NCERT Solutions Entrepreneurship Class 12 Chapter 13 Notes PDF

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Entrepreneurship Class 12 Chapter 13 Notes PDF, NCERT Solutions Entrepreneurship Class 12 Chapter 13 Notes PDF, DETERMINATION OF COSTS AND PROFITS

Entrepreneurship Class 12 Chapter 13 Notes PDF

Class12th 
Chapter NameDETERMINATION OF COSTS AND PROFITS
Chapter number13
Book NCERT
SubjectEntrepreneurship
Medium English
Study MaterialsImportant questions answers
Download PDFEntrepreneurship Class 12 Chapter 13 Notes PDF

DETERMINATION OF COSTS AND PROFITS

Some cost is required for the production of any product. Production is achieved by using different types of materials and expenses. The sum of the price of materials and total expenses is called cost. Production work is done on the basis of this cost only. The sum total of different types of costs is called total cost. 

The price of the produced product is determined by adding a certain percentage of profit to the total cost. At this price producers sell their goods in the market and earn profit. There are different types of costs, such as fixed costs, running costs, production costs,

Administrative cost, selling and distribution cost, marginal cost, opportunity cost etc. These costs have their own nature and characteristics. 

Various elements are taken into account while determining the cost. The three costs involved in making an item are called direct costs. These costs are- materials, labour, expenses etc. Materials are those things with the help of which construction work is done. There are two types of materials called direct materials and indirect materials. 

NCERT Solutions Entrepreneurship Class 12 Chapter 13 Notes PDF

Labour is employed to produce production from raw materials. There are also two types of labor which are called direct labor and indirect labor. Similarly, there are some expenses involved in the manufacturing of goods which are called construction expenses. These are of two types called direct expenditure and indirect expenditure.

Various types of expenses are included under overhead, such as construction expenses, factory expenses, administrative expenses, sales and distribution expenses etc. All these expenses are definitely incurred while manufacturing the goods. Besides, these expenses are also incurred for advertising and selling the goods.

The manufacturer of the item determines his profit only after finding out the total cost. He determines the price of that item by adding his reasonable profit to the total cost. Manufacturers sell their goods in the market at this selling price. Due to this, the producer or manufacturer gets income in the form of profit.


VERY SHORT ANSWER TYPE QUESTIONS


1. What do you understand by cost?

Ans. The sum of raw materials, other materials and expenses incurred in the production of any product is called cost. While producing a product, some cost is definitely incurred.

2. What are the running costs?

Ans. Running cost means the cost which is related to production and sale. The more quantity produced, the better will be the running costs. 

. How many types of running costs are there? Write name.

Ans. There are three types of running costs, namely: (i) Fixed costs (ii) Running costs (iii) Semi-running costs.

4. What is the total cost?

Ans. There are different types of costs in the production of any item, the total sum of which is called total cost. This includes initial cost, factory cost, office etc.

5. What is meant by determination of profit?

Ans. When the total cost of production of any item is known, then the question of determining its selling price arises. In such a situation the selling price is determined by production. The selling price of the item is determined by adding a certain percentage of profit to the total cost. 

Therefore, producers add a certain percentage to the production price to earn their profit. Profit is determined appropriately so that the product can be sold in a competitive market.

6. What do you understand by basic cost? 

Ans. Prime cost refers to the cost which includes direct materials, direct labor and direct expenses. Direct materials and direct labor used to produce a product

And if direct expenses are also added to the expenses incurred on them, then this total expenditure is called total cost. This cost is also called Direct cost or First cost.

7. What is factory cost?

Ans. Factory cost means the cost which is obtained by adding factory expenses to the original cost. It is also called Work cost or Factory cost.

8. What are the office costs?

Ans. Office cost is obtained by adding office expenses to factory cost. Selling and distribution expenses are not included in this. It is also called Office cost or Production cost.

