A to Z Costing Knowledge Glossary — Letter H
Investopedia-style costing concepts explained with formulas, practical examples, comparisons, and exam-focused teaching tips.
1 Halsey Plan
| Category | Labour Incentive / Bonus Scheme |
|---|---|
| Best Used In | Motivating workers, reducing labour cost per unit |
| Key Formula | Bonus = 50% × (Standard Time − Actual Time) × Hourly Rate |
| Exam Importance | Very High |
The Halsey Plan is a labour incentive scheme where the worker receives a fixed percentage (usually 50%) of the wages for time saved compared to the standard time.
Under the Halsey plan, the worker is guaranteed a time wage based on actual hours worked, plus a bonus equal to 50% (or another predetermined percentage) of the time saved at the normal rate. It encourages efficiency while sharing the benefit between employer and employee.
- Factories where time standards are set
- Incentivizing workers without punishing slower ones
- Costing labour in standard cost systems
A worker completes a job in 6 hours while the standard time is 8 hours. If the hourly rate is ₹100, the bonus = 50% × (8−6) × 100 = ₹100. Total earnings = (6 × 100) + 100 = ₹700.
Standard time = 10 hours, Actual time = 7 hours, Rate = ₹50/hour. Bonus = 50% × (10−7) × 50 = 0.5 × 3 × 50 = ₹75. Total earnings = (7×50) + 75 = 350 + 75 = ₹425.
Total Earnings = (Actual Hours × Rate) + (50% × (Standard Hours − Actual Hours) × Rate)
- Determine standard time for the job.
- Record actual time taken by the worker.
- Compute time saved = standard − actual (if positive).
- Calculate bonus = 50% × time saved × rate.
- Add bonus to actual wages for total earnings.
| Halsey vs. Rowan Plan | Rowan bonus is proportion of time saved to standard time, resulting in lower bonus for large time savings; Halsey gives a fixed percentage. |
|---|---|
| Halsey vs. Halsey-Weir Plan | Halsey-Weir uses 33.33% (or 30%) bonus instead of 50%; otherwise similar. |
2 Halsey-Weir Plan
| Category | Labour Incentive / Bonus Scheme |
|---|---|
| Best Used In | Sharing gains between worker and employer |
| Key Formula | Bonus = 33.33% (or 30%) × Time Saved × Hourly Rate |
| Exam Importance | Medium |
The Halsey-Weir Plan is a modification of the Halsey plan where the bonus percentage is lower, commonly 33.33% or 30% of time saved, instead of 50%.
It offers a smaller share of time saved to the worker, resulting in lower labour cost per unit for the employer while still providing an incentive.
- Employers wanting to keep labour costs lower
- Where time savings are substantial
- Comparing with Halsey and Rowan plans
A worker saves 5 hours at a rate of ₹80/hour. Under Halsey-Weir (33.33%), bonus = 0.3333 × 5 × 80 = ₹133.33. Total earnings = actual hours × 80 + 133.33.
Standard time = 9 hours, Actual = 6 hours, Rate = ₹60/hour. Time saved = 3 hours. Bonus (30%) = 0.30 × 3 × 60 = ₹54. Total earnings = (6×60) + 54 = 360+54 = ₹414.
Total Earnings = (Actual Hours × Rate) + (33.33% × Time Saved × Rate)
- Compute time saved.
- Multiply by the Halsey-Weir bonus percentage (commonly 1/3).
- Multiply by hourly rate.
- Add to actual wages.
- Compare with Halsey to show lower cost.
| Halsey-Weir vs. Halsey | Halsey uses 50%; Halsey-Weir uses 33.33% or 30% bonus, resulting in lower total labour cost. |
|---|---|
| Halsey-Weir vs. Rowan | Rowan’s bonus decreases proportionally as time saved increases; Halsey-Weir is a fixed lower percentage. |
3 High-Low Method
| Category | Cost Estimation |
|---|---|
| Best Used In | Separating fixed and variable components of mixed costs |
| Key Formula | Variable cost per unit = (Highest Cost − Lowest Cost) / (Highest Activity − Lowest Activity) |
| Exam Importance | Medium |
The High-Low Method is a simple technique used to separate a mixed cost into its fixed and variable components by analyzing the highest and lowest activity levels.
