JOB COSTING Nature and Purpose Job costing may be defined as a system of costing in which the elements of cost are accumulated separately for each job or works order undertaken by an organisation. Industries which manufacture products or renders service against specific orders use job costing or job order method of cost accounting. In the job costing system, an order or a unit, lot or batch of product may be taken as a cost unit, i.e., a job

1. 1. JOB COSTINGNature and Purpose Jobcostingmaybe definedasa systemof costinginwhichthe
elementsof costare accumulatedseparatelyforeachjoborworksorder undertakenbyan
organisation.Industrieswhichmanufacture productsorrendersservice againstspecificordersuse
jobcostingor job ordermethodof cost accounting.Inthe job costingsystem, anorderor a unit,lot
or batch of productmay be takenas a cost unit,i.e.,ajob.Job costingisa methodof costingin
whichcost unitscan be separatelyidentifiedandneedtobe separatelycosted.The primarypurpose
of jobcostingisto bringtogetherall the costsincurredfor completingajob.The systemof job
costingcan be sub-dividedintotwocategoriesviz.(a) factoryjobcostingand(b) Contract costing.A
variantof jobcostingsystemisbatch costinginwhichcostsare accumulatedforspecificbatchesof
productsof a similartype orderedformanufacture.Jobcostingisapplicable toanengineering
concern,constructioncompanies,ship-building,furnituremaking,machinemanufactureindustries,
repairshops,automobilegaragesandsuchotherfactorieswhere jobsororderscan be kept
separately.Asproductioninajobordersystemisnot continuousprocess,careful planningandstrict
control is essentialtoavoidwastage of materials,manpower,machinery,andotherresources.On
receiptsof an order,the productionandplanningdepartmentpreparesasuitabledesignforthe
productsor job.It alsopreparesa bill of materialsandan operation
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6 METHODS OFCOSTING
schedule.A productionorderisissuedgivinginstructiontothe shopstoproceedwiththe
manufacture of the product.Thisproductionorder(alsoknownaswork orderor joborder record)
constitutesthe authorityof the work.The productionorderorjob orderusuallylaysdownthe
quantityof material required,time allowedforthe operations,salesprices,customer'sname,
shippinginstruction,etc.Sometimesthe valuesof materialsandlabourare alsoindicatedandthenit
servesthe combinedpurpose of anorderformanufacture aswell asthe costsheeton whichthe
cost of the orderiscompiled.Everyproductionorderisassignedanumbercalledthe jobnumber,
jobordernumber,worksordernumber.The basisprinciples,proceduresinthe accountingof
material,laboursandoverheadcostsandotherspecial featuresof the jobcostingsystemsare
mentionedbelow:Material CostsAnessential requirementof jobordercostaccountingisthat direct
materialsandtheircostmust be traced to andidentifiedwithspecificjobsorworksorders.On
receiptof a productionorder,the shopdrawsthe requisite materialsfromstores.The withdrawals
are made on material requisitionsonbasisof the bill of materials.The particularjoborder number
for whichmaterial isdrawnisindicatedineachrequisition.Surplus,excessorincorrectmaterial are
returnedfromthe shopsto the storeswithmaterialsreturnnote.A dailyorweeklyanalysisof
materialsrequisitions,materialsreturnnotesandbillsof materialsismade andpostedinthe
materialsrequisitionjournal.Forcostaccountingpurposes,amaterialsissue analysissheetis
preparedshowingthe costof materialsissuedagainstthe variousjobordersnumbers.Direct
material costis postedonthe cost sheetrelatingtothe particularproductionorderwhile,indirect
materialscostistreatedas overheadcosts.LabourCostsAll directlabourcostsmust be analysed
accordingto individual jobsorworkorders.Onthe authorityof operationschedule,timeisbooked
on time sheets,jobcards,time ticketorpiece-workcards.The jobcards are valuedbythe costing
department;the wagespaidare classifiedintodirectandindirectlabourandbookedtoproduction
ordersand standingordernumbers
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METHODS OF COSTING

2. respectively.Laboursummariesorwage analysissheetsare preparedforeachaccountingperiod;
say a week.Amountsonaccountof overtime,idletime,shiftdifferentialandfringe benefitsmayalso
be includedinthe wage analysis sheet.Directlabourcostsare postedonthe respective cost-sheets
and indirectlabouristreatedasoverheadcosts.ManufacturingOverheadsOverheadcostsare
accumulatedagainststandingordernumbersandagainstcostcentres.Overheadrates,
predeterminedoractualsasthe case may be,are workedoutfor each center.The amountof
overheadcostrecoverable oneachjoborderissummarisedinanOverheadAbsorptionorApplied
OverheadAnalysis-sheetandispostedonthe relevantcost-sheets.Usually,overheadsare added
onlywhenthe jobiscompletedbut,atthe endof the accountingperiod,the amountof overheads
whichcouldbe appliedtoincompletejobsisascertainedforthe purpose of establishingthe extent
of overor underabsorptionof overheads. Completionof jobsPostingof directmaterial,direct
labourand manufacturingoverheadcoststothe costsheetfora job or productionorderare made
throughoutthe run of the job or order.On the completionof ajob,a jobcompletionreportissent
by the productionshoptothe ProductionandPlanningDepartment,withacopyto the CostOffice.
