MODULE :3 METHODS OF

COSTING

Course Code :- BCL102

Subject :- Cost Accounting
Instructor :- Prof .Vaishnavi Narendra
 JOB COSTING
 Meaning :- Job costing is one a particular form of specific
order costing ,where it is applicable to the work being
undertaken at customers special requirements for a
comparatively short duration. The work is being carried
out within the premises such as a workshop or a factory
which is moved through different processes or operations,
usually through identifiable units.

 Example :- Furniture jobs, Construction jobs, Printing jobs

etc.
Features of Job costing

 It is a particular form of specific order costing

 The job is carried out or the desired product is produced inorder to
meet the specific requirements of the order
 It is usually having a concern on cost of an individual job or a batch
irrespective of the time consumption taken to produce it, normally it
is having a short duration of time.
 Work in progress might exist or may not exist at the end of accounting
years.
ADVANTAGES

 Job costing method enables comparison based on the

performance with the other jobs so that inefficiencies are
identified an rectified.
 It also highlights whether the concerned job is profitable
or not.
 There is a generation of cost data where the analysis is
helpful for the decision making of the management
 There can be an accurate measurement of profit or loss
caused by each job.
Disadvantages

 The process is very expensive

 The time consumption is very high.
CONTRACT COSTING

 Definition :- This is a particular method where each contract is treated as a

cost unit and the accumulated profit or loss is ascertained separately
 FEATURES OF CONTRACT COSTING
 It is large in size and takes more than an year for completion
 There is an involvement of two parties ; Contractor and Contractee
 There is a maintained of separate account for each contract
 The contract has a large duration usually extending for more than one
accounting year.
 Penalties or extra money may be imposed
Types of Contract Costing

FIXED PRICE CONTRACT

•The fixed price is agreed

•Extra money for additional work

COST PLUS CONTRACT

•Compensates for costs which are being incurred by the contractor

•There is a payment made as per the percentage or a lump sum amount is paid.

CONTRACT WITH ESCALATION COST

•Mixture of both the components mentioned above

•A fixed price would increase in cost of material and labour.

PROCESS COSTING

 MEANING :- Process costing is a method of costing which

is used to find out the cost of product in each cost.
 It is used to calculate the cost per unit of a product
which is ascertained at each stage of production.
 It is one of the form of operating costing, it is widely used
in textiles, steel , rubber and other industries.
Overview of process costing systems

Raw
materials

MELT

SKIM AND MOLD AND FINISHED

ALLOY EXTRUDE GOODS
FEATURES OF PROCESS COSTING

FEATURES
CONTINUOUS

HOMOGENEOUS

STANDARDIZED AND
EQUIVALENT
PRODUCTION
NORMAL AND ABNORMAL LOSS

 In process costing, the abnormal loss is definable as the total loss or spoilage
of units in a processing department, that is not expected to occur under
efficient working circumstances, Abnormal loss always signifies that the
production and operations has one or more issue that needs to be rectified
and has to be fixed quickly, more often abnormal loss is witnessed due to
improper supervision and faulty equipment and power cuts or due to bad
ergonomics of a premises.
 Treatment of abnormal loss in process costing
There are two methods for treatment of abnormal loss , it is either charged to a
factory overhead or expense an account for a current period and it is presented
as an separate line on the cost of goods sold, however under the first instance,
the abnormal loss causes an additional unfavorable factory overhead
DIFFERENCE BETWEEN NORMAL AND
ABNORMAL LOSS
The core factor for consideration of differentiation between
normal and abnormal loss or any spoilage of stock is the degree of
controllability, In normal loss the anticipation of loss is much
lower when compared to an abnormal loss.
In normal loss the losses are caused by default which is inherently
caused due to certain production process; due to evaporation,
shrinkage etc.
The abnormal loss, on the other hand could be controllable and it
can be avoided under normal and efficient working conditions, it
mainly occurs because of carelessness and usage of lower quality
machines and similar facts which are controllable in nature.
ABNORMAL GAIN OR ABNORMAL
EFFECTIVENESS

 This is a gain of amount with respect to excess units produced when the
actual wastage of units decreases than expected wastage in the process of
production, In other words, when there is a loss in a process less than what is
expected, are the abnormal gain results, this might be the usage of good
quality raw materials, plant design or effective operations etc.
 The balance is transferred to the costing profit and loss account.

 Amount of abnormal gain = (Normal cost of normal output / Normal output ) *

Units produced,
OPERATING COSTING

 Meaning :- This is one of the method of costing applied in ascertainment of

costs in services, It is not applicable for manufacturing industries and goods.
 This method is usually used by Utility services
 Distribution services
 Transport services
 Management consulting industries etc.
FEATURES OF OPERATING COSTING

 It is a mixture of job and process costing.

 The undertakings are taken where it adopts service costing and it does not
applicable to any tangible goods. These undertakings render huge service to
their customers
 The expenses are having fixed and variable cost , such classifications are
necessary in ascertainment of cost of service and unit of cost of service.
 Total cost is averaged over the total number of services rendered.

 Costs are computed period wise.

 The cost sheet and log sheet are used for the collection of cost data.
TECHNIQUES OF COSTING

 The techniques of costing is used by management for controlling costs and

making some important managerial decisions.

 Marginal Costing
 Direct Costing
 Absorption Costing
 Uniform Costing
THANK YOU