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Cost accountancy Introduction

Costing is defined as the technique and process of ascertaining costs. Cost Accounting is defined as the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and reports for ascertaining and controlling costs. Cost Accountancy has been defined as the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making. OBJECTIVE OF COST ACCOUNTING Ascertainment of cost: there are two methods of ascertaining costs, viz., post costing and continuous costing. Post Costing means analysis of actual information as recorded in financial books. It is accurate and is useful in the case of Cost plus Contracts where price is to be determined finally on the basis of actual cost. Continuous costing, aims at collecting information about cost as and when the activity takes place so that as soon as a job is completed the cost of completion would be known. This involves careful estimates being prepared of overheads. In order to be of any use, costing must be a continuous process. Determination of selling price: Though the selling price of a product is influenced by market conditions, which are beyond the control of any business, it is still possible to determine the selling price within the market constraints. For this purpose, it is necessary to rely upon cost data supplied by Cost Accountants. Cost control and cost reduction: Cost control, broadly speaking the following steps should be observed: (i) Determine clearly the objective, i.e., pre-determine the desired results; (ii) Measure the actual performance; (iii) Investigate into the causes of failure to perform according to plan; and (iv)Institute corrective action. The target cost and/or targets of performance should be laid down in respect of each department or operation and these targets should be related to individuals who, by their action, control the actual and bring them into line with the targets. Actual cost of performance should be measured in the same manner in which the targets are set up, i.e. if the targets are set up operation-wise, and then the actual

costs should also be collected operation-wise and not cost centre or department-wise as this would make comparison difficult. Cost Reduction, may be defined as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.
Cost reduction should not be confused with Cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of the essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the cost of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements from the design of the product and from the techniques carried out in connection therewith. In other words, the essential characteristics and quality of the products are retained through improved methods and techniques and thereby a permanent reduction in unit cost is achieved The three-fold assumptions involved in the definition of cost reduction may be summarized under (a) There is a saving in unit cost. (b) Such saving is of permanent nature. (c) The utility and quality of the goods and services remain ur affected, if not improved. Ascertaining the profit of each activity: The profit of any activity can be ascertained by matching cost with the revenue of that activity. The purpose under this step is to determine costing profit or loss of any activity-on an objective basis. Assisting management in decision making: Decision making is defined as a process of selecting a course of action out of two or more alternative courses. For making a choice between different courses of action, it is necessary to make a comparison of the outcomes, which may be arrived under different alternatives. Such a comparison has only been made possible with the help of Cost Accounting information METHODS OF COSTING Different industries follow different methods of costing because of the differences in the nature of their work. The various methods of costing are as follows: Job costing: Under this method, the cost of each job is ascertained separately. It implies that the direct cost of each job is traceable and identifiable. It is suitable as all cases where work is undertaken on receiving a customer's order. Ex:- printing press, Motor workshop etc. Batch Costing: It is the extension of job costing. A batch may represent a number of small orders passed through the factory in batch. Each batch here is treated as a unit of cost and thus separately costed. Here cost per unit is determined by dividing the cost of the batch by the number of units produced like coal, bricks etc. Contract Costing: A larger job is called as contract. Generally, execution of work is distributed over two or more financial years. Hence, the cost of each contract is ascertained separately. It is suitable for firms engaged in the construction of bridges, roads, buildings etc.

Single or output costing: Cost is ascertained, for a product, the product being the only one produced like coal, bricks etc.

Process costing: The cost of completing each stage of work is ascertained, like cost of making pulp and cost of making paper from pulp.. In mechanical operations the cost of each operation may be ascertained separately; the name given is operation costing. Operating or Service Costing: Ascertainment of cost of rending a service is called service costing or operating costing. It is used in the case of concern rendering services like transport, cinema, hotels etc. Multiple Costing: It represents a combination of two or more methods of costing. For ex: if a firm manufactures bicycles including its components, the parts will be costed by batch costing system but the cost of assembling the bicycle will be computed by the single or output costing method. The whole system of costing is known as multiple costing. IMPORTANCE OF COST ACCOUTING TO BUSINTESS CCNCERNS Management of business concerns expects from Cost Accounting detailed cost information in respect of its operations to equip their executives with relevant information required for planning, scheduling, controlling and decision making. To be more specific, management expects from cost accounting - information and reports to help them in the discharge of the following functions: (a) Control of material cost: (b) Control of labour cost: (c) Control of overheads: (d) Measuring Efficiency: (e) Budgeting: (f) Price determination: (g) Curtailment of loss during the off season: (h) Arriving at decisions: VARROUS REPORTS PROVTDED BY COST ACCOUNTING DEPARTMENT Following reports may be provided by a Cost Accounting Department for the use of its executives: (a) Cost sheets (b) Consumption of material statements, (c) Labour utilisation statements (d) Overheads incurred compared with budgets; (e) Sales effected compared with budgets, (f) Reconciliation of actual profit earned with estimated or budgeted profit, (g) The total cost of abnormally spoiled work in the factory and abnormal losses in the store. (h) The total cost of inventory carried, analysed into raw materials in chief stores and other stores. (i) Labour turnover, and the cost of recruitment and training of new employees. (j) Expenses incurred on Research and Development as compared with the budgeted amount. Essential factors for installing a cost Accounting system?