Sometimes,informationregardingcompletionisnote onthe productionorderwhichisrouted
throughCost office.The expenditurebookedundereachelementof costis totalledupandthe grand
total of cost isarrivedat. JobAccount:An account iskeptfor eachjob sothat its costand the various
componentsof costcan be readilyascertained.There canbe variousformsinwhichthe account
may be maintained.The following,therefore,maybe treatedasillustrative(asfiguresare assumed)
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METHODS OF COSTING
JobAcount No........................................""" " Date Commenced.................... Brief
Particulars..................."""" Date Completed....................... ............................................""" "
Remarks...................................Date ParticularsMaterialsWagesTotal Total cost Rs.1997 May 7
Materialsanalysis340 340 Material consumed560 “ Wagesanalysis410 410 wages970 “14 Material
analysis220 220 Prime cost 1530 Factoryoverheads(60%) of wages) 582 Work cost 2,112
“14 Wages Analysis
560 560
Office and administrative overhead10%of workscost 211 560 970 1,530 Total cost 2,323
Work-in-progessThe costof an incomplete job,i.e.,ajobonwhichsome manufacturingoperationis
till due istermeda works-in-progress.If aproductionorderhasbeenonlycompletedbythe endof
an accountingperiod,itisessential thatthe closingstockof the work-in-progressbe determined.
Unlessthisiscorrectlydone,the profitsfor the periodwill be distorted.Determinationof work-in-
progressisfrequentlyessentialwhere periodicprofitandlossaccount isrequiredtobe preparedfor
control purposeswithoutreferencetothe closure of the accountingperiod.Job-ticket:Sometimes
the progressof differentjobsmaybe ascertainedwiththe helpof the jobticketissuedforeachjob
orderby the ProductionControl Department.The ticketconsistsof detachable portionsrelatingto
differentoperations.Anillustrationshowingthe methodof calculationof the value of work-
inprogressisgivenbelow:
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METHODS OF COSTING

3. Illustration - 1 The quantityspecifiedonaproductionorderwas2,000 unitsof an article inthe
manufacture of whichfouroperationswere involved.The piece-ratesforthese fouroperationwere
insequence,Rs.0.20, 0.25, 0.20, and 0.30 per unit.The companyrecoveredfactoryoverhead
expensesonthe basisof directlabourcost and the currentoverheadrate is80%. The entire quantity
of material authorisedforthe order,viz.1000 kgs.@ Rs. 2 per kg.was issuedtothe shop.Of this 50
kgs were returnedasscrap arisingincourse of manufacture,valuedatRs.8. Atthe yearend,the
orderwas incomplete;only200 unitswere fullycompletedandtransferredtofinishedstock-taking
of the work-in-progressrevealedthe followingposition:Materialsinprogress"""" " " " 650 kgs.
Material inhand, inshop(unprocessed)""200 kgs. Productioninpartlycompletedstage""" 1,300
units
Extentof worksperformed
Upto the first operation""" " " " 600 units Uptothe secondoperationstage""" " 400 units Upto
the thirdoperationstage"""" " 300 units Uptothe fourthoperationstage""" " Nil Calculatethe
cost of the work-in-progressatthe yearend
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METHODS OF COSTING
Solution: """""""""""Rs.P""" " Rs.P Costsheetshowingcostof work-in-progress Material Cost
Material inhand 200 kgs @ Rs 2 per kg.*" " " " " " " 400.00 Material in process650m kgs @ Rs 2 per
kg" 1,300.00 Less: Proportionate costof scrap""" " " 6.50"" 1,293.50 """"""""""""""" 1,693.50
Labour cost Operationl - 600 units@ Rs.0.20"" " " 120.00 Operationll - 400 units@ Rs.
0.45"""180.00 Operationlll - 300 units@ Rs. 0.65" " " 195.00" " " " 495.00 Factoryoverhead80%
on directlabour"""""""396.00 Total cost of works-in-progress"""""""" 2,584.50 Illustration - 2The
alphaManufacturingCompanyprocessedproductionthroughtwodepartment(i) Machineryand(ii)
Finishing.Overheadratesare predeterminedonthe basisof machine hoursinthe machine
departmentandthe directlabourwagesinthe finishingdepartment.The figure for1996-97 based
on which the overheadrateswere arrivedatas furnishedbelow: """""""MachiningDept.Rs.""
FinishingDept.Rs. Directlabourwages"""" 36,00,000" " " " 40,00,000 Factoryoverheads""" "
80,00,000" " " " 60,00,000 Directlabourhours" " " " 24,00,000" " " " 50,00,000 Machine hours"" "
" " 20,00,000" " " " 5,00,000 The cost sheetforJoborderno. 1748 indicatedthe following:
"""""""MachiningDept.Rs.""FinishingDept.Rs. Material consumed""" " Rs. 50" " " " " " Rs. 7
Directlabourwages"" " " Rs.45" " " " " " Rs. 40 Directlabourhours"" " " " 24" " " " " " " 35
Machine hours"" " " " " 15" " " " " " " 5
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METHODS OF COSTING
Assumingthatthe productionorderno.1,748 consistedof 10 numbersof part No.P- 1865, prepare
a cost sheetshowingthe unitcostof the part. SolutionJobCostsheet"""""""""""JobNo. - 1748
Startedon..................""""""PartNo. - p-1865 """""""""""No.of parts produced - 10

4. _____________________________________________________________ """""""""Partsof p-
1865" " " Units """""""""Amount DirectMaterial""" Rs.""" Rs."" " " " " Rs. Machine
Department""50" " " " Finishingdepartment""7"" " 57" " " " " " 5.7 Directlabourwages
Machinerydepartment"45 Finishingdepartment""40" " " 85" " " " " " 8.5 Prime Cost"" " " " " "
142"" " " " " 14.2 Factory overheads MachineryDepartment 15hrs x Rs.80,00,000" 60
"""20,000 Finishingdepartment Basedondirectwagesi.e. 40hrs. x Rs.40,00,000 "" Rs.
