Method of costing


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Method of costing

  1. 1. Method of Costing 1.Unit Costing 2. Job Costing 3. Contract Costing 4. Batch Costing 5. Operating Costing 6. Process Costing. 7. Multiple Costing 8. Uniform Costing.
  2. 2. 1.Unit Costing This method also called 'Single output Costing'. This method of costing is used for products which can be expressed in identical quantitative units and is suitable for products which are manufactured by continuous manufacturing activity. Costs are ascertained for convenient units of output.  Examples: Brick making, mining, cement manufacturing, dairy, flour mills etc. 
  3. 3. Job Costing: Under this method costs are ascertained for each work order separately as each job has its own specifications and scope.  Examples: Painting, Car repair, Decoration, Repair of building etc. 
  4. 4. Contract Costing: Under this method costing is done for big jobs which involves heavy expenditure and stretches over a long period and often it is undertaken at different sites. Each contract is treated as a separate unit for costing.  This is also known as Terminal Costing. Construction of bridges, roads, buildings, etc. comes under contract costing. 
  5. 5. Batch Costing This methods of costing is used where the units produced in a batch are uniform in nature and design. For the purpose of costing each batch is treated as a job or separate unit.  Industries like Bakery, Pharmaceuticals etc. usually use batch costing method. 
  6. 6. Operating Costing or Service Costing:   Where the cost of operating a service such as nursing home, Bus, railway or chartered bus etc. this method of costing is used to ascertain the cost of such particular service. Each particular service is treated as separate units in operating costing. In the case of a Nursing Home, a unit is treated as the cost of a bed per day and for buses operating cost for a kilometer is treated as a unit.
  7. 7. Process Costing:       This kind of costing is used for the products which go through different processes. For example, manufacturing cloths goes through different process. Fist process is spinning. The out put of spinning is yarn. It is a finished product which can be sold in the market to the weavers as well as use as a raw material for weaving in the same manufacturing unit. For the purpose of finding out the cost of yarn, the cost of spinning process is to be ascertained. The second step is the weaving process.The out put of weaving process is cloth which also can be sold as a finished product in the market. In such case, the cost of cloth needs to be evaluated. The third process is converting cloth in to finished product such as shirt or trouser etc. Each process is to be evaluated separately as the out put of each process can be treated as a finished good as well as consumed as a raw material for the next process. In such industries process costing is used to ascertaining the cost at each stage of production.
  8. 8. Multiple Costing: When the output comprises many assembled parts or components such as in television, motor Car or electronics gadgets, costs have to be ascertained or each component as well as the finished product. Such costing may involve different methods of costing for different components.  Therefore this type of costing is known as composite costing or multiple costing. 
  9. 9. Uniform Costing: This is not a separate method of costing. This is a system of using the same method of costing by a number of firms in the same industry. It is treated as a common system of using agreed principles and standard accounting practices in the identical firms or industry.  This helps in fixation of price of the product and inter-firm comparisons. 
  10. 10. Types of Costing There are different types or techniques of costings are used in cost accounting. Different types of costing is used in different industries to analyze and presenting costs for the purposes of control and managerial decisions.  The generally used types of costing are as follows: 
  11. 11. Marginal Costing: In Marginal Costing, it allocates only variable costs i.e. direct materials, direct labour and other direct expenses and variable overheads to the production.  It does not take into account the fixed cost of production. This type of costing emphasizes the distinction between fixed and variable costs. 
  12. 12. Absorption Costing: The technique of absorbing fixed and variable costs to production is called absorption costing.  Under absorption costing full costs, i.e. fixed and variable costs are absorbed to the production. 
  13. 13. Standard Costing: When costs are determined in advance on certain predetermined standards under a given set of operating conditions, it is called standard costing.  Standard costing is to be compared with the actual costs periodically to analyze the changes in the cost to revise the standards to avoid any loss due to outdated costing. 
  14. 14. Historical costing: When costs are determined in terms of actual costs and not in terms of predetermined standards cost is called Historical costing.  In this system of cost accounting, costs are determined only after they have been incurred.  Almost all organizations use historical costing system of accounting for costs. 
  15. 15. Reconciliation of Cost and Financial Accounts Cost accounts act as a check on financial accounts. To achieve this, we have to compare the profit/loss ascertained under the cost accounts with the profit/loss arrived under financial accounts.  By preparing a reconciliation statement, we can find out the causes of difference in cost accounting and financial accounts. 
  16. 16. Double entry system of account is being used by large manufacturing firms and they adopt one of the following two methods:  1. Integral or integrated Accounting:  2. Non-integral or Independent Accounting 
  17. 17. 1. Integral or integrated Accounting: Integral or integrated Accounting: When cost and financial transactions are unified, it is called the integral/integrated accounting. In integral or integrated accounting Cost and financial transactions are not kept separate, they are together recorded in one set of books of account.
  18. 18. 2. Non-integral or Independent Accounting. When the cost and financial transactions are kept separate, the method followed is called "non-integral or Independent Accounting".  A separate set of books are maintained  under this system. Need of reconciliation of cost and financial accounts arises only when non-integral accounting method is followed. 