Ans: Installation of a costing system requires thorough examination of all aspects of the organization including inter relations between the segments of the organizations and its place. Before setting up a system of cost accounting the following factors should be studied. 1) Objective:- The objective of the system e.g. whether it is being introduced for fixing prices of for insisting a system of cost control. 2) Scope and extent of coverage:- The areas of operation of business where the management action will be most beneficial. The system of costing should be designed to highlight significant areas, factors considered important for improving the efficiency of operations in that area. 3) Organizational set-up:- The general organization of the business, to find out which the system of cost control be introduced, without altering or organization set up appreciably. 4) The technical details:- The system should be introduced after a technical aspects of the business. Efforts should be made to secure the sympathetic assistance and support of the principal members of the supervisory and workmen. 5) Psycho-Social aspects: - The attitude and behaviour of people in organization, the manner in which the benefits of introducing cost accounting could be explained to various persons in the concern, specially those in change of production department and an awareness created for the necessity of promptitude, frequency and regularity in collection of cos t data. 6) Information requirements:- The maximum amount of information that would be sufficient same should be secured without much clerical labour. Degree of accuracy of data collected, responsibility for verification of data etc. 7) Elasticity:- The costing system should be elastic and capable of adapting to the changing requirements of the business. Difficulties in installing cost accounting system Ans: in the process of installing a cost accounting system a number of practical difficulties may be encountered. These are: 1. Lake of enthusiasm and support from top management because they are not fully convinced about the benefits from such system. 2. Resistance from production staff and people at different levels in other departments because they fear getting subjected to additional controls. 3. Resistance from accounting staff as they believe that their work would increase. 4. Shortage of trained and well-qualified staff. 5. Over enthusiasm to have an unnecessarily detailed costing structure or keeping it too simple due too much concern for cost. 6. High cost of installing the system. 7. Failing to keep the system up-to-date. Above difficulties can be avoided by due care at the time of installing the system.

Characteristics of an Efficient Cost Accounting System Ans. 1. Tailor-made Cost Accounting should be made to suit the specific needs of an organization. 2. Understood by the staff the system should not be complicated. It should be simple. 3. Cost effective the system should be economical, both in installation and operation. 4. Least changes in organization structure installation of costing system should require minimum changes in the existing authority, responsibility relation. 5. Only necessary forms the variety and the number of forms and documents used should be limited to the minimum necessary. 6. Uniformity of procedures and forms avoids confusion and leads to quicker and better understanding of cost data. 7. Minimum clerical work forms and procedures should be designed in such a manner that clerical work is reduced to the minimum. 8. Computerization maximum cost data should be fed into the computer and should be processed through it. 9. Regular updation cost data should be updated on a continuous basis. 10. Effective control on materials purchase and issue procedures should be clearly and strictly laid down. 11. Control on labour cost procedures for time recording, preparation of wage sheets and disbursement of wages should be laid down and their enforcement ensured. 12. Departmentalization of overheads the system for collection of overheads and the basis for their allocation and apportionment should be spelt out. Compare cost accounting with financial accounting The broad areas of difference between financial and cost accounting can be analysed as under:

Sno 1

Particulars Users information

Statutory Requirements

Financial accounting of Financial statements are used by internal management and also outside parties like Government, creditor, customers employee etc. Requirements of companies Act and income tax act to met through Financial accounting

Cost accounting

Focus

Nature of costs

Focus accounting recording transactions Generally historical It considers both

Detailed cost information used by internal management for the purpose of planning, decision-making and cost control Generally Cost Accounting is voluntary except when cost accounting records rules apply to the enterprise of Focus of is on accounting is to the control cost.

Stock valuation

Cost analysis

Time Period

costs are used for historical costs and recording purposes predetermined costs. Stocks are valued Stocks are valued at cost or net generally at cost. realizable value whichever is less Cost/Expenditure Costs are analysed and profits are product wise, shown as a whole department wise, for the period. activity-wise etc. Financial Cost data and statements are reports presented generally prepared on a continuous at the end of the basis for the cost financial period period. usually one year.

Cost The amount of expenditure (actual or notional) incurred on or attributable to a specified article, product or activity. To ascertain the cost of a given thing. Cost object - Anything for which a separate measurement of cost is desired. Examples of cost objects include a product, a service, a project, a customer, a brand category, an activity, a department, a programme. Direct costs - Costs that are related to the cost object and can be traced in an economically feasible way. Indirect costs - Costs that are related to the cost object but cannot be traced to it in an economically feasible way. Pre-determined cost - A cost which is computed in advance before production or operations start, on the basis of specification of all the factors affecting cost, is known as a predetermined cost. Standard Cost - A pre-determined cost, which is calculated from managements 'expected standard of efficient operation' and the relevant necessary expenditure. It may be used as a basis for price fixing and for cost control through variance analysis. Marginat Cost - The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit. Cost of Sales - The cost which is attributable to the sales made. Total Cost - The sum of all costs attributable to the cost object under colrslcleratiolr.

Cost Centre - It is defined as a location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control. Cost Centres are of two types, viz,, Personal and Impersonal. A personal cost centre consists of a person or group of persons and an impersonal cost centre Consists of a location or an item of equipment (or group of these). In a manufacturing concern there are two main types of Cost centres as indicated below: (i) Production cost centre: It is a cost centre where raw material is handled for conversion into finished product. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops are examples of production cost centres. (ii) Service Cost Centre: It is a cost which serves as an ancillary unit to a production cost center. Power house, gas production shop, material service centres, plant maintenance centres are examples of service cost centres. Cost unit: it is a unit of product, service or time (or combination of these) in relation to which costs may be ascertained or expressed. Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value. Cost unit basis Number - Tone/per bag etc. - Litre, gallon, kilogram, tone etc. Kilo-watt hour. - Passenger kilometer Responsibility Centre It is defined as an activity centre of a business organization entrusted with a special task. Under modern budgeting and control, financial executives tend to develop responsibility centres for the purpose of control. Responsibility centres can broadly be classified into three categories. They are: (a) Cost Centres; (b) Profit Centers; and (c) Investment Centres; Profit Centres Centres which have the responsibility of generating and maximizing profits are called profit Centres. Investment Centers those centres which are concerned with earning an adequate return on investment are called investment centres. Cost Allocation it is defined as the assignment of the indirect costs to the chosen cost object. Cost absorption it is defined as the process of absorbing all indirect costs allocated to or apportioned over a particular cost centre or production department by the units produced. Hence, while allocating, the relevant cost objects would be the concerned cost centre or the concerned department, while, the process of absorption would consider the units produced as the relevant cost object. The overhead costs are either allocated or apportioned over different cost centres and afterwards they are absorbed on equitable basis by the output of the same cost centres. Estimated Cost the expected cost of manufacture, or acquisition, often in terms of a unit of product computed on the basis of information available in advance of actual production or purchase. Estimated costs are prospective costs since they refer to prediction of costs.