60,00,000" 60" " " 120"" " " " " 12.0 Total Cost" " " " " " " 262"" " " " " 26.2
_____________________________________________________________ Cost Control inJobOrder
SystemControl injobcostsmay be exercisedbycomparisonof the actual costswithestimatedas
basisfor fixingjobprices.Comparisonmayalsobe made withthe costof previousperiodsorof
earlierbatchesof production.If there are several unitsunderthe managementof the concern,
comparisonof costs of identical productsmanufactured inmore thanone factorymay be useful.
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METHODS OF COSTING
Standardcosts may be usedinjobtypesof plants,particularlywhere the productorthe particular
operationsof the jobare of a standardisednature.Standardcostsprovidesafirmbasisfor
preparationof cost estimatesof specificjobsandthusserve as a powerful toolsforcostcontrol.
AdvantagesJobcostingoffersthe followingspecificadvantages:(i)Ithelpsmanagementtodetect
whichjobsare profitable andwhichare not Estimatesof cost for similarworksinthe future maybe
convenientlymade onthe basisof accurate record of job costs,thisassistsinthe promptfurnishing
of pricesquotationsforspecificjobs.(ii)Thecostof material,laboursandoverheadforeveryjobor
productin a departmentisavailableregularlyandperiodically,enablingthe managementtoknow
the trendof cost and thusby suitable comparison,tocontrol the efficiencyof operations,material
and machines;(iii)Theadoptionof predeterminedoverheadratesinjob costingnecessitatesthe
applicationof asystemof budgetarycontrol of overheadwithall the advantages.(iv)Spoilage and
defective workcanbe easilyidentifiedwithspecificjobsorproductssothat responsibilitymaybe
fixedondepartmentorindividuals.(v) Jobcostingisparticularlysuitable forcostplusandsuch other
contracts where sellingpricesisdetermineddirectlyonthe basisof costs.N.B.Jobcost information
can be usedforestimationof future costsonlyaftercareful adjustmentforvariationslikelytoarise
overtime as well asforany differenceinthe size of the order.If majoreconomicchangestake place,
comparisonof cost of a jobfor one periodwiththatof anotherbecomesmeaningless.Distortionof
cost alsooccurs whenthe batch quantitiesare different.Reportinjobcostingsystem(i) Reporton
Profiton Completedjobs:A statementmaybe preparedmonthlytoindicate the grossprofitearned
on all jobscompletedduringthe period.
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METHODS OF COSTING
Thisstatementisuseful forthe managementforevaluatingpastperformance.Netprofitanalysis
may alsobe made in similarmannerbyincludingthe administration,sellinganddistribution
overheadinthe statement.(i) ReportonCostVariances:If costestimatesare developed,a cost
variance reportshowingthe deviationsof actual costsfromthe estimatedcostsmaybe preparedso
that significantdifferencesmaybe broughttolightandinvestigated.The reportmaybe prepared
separatelyforajob,or fora departmentshowingthe variancesinrespectof all jobsundertakenby
the departmentduringaperiod.If standardcosts are in use,insteadof makingacomparisonfrom
estimatedcostsmaybe usedforcomparisonpurpose.The variancesmaybe analysedintomaterial

5. pricesand quantityvariances,labourrate andefficiencyvariances,andoverheadvolumeand
expenditure variances.
2. CONTRACTCOSTING Contractor terminal costing,asit istermed,isone formof applicationof the
principlesof jobordercosting.Contractcostingis,usually,suitableforbusinessconcernedwith
buildingorengineeringprojectsorstructural orconstructioncontracts.Contract jobs,while they
resemble jobs,have afewdistinctive features:(i)Underjobcosting,costisfirst allocatedtocost
centersandthento individual jobs.Incontractcosting,mostof the expensesare of directnature,
overheadformsonlyasmall percentage of total expenditure anditrepresentsexpenseslikeshare of
headoffice expenses,share of centerstorage costetc.(ii)Under jobcostingpricingisinfluencedby
individualconditionsandgeneral policyof the organisation.Undercontractcosting,pricingis
influencedbyspecificcausesof the contract.(iii)Unlikethe jobcosting,eachcontractisa cost unitin
contract costing.
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METHODS OF COSTING
(iv)Undercontractcosting,the workisusuallycarriedoutat a site otherthan contractee'sown
premises.Jobcostingisoftenappliedwhere jobsare carriedoutat the contractee'sownpremises.
Usually,there isa separate accountfor eachcontract. Alsothe numberof contracts undertakenata
time,generally,notbeingverylarge,the ContractLedgercanverywell be operatedaspartof the
financial books.The contract account isdebitedwithall the directandindirectexpenditure incurred
inrelationtothe contract. It is creditedwiththe amountof contractprice oncompletionof the
contract. The balance representsprofitandlossmade onthe contract andis transferredtothe profit
and lossaccount.In case,the contract is not completedatthe endof the accountingperiod,a
reasonable amountof profit,outof the total profit made sofar on the incomplete contract,maybe
transferredtoprofitand lossaccount.
