Methods of

Costing
 COST ACCOUNTING

• Cost accounting is the art or process of recording, analyzing and

classifying of expenditure for the purpose of product costing or
service costing, ascertainment of profitability, operational planning
and cost control.

• It provides data for fixing the selling price of products and services
and for determining the quotation price or tender price.
Methods of Costing
 Single or Output Costing

• This method of costing is used where a single product is produced.

• Single Cost = Total Production Cost / Total Number of Units

• This method of costing is applied to ascertain the total and per unit of a
standard product turned out in a manufacturing concern.

• It is generally applied to industries where –

a) The output of production is continuous
b) The unit of output are identical
c) The unit of output are natural
d) It is desirable to ascertain the cost per unit of output. e.g. ;per meter, per
ton, per kilogram etc.
 Objects of Output Costing

• To ascertain the total cost and per unit cost of production during a
specified period

• To make comparative study of the cost of production

• To ascertain or to determine the selling price per unit of goods

manufactured.
 Cost sheet

Cost Sheet is a statement, prepared at given interval of time, which

provides information regarding elements of cost incurred in production.

 Advantages of Cost Sheet-

 Disclosure of cost
 Determination of selling price
 Cost control
 Determination of tender price
 Specimen of Cost Sheet

Period…… Output..
Particulars Total Cost Cost per Unit
Rs. P. Rs. P.
Direct Material xxx Xxx
Direct Wages xxx Xxx
Direct Expenses Xxx Xxx

Prime Xxx Xxx

Cost
Works Overheads Xxx Xxx
Works Cost Xxx Xxx
Office &Adminstration Overheads Xxx Xxx

Cost of Production Xxx Xxx

Selling &distribution Overheads Xxx Xxx

Total Cost Xxx Xxx

Profit Xxx Xxx
Sales Xxx xxx
 PROCESS COSTING

INTRODUCTION :
The method of process costing is applied to the COP
In those industries, where a product passes through different
processes of production before its completion.

• process costing method is generally employed in industries like

chemicals , food products , oil refineries , soap, etc.
 FEATURES OF PROCESS COSTING

• The production is divided into various stages &each process is carried out by
separate cost department.

• The production is continuous & the final product is the result of a sequence of
processes.

• The finished product of each process is treated as the raw materials of the
subsequent process.

• The COP per unit is the average cost which is obtained by dividing the total process
cost by the total number of units manufactured.

• There may occur abnormal loss & abnormal gain.

• Costing profit &loss is calculated after taking into account the opening balance of
finished stock & the closing balance of finished stock.
 PROCEDURE OF PROCESS COSTING

• Under the process costing, the manufacture of a product is divided into

well-defined processes.

• A separate account is opened for each process.

• The total number of units produced during a given period is calculated &
by dividing the total cost of a process by the total number of units
produced.

• The cost of each process is transferred to the next process till it is

transferred to the finished stock account.

• The output of one process will transferred to next process.

 Job Costing

• Also known as "Job Lot Costing” or “Lot Costing”.

• Job costing is applied to ascertain the costs of specific jobs or work-

orders which are treated as contracts of small size.

• Used in printing press, painting and decorating, Manufacturing firm like,

machine-tool and non-manufacturing concern general e.g.. Workshop &
Auto Repair shop.
 Features Of Job Costing

• Production is carried on by a manufacturer against customer‟s

order and not for stock.

• Each job or work-order is of a separate nature.

• The job or work-order are generally executed in factories,

work-shops and repair-shops.

• The unit of costing under this method, is a job or specific

work-order.

• Production and requirements are determined first and then the

expenses are ascertained in relation to it.
 Job costing

ADVANTAGES DISADVANTAGES

• Job costing enables the manufacturer

to knows the profitability of each job • It involves too much clerical work
separately. which increases the chance of errors.

• Job costing facilitates cost control • Historical in nature , so it doesn‟t give

through the comparison of actual cost the prompt remedial measures.
and estimated costs.
• Non-repetitive in nature and may not
• Defective work can be easily be comparable with each other.
identified with specific job or work-
order .
 Batch costing

• Job costing is varied form of job costing.

• Batch costing is concerned with ascertainment of group of identical

products manufactured for own stock.

• Batch costing is applied in the manufacture of medicines, component

parts of complex products, biscuits, food products, readymade garments,
etc.

• The products manufactured in a batch are to be used in a particular

purpose or to be consumed within a specified period.
 CONTRACT COSTING

Defination :

According to Sharle, ” contract cost accounts are applicable to a

concern which makes specific contracts & requires to know the cost of
each.”

• The person executing the contract is known as „CONTRACTOR‟.

• The person for whom it is executed is known as „CONTRACTEE‟.
 FEATURES OF CONTRACT COSTING

• Contract s are executed at contract site. It should be away from executor‟s

premises.

• These contract jobs are of large size and may continue over more than
one accounting period.

• Each contract is treated as a separate unit of cost for the purpose of cost
ascertainment.

• The contract is executed by the contractor for some agreed amount of

consideration known as “ Contract Price “.

• Example: ship- building, Road construction, Building construction, civil

engineering works etc.
 Operating costing

• Operating costing is a method of cost ascertainment used in service

industry, such as transport, electricity, hotels etc.

• The undertakings which do not produce any products use operating

costing for ascertaining their cost.

• Operating costing may be used in those manufacturing companies, where

services are provided in the organisation.

• It applies where standardised services are rendered by a service cost

centre unit in the organisation.

• E.g. - road transport undertakings, railways, airways, shipping companies,

electricity companies, gas companies, hospitals etc.
 FEATURES OF OPERATING COSTING

• Standardised services :- Services rendered to customers are of

standardised type.

• Investment in fixed assets :- A large part of the total capital is invested

in fixed assets and very less amount is used in working capital.

• Scale of operation :- The scale of operation generally affect the cost of

service per unit rendered.

• Particular importance :- the distinction between fixed cost and variable

cost is of special importance.
 COMPONENTS OF TOTAL COST IN
OPERATING COSTING

The total cost under operating costing is classified under the

following headings:-

• Capital Expenditure

• Direct or variable cost

• Fixed cost.
 PROCEDURE OF COSTING

• The method of ascertainment of costs under operating costing is on lines

similar to output or unit costing.

• All costs incurred in operating a service are accumulated under suitable

headings in the form of cost sheet and the costs are expressed in terms of
the unit of service rendered.

• E.g. – Transport costing.

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