Differential cost - (Incremental and decremental costs). It represents the change (increase or decrease) in total cost (variable as well as fixed) due to change in activity level, technology, process or method of production, etc. For example if any change is proposed il' the existing level or in the existing method of production, the increase or decrease in total cost or in specific elements of cost as a result of this, decision will be known as incremental cost or decremental cost. Imputed costs - These costs are notional costs which do not involve any cash outlay. Interest on capital, the payment for which is not actually made, is an example of imputed cost. These costs are similar to opportunity costs. Capitalised costs - These are costs which are initially recorded as assets and subsequently treated as expenses. Product costs - These are the costs which are associated with the purchase and sale of goods (in the case of merchandise inventory). In the production scenario, such costs are associated with the acquisition and conversion of materials and all other manufacturing inputs into finished product for sale. Hence, under marginal costing, variable manufacturing costs and under absorption costing, total manufacturing costs (variable and fixed) constitute inventoriable or product costs. Opportunity cost - This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example/a firm financing its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan. Out-of-pocket cost - It is that portion of total cost, which involves cash outflow. This cost concept is a short-run concept and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out-of-pocket costs can pre avoided or saved if a particular proposal under consideration is not accepted. Shut down costs - Those costs, which continue to be, incurred even when a plant is temporarily shutdown, e.g. rent rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant. In other words, all fixed costs, which cannot be avoided during the temporary closure of a plant, will be known as shut down costs. Sunk costs - Historical costs incurred in the past are known as sunk costs. They play no role in decision making in the current period. For example, in the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost and therefore, not considered. Absolute cost - These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute amount may be called absolute costs and are base costs on which further analysis and decisions are based. Discretionary costs - Such costs are not tied to a clear cause and effect relationship between inputs and outputs. They usually arise from periodic decisions regarding the maximum outlay to be incurred. Examples include advertising, public relations, executive training etc.

Period costs - These are the costs, which are not assigned to the products but are charged as expenses against the revenue of the period in which they are incurred. All nonmanufacturing costs such as general and administrative expenses, selling and distribution expenses are recognized as period costs. Engineered costs - These are costs that result specifically from a clear cause and effect relationship between input and outputs. The relationship is usually personally observable. Examples of inputs are direct material costs, direct labour costs etc. Examples of output are cars, computers etc. Expticit Costs - These costs are also known as out of pocket costs and refer to costs involving immediate payment of cash. Salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are some examples of explicit costs involving immediate cash payment. Implicit Costs - These costs do not involve any immediate cash payment. They are not recorded the books of account. They are also known as economic costs. Direct materials: Materials which are present in the finished product (cost object) or can be economically identified in the product are called direct materials. For example, cloth in dress making; materials purchased for a specific job etc. Note: However in some cases a material may be direct but it is treated as indirect, because it is used in small quantities and it is not economically feasible to identify that quantity. Direct labour: Labour which can the economically identified or attributed wholly to a cost object is called direct labour. For example, labour engaged on the actual production of the product of in carrying out the necessary' operations for converting the raw materials into finished product. DIRECT EXPENSES Direct Expenses are also termed as 'Chargeable expenses'. These are the expenses which can be allocated directly to a cost object. Direct expenses are defined as 'costs other than material and Wages which are incurred for a specific product or saleable services" Examples of direct expenses are: (l) Hire charges of special machinery or plant for a particular production order or job. (ii) Payment of royalties. (iii) Cost of special moulds, designs and patterns (iv) Experimental costs before undertaking the jab concerned. (v) Travelling and conveyance expenses incurred in connection with a particular job (vi) Sub-contracting expenses or outside work costs if jobs are sent out for special processing Indirect materials: Materials which do not normally from part of the finished product (cost object) are known as indirect materials. These are Stores used for maintaining machines and buildings (lubricants, cotton waste, bricks etc.) by service departments like power house, boiler house, canteen etc.

Indirect labour: Labour costs which cannot be allocated but can be apportioned to or absorbed by cost units or cost centres is known as indirect labour. Examples of indirect labour includes charge hands and supervisors; maintenance workers etc. Indirect expenses: Expenses other than direct expenses are known as indirect expenses. Factory rent and rates, insurance of plant and machinery, power, light, heating, repairing, telephone etc., are some examples of indirect expenses. Overheads: It is the aggregate of indirect material costs, indirect labour costs and indirect expenses. The main groups into which overheads may be subdivided are the following: (i) Production or Works overheads (ii) Administration overheads (iii) Selling overheads (iv) Distribution overheads

Conversion cost - The sum of direct wages, direct expenses and overhead cost of converting raw materials to the finished stage or converting a material from one stage of production to the next. CLASSIFICATION OF COSTS It means the grouping of costs according to their common characteristics. The important ways of classification of costs are: By Nature of Element - Under this classification the costs are. divided into three categories i.e., materials cost, labour cost and expenses. This type of classification is useful to determine the total cost. By Functions - Under this classification, costs are divided according to the function for which they have been incurred. Some of the examples are: Production cost: the cost of sequence of operations which begins with supplying materials, labour and services and ends with primary packing of the product. Selling cost The cost seeking to create and stimulate demand (sometimes tened making) and of securing orders. Distribution cost- The cost of the sequence of operations which begins with making the packed product available for despatch and ends with making the reconditioned returned empty package, if any available for reuse. Administrative cost - The cost of formulating the policy, directing the organisation and controlling, the operations of an undertaking which is not related directly to a production, selling and distribution, research or development activity or function. Research cost - The cost of researching for new or improved products, new applications of materials, or improved methods Development cost - The cost of the process which begins with the implementation of the decision to produce a new or improved product or to employ a new or improved method and ends with commencement of formal production of that product or by that method. By Variability - According to this classification costs are classified into three groups viz., fixed, variable and semi-variable.