3. SPECIFICASPECTSOF CONTRACTCOSTINGThe recordingprocedure of the followingitemsmaybe
notedcarefully:1)Material:Material maybe purchasedinbulkandkeptinstore for supplytothe
contract, as and whenrequired,orthese maybe purchasedanddirectlysuppliedtothe contract.In
the lattercase,the cost of material wouldbe debiteddirectlytothe contract.If any materialsare
transferredfromone contractto another,theircostswouldbe adjustedonthe basisof Material
TransferNote signedbythe transferorplustransfereeforeman.Incase,certainmaterialschargesto
contract are returnedtostores,the same will be creditedtothe contractaccount. Materialsstolen
or destroyedbyfire will be transferredtoprofitandlossaccount. Material inhand at the endof the
yearwill appearonthe creditside of the contract account.2)Labour: All labouractuallyemployedon
the site isregardedas directlabourirrespectiveof the nature of the task performedbythe labour
concerned.If itis desiredtoascertainthe labourcostsfora particularjobor work, each person
wouldbe providedwithajobcard uponwhichhe must recordthe nature of the worksperformedby
him.On the basisof the analysisof the jobcards, labouranalysissheetsare preparedfor
ascertainingthe actual costof labouron differentoperations.
236
METHODS OF COSTING
If concurrentlynumberof contracts are carriedon and workmenare made to divide theirtime
betweentwoormore contracts,it wouldbe necessarytoprepare analysissheetsof labour,for

6. chargingto each contract, wages appropriate thereto.3)Directexpenses:The expenseswhichcanbe
directlychargedtodifferentcontractswill be posteddirectlytothe respective contracts.These
includedcostof special tools,costsof design,electriccharge,insurance etc.4)Plant: The value of
plantusedon a contract may be eitherdebitedtothe contract and the writtendownvalue there of
the endof the yearenteredonthe creditside forcostingthe contract account, or onlya charge for
use of the plant(depreciation) maybe debitedtothe account.5)IndirectExpenses:Incontract,
indirectexpensesare fewandrelatedonlytogeneral office expensesorworkswhichcannotbe
directlyapportionedtoindividual contracts.These indirectexpensesmaybe distributedonseveral
contracts as a percentage of cost of materialsorwagespaidor the prime cost.If,however,the
contracts are big,the labourhourmethodisoftenadoptedfordistributionof expensessince itis
more efficacious.Inmakingthe distribution,the locationof the site of the contract isanother
importantfactor,for contracts situatedata distance are not likelytoreceivethe same supervisionas
comparedto those whichare close.Where suchfactorsare prominent,some sortof quotabasisfor
distributionof expensesmaybe followed.6)Extras:Where some additionalworksnotstipulatedin
the contract is carriedout,the expenditureonthisadditionalworkshouldbe separatelyanalysed
fromthat charged to the maincontract price.7)Sub-contracts:Generallyworkof aspecialised
character e.g.the installationof lifts,special flooringetc.isentrustedtoothercontractorsby the
maincontractors. The cost of suchsub-contractsisa directcharge againstthe contracts for which
the work hasbeendone.8)Escalationclause:Escalationclause isusuallyprovidedinthe contractas
a safeguardagainstanylikelychanges,inthe change inthe pricesorutilisationof material and/
labour.Thisclause providesthatincase pricesof itemsof raw materials,labouretc.specifiedinthe
contract change duringthe executionof the contract,beyondaspecifiedlimitoverthe
237
METHODS OF COSTING
pricesprevailingatthe time of signingthe agreement,the contractprice will be suitable adjustment
inorder to avoidall future disputes.Thusthisclause safeguardthe interestof boththe contractor
and the contractee incase of fluctuationinthe pricesof material,labouretc.9)Costpluscontract:
Cost pluscontract isa contract in whichthe value of the contract is ascertained byaddingacertain
percentage of profitoverthe total costof the work.This isusedincase of these contractswhose
exactcost cannot be correctlyestimatedatthe time of undertakingwork.The profittobe paidto
the contractor may be a fixedamountor it may be a particularpercentage of a cost or capital
employed.These type of contractsare undertakenforproductionof special articlesnotusually
manufacturedandisgenerallyemployed,whenGovernmenthappentobe a contractee.Generally,
insuch contract, contractor and contractee have clearagreementaboutthe itemsof costto be
included,type of material tobe used,labourratesfordifferentgrades,normal wastagestobe
permittedandthe rate or amountof profit.Advantagesof costpluscontract I.Costpluscontract
ensuredthata reasonable profitaccruesto the contractors eveninriskyprojects.II.Itsimplifiesthe
worksofferingtendersandquotations.III.Itprovidesescalationclausesandthuscoversthe
contractor fromfluctuationsinprice and utilisationof elementsof production.IV.The customeris
assuredof payingonlyreasonable amountof profit.V.The customerhasthe rightto conductcost
auditso that he can ensure thathe isnot beingcheatedbythe contractor.
Inspite of the advantagesmentionedabovecostpluscontractsystemhasthe following
disadvantages:

7.
(i) Since the contractoris assuredof profit margin,he may nottake initiative forcostreductionby
affectingeconomiesof productionandreducingwastages.
(ii) The ultimate price tobe paidbythe customercannot be exactly
238
METHODS OF COSTING
ascertaineduntil the worksiscompletedandthiscreatesdelayinpreparingpurchase budgetbythe
customer.
