Chapter

UNIT COSTING

Introduction
Unit costing is that method of costing where the output produced is identical and each unit of output
requires identical cost (homogeneous articles are produced on large scale). Unit costing is synonymously
known as single or output costing, but these are sub-division of unit costing method. This method of costing
is followed by industries which produce single output or few variants of a single output. Under this method
costs, are collected and analysed element wise and then total cost per unit is ascertained by dividing the
total cost with the number of units produced. If we have to state it in the form of a formula, then

Total Cost of Production

Cost Per Unit =
No. of units Produced

This method of costing, therefore finds its application in industries like paper, cement, steel works, mining,
breweries etc. These types of industries produce identical products and therefore have identical costs.

Illustration 1
A factory produces 100 units of commodity X?

Direct Material : 30,000/-

Direct Wages : 20,000/-
Direct Expense : 25,000/-

Factory overheads are charged at 20% of Prime cost.

Office administration cost are charged at 10% of works cost.
If a profit of 33.33% on sales is to be realized, what would be the selling price on each article.

Answer
Direct Material Cost - 30,000/-
Direct Labour Cost - 20,000/-
Direct Expense - 25,000/-
Prime Cost - 75,000/-
Factory Overhead (20% of prime cost) - 15,000/-

Works cost - 90,000/-

Admin overheads(10% of works cost) - 9,000/-
Cost of production - 99,000/-
Profit (1/2 of cost ) - 49,500/-
Sales value - 148,500
Selling price per unit -148,500/100 units = 1485/-

Prepared by: Raman Luthra

Chartered Accountant
Illustration 2

Atharva Pharmacare Limited produced a uniform type of product and has a manufacturing capacity of
3,000 units per week of 48 hours. From the records of the company, the following data are available relating
to output and cost of 3 consecutive weeks?

Week Units Direct Direct Factory

Number Manufactured Material (`) Wages (`) Overheads (`)
1 1,200 9,000 3,600 31,000
2 1,600 12,000 4,800 33,000
3 1,800 13,500 5,400 34,000

Assuming that the company charges a profit of 20% on cost of production, FIND OUT the selling price per
unit when the weekly output is 2,000 units

Answer:

Direct Material Cost (2000x7.5) - 15,000/-

Direct Wages Cost (2000x3) - 6,000/-

Prime Cost - 21,000/-

Factory Overhead - 35,000/-
Fixed -25,000
Variable(2000*5) -10,000
Works cost/cost of production - 56,000/-
Profit (20% on cost ) - 11,200/-
Sales value - 67,200
Selling price per unit -67,200/2000 units = 33.60/-

Working Note
1. Direct material cost = 9000/1200 = 7.5 per unit
2. Direct wage cost = 3600/1200 =3.0 per unit
3. Factory overheads
1,200 – cost is 31,000
1,600 – Cost is 35,000

Variable part in factory overheads = (35,000 – 31,000)/400 = 5/-

Fixed part in factory overheads = Total cost – variable part
= 31,000 – 6000 (1200*5)
= 25,000/-

Prepared by: Raman Luthra

Chartered Accountant
Multiple Choice Questions

1. [Question] Calculate the prime cost from the following information:

Direct material purchased: Rs. 1,00,000
Direct material consumed: Rs. 90,000
Direct labour: Rs. 60,000
Direct expenses: Rs. 20,000
Manufacturing overheads: Rs. 30,000?

a) 1,70,000
b) 1,80,000
c) 2,00,000
d) 2,05,000
e) 2,10,000

Answer: a.

2. [Question] Unit Costing is applicable where ?

a) Product produced are unique and no 2 products are same

b) Dissimilar articles are produced as per customer specification
c) homogeneous articles are produced on large scale
d) Products made require different raw materials
e) heterogeneous articles are produced on large scale

Answer: c.

Prepared by: Raman Luthra

Chartered Accountant