(a) Fixed costs - These are the costs which are incurred for a period, and which, within certain output and turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or turnover). They do not tend to increase or decrease with the changes in output. For example, rent, insurance of factory building etc., remain the same for different levels of production. (b) Variable costs - These costs tend to vary with the volume of activity. Any increase in the activity results in an increase in the variable cost and vice-versa. For example, cost of direct labour, etc. (c) Semi-variable costs - These costs contain both fixed and variable components and are thus partly affected by fluctuations in the level of activity. Examples of semi variable costs are telephone bills, gas and electricity etc. Methods of segregating Semi-variable costs into fixed and variable costs - The segregation of semi-variable costs into fixed and variable costs can be carried out by using the following methods: (a) Graphical method (b) High points and low points method (c) Analytical method (d) Comparison by period or level of activity method (e) Least squares method By Controllability - Costs here may be classified into controllable and uncontrollable costs. (a) Controllable costs - These are the costs which can be influenced by the action of a specified member of an undertaking. A business organisation is usually divided into a number of responsibility centres and an executive heads each such centre. Controllable costs incurred in a particular responsibility centre can be influenced by the action of the executive heading that responsibility centre. Direct costs comprising direct labour" direct material, direct expenses and some of the overheads are generally controllable by the shop level management. (b) Uncontrollable costs - Costs which cannot be influenced by the action of a specified member of an undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the tool room is controllable by the foreman in charge of that section but the share of the tool-room expenditure which is apportioned to a machine shop is not to be controlled by the machine shop foreman. The distinction between controllable and uncontrollable costs is not very sharp and is sometimes left to individual judgement. In fact no cost is uncontrollable; it is only in relation to a particular individual that we may specify a particular cost to be either controllable or uncontrollable. By Normality - According to this basis cost may be categorized as follows: (a) Normal cost - It is the cost which is normally incurred at a given level of output under the conditions in which that level of output is normally attained. (b) Abnormal cost- It is the cost which is not normally attained. It is charged to costing profit and loss Account. TYPES OF COSTING For ascertaining cost, following types of costing are usually used. Uniform Costing: When a number of firms in an industry agree among themselves to follow the same system of costing in detail, adopting common terminology for various items and processes they are said to follow a

system of uniform costing. In such a case, a comparison of the performance of each of the firms can be made with that of another, or with the average performance in the industry. Under such a system it is also possible to determine the cost of production of goods which is true for the industry as a whole. It is found useful when tax-relief or protection is sought from the Government. Marginal Costing: It is defined as the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit. Standard Costing and variance analysis: It is the name given to the technique whereby standard costs are pre-determined and subsequently compared with the recorded actual costs. It is thus a technique of cost ascertainment and cost control. This technique may be used in conjunction with any, method of costing. However, it is especially suitable where the manufacturing method involves production of standardized goods of repetitive nature. Historical Costing: It is the ascertainment of costs after they have been incurred. This type of costing has limited utility. Direct Costing: It is the practice of charging all direct costs to operations, processes or products leaving all indirect costs to be written off against profits in which they arise. Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations, processes or products. This differs from marginal costing where fixed costs are excluded.

Cost Sheet
Cost Sheet Cost Sheet or Statement of Cost Cost sheet is a statement designed to show the output of a particular accounting period along with break-up of costs. The data incorporated in cost sheet are collected from various statements of accounts which have been written in cost accounts, either day-to-day or regular records. Cost sheet is a memorandum statement. Therefore, it does not form part of double entry cost accounting records. Cost sheet may be prepared weekly, fortnightly, monthly, quarterly, half-yearly or yearly:

Advantages of Cost Sheet: 1. It discloses the total cost and the cost per unit of the units produced during the given period. 2. It enables a manufacturer to keep a close watch and control over the cost of production. 3. By providing a comparative study of the various elements of current cost with the past results and standard costs, it is possible to find out the causes of variations in costs and to eliminate the adverse factors and conditions which go to increase the total cost. 4. It acts as a guide to the manufacturer and helps him in formulating a definite useful production policy.

5. It helps in fixing up the selling price more accurately. 6. It helps the business-man to minimize the cost of production when there is a cutthroat competition. 7. It helps the businessman to submit quotations with reasonable degree of accuracy against tenders for the supply of goods. Cost sheet may be prepared on the basis of actual or estimated figures (a) Historical Cost Sheet: Cost Sheet prepared or the basis of actual costs after the actual costs have been incurred is called Historical Cost Sheet. (b) Estimated Cost Sheet: Cost sheet prepared on the basis of estimated costs before the actual commencement of production, is called Estimated Cost Sheet. Elements of Costs: 1. Direct Materials are those materials which can be identified the product and can be conveniently measured and directly charged the product. Thus, these materials directly enter the product and form a part of the finished product. For example, timber in furniture making, cloth in dress making, bricks in building a house. The following are normally classified as direct materials: a. All raw materials like jute in the manufacture of gunny bags, pig iron in foundry, and fruits in canning industry. b. Materials specifically purchased of are specific job, process or order like gluer for book-binding, starch powder for dressing yarn. c. Parts or components purchased or produced like batteries for transistor-radios and types for cycles d. Primary packing materials like cartons, wrappings, card boards boxes, etc. 2. Direct labour is all labour expended in altering the construction, composition, confirmation or condition of the product. In simple words, it is that labour which can be conveniently identified or attributed wholly to a particular job, product or process or expended in converting raw materials into finished goods. Wages of such labour are known as direct wages. 3. Direct (or chargeable) Expenses include all expenditure other than direct material or direct labour that are specifically incurred for a particular product or process. Such expense is charged directly to the particular cost centre as part of the prime cost.

II. Indirect Costs: These are costs which cannot be readily identified with products or services but are
generally incurred in carrying out production activity. These costs are called overheads. Overheads may be defined as the aggregate of the cost indirect materials, indirect labour and such other expenses including services as cannot conveniently be charged direct to specific cost units. Thus overheads are all expenses other than direct expenses. The main groups into which overheads may be sub-divided are (i) manufacturing overheads; (ii) Administration overheads; (iii) Selling overheads; (iv) Research and Development overheads.

