic

costs, other than materials or wages, which are

expenses which cannot be directly,

It is indirect expenses – as it cant be attibuted

cost of indirect material, indirect labour and

1. Function wise classification (manufacturing,

Allocation of overheads is the process of

allotment of proportions of items of cost to cost

Allocation refers to charging overhead to a

The expenses of maintenance department can

overhead cost for operating the machine for

After primary distribution, the expenses of

Standing order number is a code number given

There are two possibilities :

Adopt responsibility accounting, responsibility

Cost of office staff, office maintenance

Administrative overheads can be standardised as follows :

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