It assumes that the variable cost per unit is constant, and the difference in cost between high and low points is due solely to the difference in activity.
- Estimating cost equations for budgeting
- Quick analysis of mixed costs
- When more sophisticated methods (regression) are unavailable
A company records total costs of ₹50,000 at 10,000 units and ₹70,000 at 15,000 units. Variable cost per unit = (70,000−50,000)/(15,000−10,000) = ₹4. Fixed cost = 50,000 − (4×10,000) = ₹10,000. Cost equation: Total cost = 10,000 + 4x.
High activity: 12,000 units, cost ₹90,000. Low: 8,000 units, cost ₹70,000. Variable cost = (90,000−70,000)/(12,000−8,000) = 20,000/4,000 = ₹5/unit. Fixed = 70,000 − (5×8,000) = ₹30,000. Equation: Y = 30,000 + 5X.
Fixed Cost = Total Cost at any point − (Variable Cost per Unit × Activity at that point)
- Identify highest and lowest activity levels and corresponding costs.
- Compute difference in cost and difference in activity.
- Divide to get variable cost per unit.
- Substitute into either high or low point to find fixed cost.
- Formulate total cost equation for forecasting.
| High-Low vs. Regression Analysis | Regression uses all data points; high-low only uses two extreme points, making it less accurate. |
|---|---|
| High-Low vs. Scattergraph Method | Scattergraph plots data visually; high-low is mathematical from two points. |
4 Historical Cost
| Category | Cost Measurement |
|---|---|
| Best Used In | Financial reporting, cost ascertainment |
| Key Formula | Historical Cost = Original cost incurred to acquire asset or resource |
| Exam Importance | Medium |
Historical Cost is the original monetary value of an asset, liability, or resource at the time it was acquired or incurred.
It is the traditional basis of accounting, where assets are recorded at their original purchase price, not current market value. In costing, historical cost refers to actual costs incurred in the past.
- Financial statements under historical cost convention
- Cost ascertainment and cost sheets
- Inventory valuation (at cost)
A machine purchased 5 years ago for ₹10,00,000 is recorded at ₹10,00,000 in the books, less accumulated depreciation, even though its current market value may be ₹8,00,000 or ₹12,00,000.
Raw material purchased at ₹50/kg is recorded at ₹50/kg on issue, regardless of current replacement cost ₹55/kg. Historical cost is used for inventory valuation.
- Identify the date of acquisition.
- Determine all costs incurred to bring the asset to usable condition.
- Record total as historical cost.
- Depreciate/amortize over useful life.
- Use for financial reporting and cost analysis.
| Historical Cost vs. Current Cost | Current cost is replacement cost at current prices; historical cost is original cost. |
|---|---|
| Historical Cost vs. Fair Value | Fair value is current market value; historical cost is original transaction value. |
5 Holding Cost
| Category | Inventory Management / EOQ Component |
|---|---|
| Best Used In | Calculating EOQ, optimizing inventory levels |
| Key Formula | Holding Cost per unit per year = Storage + Insurance + Obsolescence + Opportunity cost |
| Exam Importance | High |
Holding Cost (also called carrying cost) is the total cost of holding inventory over a period, including storage, insurance, handling, spoilage, and opportunity cost of capital tied up in inventory.
It is a key component in EOQ calculation; it represents the cost of keeping one unit of inventory for one year.
- Economic Order Quantity (EOQ) computation
- Inventory reduction initiatives
- Cost-benefit analysis of inventory levels
A company estimates holding cost per unit per year as: storage ₹5, insurance ₹2, obsolescence ₹3, opportunity cost ₹10. Total holding cost = ₹20 per unit per year. This is used in EOQ formula.
If annual demand 10,000 units, ordering cost ₹500/order, holding cost ₹25/unit/year. EOQ = √(2×10,000×500/25) = √(4,00,000) ≈ 632 units.
- Identify all components of holding cost.
- Estimate each component per unit per year.
- Sum to get total holding cost per unit per year.
- Use in EOQ formula: EOQ = √(2DS/H).