PERFORMANCE OF COST SHEET


Raw Material Consumed:

Opening stock of RM Purchase of RM Carriage Inwards Less: Closing Stock of RM Direct Wages Direct Expenses

XXX XXX XXX XXX XXX

XXXX XXX XXX XXXX XXX XXXX XXX XXXX XXX XXXX XXX XXXX XXX XXXX XXX XXXX XXX XXXX XXX XXXX

Prime Cost
Add Factory Overhead

Factory Cost Incurred


Add Opening WIP Less: Closing WIP

Factory Cost/Works Cost


Add: Administration OH

Cost of Production
Add: Opening Stock of Finished Goods Less: Closing Stock of Finished Goods

Cost of Goods Sold


Add: Selling & Distribution OH

Total Cost/Cost of Sales


Add: PROFIT SALES

Items excluded from cost:


Cash discount, interest paid, preliminary expenses written off, Goodwill Written off, Provision for taxation, Provision for bad debts, Transfer to General Reserves and Sinking fund, Donations, Income Tax, Dividend paid, Profit/loss on sale of Assets and Investments, Penalties and fines, Dividends received, Interest received, Transfer fees received, Abnormal Loss of Stocks and Discount on issue of Shares and Debentures.

Problems
Problem No.1
The accounts of Z manufacturing company for the year ended December, 2004 show the following: Rs. Rs. Factory office salaries 6, 500 Travelling Expenses 2, 100 General Office Salaries 12, 600 Travellers Salaries and Commission 7, 700 Carriage outward 4, 300 Productive Wages 1, 26, 000 Carriage on purchases 7, 150 Deprecation- Plant, Machinery and Tools 6, 500 Bad debts written off 6, 500 Dep. On Furniture 300

Repairs of plant, machinery 4, 400 and tools Rent, rates, taxes insurance Factory 8, 500 Office 2, 000 Sales Stock materials 31st Decemeber, 2003 31st December, 2004 Materials Purchased 4, 61, 100 62, 800 48, 000 1, 85, 000

Directors Fees Gas & Water Factory

6, 000

1, 200 Office 400 Managers Salary (3/4 Factory & Office 10, 000 General Expenses 3, 400 Income Tax Dividend 500 1, 000

Prepare a statement giving the following information: (a) Materials Consumed; (b) Prime Cost; (d) Cost of Production; (e) Total Cost;

(c) Factory Cost; (f) Net Profit;

Problem No.2
The following information has been obtained from the records of Sarada manufacturing company: 1.1.98 (Rs) 31.12.98 (Rs.) Stock of raw Material 20, 000 25, 000 Stock of finished goods 50, 000 75, 000 Stock of work-in-progress 5, 000 7, 000 Indirect labour 25, 000 Lubricants 5, 000 Insurance on plant 1, 500 Purchase of raw material 2, 00, 000 Sales commission 30, 000 Salaries of salesmen 50, 000 Carriage outward 10, 000 Administration Expenses 50, 000 Power Depreciation on 25, 000 Factory Rent 30, 000 Machinery Property tax on factory 5, 500 Sales 6, 00, 000 building Prepare a statement of cost and profit showing: (a) Cost of raw materials consumed; (b) prime cost; (c) cost of production; (d) cost of goods sold; (e) cost of sales; (f) profit

Problem No.3
The following particulars have been extracted from books of M. Manufacturing Co. Ltd., Calcutta, for the year ended 31st March 1986. Rs. on 47, 000 on 50, 000 2, 08, 000 9, 600 Rs. Rent, rates, taxes and Insurance (Office) 1, 000 Travelling expenses 3, 100 Travellers salaries and Commission 8, 4000 Drawing office salaries

Stock of materials 31-3-1985 Stock of materials 31.3.1986 Materials purchased

Counting house salaries Carriage inwards Carriage outwards Cash discount allowed Bad debts written off Repairs of plants, machinery and tools Rent, rates, taxes and insurance (Factory)

14, 000 8, 200 5, 100 3, 400 4, 700 10, 600

Product wages Depreciation written off machinery, plant and tools

1, 40, 000 on 7,100 600 6,000 1, 500 300 5, 000 12, 000

Depreciation written off on furniture Directors fees Gas and water charges (Factory)

3, 000 Gas and Water Charges (Office) General Charges Managers Salaries

Out of 48 working hours in a week, the time devoted by the manager to the factory and office was on average 40 hours and 8 hours, respectvely, throughout the accounting year. Prepare a statement giving the following information. a. Prime cost b. Factory overheads and the percentage on production wages c. Factory cost d. General overheads and present percentage on factory cost e. Total cost

Problem No. 4
The following is the manufacturing and profit and loss account of Swastik Ltd. For the year ended 30th June 1984. Opening Stock Rs. Rs. Rs. 5, 00, 000 Materials 2, 000 Closing stock: Finished goods 3, 000 Materials 18, 500 Purchase of materials 1, 50, 000 Finished goods 3, 000 Direct wages 1, 20, 000 5, 21, 500 Power 15, 500 Carriage on materials 2, 000 Royalty 24, 000 Cost of a special design 5, 000 Gross profit c/d 2, 00, 000 5, 21, 500 Rent and rates: Office Factory Telephone Advertisement Electricity Office Factory Provisions for bad debts Gross Profit b/d Interest on loan 12, 000 Sales of scrap 3, 000 [at works cost] 7, 500 Discount received 2, 00, 000 4, 500 750 1, 750

5, 000 7, 000

3, 000 4, 500

7, 5000 10, 000

Depreciation Plant and machinery Delivery vans Income-Tax Salaries Donations Establishment Depreciation on furniture Office Factory Rent of warehouse Net profit

6, 000 2, 000 8, 12, 25, 7, 10, 000 000 000 000 000

2, 500 2, 000

4, 5000 6, 000 94, 000 2, 07, 000

2, 07, 000

You are required to prepare a statement showing classification of cost and different components from the above information after giving due consideration to the following facts 1. 60% of telephone expenses relate to office and 40% to sale department 2. 25% of salaries relate to factory, 50% to office and 25% to sales department; and 3. 50% of the establishment expenses relate to office and 50% to sales department.