9. What do you understand by selling price?

Ans. If a certain percentage of profit is added to the total cost, then it is called selling price. In this way profit is included in the selling price. 

10. What do you understand by marginal cost?

Ans. Marginal cost is a cost that affects the total cost of producing one additional unit. Increase or decrease in total cost is due to running costs only.

11. Classify costs related to accounting period.

Ans.(i) Capital Costs – Capital cost is the cost by which fixed assets are purchased and from their use the businessman earns income. The cost of purchasing the machine is the capital cost.

(ii) Revenue Costs – In this category they are divided into normal costs and abnormal costs.

12. Classify costs on general basis.

Ans. (i) Normal Costs – Normal costs are those costs which are incurred for normal level production. Such costing is incurred under normal circumstances.

(ii) Abnormal Costs – These are costs which do not occur for a certain production level. Such costs may arise due to carelessness, or due to extenuating circumstances. Normal costs are part of production costs while abnormal costs are excluded from production costs. It is put in the profit and loss account (like other expenses).

13. Classify costs on the basis of time.

Ans. On the basis of time, costs can be divided into historical costs and pre-determined costs.

(i) Historical Costs – This type of costs include those costs which are written off after they are incurred. This is of the past i.e. after the production has taken place. Thus, the time difference between the two periods should be kept in mind while deciding.

(ii) Pre-determined Costs: This type of costs are also called future costs. Such costs are estimated on some scientific basis. This is called proof cost. The proof cost is compared with the actual cost and the deviation is compared. Managers correct such deviations. Can take corrective decisions.

14. What are Distribution Expenses?

Ans. Distribution expenses include those expenses incurred from the point where the production process is completed till the time the product reaches the consumer. Such as warehouse expenses, freight vehicle expenses, banking expenses, shipping expenses, etc.


SHORT ANSWER TYPE QUESTIONS


1.What is meant by material cost? 

Ans. Material cost refers to the cost of various items of material, such as raw materials,

Parts and spare parts of machines, maintenance materials, office supplies, packing materials, etc. that are used by a business. Again the content can be analyzed in the following way-

(a) Direct material cost and 

(b) Indirect material costs.

(a) Direct Material Cost – Direct material cost means the cost of direct materials. Direct materials are those materials which can be identified and easily measured in the product and which can be directly charged to the cost of the product. 

In other words, direct materials are materials that are used in the manufacturing of a product and that can be measured and charged to a product process or sub-job. Wood used in wooden furniture, clay used in bricks, bricks used in house construction, pig iron used in an iron furnace are examples of direct materials.

(b) Indirect Material Cost – Indirect material cost means the cost of indirect materials. Indirect ingredients are ingredients that cannot be easily identified in a product. These are materials that are not an ordinary part of a manufactured product but are used, such as consumables, repair and maintenance materials, office supplies, etc.

2. What do you understand by direct material?

Ans. Direct Material – The material which is used directly in production and is a major part of the manufactured item is called direct material. Direct material actually refers to the material from which the object is made, for example, using wood to make a table is a direct material. 

Direct material is also known by the following names: (A) Process Material, (B) Production Material, (C) Stores Material, (D) Construction Material. And (E) Prime Cost Material.

The following materials are included under direct materials – (i) All those materials which are specially harvested for a particular undertaking, order or method. (ii) All materials (including starting materials and raw materials) which are taken from stores for a particular production order. (iii) Initial packing material, in which raw material has come, like cardboard boxes etc. (iv) Goods moving from one method to another.

Import tax on material, postage charges, transportation of material, storage of material, cost of packing and receiving the material, all these are added to the invoice price of the material and then the basic cost is calculated on the basis of this added value. She goes.

3. What do you understand by indirect material?

Ans. Indirect Material – Indirect material means that material which does not actually form a part of the manufactured item, but without this material the construction work cannot be run well and smoothly, such as a factory. Cloth and oil for cleaning the machines will be called indirect materials. 

