Methods of Costing

Session Objectives
In this chapter we shall deal with
Job costing Batch costing Contract costing Process costing Operation costing.

Methods of Costing
The methods used for the ascertainment of cost of production primarily depend on the manufacturing process and the methods of measuring the departmental and finished goods. Basically, there are two methods of costing:

Method of Costing

Job Costing

Job costing is a form of specific order costing that applies where work is undertaken to meet customers special requirements and each order is of comparatively short duration.

This method of costing should possess the following features

The production is generally against the customers order but not for stock. Each job has its own characteristics and needs special treatment. There is no uniformity in the flow of production from department to department. Each job is treated as a cost unit under this method of costing. The cost of production of every job is ascertained after its completion.

Batch Costing

Batch costing is a type of specific order costing. A quantity of identical articles when produced as a single job is termed as a batch. It is suitable in the following situations When the output of a job consists of a number of units and it is not economical to ascertain cost of every unit of output independently. When customers annual requirement is to be supplied in uniform quantities over the year.

Batch Costing

When certain physical characteristics like size, color, taste, quality, etc. are required uniformly over a collection of units e.g., garments of the same size, pharmaceuticals, etc. When an internal manufacturing order is made out for production of components/sub-parts e.g., component parts of radio sets, watches, etc.

Contract Costing

Contract costing is that form of specific order costing which applies to work that is undertaken to meet customers special requirements and each order is of long term duration. It is mainly applied in civil construction and engineering projects, ship building etc. This method of contract costing is used in contracts for which substantial time is taken to complete the contract and this method falls into different accounting periods.

Contract Costing
Subcontracting Sometimes part of the contract work is given on sub-contract basis and payments made on sub-contract work are debited to contractors account. Cost-plus Contract Cost plus contracts provide for payment of allowable actual costs plus an agreed element to cover the profit as incentive.

Contract Costing
Escalation Clause Sometimes to avoid the effect for unfavorable movement of the price escalation, a clause is incorporated in the terms and conditions of the contract. Under this clause, the price of the contract is dependent on the market price and any increase beyond a certain point in the price of the inputs is to be borne by the customer

Continuous Operation Costing

Process Costing Operating Costing Output Costing Service Costing

Process Costing
Process is a series of activities (operations) that are linked to perform a specific objective. It is a method of costing useful in manufacturing of products where production process is continuous & Output of one process became Input of next process till completion.

Characteristics of Process Costing

Homogeneous units pass through a series of similar processes. Each unit in each process receives a similar dose of manufacturing costs. Manufacturing costs are accumulated for a process for a given period of time.

Operation Costing

Some manufacturing firms have characteristics of both job & process environment. Firms in these hybrid setting often use Batch Production Process. Batch production Process produce batches of different products which are identical in many ways but differ in other. Operations costing is a blend of job order & process costing procedures applied to batches of homogeneous products.

Operating Costing/Service Costing

This method of costing is adopted by those business organization which are engaged in providing service such as transportation, Generation & Distribution of Electricity, Hotels, Hospitals, Theaters etc. Normally double units of management are used such as Ton Kilometers, passenger Kilometer, room days, patient days, Kilowatt hrs. etc.

Unit Costing /Cost Sheet

It is suitable where only one product or a few grades of the same product involving a single process or operation is produced. No much-detailed analysis of Expenses as only Single product is produced.

Cost Sheet

Cost sheet is a statement, which provides for the assembly of the estimated cost in respect of a cost center or cost unit. It may be prepared on the basis of actual expenditure incurred or it may be prepared on the basis of estimated expenditure.

PROFORMA COST SHEET

Particulars of cost Opening Stock of Raw Materials Add: Purchase of Raw Materials Amount (Rs.) xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Less: Closing Stock of Raw Materials Raw Material consumption Direct Labour Direct Expenses PRIME COST Factory Overheads Add: Opening Work-in-Progress Less: Closing Work-in-Progress Less: Sale of By-Products or Scrap FACTORY COST Administration Overheads COST OF PRODUCTION Add: Opening Stock of Finished goods Less: Closing Stock of Finished goods COST OF GOODS SOLD Selling and Distribution Overheads COST OF SALES Profit SALES

Problem on Unit or Output Costing

A manufacturing company has an installed capacity of 1,20,000 units per annum. The cost structure of the product manufactured is as under: Variable cost per unitRs. Materials 8 Labor (Subject to a minimum of Rs. 56,000 per month) 8 Overheads 3 Fixed overheads Rs. 1,68,750 per annum. Semi-variable overheads Rs. 48,000 per annum at 60% capacity, which increases by Rs. 6,000 per annum for increase of every 10% of the capacity utilization or any part thereof, for the year as a whole. The Capacity Utilization for the next year is estimated at 60% for two months, 75% for 6 months and 80% for remaining part of the year. If the company is planning to have a profit of 25% on the selling price, Calculate the selling price per unit. Assume that there are no opening and closing stocks.

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