Problem No.5
The Government of India has instituted the dual pricing system in the industry in which your organisation operates. You are the head of the costing division of Raja Textiles Co. Ltd. Your company produces a standard type of cloth, 50% of which is procured by the Government at a price of Rs. 4 per metre. You are required by the managing Director of your company to suggest a suitable price for the cloth to be sold in the open market. Production during 2002-2003 has been 20, 00, 000 metres of cloth. Relevant information is given below Expenditure Head Cotton consumed Direct labour in factory Carriage inward Indirect labour in factory Salary of works director & other staff in factory Water, power, local taxes (Factory) Dyeing, bleaching, etc Depreciation (Factory) Excise & other Taxes Misc. Expenses (Factory) Amount Expenditure Head Rs. 10, 00, 000 Depreciation of machines (Office) 10, 00, 000 Misc. Office Expenses 50, 000 Purchase of Computer for office 4, 00, 000 Misc. Purchases of furniture & Machines for office Dividend paid 2, 50, 000 Directors fees 5, 00, 000 10, 00, 000 2, 00, 000 30, 00, 000 1, 00, 000 Advertising & Publicity Commission paid on sales Commission paid to Foreign Buyers Packing and forwarding (Sales) Amount Rs. 1, 00, 000 1, 00, 000 2, 00, 000

5, 00, 000 12, 00, 000 2, 00, 000

10, 00, 000 10, 00, 000 1, 00, 000 2, 00, 000

Office Salaries Salary of Managing Director Expenditure of Sales Dep.

10, 00, 000 1, 00, 000 4, 00, 000

Following further information is made available: (i) The company expects a fair return of 20% on its paid-up capital which is Rs.1, 00, 000 (ii) Marketing Expenses outstanding are Rs. 1, 00, 000 Suggest the open market price after preparing a Cost Analysis sheet in columnar form.

Problem No. 6
The following figures are extracted from the trail balance of Gogetter Co. On 30th September 2003. Rs. Inventories: Finished stock Raw materials Work-in-progress Office appliances Plant & machinery Building Sales Sales return & rebates Materials purchased Freight incurred on materials Purchase returns Direct labour Indirect labour Factory supervision Repairs & unkeep Factory Heat, light and power Rates and taxes Miscellaneous factory expenses Sales commission Sales travelling Sales promotion Distribution dept. Salaries & Expenses Office salaries and expenses Interest on borrowed funds Further details are available as follows: (i) Closing inventories: Finished Goods Raw Materials Work-in-progress (ii) Accrued expenses on: Direct Labour Indirect Labour 80, 000 40, 000 00, 000 17, 400 60, 500 00, 000 7, 68, 000 14, 000 3, 20, 000 16, 000 4, 800 1, 60, 000 18, 000 10, 000 14, 000 65, 000 6, 300 18, 700 33, 600 11, 000 22, 500 18, 000 8, 600 2, 000 Rs.

1, 2, 4, 2,

1, 15, 000 1, 80, 000 1, 92, 000 8, 000 1, 200

Interest on borrowed funds 2, 000 (iii) Depreciation to be provided on: Office Appliances 5% Plant & Machinery 10% Buildings 4% (iv) Distribution of the following costs: Heat, light and power to factory, office and distribution in the ratio 88:0:1. Rates and Taxes two-thirds to factory and one-third to office. Depreciation on buildings to Factory, office and selling in the ratio 8:1:1. With the help of he above information, you are required to prepare: (i) A statement of cost showing various elements of cost and (ii) A statement of profit

Problem No. 7
The following particulars relating to the year 1997 have been taken from the books of chemical works, manufacturing and selling a chemical mixture. Rs. Stock on 1 janjuary, 1997: Raw materials Finished mixture Factory stores Purchases: Raw materials Factory stores Sales: Finished mixture Factory scrap Factory wages Power Depreciation on machinery Salaries: Factory Office Selling Expenses: Direct Office Selling Stock on 31st December 1997: Raw materials Finished mixture Factory stores
st

Rs. 2, 000 1, 750 7, 250 1, 80, 000 24, 250 9, 18, 000 8, 170 1, 78, 650 30, 400 18, 000 72, 220 37, 220 41, 500 18, 500 18, 200 18, 000

2, 000 500

1, 60, 000

1, 53, 100

1, 500 400 5, 500

The stock of finished mixture at the end of 1997 is to be valued at the factory cost of the mixture for that year. The purchase price of raw materials remained unchanged throughout 1997. Prepare a statement giving the maximum possible information about cost and its break-up for the year 1997.

Problem No. 8
From the following particulars relating to the production and sales for the year ended 30th june, 1987, prepare a cost statement showing therein (i) prime Cost (ii) works cost, (iii) cost of production, (iv) cost of sales and (v) profit per unit: Rs. Raw materials as on 1.7.86 Work-in-progress as on 1.7.86 At prime Cost: (+) Manufacturing Expenses Finished goods at cost as on 1.7.86 (8, 000 Units) Raw materials purchased Freight on raw materials purchased Loss of materials by fire Factory expenses Chargeable expenses Direct labour Administrative expenses Rs. 2 per unit. Selling expenses Rs. 1 per unit Distribution expenses Sale of finished goods (28, 000 units) Raw materials as on 30.6.87 Work-in-progress as on 30.6.87: At prime cost (+) Manufacturing Expenses Stock of finished goods on 30.7.87 (10, 000 Units) Assume sales are made in FIFO basis. Rs. 12, 500

15, 000 3, 000 18, 000 60, 000 1, 10, 000 5, 000 5, 000 70, 000 25, 000 1, 35, 000

15, 000 4, 00, 000 20, 000 10, 000 8, 000 18, 000

Problem No. 9
Honesty engineering works has a machine shop in which it manufactures two auto parts p1 and p2 out of forgings F1 and F2. For the quarter ending December, 1993, following cost data are available. Rs. 1, 50, 000 2, 00, 000

Consumption of Raw Materials Wages and salaries Sores and spares Repairs and maintenance Power Insurance Depreciation Factory overheads Administrative Overheads

F1 F2

Distribution Overheads Total cost You are given following further information: (i) Production and sale of P1 and P2 were as under: Production (Prices) Sale of above pieces (Rupees) P1 6, 000 4, 80, 000 P2 4, 000 5, 20, 000 8, 11, 400

(ii) Direct wages paid were Rs. 36, 000 in case of P1 and Rs. 32, 000 for P2. This basis is used for apportioning Wages and Salaries and Factory Overheads. (iii) Following machine hours were utilized in production of these products: P1 550, p2 450 (iv) Stores and spares, repairs and maintenance, power, insurance and depreciation are charged to cost of both the products on the basis of machine hours used. (v) Administrative overheads are apportioned on the basis of respective conversion costs while distribution overheads on the basis of their sales realisations. (vi) All the production was sold out. Required: prepare cost sheets of both the products and workout profit earned on each of them.