(iii) The customerhastopay not onlythe resultanthighcostbutalso the resultanthighprofit.Thus,
customerhave to paysubstantiallyforlackof properattitude (towardscostandefficiency) onthe
part of contractor.10)Surveyor'sor architect'scertificate:Whena contractor isengagedona
contract for several years,he cannotaffordtoblocka large amountof funds.
4. BATCH COSTING Thisisanotherformof jobcostingwhichisadoptedincase of a manufacturingof
a large numberof componentsof machinesorof otherarticles.Since alarge numberof them are
manufacturedtogetherandpassthroughthe same processof manufacture,itisconvenientto
collecttheircostof manufacture together.Costof eachcomponentinthe batchisthendetermined
by dividingthe total costbythe numberof articlesmanufactured.
5. PROCESS COSTINGIt isthe methodaccordingto whichcost data of productionare collected
accordingto the departmentsorprocessesandthereafterthe total costisdividedbythe quantityof
production,toarrive at the cost per unit.Itis suitable forthose industriesinwhichproductionflows
fromthe beginningtothe endcontinuouslyandthroughvariousstagesinatextilemill through
carding,warping,spinning,drawing,sizing,winding,weaving,painting,foldingetc.Thisissuitable
for manufacturingindustriessuchascotton,paper,sugar,chemicals,rubber,paintsandfoodwhere
the final product isa large massof a uniformquality.Itcanalsobe made applicable tominingof
coal,clay, stone,etc.Usually,however,insuchindustriesthe processinvolvedisonlyone,and
therefore,the methodof costingissimplerthanthe usual processcostingmethods;the methodis
calledsingle oroutputcosting.General Principal of processCosting
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METHODS OF COSTING
1)The majorityof itemsof costs can ordinarilybe identifiedwithspecificprocessesandcollectedand
accumulatedseparatelyforeachperiod.2)Productionrecordsof eachprocessare so designedas
wouldshow the quantumof productionforeachperiod.3)The total cost of each processis divided
by the total productionbe the processfor arrivingatthe unitcost of the article processed.
ComparisonbetweenjobcostingandprocesscostingThe typesof costaccumulationtobe usedis
determinedbythe typesof manufacturingoperations.The difference betweenthe twomethods
centermainlyaroundhowcostingisaccomplished.The productcostunderbothmethodis
ascertainedbyaveragingprocess,size of determinatorsbeingdifference inbothmethodis
ascertainedbyaveragingprocess,size of denominatorbeingdifferentinboththe cases.Injob

8. costingcosts are appliedtospecificjobsconsistingof asingle orjointsunits,whileprocesscostingis
appliedtolarge numberof units.The mainpointsof distinctionbetweenjobcostingandprocess
costingmay be summarisedasshownonthe nextpage.
240
METHODS OF COSTING
JobCostingProcess(a) Goodsare manufacturedonlyagainstspecificordersProductionisof like
unitsincontinuousflow.(b) Costsare accumulatedandappliedtospecificjobsCostsare
accumulatedandappliedprocess-wise ordepartment-wise (c) Costsare computedaftereveryjobis
completedCostsare computedafterthe expiryof aparticularcost period(d) Difference jobsare
independentof eachotherProductionbeinginacontinuousflow,productionare intermingledin
such a mannerthat lotsare notdistinguishable
(e) Productsare normallynottransferredfromone jobto anotherexceptinthe case of surpluswork
or excessproduction
Costsare normallytransferredfromone processtoanother.Generallythe finishedproductof the
processbecomesthe rawmaterial of the nextprocessuntil the goodsare completelymanufactured.
(f) Fromthe pointof viewof managerial control,more attentionisneededbecauseproductionisnot
incontinuousflowandeach jobis different.
Because of the standard,mass and continuousproduction,managerialcontrol iseasier.
(g) Differentjobmayormay not have openingorclosingwork-in-progress.
As the productionisincontinuousflowthere isalwaysanopeningandclosingbalance of work-in-
progress.
6. PROCESS LOSSESANDWASTAGES In manyprocessindustriessome lossorwastage isinavailable.
Such a lossmay be the resultof an evaporation,shrinkage,chemical changes,changesinmoisture
contentor spoilage.The processlossmaybe normal or abnormal.Normal processloss:Thisisthe
losswhichisunavoidable because of the nature of raw material forthe productiontechnique andis
inherentinthe normal course of productionsuchlosscan be estimatedinadvance onthe basisof
past experience orchemical data.
