ENGLISH 7_Q4_LESSON 2_ Employing a Variety of Strategies for Effective Interp...
Chapter 06 Costing Methods
1. CHAPTER 06:
METHODS OF COSTING
1. JOB COSTING
2. BATCH COSTING
3. CONTRACT COSTING
4. PROCESS COSTING CONDUCTED BY:
P. Ayanthi Madumali
2. Intended Learning Outcomes
• At the end of the chapter, you will able to
1. To understand the meaning of ‘Costing Methods.’
2. To know various methods of costing.
3. To understand the numerical problems relating to the
costing methods.
3. Introduction
• costing’ refers to the techniques and processes of determining
costs of a product manufactured or services rendered.
• Different methods of costing are required to be used in different
types of businesses. For example, costing methods used in a
manufacturing business will differ from the methods used in a
business that is offering services.
• Even in a manufacturing business, some business units may
have production in a continuous process and while in some
businesses production is done according to the requirements of
customers.
4. Methods of Costing
There are two principle methods of costing. These
methods are as follows
01. Special Order Costing ( Job costing , Batch costing
,Contract costing)
02. Process Costing
5. Job costing
• A job is carried out or a product is produced to meet the specific
requirements of the Order. (Ex: Repair of motor vehicle , repair
of machinery, decoration)
Job Cost sheet
• The objective of job costing is to ascertain the cost of a job that
is produced as per the requirements of the customers.
• Hence job cost sheet is necessary to identify the costs
associated with the job and present it in the form of job cost
sheet for showing various types of costs
• See: Tutorial No: 06, Question No 01, 02, 03
6.
7. Batch Costing
• Batch costing is used where units of a product are manufactured
in batches and used in the assembly of the final product.
• Thus components of products like television, radio sets, air
conditioners, bakery and other consumer goods are
manufactured in batches to maintain uniformity in all respects
• See: Handout Example 10.2 & 10.3
8. Contract Costing
• Under this methods costing is done for big jobs which involves
heavy expenditure & stretches over a long period & often it is
undertaken at different sites.
• Each contract is treated as a separate unit for costing and profit
& loss is ascertained separately.
• Ex: Construction of bridges, roads , ship and building
9. Features of Contract Costing
• Large in size and takes more than one year for completion
• Involves two parties viz. Contractor and Contractee
• Contract executed for a price termed as Contract Price
• Each contract is a cost unit; expenses get separately recorded and
profit too is separately ascertained
• Expenses are chargeable directly to contract account
Contd..
10. • Specialist sub-contracts may be employed
• Plant may be purchased or hired especially for the contract
• Work carried out at site and not in factory premises
• May contain Penalty Clause
• Payments made based on stages of completion and depends on
Architects Certificate
11. Concepts relating to ContractAccounts
01.Contractor
• Person who undertakes the task of doing the job
02.Contractee
• Person on whose behalf the task is being done
03.Contract Price
• Value for which the contract is undertaken
04.Work certified
• Part of the total contract price which is has been completed and
approved by the architect
12. 05.Uncertified Work
• Part of the task done but not approved by the architect of the
Contractee
06.Cash Paid:
• Part of the work certified that is paid by the Contractee
07.Retention Money:
• Part of the work certified that is held back by the Contractee
08.Notional Profit
Difference between the value of work certified and cost of
work certified.
13. ContractAccount
• Contract account is a nominal account & its main purpose is to estimate the
profit earned each year in case of contract.
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&
Financial
expenses not
consider
14. • Example 01 :From the following particulars relating to a contract ,prepare
the contract account.
1. Labour engaged on site 300,000
2. Wages accrued on end of year 20,000
3. Material purchased 500,000
4. Depreciation of plant & machinery 60,000
5. Establishment charges 10,000
6. Rent paid for machinery 25,000
7. Technical planning charges 15,000
8. Compensation for central environment Athoutity 35,000
9. Material return to stores 20,000
10. Material on hand 31st Dec 100,000
11. Sells of scraps 2,000
12. Overhead cost 30,000
13. Advertisement cost 5,000
14. Interest of loan 3,000
15. Sub contractors wages 25,000 (paid) , 3,000( accrued)
15. Estimation of profit
• Value of certified work only should be taken into consideration while
determining the profit.