- Periodically review components for accuracy.
| Holding Cost vs. Ordering Cost | Ordering cost decreases with larger orders; holding cost increases with larger orders; EOQ balances both. |
|---|---|
| Holding Cost vs. Stockout Cost | Stockout cost is cost of not having inventory when needed; holding cost is cost of having inventory. |
6 Hourly Rate
| Category | Labour Costing |
|---|---|
| Best Used In | Calculating labour cost for jobs, overhead absorption |
| Key Formula | Hourly Rate = (Basic + Allowances) / Standard Hours |
| Exam Importance | Medium |
Hourly Rate is the amount paid to a worker per hour of work, often computed by dividing total labour cost (wages plus allowances) by the number of standard working hours in a period.
It is used to charge labour costs to jobs, compute overhead absorption rates (if labour hour base), and in incentive schemes.
- Job and process costing
- Labour cost budgeting
- Overhead absorption using labour hours
A worker receives a monthly salary of ₹15,000 and works 200 standard hours per month. Hourly rate = 15,000 / 200 = ₹75 per hour. Jobs are charged at this rate.
Total labour cost for a group: ₹40,000 per month. Total working hours 800. Hourly rate = 40,000 / 800 = ₹50/hour. If a job takes 10 hours, labour cost = ₹500.
- Determine total labour cost for a period.
- Determine total standard working hours for same period.
- Divide to get hourly rate.
- Use to compute labour cost per job (hours × rate).
- Use as base for overhead absorption if labour-hour method is chosen.
| Hourly Rate vs. Piece Rate | Piece rate pays per unit produced; hourly rate pays per hour worked. |
|---|---|
| Hourly Rate vs. Wage Rate | Wage rate is the base rate; hourly rate may include allowances. |
7 Hybrid Costing
| Category | Costing Methodology |
|---|---|
| Best Used In | Products with both job and process characteristics |
| Key Formula | Combination of job costing and process costing |
| Exam Importance | Low |
Hybrid Costing is a costing system that combines elements of both job costing and process costing, used when products have some common processes and some unique features.
Examples include operations costing, where a product may go through a common process but then be customized, or batch costing with multiple products from same process.
- Clothing manufacturers with standard fabric but custom designs
- Electronics with standard components but different configurations
- Food processing with common base but different packaging
A company produces a standard smartphone model (process costing for the base) but offers different memory configurations (job costing for customization). Hybrid costing assigns base costs using process costing and customization costs using job costing.
Standard base cost per unit from process costing ₹10,000. Customization cost per order (job) ₹2,000. Total cost per customized unit = ₹12,000.
- Identify common processes and assign costs using process costing.
- Identify unique customization and assign costs using job costing.
- Combine the two cost components for total cost.
- Use for pricing and inventory valuation.
- Choose appropriate basis for allocating common costs.
| Hybrid vs. Job Costing | Job costing for unique items; hybrid for partly standardized, partly customized. |
|---|---|
| Hybrid vs. Process Costing | Process costing for homogeneous continuous production; hybrid combines both. |
8 Homogeneous Cost Pool
| Category | Activity-Based Costing / Overhead Allocation |
|---|---|
| Best Used In | Grouping similar overhead costs for accurate allocation |
| Key Formula | Pool Rate = Total Pool Cost / Total Pool Driver Volume |
| Exam Importance | Medium |
A Homogeneous Cost Pool is a group of overhead costs that share a single cost driver, meaning the costs are caused by the same factor and can be allocated together.
In ABC, costs with a similar cause-and-effect relationship are pooled together and allocated using one driver, improving accuracy over a single plant-wide rate.
- Activity-based costing systems
- Overhead allocation in complex manufacturing
- Improving cost accuracy
A company groups all machine setup costs (setup labour, setup materials, setup equipment) into a homogeneous “Setup Cost Pool” and allocates using number of setups, rather than spreading all overheads equally.
Setup pool: setup wages ₹50,000, setup supplies ₹10,000, equipment depreciation for setups ₹20,000 = total ₹80,000. Total setups 200. Pool rate = ₹400 per setup. A product with 5 setups absorbs ₹2,000.
- Identify overhead items with same cost driver.
- Group into a homogeneous pool.
- Determine total cost of pool and total driver volume.
- Compute pool rate.
- Allocate pool costs to products based on driver usage.
| Homogeneous Pool vs. General Overhead Pool | General pool may contain unrelated costs; homogeneous pool ensures same driver for all costs in pool. |
|---|---|
| Homogeneous Pool vs. Cost Centre | Cost centre may have multiple drivers; homogeneous pool is more refined for ABC. |