241
METHODS OF COSTING
The normal processlossis recordedonlyintermsof quantityandthe cost per unitof usable
productionisincreasedaccordingly.Where the scrappossessessome value asawaste product or as
raw material foran earlierprocess,the value thereof iscreditedtothe processaccount.Thisreduces
the cost of normal outputandprocesslossis sharedbyusable unit.Abnormal processloss:Anyloss
causedby unexpectedorabnormal conditionssuchassub-standardmaterialcarelessness,accident
etc.Or lossonthe excessof the marginanticipatedfornormal processlossisregardedasabnormal
processlossabnormal lossisnot expectedtoarise,whenoperationare carriedon efficiently
accordingto norms relatingtomanufacturingoperationscostof normal lossissharedby goodunits
of productioninthe process,butthe same cannot be giventoabnormal loss.Unitsrepresenting
abnormal lossare valuedlike goodunitsproducedandthe value of unitsrepresentingabnormal loss
isdebitedtoa separate account,whichisknownas abnormal lossaccount.The value of abnormal
lossiscalculatedwiththe helpof the followingformula:"Normal costof normal output"" X " Units

9. of abnormal loss """Normal outputIf the abnormal losshasgotany scrap value,itshouldbe
creditedtoabnormal lossaccountand the balance isultimatelywrittenoff tocostingprofitandloss
accounting.Abnormal losspresentsgoodunits,whichcouldhave beenproduced,if operationshad
beencarriedoutaccordingto acceptednormsrelatingtomanufacturingoperations.Becauseof this
reason,unitsrepresentingabnormal lossare treatedatpar withgood unitsrepresentingabnormal
lossfor the purpose of valuation.All costrelatingtoabnormal lossisdebitedtoabnormal loss
account and creditedtoprocessaccountso that the cost, whichcouldhave beenavoidedaccording
to the norms of operationsiskeptseparatelytofacilitate control actiontobe taken.Abnormal gain:
if the quantumof lossislessthanthe determinedpercentage of normal loss,the differenceiscalled
abnormal gainof effectives.The presence of abnormal effectivesshouldnoteffectthe costof good
unitsinthe normal circumstances.The value of abnormal effective isdebitedtothe concerned
processaccount andcreditedtoabnormal effectiveaccount.Thisvalue iscalculatedatthe rate at
whichthe effectiveoutput
242
METHODS OF COSTING
wouldhave beenvaluedif normal wastage hadtakenplace accordingtoexception.The value of
abnormal effectivesiscalculatedasfollows:"Normal costof normal output"" X " Units of abnormal
effective ""Unitsof normal outputIllustration - 3 A productpassesthroughthree processes.The
outputof eachproduct iscreditedasthe raw material of the nextprocessto whichitistransferred
and outputof the thirdprocessistransferredtothe finishedstock.""""""1stprocess""2ndprocess""
3rd process """""""Rs."""" Rs.""" " Rs. Material issued""" " 40,000" " " 20,000" " " 10,000
Labour" " " " " " 6,000" " " 4,000" " " 1,000 Manufacturingoverhead""10,000" " " 10,000" " "
15,000 10,000 unitshave beenissuedtothe firstprocessand, afterprocessing,the outputof each
processisas under:""""""""Output""" " Normal wastage ProcessNo.1"" " " " 9,750 units""" " 2%
ProcessNo.2" " " " " 9,400 units"" " " 5% ProcessNo.3" " " " " 8,000 units"" " " 10% Nostock of
material of work-in-progresswasleftatthe end.Calculate the costof the finishedarticles.Solution
ProcessAccountNo.1 _____________________________________________________________
""""Units""Rs.""" " " " " Units""Rs.
________________________________________________________________________ To
materials""10,000"" 40,000" By normal wastage""200"" " - To labour""" " " " 6,000" Byabnormal
wastage" 50"" " 286 To overhead""" " " 10,000" (costper unitRs.5.714) """""""""ByProcessNo.
2"" 9,750" 55,714 """""""""(transferof completed """""""""units)
________________________________________________________________________
""""10,000"" 56,000" " " " " " 10,000" 56,000
243
METHODS OF COSTING
Note:The cost of abnormal wastage iscomputedthis:Normal output=10,000 units - 200 units=
9,800 unitsCostperunitof normal unit= Rs.56,000 / 9,800 = Rs. 5,714 Cost of 50 units= Rs. 5.714 x
50 = Rs. 286 ProcessAccountNo.2 Units Rs.Units Rs. To processno.1 9,750 55,714 By normal
wastage 48
8

10. To materials20,000 (5% of 9,750) To labour4,000 (costperunitRs. 9.686) To overhead10,000 To
abnormal gain(@ Rs. 9.686) 138 1,337 By processno. 3 9,400 91,051 9,888 91,051 9,888 91,051
Note:The cost per unitsisobtainedbydividingRs.89,714 by9,262 units(i.e.,9,750 unitsless488
units).ProcessAccountNo.3 UnitsRs. Units Rs.To process9,400 91,051 By normal wastage 940 To
material 10,000 By abnormal wastage (costper unitsRs.13.677) 460 6,364 To labour1,000 To
overhead15,000 By finishedstock8,000 1,10,687 Total 9,400 1,17,051 9,400 1,17,051
244
METHODS OF COSTING
Note:The calculationof the cost of the abnormal wastage asfollows:Normal output=8,000 Units +
460 Units= 8,460 unitsCost perunitof normal unit= Rs. 1,17,051 / 8,460 = Rs.13.856 Costof 460
units= Rs. 13.836 x 460 = Rs. 6,364
7. EQUIVALENT PRODUCTION Equivalentproductionrepresentsthe productionof aprocessinterms
of completedunits.Inotherwords,itmeansconvertingthe completedproductionintoits
equivalentof completeunits.AccordingtoCIMA,Londonthe termequivalentunitsmeans"notional
whole unitsrepresentinguncompletedwork.Usedtoapportioncostsbetweenwork-inprogressand
completedoutput"the principalapplieswhenoperationcostsare beingapportionedbetweenwork-
in-progressandcompletedoutput.The formulaforequivalentproductionis:Equivalentunitsof
work-in-progress=Actual No.of unitsinprocessof manufacture x percentage of workcompleted.
Total equivalentproductionwill be equal tothe sumof equivalentcompletedunitsof work-in-
progressinthe beginningplusunitsstartedandfinishedduringthe yearplusequivalentcompleted
unitsof work-in-progressatthe end.The cost perunitof equivalentproductionwillbe equal tothe
total cost dividedbyeffectiveproductionandthe costwork-in-progresswill be equal tothe
equivalentunitsof work-in-progressmultipliedbythe costper unitof effectiveproduction.