• Value of work not certified should not be taken into consideration.
Degree(%) of completion = (Work certified / Contract price ) *100
16. Estimation of profit
1) When % of completion is less than 25% then full Notional
profit is transferred to reserve. (No profit should be taken to
Profit & Loss account)
2) When % of completion is 25% or less than 50% following
amount should be credited to profit & loss a/c
= 1/3 * Notional Profit * {Cash received / Work certified}
3) When % of completion is 50% or less than 90% then the
amount transferred to profit is
=2/3 * Notional Profit * {Cash received / Work certified}
[Balance is transferred to reserve a/c]
17. Con…
4) Completion of contract is up to 90 per cent or more than 90 per
cent i.e. it is nearing completion: In this case the profit to be taken to
Profit and Loss Account is determined by:
= Estimated Profit × Work certified × Cash received
Contract price Work certified
• Estimated profit = Contract Price – Cost incurred – Cost yet to be incurred
5) If contract is complete in full , then the entire amount is
transferred to P&L A/C.
6) If there are losses being incurred in contract, then the entire
amount is transferred to P&L A/C.
See: Question No: 04-09
19. Process Costing
• Process Costing is a method of costing which is used in those
industries where the production is in continuous process, i.e. the
output of one process becomes the input of the subsequent
process and so on.
• Examples of such industries are, paint works, chemical plants,
food manufacturing, oil refining, paper mill, textile mills, sugar
factories, fruit canning, dairy and so on
20. Important aspects an ProcessAccounts
• Normal Loss: Normal loss is a loss, which is inevitable in any
process. Thus if the input is 100, the output may be 95 if the
normal loss is anticipated as 5%.
• Abnormal Loss/Abnormal Gain: If the actual output is less
than the normal output [Normal output = Input – Normal Loss],
the difference between the two is the abnormal loss.
• If the actual output is more than the normal output, the
difference between the two is abnormal gain.
• Thus in the example given above, the normal output is 95 which
is 100 – 5% of 100 as the normal loss.
• If the actual output is 93 units, 2 units will be abnormal loss and
if the actual output is 97 units, 2 units will be abnormal gain.
22. Situations which may be found in a production
1. Process costing having no process loss or gain & no
opening & closing WIP
2. Process costing having process loss or gain
3. Process costing having opening & closing WIP
4. Process costing having opening & closing WIP with
process losses or gain
5. Inter process profits.
27. Process costing having process loss or gain &
no opening & closing WIP
• Normal Loss: Normal loss is anticipated and in a process it is
inevitable. The cost of normal loss is therefore not worked out.
• The number of units of normal loss is credited to the Process
Account and if they have some scrap value or realizable value
the amount is also credited to the process account.
• If there is no scrap value or realizable value, only the units are
credited to the process account.
• Normal loss Dr. xxx
Relevant process Cr. xxx
28. • Abnormal Loss: If the units lost in the production process are
more than the normal loss.
• The relevant process of account is credited and abnormal loss
account is debited with the abnormal loss valued at full cost of
finished output.
• The amount realized from sale of scrap of abnormal loss units
is credited to the abnormal loss account and the balance in
the abnormal loss account is transferred to the Costing Profit
and Loss Account.
29. • Abnormal Gain: If the actual production units are more than
the anticipated units after deducting the normal loss, the
difference between the two is known as abnormal gain.
• The units and the amount is debited to the relevant Process
Account and credited to the Abnormal Gain Account
36. Difference between job costing & process
costing
Characteristics Job Costing Process Costing
Applicability To identify costs with
specific products or jobs
Issued in case of mass
production of similar units
that continuously pass
through different process.
Cost collection Manufacturing costs are
accumulated for particular
jobs or batches
Manufacturing costs are
accumulated for entire
departments or process.
Time period assumption Production time which may
be more than one
accounting period
Production is measured for
specific time period.
37. Characteristics Job Costing Process Costing
Purpose Generally depend on
customer order
Production is done for
storing stock of goods for
future sale
Computation of unit cost Cost of the job order
Units produced
Process cost
Process production
WIP work in progress One WIP account is
maintained
Individual WIP accounts
are prepared for each
process