Chapter 3

SINGLE OR OUTPUT COSTING

MEANING
Single or output costing is a method of costing by the UNIT OF PRODUCTION. It is adopted by concerns producing a single article on a large scale by a continuous process of manufacture, and all the units produced are identical and homogeneous.

UTILITY
Thus Single or output costing is employed in case of industries where: 1) The production is uniform and continued affair 2) The units of production are identical 3) The cost units are physical or units of production are capable of being expressed in convenient unit of measurement. Examples: sugar mills, paper mills, dairies, cement works, quarries, etc There is a cost unit such as : tonne of coal or cement or sugar, a gallon of milk etc

Costing Procedure
Analysis of the different elements of expenditure to determine:
prime cost, factory cost, office cost and total cost.

Determination of per unit cost

Total expenditure divided by the quantity produced.

Classification of expenditure at regular intervals e.g. monthly, quarterly or half-yearly Preparation of COST SHEET Comparative figures of preceding period are provided

ELEMENTS OF COST
Direct Material Factory Overhead Indirect Material Direct Labour Direct Expenses

Overhead
Selling & Distribution Overhead

Administrative Overhead Indirect Labour

Indirect Expenses

Components of Total Cost

Prime Cost = Direct Materials + Direct Labour + Direct Expenses. Factory/Works Cost = Prime Cost + Factory Overheads

Cost of Production = Works Cost + Administration Overheads

Total Cost or Cost of Sales = Cost of Production + Selling & Distribution Overheads
The difference between the cost of sales and selling price represents profit or loss.

Cost Sheet
A cost sheet is a statement that provides a logical, detailed and systematic presentation of various elements of cost information obtained through the cost records.

It is a statement designed to show the output of a particular accounting period alongwith break-up of cost.

Cost Sheet

It discloses the total cost and cost per unit.

It helps 1. To estimate cost 2. To fix Selling Price. 3. To submit quotation price/tender price.

4. To Control cost.

Items Shown in Cost Sheet

Direct Materials Cost

It is the cost of materials which can be identified with and allocated to cost units or cost centres. Includes cost of: a. Raw materials b. Parts or components c. Materials purchased specially for a job, process, work order d. Primary packing materials. e. Material procurement expenses such as carriage, import duty, freight, octroi charges.

Direct Labour Cost

It is the remuneration of workers/employees who are directly engaged in the production of the product It includes: a. Wages, salaries, bonus, DA, city compensatory allowance, overtime wage etc of labour engaged in actual production including supervision, inspection and analysts engaged in a particular job b. Fringe benefits like leave salary, PF contribution, gratuity

Direct Expenses
All such expenses (other than direct material and direct wages ) as have been specifically incurred for a job, process, or product line and can be identified with and allocated to cost centres or cost units. Examples :
a. b. c. d. Cost of special designs, moulds, blue-prints Experimental/trial expenses Hire charges of special equipment Fees paid to architects, consultants and surveyors for specific job e. Royalties for land, mine, trademark

OVERHEADS

FACTORY/WORKS OVERHEADS

Power, fuel ,coal, gas, water. Lighting, heating ,cleaning, haulage, cooling. Cleaning and oiling of machines. Rent, rates, taxes, insurance of the factory. Repairs, maintenance, depreciation of factory building, equipment, plant and machinery. Supervision, surveying, testing and inspection expenses Salaries and wages of time-keepers, watchmen, gatekeepers, foremen, works manager. Procurement expenses of materials, spares & loose tools Storage costs Drawing & designing expenses Training costs Rectifying defective products.

ADMINISTRATION OVERHEADS
Remuneration of office staff. Office rent, lighting, postage, telephone. Directors and General Managers fees & remuneration Salaries of secretary & accountant Auditors fees Legal fees & consultants charges Repairs , maintenance, insurance and depreciation of office furniture, equipment, vehicles & building. Bank charges.

SELLING AND DISTRIBUTION OVERHEADS

Selling Overheads Selling and commission of salesmen & agent Travelling expenses Free samples Showroom & display expenses Advertising & publicity Trade fairs & Exhibition Packing expenses Carriage & freight on goods sold Discounts, bad debts & collection charges Sales office rent, salaries, electricity, stationery, postage & telephone. Repairs, maintenance, insurance & depreciation of assets.

