# Treatment of Specific Items in Cost Accounting
Certain costs do not fit neatly into the standard cost classification. The table below provides the decision rules for 18 such items.
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## 1. Interest on Capital (Own Funds)
Arguments for Inclusion:
- Wages = reward for labour; Interest = reward for capital → both should be included
- Required for accurate carrying cost, job comparison, old vs new method comparison, tender pricing
- Needed to calculate true profit
Arguments against Inclusion:
- An economics concept, not a costing concept
- Purely financial; not connected to cost of manufacture
- Difficult to determine a fair rate
- Inclusion raises closing stock value → recognises unrealised profit
Conclusion: Include for managerial decision making; Exclude from formal Cost Accounts.
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## 2. Depreciation
| Asset location | Cost classification |
|---|---|
| Factory building/plant | Production OH |
| Administration office building | Administration OH |
| Showroom / selling office | Selling OH |
| Warehouse, delivery van | Distribution OH |
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## 3. Packing Expenses
| Type of packing | Treatment |
|---|---|
| Primary packing (protects the product) | Prime Cost |
| Secondary packing (facilitates transport to customer) | Distribution OH |
| Fancy secondary packing (attracts customers) | Selling OH |
| Special packing (at customer's specific request) | Direct charge to that job |
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## 4. Fringe Benefits
(Indirect benefits: medical, housing — beyond basic salary, DA, HRA)
| Condition | Treatment |
|---|---|
| Amount is substantial | Direct charge to product via supplementary labour rate |
| Amount is not substantial | Production OH |
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## 5. Removal & Re-erection of Machines
| Cause | Treatment |
|---|---|
| Change in production method / factory alteration (normal) | Production OH |
| Abnormal reasons (faulty planning) | Costing P&L Account |
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## 6. Bad Debts
| Condition | Treatment |
|---|---|
| Normal bad debts (arising in normal course of business) | Selling OH |
| Abnormal bad debts | Exclude from Cost Accounts |
Note: One view holds that bad debts are financial losses and should always be excluded.
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## 7. Training Expenses
(= Trainee salaries + Training dept costs + Loss from initial low production)
| Training relates to | Treatment |
|---|---|
| Factory trainees | Production OH |
| Office/Administration trainees | Administration OH |
| Sales trainees | Selling OH |
| Distribution trainees | Distribution OH |
| High labour turnover | Costing P&L Account (loss) |
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## 8. Canteen / Welfare Activity Expenses
| Staff benefited | Treatment |
|---|---|
| Factory staff | Production OH |
| Administration staff | Administration OH |
| Sales staff | Selling OH |
| Distribution staff | Distribution OH |
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## 9. Carriage & Cartage Expenses
| Material/goods type | Treatment |
|---|---|
| Inward carriage on Direct Materials | Part of Direct Material cost |
| Inward carriage on Indirect Materials | Production OH |
| Outward — distribution of Finished Goods | Distribution OH |
| Abnormal shifting (fire, flood) | Costing P&L Account |
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## 10. Night Shift Allowance
| Reason for night shift | Treatment |
|---|---|
| To meet general demand beyond normal capacity | Production OH |
| To meet a specific customer order | Direct charge to that job |
| Abnormal circumstances (e.g., no power during day) | Costing P&L Account |
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## 11. Research & Development Expenses
Research Costs:
| Research relates to | Treatment |
|---|---|
| Manufacturing activities | Production OH |
| General management | Administration OH |
| Marketing activities | Selling & Distribution OH |
| A particular product | Direct charge to that product |
| Unsuccessful research | Deferred revenue loss → Costing P&L over ≤ 3 years |
Development Costs (implementation of decision to produce a new/improved product):
| Condition | Treatment |
|---|---|
| Relates to a specific product | Direct charge to that product |
| Substantial amount | Deferred revenue expenditure → Costing P&L over ≤ 3 years |
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## 12. Idle Capacity Cost
$$\text{Idle Capacity} = \text{Practical Capacity} - \text{Actual Capacity}$$
$$\text{ICC} = \text{Total Fixed OH} \times \frac{\text{Idle Capacity}}{\text{Practical Capacity}}$$
| Reason for idle capacity | Treatment |
|---|---|
| Unavoidable (repairs, maintenance) | Spread over actual output via Supplementary OH Rate |
| Abnormal (power failure, shortage) | Costing P&L Account |
| Seasonal factors | Inflate OH rates for actual production |
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## 13. Small Tools (drill bits, screw cutters — short life)
| Condition | Treatment |
|---|---|
| Life is ascertainable | Capitalise; depreciate over life; charge depreciation to Factory OH |
| Life is NOT ascertainable | Charge full purchase cost to the department receiving them |
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## 14. Obsolescence of Fixed Assets
- Provision for obsolescence: Included in depreciation rate → Production OH
- Loss on actual obsolescence: Charged to Costing P&L Account
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## 15. Leave Wages
| Workers category | Treatment |
|---|---|
| Factory direct workers | Adjust wage rate → charge to production |
| Factory indirect workers | Production OH |
| Administration workers | Administration OH |
| Sales workers | Selling OH |
| Distribution workers | Distribution OH |
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## 16. Bonus (Profit Sharing)
| Type | Recipients | Treatment |
|---|---|---|
| Minimum Bonus (Payment of Bonus Act) | Factory direct workers | Direct Labour Cost |
| Minimum Bonus | Factory indirect workers | Production OH |
| Minimum Bonus | Administration workers | Administration OH |
| Minimum Bonus | Sales workers | Selling OH |
| Minimum Bonus | Distribution workers | Distribution OH |
| Bonus above minimum | Any | Costing P&L Account |
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## 17. Fines Realised from Workers
- Credit to a separate Fine Fund
- Utilise for welfare of workers
- Exclude income and expenses of Fine Fund from Cost Accounts entirely
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## 18. Leave Travel Concession (LTC)
| Employees | Treatment |
|---|---|
| Factory direct workers | Direct Labour Cost |
| Factory indirect workers | Production OH |
| Administration employees | Administration OH |
| Sales employees | Selling OH |
| Distribution employees | Distribution OH |
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## Universal Classification Rule
For items 7, 8, 9, 10, 15, 16, 18 — the principle is the same:
> The overhead category mirrors the function the employee/activity serves.
Factory → Production OH | Office → Administration OH | Sales → Selling OH | Distribution → Distribution OH | Abnormal/unrelated → Costing P&L.