8. BY-PRODUCTS ANDJOINTPRODUCTS By-productsare definedas" any saleable orusable value
incidentallyproducedinadditiontothe mainproduct".Byproductsmeanssecondaryor subsidiary
productsarisinginthe course of manufacturingthe mainproducts(s).Inthe processof producing
the mainproduct itfrequentlyoccursthatmaterialsorotherproductsemerge whichare of smaller
value.These are the productsand evenif subsequentprocessingenhance theirvalue,the resulting
profit will be lessthenthatfromthe mainproduct;otherwise of 245
METHODS OF COSTING
course the by-productwouldbecome the mainproductandvice-versa.Forexample,inoil refinery
crude oil is processedbutby-products,i.e.sulfur,bitumen,chemical,fertilizerare obtainedwiththe
mainproduct-refinedoil.Similarlyincoke ovens,gasandtar are incidentallyproducedinadditionto
the mainproduct coke.Gas and tar are therefore treatedasbyproducts.There are certainindustries
where twoor more productsof equal importance are simultaneouslyproducedsuchproductsare
regardedas jointproducts.Joint-productsthusrepresenttwoormore productsseparatedinthe
course of some processingoperations,usuallyrequiringfurtherprocessing,eachproductbeingin
such proportionthatno single productcanbe designate asa majorproduct. CIMA has defineditas
"Two or more productsseparatedin processing,eachhavingasufficientlyhighsaleablevalue to
meritrecognitionasa mainproduct."So jointproductimplythe following:(i) Theyare produced
fromthe same basicraw materials.(ii) Theyare comparativelyof equal importance.(iii) Theyare
producedsimultaneouslybyacommonprocess.(iv) Theymayrequire furtherprocessingafterthe
pointof separation.Examplesof jointproductsare gasoline,diesel,kerosene,lubricants,tarparaffin
and asphaltobtainedfromcrude oil.Differentgrades of lumberresultingfromalumbering

11. operationisanotherexample.The classificationof variousproductsformthe same processintojoint
productsand byproductsdependsuponthe relative importance of the productsandtheirvalue of
the variousend-productsare almostequal inimportance andtheirvalue isalsomore orless the
same,theymaybe identifiedasjointproducts.But,if one end-producthasgreaterimportance and
highervalue andthe otherproductsare of lessimportance andratherof low value,the lattermay
be classifiedasby- products.It may be notedthat the value of some end-productsmaybe so
insignificantasthattheymay be classifiedaswaste or scrap onlyinrespectsof degree of importance
and value.Jointproductsare producedsimultaneouslybutthe by-productsare produced
incidentallyinadditiontothe mainproduct.
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METHODS OF COSTING
Co-productsCo-productsare particulartype of productsbutproducedindifferentvarieties.These
productsmay not necessarilyarise fromthe same operationorraw materialsandmaybe produced
indifferentquantitieswithoutanyco-relationtothe othersaccordingto the needsof the market.
For example,indifferentquantities,suchas,ceilingfan,table fan,pedestal fan,cabinfan.Etc.
Similarly,inautomobile industryco-productsare,cars,jeeps,trucks,busesetc.Co-productsare
distinguishedfromjointproductsinasmuch as the quantitiesof jointproductsremaininlinear
relationshipbetweenthemwhereasco-productsare independentonesandmaybe producedin
differentquantitieswithoutanyco-relationshipwithothers.Objectivesof jointcostAnalysisAnalysis
of jointcostsand Accountingof jointproductsandby- productsserve the followingpurposes:
(i)Correctcollectionandcompilationof processcosts.(ii)Determinationof profitandlossoneach
line (iii)Dataforprice fixation(iv)Determinationof the patternof productionandthe mostprofitable
productmix.(v)Marginal contributionanalysis.(vi)Studyof the effectoncostsand profitdue to
increase ordecrease inproductionof jointproducts.(vii)Determiningthe profitabilityof selling
productsand by-productsastheycome out at the split-off-pointandsellingonlyafterfurther
processing.LimitationsandProblemsof JointCostAnalysis(a)Apportionmentof jointcostsare
mainlyarbitraryandno two methodswill producethe same result.Assuch,jointcostscanonlybe
inaccuratelydetermined.(b)Thismakesinter-firmcomparisondifficult.
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METHODS OF COSTING
(c) If the by-producthasnegligible sale value,analysisisnoteconomic.(d)Several assumptionsare
made and these have tobe consistentlyadheredto,inorderto have complete information.
9. OPERATINGCOSTINGOperatingcostingalsoknow as servicescostingisusedwhere servicesare
renderedandarticlesare notproduced.Itrefersto the cost procedure usedfordeterminingthe cost
perunitof servicesrendered.Service costingisjustavariantof unitsor outputcosting.The principle
isto accumulate costs undersuitable headingsandtoexpressthemintermsof the unitsof service
rendered.Because of the diversenature of aactivitiescarriedoutinservicesundertakings,the cost
systemusedisobviouslydifferentfromthatof manufacturingconcerns.The maindifferencesarise
in:(i)The adoptionof amultiple costunit(ii)The adoptionof asuitable costunitwhichisnota jobor
processbut isrelatedtothe servicesrenderede.g.unitof electricity,tonnekm.Of transport
services.(iii)The mannerof collectionandallocationof coststothe costunit.Operatingcostsare
usuallycollectedunderfollowingheadings:1) Fixedorstandardcharges2) Semi-fixedor
maintenance charges3) Variable orrunningchargesAnimportantfeature of operatingcostingis
that mostlysuchcosts are fixedinnature.The operatingcostsmaybe collectedfordifferentcost

12. unitsso thatthe relevance,andutilityof costdatacouldbe understoode.g.inhospital cost
accounting;fixedcharge maybe apportionedinaccordance withthe numberof availablebeddays
but variable costsinhospitalsmaybe ascertainedintermsof occupiedbeddays.
