How to treat experiment expenses in cost accounting?
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1. Insurance Premium: For the insurance of property against fire, accident etc. & in respect of employees’ state insurance, premium may be paid.
2. Packing Charges: For three different purposes, packing is done:
(a) For giving protection to an article or for the purpose of containing an article (e.g. tubes, cartons, bottles etc);
(b) For the purpose of facilitating delivery; &
(c) For the purpose of giving effect to advertisement, at least partly.
Packing cost for the purpose of ‘a’ above is a direct expense & should be included in the prime cost. On the other hand, packing cost for the purpose of ‘b’ above is to be treated as distribution overhead whereas that for the purpose of ‘c’ above is to be treated as selling overhead.
3. Carriage & Cartage Inward: Normally in the cost of materials, the carriage & cartage inward which is incurred for the materials purchased, is included. The cost incurred for internal transport facilities & also the carriage incurred for the purpose of bringing materials from the store to the workshop are treated as works overhead.
4. Carriage Outward: Expenses which are incurred for the delivery of goods to the customers are known as carriage outward. The carriage outward is included in selling price, if the cost is paid by the customers & therefore has to be excluded from cost. On the other hand, carriage outward constitutes a cost which needs to be included in the distribution overhead, if delivery is made free of cost.
5. Advertisement & Service Cost: For the below mentioned purposes, expenses on advertisement may be incurred:
(a) for sales promotion for short-period for single or all products;
(b) for sales promotion for long-term for single or all products;
(c) for requirement of staff, office address or telephone numbers change, for opening of new branches etc.; & for legal requirements fulfillment in respect of share transfer books closure, legal proceedings notices, calling of meetings etc; &
(d) for the purpose of tender or quotation invitations for purchases etc.
Short-period advertisement cost which are incurred for sales promotion, needs to be treated as selling overhead which can be recovered from the period’s sales.
On the other hand, long period advertisement costs which are incurred for sales promotion should not be charged as selling overhead in the year in which it is incurred. Only that part of the cost should be recovered from the period’s sales, which benefitted the sales of that period & the deferment & charging of the balance to the goods sold in future as selling overhead should be done.
6. After sales service cost: During a particular period after sale, free service of repairs & replacement may be offered by many concerns. Therefore, cost in respect of salaries, wages & travelling expenses of the service staff & also in respect of free of cost replaced parts & components are incurred by the concern. Together, these items constitute ‘after sales service cost’ which should be treated as selling overhead in cost accounts.
7. Royalties: Payment made by the lessee, patentee etc. to the lessor or patentor in respect of the assets or formula etc. used by him, is known as royalties. The payment may be either at a fixed rate per unit of output produced or sold or a lump sum amount during a period. When payment of royalties is made as a rental in lump, the same should be treated as works overhead. However, royalties may be charged to cost of production as a chargeable expense, when payment of the same is made at a rate per unit produced. Similarly, when payment of the royalties is made at a rate per unit sold, they should be treated as an item of selling & distribution overhead.
8. Rent of factory paid & notional rent: If rent is paid for hired factory overhead, then it’s treated as work overhead & on the basis of floor space occupied, apportionment of the same to the various departments is done. Even if the building is owned, then also rent is considered into the cost for the purpose of comparing different factories’ cost, where some factories may have hired buildings while others may have owned buildings.
9. Research & Experimental cost: These costs are incurred while discovering new ideas or processes by experiment or otherwise & for the purpose of putting on commercial basis, the results of such experiments. Also for the improvement of an existing process or product, research may be done.
10. Managerial remuneration: This expenses includes remuneration paid to managers, directors etc. Upon the functions performed by such directors or managers, the treatment of this item depends. Remuneration paid to the works manager, technical director etc. whose work is in connection with production, should obviously be treated as works overhead.
2. Packing Charges: For three different purposes, packing is done:
(a) For giving protection to an article or for the purpose of containing an article (e.g. tubes, cartons, bottles etc);
(b) For the purpose of facilitating delivery; &
(c) For the purpose of giving effect to advertisement, at least partly.
Packing cost for the purpose of ‘a’ above is a direct expense & should be included in the prime cost. On the other hand, packing cost for the purpose of ‘b’ above is to be treated as distribution overhead whereas that for the purpose of ‘c’ above is to be treated as selling overhead.
3. Carriage & Cartage Inward: Normally in the cost of materials, the carriage & cartage inward which is incurred for the materials purchased, is included. The cost incurred for internal transport facilities & also the carriage incurred for the purpose of bringing materials from the store to the workshop are treated as works overhead.
4. Carriage Outward: Expenses which are incurred for the delivery of goods to the customers are known as carriage outward. The carriage outward is included in selling price, if the cost is paid by the customers & therefore has to be excluded from cost. On the other hand, carriage outward constitutes a cost which needs to be included in the distribution overhead, if delivery is made free of cost.
5. Advertisement & Service Cost: For the below mentioned purposes, expenses on advertisement may be incurred:
(a) for sales promotion for short-period for single or all products;
(b) for sales promotion for long-term for single or all products;
(c) for requirement of staff, office address or telephone numbers change, for opening of new branches etc.; & for legal requirements fulfillment in respect of share transfer books closure, legal proceedings notices, calling of meetings etc; &
(d) for the purpose of tender or quotation invitations for purchases etc.
Short-period advertisement cost which are incurred for sales promotion, needs to be treated as selling overhead which can be recovered from the period’s sales.
On the other hand, long period advertisement costs which are incurred for sales promotion should not be charged as selling overhead in the year in which it is incurred. Only that part of the cost should be recovered from the period’s sales, which benefitted the sales of that period & the deferment & charging of the balance to the goods sold in future as selling overhead should be done.
6. After sales service cost: During a particular period after sale, free service of repairs & replacement may be offered by many concerns. Therefore, cost in respect of salaries, wages & travelling expenses of the service staff & also in respect of free of cost replaced parts & components are incurred by the concern. Together, these items constitute ‘after sales service cost’ which should be treated as selling overhead in cost accounts.
7. Royalties: Payment made by the lessee, patentee etc. to the lessor or patentor in respect of the assets or formula etc. used by him, is known as royalties. The payment may be either at a fixed rate per unit of output produced or sold or a lump sum amount during a period. When payment of royalties is made as a rental in lump, the same should be treated as works overhead. However, royalties may be charged to cost of production as a chargeable expense, when payment of the same is made at a rate per unit produced. Similarly, when payment of the royalties is made at a rate per unit sold, they should be treated as an item of selling & distribution overhead.
8. Rent of factory paid & notional rent: If rent is paid for hired factory overhead, then it’s treated as work overhead & on the basis of floor space occupied, apportionment of the same to the various departments is done. Even if the building is owned, then also rent is considered into the cost for the purpose of comparing different factories’ cost, where some factories may have hired buildings while others may have owned buildings.
9. Research & Experimental cost: These costs are incurred while discovering new ideas or processes by experiment or otherwise & for the purpose of putting on commercial basis, the results of such experiments. Also for the improvement of an existing process or product, research may be done.
10. Managerial remuneration: This expenses includes remuneration paid to managers, directors etc. Upon the functions performed by such directors or managers, the treatment of this item depends. Remuneration paid to the works manager, technical director etc. whose work is in connection with production, should obviously be treated as works overhead.
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