Methods of Costing

COST ACCOUNTING

Cost accounting is the art or process of recording, analyzing and classifying of expenditure for the purpose of product costing or service costing, ascertainment of profitability, operational planning and cost control.

It provides data for fixing the selling price of products and services and for determining the quotation price or tender price.

Methods of Costing

Single or Output Costing

This method of costing is used where a single product is produced.

Single Cost = Total Production Cost / Total Number of Units This method of costing is applied to ascertain the total and per unit of a standard product turned out in a manufacturing concern.

It is generally applied to industries where a) The output of production is continuous b) The unit of output are identical c) The unit of output are natural d) It is desirable to ascertain the cost per unit of output. e.g. ;per meter, per ton, per kilogram etc.

Objects of Output Costing

To ascertain the total cost and per unit cost of production during a specified period
To make comparative study of the cost of production To ascertain or to determine the selling price per unit of goods manufactured.

Cost sheet
Cost Sheet is a statement, prepared at given interval of time, which provides information regarding elements of cost incurred in production.
Advantages of Cost SheetDisclosure of cost Determination of selling price Cost control Determination of tender price

Specimen of Cost Sheet

Period Particulars
Direct Material Direct Wages Direct Expenses Prime Cost Works Overheads Works Cost Office &Adminstration Overheads Cost of Production Selling &distribution Overheads Total Cost Profit Sales

Output.. Total Cost Rs. P.

xxx xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx

Cost per Unit Rs. P.

Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx xxx

PROCESS COSTING
INTRODUCTION :
The method of process costing is applied to the COP In those industries, where a product passes through different processes of production before its completion. process costing method is generally employed in industries like chemicals , food products , oil refineries , soap, etc.

FEATURES OF PROCESS COSTING

The production is divided into various stages &each process is carried out by separate cost department. The production is continuous & the final product is the result of a sequence of processes. The finished product of each process is treated as the raw materials of the subsequent process. The COP per unit is the average cost which is obtained by dividing the total process cost by the total number of units manufactured.

There may occur abnormal loss & abnormal gain.

Costing profit &loss is calculated after taking into account the opening balance of finished stock & the closing balance of finished stock.

PROCEDURE OF PROCESS COSTING

Under the process costing, the manufacture of a product is divided into well-defined processes. A separate account is opened for each process. The total number of units produced during a given period is calculated & by dividing the total cost of a process by the total number of units produced. The cost of each process is transferred to the next process till it is transferred to the finished stock account. The output of one process will transferred to next process.

Job Costing

Also known as "Job Lot Costing or Lot Costing.

Job costing is applied to ascertain the costs of specific jobs or workorders which are treated as contracts of small size.
Used in printing press, painting and decorating, Manufacturing firm like, machine-tool and non-manufacturing concern general e.g.. Workshop & Auto Repair shop.

Features Of Job Costing

Production is carried on by a manufacturer against customers order and not for stock. Each job or work-order is of a separate nature. The job or work-order are generally executed in factories, work-shops and repair-shops. The unit of costing under this method, is a job or specific work-order. Production and requirements are determined first and then the expenses are ascertained in relation to it.

Job costing
ADVANTAGES
Job costing enables the manufacturer to knows the profitability of each job separately. Job costing facilitates cost control through the comparison of actual cost and estimated costs. Defective work can be easily identified with specific job or workorder .

DISADVANTAGES

It involves too much clerical work which increases the chance of errors. Historical in nature , so it doesnt give the prompt remedial measures. Non-repetitive in nature and may not be comparable with each other.

Batch costing
Job costing is varied form of job costing. Batch costing is concerned with ascertainment of group of identical products manufactured for own stock. Batch costing is applied in the manufacture of medicines, component parts of complex products, biscuits, food products, readymade garments, etc. The products manufactured in a batch are to be used in a particular purpose or to be consumed within a specified period.

CONTRACT COSTING
Defination :
According to Sharle, contract cost accounts are applicable to a concern which makes specific contracts & requires to know the cost of each. The person executing the contract is known as CONTRACTOR. The person for whom it is executed is known as CONTRACTEE.

FEATURES OF CONTRACT COSTING

Contract s are executed at contract site. It should be away from executors premises. These contract jobs are of large size and may continue over more than one accounting period. Each contract is treated as a separate unit of cost for the purpose of cost ascertainment. The contract is executed by the contractor for some agreed amount of consideration known as Contract Price . Example: ship- building, Road construction, Building construction, civil engineering works etc.

Operating costing
Operating costing is a method of cost ascertainment used in service industry, such as transport, electricity, hotels etc.
The undertakings which do not produce any products use operating costing for ascertaining their cost. Operating costing may be used in those manufacturing companies, where services are provided in the organisation. It applies where standardised services are rendered by a service cost centre unit in the organisation. E.g. - road transport undertakings, railways, airways, shipping companies, electricity companies, gas companies, hospitals etc.

FEATURES OF OPERATING COSTING

Standardised services :- Services rendered to customers are of standardised type.
Investment in fixed assets :- A large part of the total capital is invested in fixed assets and very less amount is used in working capital. Scale of operation :- The scale of operation generally affect the cost of service per unit rendered. Particular importance :- the distinction between fixed cost and variable cost is of special importance.

COMPONENTS OF TOTAL COST IN OPERATING COSTING

The total cost under operating costing is classified under the following headings: Capital Expenditure Direct or variable cost Fixed cost.

PROCEDURE OF COSTING

The method of ascertainment of costs under operating costing is on lines similar to output or unit costing.
All costs incurred in operating a service are accumulated under suitable headings in the form of cost sheet and the costs are expressed in terms of the unit of service rendered. E.g. Transport costing.

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