Problem No. 10
A factory uses a job costing system. The following cost date are available from the books for the year ended 31st March 2003. Rs. 9, 00, 000 7, 50, 000 6, 09, 000 5, 25, 000 4, 20, 000 4, 50, 000

Direct material Direct wages Profit Selling and distribution overhead Administrative overhead Factory overhead

Required: (a) Prepare a cost sheet indicating the prime cost, works cost, production cost, cost of sales and sales value. (b) In 2003-2004, the factory has received an order for a number of jobs. It is estimated that the direct materials would be Rs. 12, 00, 000/- and direct labour would cost Rs. 7, 50, 000/-. What would be the price for these jobs if the factory intends to earn the same rate of profit on sales, assuming that the selling and distribution overhead has gone up by 15% the factory recovers factory overhead as a percentage of direct wages and administrative and selling and distribution overheads as a percentage of works cost, based on the cost rates prevalent in the previous year.

Problem No. 11
From the following information prepare a monthly cost sheet of sand, lime brick works, showing cost and profit per 1,000 bricks. Materials used:Lime Coal Sand Stores

895 tons @ Rs. 50 per ton 820 tons @ Rs. 40 per ton Rs. 2 per 1000 bricks made Rs. 1250

Labour:Sand digging and running Bricking

10, 000 40, 000

Factory on cost is 25% of direct charges. Office on cost is 10% of factory cost. Bricks sold 35 lakhs. @ Rs. 70 per thousand. Stock of bricks at the end of month was 6 lack bricks. In the beginning the stock was 1 lakhs bricks.

Problem No. 12
A company is manufacturing building bricks and fire bricks, two processes brick forming and heat treating, are required for completion of both the products. Time required (in hours) Building bricks Fire bricks Brick forming per 100 bricks 3 2 Heat treating per 100 bricks 2 5 Total costs of the two processing departments in a particular month were: Brick Forming: Rs. 21, 200 Heat Treating: Rs. 48, 800 Production during that month was: building bricks: 1, 30, 000 pieces, fire bricks: 70, 000 pieces Prepare a statement of manufacturing costs for the two varieties of bricks.

Problem No. 13
The books of Adarsh Manufacturing company presents the following data for the month of April, 2003. Direct labour cost Rs. 17, 500 being 175% of the works overhead. Cost of goods sold excluding administration expenses Rs. 56, 000. Inventory accounts showed the following opening and closing balances. 1st April 30th April Raw Materials 8, 000 10, 600 Work-in-progress 10, 500 14, 500 Finished Goods 17, 600 19, 000

Rs. Selling Expenses 3, 500 General and Administration expenses 2, 500 Sales for the month 75, 000 You are required to:(i) Compute the value of materials purchased. (ii) Prepare a cost statement showing the various elements of cost and also the profit.

Problem No. 4
Mr. Rohit has a small furniture factory. He specialises in the manufacture of small dining tables of standard size of which he can make 15, 000 in a year. The cost per table worked out as under for the year 2001-2002, when he made and sold 10, 000 tables. Material Labour Overhead (fixed) recovered 50% of material cost Total Cost 30 10 15 55

Prices are fixed by adding a standard of 10% to the total cost arrived at the above. In 2002-2003 due to fall in the cost of materials, total cost worked out as under: Material Labour Overhead (fixed) recovered 50% of material cost Total Cost 20 10 10 40

Mr. Rohit maintained margin of 10% on the cost of sales. Sales were at the same level as in 2001-2002. You are asked to: (a) Determine profit or loss for the year 2002-2003. (b) Compute the price which should have been charged in 2002-2003 to yield the same profit or loss in 2001-2002.

Problem No. 15
Music India Ltd. Has furnished the following information in relation to the production of 1, 000 compact discs manufactured by it during the year 1998 Rs. Cost of Materials : 1, 00, 000 Direct wages paid : 70, 000 Cost of power and Consumable stores (20% Fixed) : 15, 000 Factory indirect wages paid (40% Fixed) : 20, 000 Cost of lighting in the factory (Fixed) : 10, 000 Office expenses incurred (Fixed) : 30, 000

(i) (ii) (iii) (iv) (v) (vi)

(vii) (viii)

Selling expenses paid (70% variable) : 50, 000 Depreciation of plant (under straight line method) : 10, 000

The entire output were sold at Rs. 350 per unit. For the year 1999, it is estimated that the production will be increased by 50% by utilizing the spare capacity and the rates for materials and direct wages will increase by 10% and 20% respectively. The expenses of the company are either fixed or variable and the company assumes that the nature of the expenses will not change in the coming days. You are required to prepare: (a) A cost sheet for the year 1998 showing the cost per unit (b) A statement showing estimated cost and profit for the year 1999, assuming that all the goods produced would be sold at a price of Rs. 340 per unit.

Problem No. 16
M/s M.T. Shoe Co. manufactures two types of shoes A and B. Production costs for the year ended 31st March 2003 were. Rs. 15, 00, 000 8, 40, 000 3, 60, 000 ----------------27, 00, 000 ----------------There was no work-in-progress at the beginning or at the end of the year. It is ascertained that. (a) Direct material in type A shoes consists twice as much as that in type B shoes. (b) The direct wages for type B shoes were 60% of those for type A shoes. (c) Production overhead was the same per pair of A and B type. (d) Administrative overhead for each type was 150% of direct wages. (e) Selling cost was Rs. 1.50 per pair. (f) Production during the year were: a. Type A 40, 000 pairs of which 36, 000 were sold b. Type B 1, 21, 000 pairs of which 1, 00, 000 were sold (g) Selling price was Rs. 44 for A and Rs. 28 per pair for type B. Prepare a statement showing cost and profit Direct material Direct wages Production overhead

Problem No. 18
Indian Products Ltd. Have received an enquiry for the supply of 2, 00, 000 numbers of a special type of machine screw. Capacity exists for manufacture of the screws in the companys unit No.3 but a fixed investment of Rs. 60, 000 and working capital to the extent of 25% of the sale value will be required if the job is undertaken. The costs are estimated as follows:

Raw material Labour hours Labour rate Factory Overhead Selling and Distribution cost

20, 000 lbs at Rs 2.30 per lb direct 18, 000 of which 2, 000 would be overtime hours Payable at double the labour rate Re. 1 per hour. Re. 1 per direct labour hour Rs. 23, 000

Material recovered as scrap at the end of the operations is estimated at Rs. 2, 000. The company expects a net return of 25% on the capital employed. Prepare a cost and price statement indicating the price which should be quoted to the customer.