Small materials of very low value that are used in the goods being produced are considered indirect materials because it is difficult to calculate their per unit cost, such as nails used in shoes or used in book binding. Thread.

4. What is direct labour?

Ans. Direct Labor – The labor which is used to change the shape or size of the material is called direct labour. Its place in the manufactured goods is the same as that of direct materials, for example, the labor of a carpenter in making a table is direct labour. Direct labor is also referred to by the following names- 

(i) Process Labour, (ii) Production Labour, (iii) Operating Labor and (iv) Prime Cost Labour.

5. What is indirect labour?

Ans. Indirect Labor – The labor which is not used directly on the material, that is, no part of which is directly used in the manufacturing of the product, is called ‘indirect labour’, such as direct labor in a factory. The labor of the one who takes care of the workers, the labor of the watchman who guards the door of the factory and the wages of the foreman, etc. 

6. What is the meaning of direct expenditure?

Ans. Direct Expenses: All those expenses come under these expenses. Which are done in relation to direct materials and direct and direct labour. These expenses are directly related to the manufactured goods and are a part of it. In the manufacturing of every item, in addition to direct materials and direct labour, sometimes there seems to be a need for some expenses which are specifically incurred on that item and can definitely be attributed to that item. 

Such expenses are called direct expenses, like the expenses of bringing the direct material from the place of production to the factory. The examples of these expenses depend on the conditions of the product specialist. To arrive at the original cost, expenses are added to direct materials and direct labor.

The following expenses also come under direct (or chargeable) expenses – (i) Cost of such pattern, drawing or design which is specially prepared for a particular undertaking. (ii) Fees paid to architects and surveyors in connection with a particular contract or undertaking. (iii) Cost of experimental work done for a particular undertaking. (iv) Internal carriage, which is paid for transporting special materials directly to the undertaking. . (v) Rent of special or single purpose machines, plants or other equipment, such as portable cranes, scaffolding etc.

(vi) Traveling expenses and subsistence allowances of experts who are given for inspection of work being done away from the factory. (vii) Royalty paid to the landowner. (viii) Expenses incurred in taking any contract, such as legal expenses, traveling expenses and other expenses. (ix) Operating expenses of machines which are used for a particular sub-task and are not used for other tasks (in some cases). 

7. What is indirect expenditure?

Ans. Indirect Expenses: These expenses are not directly related to the manufactured goods, but are so essential that without them the manufacturing of goods is often not possible. These include- (A) Factory or Works Expenses or Works on cost or Factory on cost, (B) Office and Administrative Expenses, and (C) Sale and Distribution Expenses. Expenses) come.

(A) Factory expenses – All those expenses which are incurred in connection with construction in the factory are called factory expenses. For example, factory rent; Expenses incurred for power and fuel, factory lighting, heating and cooling; And depreciation and repair of machines etc. Indirect materials and indirect labor are also included in factory expenses.

(B) Office and operating expenses – These expenses include office expenses, such as printing and stationery expenses, salaries of office clerks, expenses of legal proceedings, depreciation of office building, salaries of office operators, office equipment, etc. Rent and insurance, depreciation of office furniture, postage and telephone expenses and other office expenses.

(C) Sales and distribution expenses: These expenses include those expenses which are incurred in relation to selling the goods and sending the sold goods from one place to another, such as remuneration given to sales representatives, advertising expenses, Discounts given to debtors, traveling expenses of sales agents, expense of price list and expenses of branches and agencies etc. 

8. What is the original cost? Describe its importance.

Ans. Prime cost refers to the cost which includes direct materials, direct labor and direct expenses. The direct material and direct labor used in manufacturing an item and if direct expenses are also added to the expenses incurred on them, then this total expense is called basic cost. This cost has different names in English, such as Flat Cost and Direct Cost etc. Direct Material}

Direct Labor Direct Expenses = Prime cost

Importance – In cost accounting, the original cost is determined first, because by knowing it the producer gets to know how much material has actually been directly used in the product. By comparing the value of this material with the value of direct materials of previous years it can be known whether more or less has been spent on materials this year. 