SELLING AND DISTRIBUTION OVERHEADS

Distribution Overheads Rent, insurance & other expenses on warehouses & godowns. Depreciation of handling equipment & warehouse building. Repairs, insurance, depreciation and running expenses of delivery vans. Freight, insurance and carriage on goods sent to warehouses. Salaries of godown keepers & other staff in warehouses.

Items Excluded From Cost Records

The total cost of a product should include only those items of expenses which are a charge against profit. Items which are relating to capital assets, capital losses, payments by way of distribution of profits and matters of pure finance would not form part of the costs.

Items Excluded From Cost Records

a. Cost of raising loans and finance discount on issue of debentures and shares, underwriting commission and brokerage paid on such issues. b. Interest on debentures, loans, interest received on investments. c. Losses or gains of capital nature or on sale of fixed assets, writing off goodwill, preliminary expenses written off. d. Capital expenditure i.e. fixed assets purchased e. Incomes such as, property rent, dividend received, transfer fees etc. Cont

Items Excluded From Cost Records

f. Appropriation of profits such as : dividend paid, transfers to various reserves, provisions for sinking funds for replacement of assets, income tax. g. Unusual expenses like expenses on shifting the business to a new building. h. Cash discount i. Abnormal idle time, excessive depreciation. j. Items of expenses and incomes of purely financial and non-operational nature eg income tax and donations

Format of Cost Sheet

Particulars Direct Materials Direct Wages Other Direct Expenses

Prime Cost

Total Cost XXX XXX XXX XXX XXX

Cost Per Unit XXX XXX XXX XXX XXX

Add: Factory/Works overhead Factory Cost

Add: Administrative overheads Cost of production Add:Selling & Distribution overheads Cost of Sales

XXX
XXX XXX XXX

XXX
XXX XXX XXX

XXX

XXX

Example 1
Direct materials Direct wages Indirect wages Direct Expenses Electric Power Depreciation of Office Building Depreciation of Plant and Machinery Directors fees Oil And Waste Lubricants Consumable stores Bad Debts Postage & Telegraph

Rs. 80,000 40,000 10,000

12,000 1,000 1,000 2,000 2,000 200 300 1,000 2,000 500

Lighting-Factory -Office Carriage outward General selling Expenses Storeskeepers wages Office Printing & Stationery Travelling Expenses Telephone charges Rent Factory - office Managers Salary General factory Expenses

Rs. 1,000 400 300

2,000 1,200 500 1,000 800 2,000 1,000 3,000 500

Treatment of stock
Stock may be of Raw material Work-in-Progress Finished Goods

Stock of Raw Materials

Raw Materials consumed is computed as follows:
Opening stock of raw materials Add: Purchases (including expenses on purchase Less: Closing Stock of Raw Materials Cost of Raw Materials consumed Rs. XX

XX XX XX XX

Particulars Direct Materials consumed Direct Wages Other Direct Expenses

Prime Cost

Total Cost XXX XXX XXX XXX XXX XXX

XXX XXX

Cost Per Unit XXX XXX XXX XXX XXX XXX

XXX XXX

Add: Factory/Works overhead y Factory Cost

Add: Administrative overheads Cost of production

Add:Selling & Distribution overheads Cost of Sales

XXX

XXX

XXX

XXX

Stock of Work-In-Process
Work-in-process(W-I-P) refers to units on which some work has been done but which are not yet complete. Adjustment of opening W-I-P and closing W-I-P is as follows: Rs. XX XX XX XX XX

Prime Cost Add: Factory overhead Add: Opening W-I-P Less: Closing W-I-P Factory Cost

Stock of Finished Goods

Cost of Production Add: Opening Stock of Finished Goods Rs. XX XX XX XX XX

Less: Closing Stock of finished Goods Cost of Goods Sold

Cost sheet for the period.

