methods of costing (1)

7/31/2019 Methods of Costing (1)

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Methods of Costing


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Session Objectives

In this chapter we shall deal with

Job costing

Batch costing

Contract costing

Process costing

Operation costing.


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Methods of Costing

The methods used for the

ascertainment of cost of production

primarily depend on themanufacturing process and the

methods of measuring the

departmental and finished goods.

Basically, there are two methods of

costing:


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Method of Costing


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Job Costing

Job costing isa form of specificorder costing that applies where

work is undertaken to meetcustomers special requirements

and each order is of comparatively

short duration.


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This method of costing should

possess the following features

The production is generally against thecustomers 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.


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Batch Costing

Batch costing is a type of specific order costing.A quantity of identical articles when producedas a single job is termed as a batch. It issuitable in the following situations

When the output of a job consists of a numberof units and it is not economical to ascertaincost of every unit of output independently.

When customers annual requirement is to besupplied in uniform quantities over the year.


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Batch Costing

When certain physical characteristicslike size, color, taste, quality, etc. arerequired uniformly over a collection of

units e.g., garments of the same size,pharmaceuticals, etc.

When an internal manufacturing order ismade out for production of

components/sub-parts e.g., componentparts of radio sets, watches, etc.


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Contract Costing

Contract costing is that form of specificorder costing which applies to work that isundertaken to meet customers specialrequirements and each order is of long term

duration.

It is mainly applied in civil construction andengineering projects, ship building etc.

This method of contract costing is used in

contracts for which substantial time is takento complete the contract and this methodfalls into different accounting periods.


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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 ofallowable actual costs plus an agreed

element to cover the profit as incentive.


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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


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Continuous Operation

Costing

Process Costing

Operating Costing

Output Costing

Service Costing


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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.


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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 giveneriod of time.


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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.


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Operating Costing/Service

Costing

This method of costing is adopted bythose business organization which areengaged in providing service such astransportation, Generation &Distribution of Electricity, Hotels,Hospitals, Theaters etc.

Normally double units of managementare used such as Ton Kilometers,passenger Kilometer, room days,patient days, Kilowatt hrs. etc.


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Unit Costing /Cost Sheet

It is suitable where only one product

or a few grades of the same product

involving a single process or operationis produced.

No much-detailed analysis of

Expenses as only Single product is

produced.


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Cost Sheet

Cost sheet is a statement, which

provides for the assembly of the

estimated cost in respect of a costcenter 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.


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PROFORMA COST SHEET

Particulars of cost Amount (Rs.)

Opening Stock of Raw Materials xxx

Add: Purchase of Raw Materials xxx

xxx

Less: Closing Stock of Raw Materials xxx

Raw Material consumption xxx

Direct Labour xxx

Direct Expenses xxx

PRIME COST xxxFactory Overheads xxx

Add: Opening Work-in-Progress xxx

Less: Closing Work-in-Progress xxx

Less: Sale of By-Products or Scrap xxx

FACTORY COST xxx

Administration Overheads xxx

COST OF PRODUCTION xxx

Add: Opening Stock of Finished goods xxx

Less: Closing Stock of Finished goods xxx

COST OF GOODS SOLD xxx

Selling and Distribution Overheads xxx

COST OF SALES xxx

Profit xxxSALES xxx


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Problem on Unit or Output Costing

A manufacturing company has an installed capacity of 1,20,000 units perannum. The cost structure of the product manufactured is as under:

Variable cost per unit- Rs.

Materials 8

Labor (Subject to a minimum of Rs. 56,000 per month) 8

Overheads 3Fixed overheads Rs. 1,68,750 per annum.

Semi-variable overheads Rs. 48,000 per annum at 60% capacity, whichincreases by Rs. 6,000 per annum for increase of every 10% of thecapacity utilization or any part thereof, for the year as a whole.

The Capacity Utilization for the next year is estimated at 60% for twomonths, 75% for 6 months and 80% for remaining part of the year. Ifthe company is planning to have a profit of 25% on the selling price,Calculate the selling price per unit. Assume that there are no openingand closing stocks.


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methods of costing (1)

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