Estimation & Costing

Estimation and Costing

Technical Terms
∗ Estimation is the art of finding cost of an article, before its actual manufacture.
∗ Costing is determination of actual cost of an article after adding different expenses
incurred during manufacture.
∗ Bonus is the amount paid in addition to the wages to a worker from the profit earned by
the concern.
∗ Capital is that part of wealth, which is used for further production other than land like
hard cash, building, raw material, machinery, tools etc.
∗ Direct Labour are involved directly in the processing of the raw material, also called
productive labour. E.g., toolmakers, machinists etc.
∗ Indirect Labour is also called non-productive labour. E.g., Foreman, supervisor,
storekeeper etc.
∗ Direct Material is the raw material, which is processed into final product.
∗ Indirect Material is the material used during the processing of the raw material. E.g.,
coolant, cotton waste, lubricating oil, grease etc.
Elements of cost
1) Materials
a) Direct Material Cost
b) Indirect Material Cost
2) Labour
a) Direct Labour Cost
b) Indirect Labour Cost
3) Expenses
a) Direct Expenses – are the expenses done for a specific job only. E.g., special
jigs and fixtures, experimental work any done on the work etc.
b) Indirect Expenses – overhead charges, on cost.
i) Factory Expenses – works on-cost
ii) Administrative Expenses – establishment on-cost or office expenses
iii) Selling Expenses
iv) Distribution Expenses
Overheads
1) Fixed Overheads – Salaries of workers, Rent of building, Insurance,
Depreciation of machines and equipment, Interest on capital invested.
2) Variable – Power or Fuel consumed, Repairs and Maintenance, Expenses on
tools, Consumable supplies (stationery, lighting etc.)
Components of Cost
∗ Prime Cost or Direct Cost = Direct Material Cost + Direct Labour Cost + Direct
Expenses
∗ Factory Expenses = Indirect Material Cost + Indirect Labour Cost
∗ Factory Cost or Works Cost= Prime Cost + Factory Expenses
∗ Office Cost Or Production Cost = Factory Cost + Administrative Expenses
∗ Total Cost = Office Cost + Selling Expenses + Distribution Expenses

Compiled By – Raghavendra M. 11
 Estimation & Costing

∗ Selling Price = Total Cost + Profit Or Loss

Allocation of On-Cost or Overheads
∗ Percentage of Prime Cost = Factory overheads / prime cost
∗ Percentage on Direct Lab. Cost = Total Overheads / Direct Lab. Cost
∗ Percentage on Direct Mat. Cost = Total Overheads / Direct Mat. Cost
∗ Man Hour Rate = Total Overheads / Total Direct Man Hours Spent
∗ Machine Hour Rate = Total Overheads / Total Productive Machine hours
∗ Combination Of Man Hour And Machine Hour Rate
∗ Unit Rate Method = Total Overheads / Quantity Of Production

Compiled By – Raghavendra M. 12