Particulars Direct Materials consumed Direct Wages Other Direct Expenses Prime Cost Add: Factory or Works Overhead Factory Cost (Gross) Add : opening work-in-progress Less : Closing work-in-process Factory Cost (net) Add:Administrative overheads Cost of production Add : opening stock of finished goods Less : Closing stock of finished goods Cost of Goods Sold Add : Selling Overheads Cost of Sales Total Cost XXX XXX XXX XXX XXX XXX XXX (XXX) XXX XXX XXX XXX (XXX) XXX XXX XXX Cost Per Unit XXX XXX XXX XXX XXX XXX XXX (XXX) XXX XXX XXX XXX (XXX) XXX XXX XXX

Example 2
Opening stock of raw materials Closing stock of raw materials Direct wages Indirect wages Opening W-I-P Closing W-I-P Rs. 1,50,000 Factory rent, rates and power 1,80,000 Depreciation of Plant and Machinery 1,00,000 Repairs of Machinery 10,000 Advertising 55,000 Office rent & taxes Salesmen salaries & Commission 4,00,000 Opening Stock of Finished Goods 1,30,000 Closing Stock of finished Goods 5,000 Sale of Scrap 70,000 Rs. 30,000 7,000 3,000 12,000 5,000 15,000

Sales
Purchase of Raw Materials Carriage inwards

1,00,000
65,000 2,000

Example 3
The following data relate to the manufacturing of a standard product during the month ended 31 March 2007: Raw materials consumed Rs 15,000 Direct wages Rs 9,800 Machine hours worked
Machine hour rate Office overheads Selling overheads Units produced

2,300 Hrs.
Re.0.50 10% of works cost Re. 0.10 per unit 19,030

Units sold 11,418 @ Rs. 2 each Prepare a cost sheet and statement of profit

 The following details are available from the books of Sea Products Ltd. for the year ending 31st Dec. 2007 Rs. Rs. Direct wages 6,00,000 Printing and stationery 12,000 Purchase of materials 7,20,000 Accountants salary 12,000 Indirect materials 36,000 Sales 18,00,000 Office rent 8,640 Stock 1-1-2007 1,20,000 -Raw materials Wages of foremen and 48,000 -work-in-progress 28,800 storekeepers Other indirect wages 6,000 -finished products (units) 6,000 Cost of research and 30,000 Stock 31-12-2007 1,33,440 experiments -Raw materials Office managers salary 72,000 -work-in-progress 96,000 Employees State 6,000 -finished products Insurance (units) 12,000 Power, fuel and haulage 54,000 Income Tax 22,000 Drawing expenses 36,000 Donation 5,000

Example 4

Example 4(cont.)

The selling and distribution expenses are to be charged at Re. 1 per unit. During the year 2007 units produced were 96,000. prepare a cost sheet showing the different elements of cost and the profit.

ADVANTAGES OF COST SHEET

It discloses the total cost and the cost per unit of the units produced during the given period. Cost control-It enables a manufacturer to keep a close watch and control over the cost of production. Enable determination of variances and taking corrective measures - by providing a comparative study of the various elements of current costs with the past results and standard costs. Guides in formulating production policy by estimating costs. Helps in price fixation Helps to minimise the cost of production during cutthroat competition. Helps to submit reasonably accurate quotations against tenders for the supply of goods.

Cost Estimation
It is the process of determining in advance the cost of a product, job, order or service.
In cost estimation, an allowance is made for anticipated fluctuations in the prices of elements of cost i.e. materials, labour and overheads.

Purpose of Cost Estimation

1. Bidding for contracts and offering quotations. 2. Preparation of budgets for budgetary control and cost control. 3. Performance Evaluation 4. Preparation of projected financial statements.

Tender Price
Tender is an offer inviting quotations to do a certain work. Cost sheet is useful for determining tender/bid price by providing information elementwise and componentwise In preparing tender price probable changes in the input prices should be taken into account. Fixed costs should be ignored if the tender output can be met out of the existing plant capacity of the firm.

Example 5(Determination of Tender Price)

The following cost data is of Stove Manufacturing Co. Ltd for current year ending March 31. Rs. Opening Materials Inventory 70,000 Closing Materials Inventory 9,800 Purchase of Materials 1,05,000 Factory Wages 1,90,000 Factory expenses 35,000 Establishment Expenses 20,000 Opening finished stock Nil Closing finished stock 70,000 Sales 3,78,000

Example 5 (Cont.)
The number of stoves manufactured during the year was 8,000. The company wants to quote for the supply of 2,000 stoves for the coming year. The stoves to be quoted are similar to the current year but cost of materials is expected to increase by 10% and factory labour by 20%. Prepare a statement showing the price to be quoted so as to give the same percentage of profit on turnover as was realised during the current year assuming that other costs will be the same as in the previous year.