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There are two principle methods of costing. These methods are
I] Specific order or Job Costing II] Continuous operation or Process Costing
Production under job work is strictly according to customer’s specifications and each job is unique. Example- ship building, roads, bridges construction, manufacture of heavy electrical machinery, machine tools, furniture making, printing jobs etc. Costs are accumulated and ascertained job-wise It is possible to identify a job at each stage of its manufacturing While computing the cost, direct costs are charged to the job directly as they are traceable to the job. Indirect expenses i.e. overheads are charged to the job on some suitable basis. Each job completed may be different from other jobs and hence more detailed supervision and control is necessary.
Job Costing Procedure Direct Material Material Requisitions Direct Labour Time Sheets Direct Expenses Factory Overhead Absorption at predetermined overhead rates Factory Cost (Transferred to finished goods store) Add: Administration. Selling & Distribution Overheads Cost of Sales Add: Profit Selling Price .
Cost of batch is ascertained by dividing the total of batch by number of units produced in that batch Cost per unit= Total cost of batch/ No. Example -printing. . television/AC parts manufacturing etc.Job Costing: Batch Costing. etc. construction engg. automobile. Contract Costing Batch costing Used when a quantity of similar and identical products are manufactured in batches. Separate cost sheets are maintained for each batch of products by assigning a batch number. ship-building. ready-made garments. of units produced in the batch Contract costing This method is suitable for big jobs spread over a period of time Normally work is done at the customer’s site Suitable for undertakings engaged in building construction.
Examples of such industries are chemical plants. Operation Costing . Operating Costing. The process loss may arise due to wastage. textile mills. sugar factories. Cost per process is ascertained and cost of each process is transferred to the subsequent process until the finished product emerges. spoilage. This is the average cost of the product units. dairy etc. Process Costing: Unit or Single or Output Costing. paper mill. food manufacturing. The production is in continuous flow and is uniform. All units coming out as finished products are uniform with each other in all respects. evaporation etc.Process Costing Process Costing is used in those industries where the production is in continuous process. The unit cost is obtained by dividing the total cost for a particular period by the total output.
bricks works. hotels. educational institutions. cement etc. hospital.Single output or Unit Costing Applied where production is continuous and uniform and the industry in engages in production of a single product or few grades of the same product Total cost is divided by number of unit produced to determine cost per unit Applied in the industries like dairy. . paper mills. electricity etc. textile mills. Operating Costing Suitable for industries which render services rather than manufacturing goods To ascertain the cost of rendering services Applied in transport company.
choosing product mix. Fixed costs are distributed proportionately on suitable basis over diff. decision to make or to buy etc. the variable costs are directly charged to the product. These techniques may be grouped as follows : Absorption costing : As per this system.TECHNIQUES OF COSTING In each of the costing methods. product manufactured during the period. Marginal costing : In marginal costing. In this method. Contribution is the difference between sales and variable or marginal cost of sales. all fixed and variable costs are allotted to cost units and total overheads are absorbed by actual activity level. It is a valuable aid to management in taking important policy decisions. . depending on the management requirement. Contribution= Sales – Variable Cost Marginal costing is also known as direct or variable costing. such as product pricing. various techniques may be used to ascertain cost. Variable costs are charged to unit cost and the fixed costs attributable to the relevant period is written off in full against the contribution for that period. only variable costs are considered in calculating cost of product.
This helps in fixation of price of the product and inter-firm comparisons. The main objective of fixation of standard cost is to have benchmark against which the actual performance can be compared. . This is a system of using the same method/principle of costing by a number of firms in the same industry. Standard Costing: Standard costs are predetermined costs and are worked out on scientific basis by conducting technical analysis.. The difference between standard & actual cost is called as ‘variance’. Uniform Costing: This is not a separate method of costing. It is treated as a common system of using agreed principles and standard accounting practices in the identical firms or industry.Contd.
Hence. 3.in the process of production for such sale (Work-in-progress) . Which price will be applicable in such case? Obviously the answer is that the issues should be priced at the same price at which they are purchased.for consumption in the production of goods or services for sale (Raw materials) Objective of Inventory Valuation. The various methods of pricing of issues are given below. First In First Out (FIFO) Last In First Out [LIFO] Simple Average Method Weighted Average Method . 2. 1. But it is not practical as it is virtually impossible to identify the material issued. it may happen that materials from more than one lot may have to be issued. when issues are made from stock.Pricing of Issues Different lot of materials may be received at different prices.Inventory Costing Inventories are tangible properties held: .for sale in ordinary course of business (Finished Goods) . Hence it is necessary to price the issues by using certain methods. 4.
If the price of the material purchased fluctuates considerably. 2. It is a good store keeping practice 5. 3. It is easy to understand and simple to price the issues. it involves more clerical work and there is possibility of errors . Material cost represents actual cost which should be charged to product or process. Demerits: 1. Usually more than one price has to be adopted for a single issue of materials. 3. 2. Stock value is closer to current price. It is a straight forwarded method which involves less clerical cost 4. In case of rising prices it will result in charging lower prices.First In First Out (FIFO) In this method. the stock received first is issued first Then the issues are made according to the dates of purchases made Closing inventories are valued at latest purchase prices Merits: 1. while in case of falling price it will result in charging higher prices to the material consumption.
. material received last are issued first to the job.Closing inventories are valued at oldest purchase prices Merits: 1. which is more appropriate. Product cost will tend to be more realistic since material cost is charged at more recent price.In this method. . Like FIFO. It is simple to understand and easy to apply 3.Therefore the issue should be charged at the latest prices. . Demerits: 1. Stock-value does not represent current market price.Last In First Out (LIFO) . Unfair comparison of job cost when price changes too frequently. this method also involves too many calculations and more clerical work 3. 2. 2. Issues are charged at latest price.
the issues are charged at the average price of the material purchased without taking into consideration the quantities involved in the same. . 2. it is calculated before any issue is made Merits: 1. The method is used prices do not fluctuate significantly. profit or loss may occur. Since issues are not valued at actual cost. .Every time when inventory is received. this would be highly suitable as it will even out such fluctuation Demerits: 1.This method takes into consideration the prices as well as the quantities of materials purchased. . Easy to calculate and operate. When there is wide fluctuation in prices of different inventories. Issues and closing stock are not at current cost.Simple Average Method: Under this method. Weighted Average Method . 2.It is computed by dividing the total amount by the total quantity.
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