  19. 19. Integral Accounting:   Integral Accounting: means the maintenance of cost and financial accounts in a single set of books. In other words the merger of financial and cost accounting by using a single set of books of accounts. This serve the purpose of both financial account and cost account. A cost ledger and three subsidiary ledgers i.e. Stores Ledger, Work-in-progress Ledger and Finished Stock Ledger are also maintained in addition to the General Ledger, Sales Bought Ledger and Sales Ledger.
  20. 20. Preparation of Cost Sheet  Suppose you are running a factory which manufactures electronic toys. You incur expenses on raw material, labour and other expenses which can be directly attributed to cost and which cannot be directly attributed but are incurred Upto their sales. You need to know the composition of cost at different stages. This will help you in the analysis of cost of a product so that same can be used for its proper management. In this lesson you will learn about cost sheet and its various components.
  21. 21. COST SHEET : MEANING AND ITS IMPORTANCE  Cost sheet is a statement, which shows various components of total cost of a product. It classifies and analyses the components of cost of a product. Previous periods data is given in the cost sheet for comparative study. It is a statement which shows per unit cost in addition to Total Cost. Selling price is ascertained with the help of cost sheet. The details of total cost presented in the form of a statement is termed as Cost sheet. Cost sheet is prepared on the basis of :   1. Historical Cost 2. Estimated Cost
  22. 22.  Historical Cost  Historical Cost sheet is prepared on the basis of actual cost incurred. A statement of cost prepared after incurring the actual cost is called Historical Cost Sheet. Estimated Cost  Estimated cost sheet is prepared on the basis of estimated cost. The statement prepared before the commencement of production is called estimated cost sheet. Such cost sheet is useful in quoting the tender price of a job or a contract. 
  23. 23. Importance of Cost Sheet        The importance of cost sheet is as follows: ś Cost ascertainment: The main objective of the cost sheet is to ascertain the cost of a product. Cost sheet helps in ascertainment of cost for the purpose of determining cost after they are incurred. It also helps to ascertain the actual cost or estimated cost of a Job. Fixation of selling price: To fix the selling price of a product or service, it is essential to prepare the cost sheet. It helps in fixing selling price of a product or service by providing detailed information of the cost. Help in cost control: For controlling the cost of a product it is necessary for every manufacturing unit to prepare a cost sheet. Estimated cost sheet helps in the control of material cost, labour cost and overheads cost at every point of production. Facilitates managerial decisions: It helps in taking important decisions by the management such as: whether to produce or buy a component, what prices of goods are to be quoted in the tender, whether to retain or replace an existing machine etc.
  24. 24. Preparation of Cost Sheet Questions - 1 From the following information, prepare a cost sheet for period ended on 31st March 2013.  Opening stock of raw material  12,500 Purchases of raw material 1,36,000 Closing stock of raw material 8,500 Direct wages 54,000 Direct expenses 12,000 Factory overheads 100% of direct w Office and administrative overheads 20% of works co Selling and distribution overheads 26,000
  25. 25. SOLUTION
  26. 26. Question – 2 The following information is given to you from which you are required to prepare Cost Sheet for the period ended on 31St march 2013:
  27. 27. SOLUTION Cost Sheet for the period ended on 31st March, 2013 .
  28. 28. Fill in the BLANKS        (i) Cost sheet classifies and analyses the ---------of cost of a product. (ii) ............... is ascertained with the help of cost sheet. (iii) ............... Cost sheet is prepared on the basis of actual cost incurred. (iv) Cost sheet also helps to ascertain the actual cost or …….of a job. (v) Cost sheet helps in fixing ...............of products or services by providing detailed cost information. (vi) ............... cost sheet helps in the control of material cost of a product/service.
  29. 29. ANSWERS (i) Components  (ii) Selling price  (iii) Historical  (iv) estimated  (v) selling price  (vi) Estimated 
  30. 30. Need for reconciliation of Cost and Financial Accounts. When financial and cost accounts are maintained independently many a times the profit or loss disclosed by the two sets of books may differ from each other.  This difference in profit/loss necessitates the preparation of a reconciliation statement. This statement will show the reason for the difference in figures in the two accounts i.e. cost account and financial account.  It not only helps in checking the arithmetical accuracy of operating results shown by the financial accounts but also establish the accuracy of cost accounts. 
  31. 31. Need for reconciliation of Cost and Financial Accounts. Limitations and techniques of Cost accounting management  Cost Accounting is not an exact science like other branches of accounting but is an art which has developed through theories and accounting practices based on common sense and reasoning.... Methods of Costing and Types of Costing  As per the nature and peculiarities of the business, different Industries follow different methods to find out the cost of their product. There are different principles and procedure for doing the costing.... Costing and Cost Accounting  Costing or cost accounting is a branch of accounting which deals with recording classifying and appropriate allocation of expenditure to determine the cost of product and services. After determining the cost one can fix the profit margin...