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 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 xxx
Factory 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 xxx
SALES xxx
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 unit- Rs.
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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