## Treatment of Specific Items in Costing

The following items require special treatment decisions in cost accounts:

Item	Treatment
Interest & Financing Charges	Shown as a separate item under cost of sales; imputed costs excluded
Depreciation	Traced to cost object where feasible; otherwise allocated on cause-and-effect/benefit basis
Packing Expenses	Primary packing (product protection) → production cost; transport packing → distribution cost; special customer-requested packing → specific work order; fancy/decorative packing → selling overhead
Fringe Benefits (OT pay, holiday pay, shift allowance, pension)	Included in production overheads if significant; otherwise part of production cost
Machine Removal & Re-erection	Production overheads; if large, amortise over time; if due to faulty planning/abnormal factors → Costing P&L
Bad Debts	Normal bad debts → selling & distribution overhead; exceptionally large bad debts → excluded from cost accounts
Training Expenses	Factory worker training → production cost; office/sales/distribution worker training → respective overhead
Canteen Expenses	Production overheads, apportioned by no. of workers per dept; if office staff also use canteen, a share → office overhead
Carriage & Cartage Inward (direct material)	Direct material cost
Carriage (indirect material)	Factory overhead
Carriage Outward (finished goods)	Distribution overhead
Welfare Activity Expenses	General overheads, apportioned between factory/office/selling/distribution by no. of people
Night Shift Allowance	Production overheads; if for specific customer order → direct charge; if due to abnormal circumstances → Costing P&L
Research Expenses	Allocated based on area of research (production/admin/selling)
Development Costs	Directly charged to the related product
Failed Research Costs	Excluded from costs; charged to Costing P&L

> Memory hook for packing: Think of packing in layers – protection layer is production, delivery layer is distribution, fancy layer is selling.

Worked example

### Example 1

Exam scenario – classify each item:

1. Overtime wages paid to meet a specific rush export order → Direct charge to that job/order (not general production overhead)

2. Night shift allowance paid because the factory had a power failure and had to reschedule → Costing Profit & Loss Account (abnormal)

3. Cost of boxes used to pack goods for shipment → Distribution overhead (transport packing)

4. Cost of attractive gift wrapping offered to customers → Selling overhead (fancy packing)

5. Wages paid to workers during training period (reduced output) → Production cost (factory workers)

6. Bad debts of ₹500 in a month with ₹10 lakh sales → Selling & distribution overhead (normal)

7. Bad debt of ₹15 lakh due to a major customer's insolvency → Excluded from cost accounts (exceptional)

⚠️ Common exam mistakes

Treating all packing expenses as selling overhead – primary protective packing is a production cost; only fancy/decorative packing is selling overhead.
Classifying all bad debts as excluded from costs – only exceptionally large bad debts are excluded; normal bad debts are a selling cost.
Treating night shift allowance for abnormal reasons as a production overhead – abnormal circumstances push it to Costing P&L.
Including imputed interest (notional cost of equity funds) in interest and financing charges – only actual interest on borrowings is included.
Charging all training expenses to production cost regardless of which employees are trained – office/sales training is charged to respective overheads, not production.

Reference:

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Treatment of Special/Specific Items in Cost Accounts

Worked example

⚠️ Common exam mistakes