If more expenditure has been incurred this year than last year, then the producer will pay more attention to the purchasing department of the material and will try to bring its price to a reasonable level. The second importance of original cost is that its

This basis helps the producer in managing the estimated expenditure on direct materials and labor for the next year. Isolating original cost means separating direct and indirect expenses. In doing this the producer gets correct knowledge of the status and importance of indirect expenses. On this basis, he can decide where there is wastage and where work is being done efficiently. 

9. What do you understand by factory cost; Discuss its importance. 

Ans. Factory cost means the cost which is obtained by adding factory expenses to the original cost. It is called by different names in English, like Works Cost, Factory Cost and Manufacturing Cost etc.

Prime Cot + Factory Overhead = Factory Cost.

Importance – After calculating the basic cost, every producer wants to know what is the cost price of his factory? Office, sales and distribution expenses are not included in this price. Expenses go up and down due to market competition. In fact, knowledge of the recovery cost of factories can be obtained only by separating them. On the basis of this, the producer estimates his efficiency and compares it with other producers.

The scientific method of dividing the costs in this manner is commendable. Suppose one producer knows only one cost and the other producer knows both the ‘original cost’ and ‘factory cost’ of the production of his industry. Certainly, the second producer can examine his production well in comparison to the previous one and can make proper plans for the future, that is, he is aware of the unproductive resources and considering the circumstances, he can plan to employ or remove them. Could.

10. What are the office costs? Describe its importance.

Ans. Office cost is obtained by adding office expenses to ‘factory cost’. Sales and distribution expenses are not included in this. This cost is referred to by different names in English, such as Office Cost or Cost of Production etc.

Factory Cost + Office and Administration Overhead = Office Cost or Cost of Production. Importance: After knowing the factory cost, each producer wishes to increase his total cost.

Have to know. To do this he works out the total cost by adding estimated selling and distribution expenses to the office cost. In fact, the price that the sales representative puts in front of the consumer is calculated on the basis of office cost only. By comparing this cost with previous years, knowledge of the capacity of the office can be obtained and plans can be made to upgrade the office in future. 

11. Describe the calculation of total cost.

Ans. Estimated selling and distribution expenses are added to office costs to arrive at the total cost. The selling price is decided after adding a certain percentage of profit to it. If the total cost is high, a very small percentage of profit will be added taking into account market competition. 

On the contrary, if the total cost is low then a higher percentage of profit can be added, that is, whether the profit to the producer is more or less depends on his total cost.

Office Outlay + Selling and Distribution Overhead = Total Cost.

12. What is the selling price?

Ans. If a certain percentage of profit is added to the total cost then it is called selling price. In this way profit is included in the selling price. Total Outlay + Estimated Profit = Selling Price.

13. What do you understand by indirect expenditure or overheads?

Ans. All indirect expenses (indirect raw material, indirect labour, indirect expenses etc.) are called sub-expenditure or indirect expenditure. This type of expenditure is divided into three parts which are-

(a) Manufacturing Expenses – Manufacturing expenses include those indirect expenses which include the expenses of making factories and goods i.e. the expenses of running the factory. These types of expenses include indirect raw materials, indirect labour, factory rent, salary of factory manager, foreman, supervisor, factory repairs, depreciation of machine plant and power expenses.

(b) Factory and Administrative Overheads – These types of expenses include office expenses like office rent, salaries of employees, lighting expenses, telephone expenses, postage and stationery, operator fees, bank expenses etc.

(c) Selling and Distribution Costs – In this type of expenses, office expenses are added to the factory cost. The following expenses fall in this category – advertising expenses, salary commission of sellers, market research expenses, bad debts etc.

14. Classify costs on the basis of relationship with production. 

Ans. Such costs are also called product costs or period costs. (i) Product Costs – This type of costs include raw material, manufacturing

There are wages and direct expenses or direct costs and factory expenses. This is also called factory cost.