Problem No. 19
M/s. Precision Works having a capacity of 4, 800 tonnes per annum manufactures a product which passes through two production department A and B. The sale forecast for the next financial year envisages full utilisation of production capacity in the following customer mix Customer P: 3, 000 tonnes @ Rs. 1.50 lakhs/tonne Customer Q: 1, 800 tonnes @ Rs. 2.00 lakhs/tonne. Over the years the company has established three possible sources of raw material supplies as under. Supplier X: is prepared to supply 3, 600 tonnes of input materials @ 0.60 lakh/tonne Supplier Y: offers to supply 4, 000 tonnes of input materials @ Rs. 0.55 lakh/tonne Supplier Z: agrees to supply @ Rs. 0.65 lakh/tonne only if the entire input requirement is taken from him but offers a discount of 5% The cost of transport for bringing the input materials from suppliers point is as under: Supplier X: Rs. 0.02 lakh/tonne to be spent by M/s Precision Works Supplier Y: Rs. 0.03 lakh/tonne to be spent by M/s Precision Works Supplier Z: the transport cost is to be paid by the supplier. The average level of scrap arising from the two production departments A and B and 5.0% and 10% respectively calculated on the final output the realizable value of scrap sold out is Rs. 0.15% lakh/tone for Department A and Rs. 0.20% lakh/tone for Department B. this budgets for the departmental cost for the next year are as under: Dept. A Rs. 16.00 lakhs Rs. 64.00 lakhs Dept. B Rs. 48.00 lakhs Rs. 144.00 lakhs

Direct labour Overheads

Based on the above data, you are required to work out the following: (i) Gross quantity of input material required to be procured. (ii) Selection of the source of procurement and the price at which this inputs are to be procured (iii) Total profitability for next year assuming a distribution cost of 15% on cost of production

Problem No. 20

A factory can produce 60, 000 units per annum at its optimum (100%) capacity. The estimated costs of production area as under: Direct material Direct labour Indirect Expences: Fixed Variable Semi-variable Rs. 3 per unit Rs. 2 per unit

Rs. 1, 50, 000 per annum Rs. 5 per unit Rs. 50, 000 per annum upto 50% capacity and an extra expenses of Rs. 10, 000 for every 25% increase in capacity or part thereof. The factory produces only against orders (and not for own stock). If the production programme of the factory is as indicated below and the management desires to ensure a profit of Rs. 1, 00, 000 for the year, work out the average selling price at which each unit should be quoted. First 3 months of the year: 50% of capacity; remaining 9 months 80% of capacity. Ignore selling, distribution and administration overheads.

Problem No. 21
A fire occurred in the factory premise on Octorber 31, 2003. The accounting records have been destroyed. Certain accounting records were kept in another building. They reveal the following for the period September 1, 2003 to October 31, 2003: (i) Direct material purchased (ii) Work in process inventory 1.9.2003 (iii) Direct materials inventory, 1.9.2003 (iv) Finished goods inventory, 1.9.2003 (v) Indirect manufacturing costs (vi) Sales revenues (vii) Direct manufacturing labour (viii) Prime costs (ix) Gross margin percentage based on revenues (x) Cost of goods available for sale Rs. 2, 50, 000 Rs. 40, 000 Rs. 20, 000 Rs. 37, 750 40% of conversion cost Rs. 7, 50, 000 Rs. 2, 22, 250 3, 97, 750 30% Rs. 5, 55, 775

The loss is fully covered by insurance. The insurance company wants to know the historical cost of the inventories as a basis for negotiating a settlement, although the settlement is actually to be based on replacement cost, not historical cost. Required: (i) Finished goods inventory, 31.10.2003 (ii) Work-in-progress inventory, 31.10.2003 (iii) Direct materials inventory, 31.10.2003

JOB COSTING

Job Costing Job costing is that form of specific order costing under which each job is treated as a cost unit and costs are accumulated and ascertained separately for each job. CIMA, London defines job costing as that form of specific order costing which applies where work is undertaken according to customers specifications. Basic Features of Job Costing (a) Each job is treated as a cost unit. (b) All costs are accumulated and ascertained for each job (c) Each job is unique (d) Each job is executed as per customers specifications (e) A separate job cost sheet or job card is used for each job and is assigned a certain number by which the job is identified. Job Costing is applied in those industries where the goods are manufactured or services are rendered against specific orders as per customers specifications. It is generally applied in (a) Engineering industries (b) Construction industries (c) Ship-Building industries (d) Furniture-Making industries (e) Machine Manufacturing Industries (f) Automobile Service Industries (g) Repair shops Industries Advantages of Job Costing Job Costing enables the management 1. To know a detailed analysis of costs of materials, labour and overheads charged to each job 2. To ascertain profit or loss made on each job. 3. To estimate the costs and profitability of similar jobs to be taken up in future. 4. To control operational inefficiency by comparing the actual costs with the estimated costs. 5. To identify jobs where waste, scrap, spoilage and defectives occurred and take corrective action against the responsible person or department.

Notes:Direct material, direct wages and Direct Expenses are charged to job Cost sheet. Overheads are allocated to jobs on the basis of predetermined overhead recover rate, which is calculated on the basis of given information (Ex:- direct labour hours, direct wages or machine hours). Actual overheads incurred are ignored. Total cost relating to the incomplete job is treated as WORK IN PROGRESS. Job costing differs from Contract costing in the following respects. Job Costing Contract Costing Each job is treated as a cost unit Each contract is treated as a cost unit Job work is executed in factory premises Contract work is executed at the site of contract Size of a job is smaller than that of a Size of a contract is larger than that of a job contract The number of jobs are usually large The number of contracts undertaken are usually small

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