1.

Direct expenses
These are the expenses other than direct material cost and direct employees costs which can be
identified with the product. Generally these items are lump sum nature & not a common for the
products.
Direct expenses include :
1) Cost of utilities such as fuel, power, water, steam, etc.,
2) Royalty based on production
3) Technical Assistance / know how fees (releted to Project Managers)
4) Amortized cost of moulds, patterns, patents, etc.
5) Job charges
6) Hire charges for tools and equipment
7) Charges for a particular product designing, etc.,

2. Production / works overhead/ manufacturing Expenses:

1. Consumable stores and spares
2. Depreciation of plant and machinery, factory building, etc.,
3. Lease rent of production assets
4. Repair and maintenance of plant and machinery, factory building, etc.,
5. Indirect employees cost connected with production activities
6. Drawing and Designing department cost.
7. Insurance of plant and machinery, factory building, stock of raw materials & WIP,
etc.
8. Amortized cost of jigs, fixtures, tooling, etc.
9. Service department cost e.g. Tool Room, Engineering & Maintenance, Pollution
Control.
10. Salaries for staff for production planning, technical supervision, factory
administration etc.,
11. Normal idle time cost & all normal losses. Abnormal losses are transfer to P& l a/c
12. Expenses for stores management
13. Security expenses in the factory
14. Labour welfare expenses
15. Dispensary and canteen expenses
Administrative/ Office / Establishment Overheads
Administrative overhead needs to be analyzed in relation to production activities and other
activities e.g factory office, works manager office. Administrative overheads in relation to
production activities shall be included in the cost of production. Administrative overheads in
relation to activities other than manufacturing activities e.g. marketing, projects management,
corporate office expenses, etc., shall be excluded from the cost of production. Nothing
mentioned. In the problem, consider it as a part of marketing overhead the example of
Administrative Expenses is
1. Salaries of administrative and accounts staff
2. General office expenses e.g. rent, lighting rates and taxes, telephone, stationery, etc.,
3. Bank charges
4. Audit fees
5. Legal expense
6. Depreciation & repair and maintenance of office building etc.

6. Selling costs are indirect costs related to selling of products or services and include all
indirect cost in sales management for the organization.
1. Salaries commission and traveling expenses for sales personnel
2. Advertisement cost
3. Legal expenses for debt realization
4. Market research cost
5. Royalty on sale
6. After sales service cost
7. Rent of the show room
8. Travelling expenses
9. Warranty claim
10. Brokerage & commission
11. Advertisement relating to sales and sales promotion
12. Sales incentive
13. Bad debt (deductible from actual sales), etc.,
Purchases of stock in trade, refers to all the purchases of finished goods that the company buys towards
conducting its business.

Change in inventory of finished goods refers to the costs of manufacturing incurred by the company in
the past, but the goods manufactured in the past were sold in the present/current financial year.

A negative number indicates that the company produced more batteries in the FY14 than it managed to
sell. To give a sense of proportion (in terms of sales and costs of sales) the company deducts the cost
incurred in manufacturing the extra goods from the current year costs. The company will add this cost
when they manage to sell these extra products sometime in future. This cost, which the company adds
back later, will be included in the Purchases of Stock in Trade line item.

The details mentioned on the above extract are quite straightforward and is easy to understand. At this
stage it may not be necessary to dig deeper into this note. It is good to know where the grand total lies.
However, when we take up Financial Modeling as a separate module we will delve deeper into this
aspect.

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