(ii) Period Costs – Such costs cannot be directly linked with the units produced. These are related to time. These types of expenses are related to a period. The expenses of this period can include both fixed costs and running costs. Examples of such costs are-

General administrative costs, salaries and commission of sales staff, depreciation of office equipment, etc.


LONG ANSWER TYPE QUESTIONS


1. Classify the costs accordingly.

Ans. Running cost means the cost which is related to production and sales. The greater the quantity produced, the greater will be the running costs. Running costs are also of three types which are as follows-

1. Fixed Cost – Autonomous costs are those costs which are not related to the quantity of production, that is, the increase or decrease in production has no effect on these costs. These costs remain the same. These are called fixed, vertical, capacity cost and period related cost.

Examples of fixed costs: Rent, property tax, salaries, depreciation, advertising, insurance etc. These costs become payable with the passage of time and not upon production, that is why fixed costs are incurred daily, monthly, annually and not per unit of production. (i) Committed Costs – This type of costs are committed costs. Management does not have freedom in respect of such costs. These costs are incurred to enable the company to survive on some of its facilities. These types of costs cannot be eliminated 213 . Examples are fare, taxes, insurance premium etc.

(ii) Managed Costs: Managed costs are related to ongoing business. These types of costs have to be incurred to keep the business running, such as salaries of management and employees.

(iii) Discretionary Costs – This type of costs are not related to current production and are incurred for activities at any time, after a certain limit they are contracted again. For example advertising expenditure, research and development expenditure.

(iv) Step Cost – This type of cost remains constant up to a certain production level, and above that production level the production expenses increase. For example, a supervisor for a manufacturing company may look after the work of 50 workers to look after a certain production and earn Rs 1000. Given every month. But as soon as the number of 51st workers is reached, another supervisor is appointed and the supervisory expenses double.

2. Variable Cost: Variable cost is the cost which keeps increasing and decreasing according to the quantity of production. Costs decrease when production decreases and increase when it increases. Increase and decrease are directly related to production. This cost remains the same per unit. It is also called direct cost. If there is no production this cost is zero. Example: Direct raw material manufacturing wages and direct expenses (customs duty, royalty etc., ethanol and power, commission on sales etc.) 

3. Mixed Costs / Semi-Variable / Mixed Costs – This type of costs are a combination of fixed and floating costs. When costs are linked to production in a way that increases as production increases and decreases as production decreases. Here some costs do not increase or decrease in the same proportion; Only in a small proportion it is called money-moving. They remain constant for production up to a certain limit, after which they become floating costs.

For example, a worker gets Rs 500. A bonus of 50 paise per unit of production is given every month. If the production is 500 per week, the worker’s income is 500 + 250 = 750. When the production unit increases from 500 to 800 per week, the worker’s income increases to Rs 750 + 150 = Rs 900. will be. Thus, with a 60% increase in production, only 20% income increases. 

2. Classify costs on the basis of function. (Classify the cost according to Functions.)

Ans. On the basis of this classification, costs are divided into different categories to which they belong. For example, in an organization these costs include production costs, administrative costs, sales and distribution costs.

(i) Manufacturing/Production Costs – This type of costs include the expenses incurred in manufacturing the goods. Here direct costs include the sum of (1) raw materials (ii) wages (iii) direct expenses and (iv) factory expenses. (ii) Administrative Costs – This type of costs include the costs of policy making, organization and control. These costs do not include direct production, sales, distribution costs. These include office expenses, Employee welfare expenditure, bank expenditure etc.

(iii) Selling and Distribution Costs – These expenses are included in selling expenses due to which sales increase or demand increases. Such as advertising expenses, commission on sales, promotion expenses, packing expenses, shipping expenses, salaries of employees (employees who send the goods), delivery van expenses, etc. Through these expenses the top management gets to know the efficiency of each department.

