Chapter 5

OUTPUT COSTING
Output costing (or unit costing or single costing) is a method of cost
ascertainment which is used in those industries which have the following
features :

((i) Production consists of a single 
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product or a few varieties of the 
same product with variations  in 
size, shape, quality, etc.

(ii) Production is uniform and on 
continuous basis.
 COSTING PROCEDURE
Cost Sheet: Cost sheet is defined as ‘a document which provides for the assembly of the
detailed cost of a cost centre or cost unit.’

Purposes Cost sheet serves  the following purposes:

• 1. It reveals the total cost and cost per unit of goods produced.
• 2. It discloses break‐up of total cost  into different elements of cost.
• 3. It provides  a  comparative  study of  the  cost  of  current period 
3  It provides  a  comparative  study of  the  cost  of  current period 
with  that of  the corresponding previous period.
• 4. It  acts  as  a  guide  to management  in  fixation of  selling prices  
and quotation  of tenders.
 TREATMENT OF STOCKS
Stocks may be of the following three types:

Stocks of Raw Materials In order  to calculate  the value of  raw materials 
St k   f R  M t i l  I   d   t   l l t   th   l   f     t i l 
consumed during the period, opening stock of raw materials is added to 
the raw materials purchased and closing stock  is subtracted.

Stocks of Work‐in‐progress This  is  the  stock of  semi‐finished goods.  
In  cost  sheet, opening stock of work‐in‐progress is added in prime cost 
along with factory overhead and closing stock of work‐in‐progress in 
subtracted therefrom. 

Stock of Finished Goods In cost sheet,  finished goods are adjusted after 
calculating cost of production. Opening stock of  finished goods  is added  
to cost of production  and closing stock of finished goods is subtracted 
therefrom. The resultant figure is called cost of goods sold. 
 ITEMS EXCLUDED  FROM COST
Following items are of financial nature and not included while preparing a cost sheet:
1. Cash discount

2. Interest paid

3. Preliminary expenses written off

4  Goodwill written off
4. Goodwill written off

5. Provision for  taxation

6. Provision for bad debts 

7. Transfer to reserves

8. Donations

9. Income tax paid

10. Dividend paid

11. Profit/loss on sale of fixed assets
 P fit/l     l   f fi d  t

12. Damages payable at law, etc.
 TREATMENT OF SCRAP
Scrap may be defined as an unavoidable residue material arising in certain types of
manufacturing processes. Examples of scrap are trimmings, turnings or boring from metals
or timber, on which operations are performed. Scrap usually has a small realizable value.
Such realizable value of scrap is deducted from either factory overheads or factory cost while
preparing a cost sheet.
PRODUCTION ACCOUNT
PRODUCTION  ACCOUNT
When information shown in a cost sheet is presented in the form of a T‐shape 
account, it is known  as Production Account.  

In  this account, debit  side  shows  the various  item of cost while credit side shows 
the sales of  finished goods. 

Opening stock  is written on the debit side while closing stock  is written on the 
credit side.

Alternatively, closing stock may be shown as a deduction from the items in debit 
side. 

In this way this account shows the total cost. 

The balance in this account shows profit or loss, as the case may be.
PRICE QUOTATIONS AND ESTIMATED 
COST SHEET
¾ Quite often the management has to quote prices of its products in advance or has to submit
tenders for goods to be supplied. For this purpose an estimated cost sheet has to be
prepared. Such an estimated cost sheet is prepared to show the estimated cost of products to be
manufactured.
¾ In this cost sheet,
sheet cost of direct materials,
materials direct wages and various types of overheads are
predetermined on the basis of past costs after taking into account the present conditions and
also the anticipated changes in the future price level.
¾ Overheads are absorbed on the basis of a suitable method of absorption like percentage
of direct materials,
materials or wages or machine hour rate,rate etc.
etc

Calculation of profit

¾ After the total cost has been estimated, a desired percentage of profit is added
to arrive at the price to be quoted.
¾ Such profit may be given as a percentage of cost or percentage of selling price.
¾ In order to calculate the amount of profit,
profit it is easy to assume that figure as 100
on which profit percentage is given and then calculate the amount of profit.