3. Classify costs on the basis of management decisions. (Classify the Cost according to Management Decision.)

Ans. The following costs are helpful in decisions:

(i) Marginal Cost – Marginal cost is the cost which affects the total cost when one additional unit is produced. Variation in total cost occurs only due to variable cost.

(ii) Opportunity Cost – Opportunity cost is a cost which can be obtained by spending it somewhere else. For example, if your building is used for business, the rent that could have been earned is lost – this is opportunity cost. This type of cost is taken into account only when the profitability of a project is calculated.

(iii) Cash Cost (Action) (Out of Pocket Cost) – In this type of cost where cash is not spent in any activity like depreciation is not added to the cost. For example, a company has its own truck. Which are used to transport raw materials and finished goods. Now the same company wants to bring them in to carry public goods.

In this situation, the expenses of those trucks: gas, oil, drivers’ salaries, maintenance, etc. All these costs are called out of pocket costs. This type of costs are very useful in determining prices. These are considered useful especially in times of depression and are also helpful in making and buying decisions.

(iv) Differential Cost – Whenever the management decides which production to choose, it depends on the fact that which production has more profitability. In this type of costing the costs of two products are compared. In its cost, additional running cost is added to the total cost. Sometimes incremental costs and differential costs are considered the same. In the technical sense both do not have the same meaning. In incremental cost, there is a difference in the cost of one option over another. If the cost is less then it is called decremental cost.

Differential Costs – Differential costs are taken in broad form. Both incremental and marginal costs are included in this. In other words the total change in differential cost: up/down is the result of both cost options. This type of cost study is used to select the best options. (v) Sunk Costs – Sunk costs are the past costs which have already been incurred. And cannot be changed by any new decision. In such expenditure, expenditure incurred on plant and machinery cannot be recovered and has no contribution in the decision.

(vi) Controllable and Non-Controllable Costs – Controllable costs are those costs which can be influenced and which the management can keep under its control. In manufacturing organizations, responsibilities of various departments are concentrated which are managed by a particular level of manager. 

Such a manager can control the costs related to his department, but not the costs of other departments, the manager of the production department can control the direct labor costs and factory expenses. But he cannot control his own wages and the wages/salaries of other managers. This happens because salary determination is not under his control.

These types of costs are not 100% controlled. There are some costs which relate to more than one department. For example, maintenance cost is a controlled cost. Just like a well skilled person can do repairs and maintenance, to do this he has to use machines and time plants efficiently.

Uncontrollable Costs – These are the costs which are not affected by any particular person. These types of costs are limited to managers at some level. Is. This type of costs means reducing costs and controlling them.

The manager tries to find areas where costs can be reduced. (vii) Imputed Costs – These types of costs do not involve cash expenditure. These are imaginary and are not included in the financial accounts. But these costs are important while taking decisions. Such as interest on capital, accrued profits, rent on own building are not accounted for in financial accounting but are taken into account for the profitability of a project.

It is necessary to pay attention to these. (viii) Common Costs – Common costs are those costs which are incurred for more than one project, product and work. It is not easy to relate these types of costs to any cost centre. For example, indirect expenses incurred in a factory can be divided among different products. Similarly, the rent of the factory can also be divided among the different departments of that factory which are located in that factory.

(ix) Joint Costs – Whenever two or more products are made from the material, such cost is divided among all the products, it is called joint cost. For example, if kerosene, fuel, gas etc. are extracted from crude oil, then the joint cost is up to that point. from where they diverge. Common Cost and Joint Costs are interchangeable with each other while the difference between the two is as follows-

Joint costs – These costs are for two or more products whereas common costs – this is not the case. It is difficult to write these in cost accounts.

(x) Making/Conversion Costs – The nature of this type of costs is also called transforming costs. Like making finished goods from raw materials. This type of expenses include factory expenses like raw material, manufacturing wages, direct expenses and factory expenses etc.

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