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METHODS OF COSTING
10. OPERATION COSTINGSometimes,aprocessmayconsistof several operations.Eachoperationin
each processor stage of productionisseparatelycosted.Operationcostingreferstothe
determinationof unitoperationcostbyeachoperationformingpartof a productionprocess.The
procedure of costingforoperationisthe same as for processcosting.Material,labourandexpenses
are recordedseparatelyforeachoperationandcostof one operationistransferredfromone
operationtoanotherinthe case of processcosting.Whenaseriesof operationsiscarriedoutto
convertraw material intothe finishedproduction,rejectionsmayoccurat the endof such
operation.Tofindout the ultimate conversioncostof specifiedquantityof output,considerationis
to be giventothe cumulative effectonconversioncostof the rejectionateachoperation.
Illustration - 4 Anarticle undergoesthree successiveoperationsfromraw materialstothe finished
productstage.The followinginformationisavailable fromthe productionrecordsof aparticular
month.OperationNo."No.of pieces""No.of pieces""No.of pieces """""(input)""" (rejected)""""
(output) 1"" " " " 12,000" " " " 4,000" " " " 8,000 2" " " " " 13,200" " " " 1,200" " " " 12,000 3" " "
" " 9,600" " " " 1,000" " " " 8,000
Findout whatshouldbe the inputinthe first operationinnumberof piecestoobtaina finished
productof 100 piecesafterthe lastoperation.Calculate the costof raw material requiredtoproduce
one piece of finishedproductfromthe followingparticulars:Weightof the finishedpieces........100
gm. perpiece Price of raw material ........Rs.10per kg.
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METHODS OF COSTING
Solution:____________________________________________________________ OperationNo."
No.of pieces""""No.of pieces """"Input""" Output""Rejected""%of output 1"" " " 12,000" " "
8,000"" 4,000" " " " 50% 2" " " " 13,200" " " 12,000"" 1,200" " " " 10% 3" " " " 9,600" " " 8,000""
1,600" " " " 20% If 100 goodunitsshouldbe the outputof the thirdoperation,the inputshouldbe
100 plus20%, i.e.,120 units.Thisinputof 120 unitsof the thirdoperationshouldbe the outputof
the secondoperation.The percentage of rejectioninthe secondoperationshouldbe the outputof
the secondoperation.The percentage of rejectioninthe secondoperationbeing10%,the input
shouldbe 120 plus10% i.e.,132 units.Similarly,132unitsshouldbe the outputinthe first
operation.The rejectionbeing50%,the inputinthe first operationshouldbe 132 plus50% i.e.,198
units.Thiscan be tabulatedasfollows:
____________________________________________________________ Operation""Input""
Rejection""%of rejection"Output
____________________________________________________________ 1" " " " 198"" " " 66" " " "
50" " " 132 2" " " " 132"" " " 12" " " " 10" " " 120 3" " " " 120"" " " 20" " " " 20" " " 100"" " Thus if
the inputinthe firstoperationis198 units,100 goodunitswill be the outputinthe thirdoperation.
It isgiveninthe problemsthatthe weightof a finishedpiece is100 gm.Since for everyfinishedpiece
of output,100 gm.of materialsare required,assuming thatnootherlossof material occurs,for 198
unitsof inputinthe first operation,198 x100 = 19,800 gm.of raw materialsare required.The prices

13. of rawmaterial beingRs.10 perk.g.,the price of the raw material requiredshouldbe 10 x 19,800 =
Rs 198. """""1,000
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METHODS OF COSTING
11. SINGLE/OUTPUT/ UNIT COSTINGUnit costingreferstothe costingprocedure,whichisideally
usedincase of concernsproducinga single article onlarge scale bycontinuousmanufacture.The
cost unitsare identical withcosts.The productstobe costedare homogenous.Concernusingsingle
or outputcostingproducesbasicallyone producttotwoor more gradesof one product. Itis not
necessarytomaintainseparate costaccountsunderthissystem, for,onlybyorganisingthe financial
accounts ina mannerpermittingthe expenditure tobe properlyanalysed.All the information
requiredcanbe obtained.Ondividingthe total expenditure incurredbythe numberof units
produced,the costper unitsisascertained.Thissystemof costingissuitableforbreweries,collieries,
cementworks,etc.Inall these casesthe unitcost of the article producedrequirestobe ascertained.
The collectionof expenditure onmaterial,labouranddirectexpensesdoesnotinvolveanyspecial
difficulty.The worksandoffice expensesactuallyincurredalsoare includedinthe total cost.Itemsof
indirectexpenseswhichare onlypaidatperiodical intervals,however,are includedinaccountson
the basisof estimates.Sellinganddistributingexpenses,since thesehave noconnectionwiththe
quantityproduced,are notincludedincostsheets.If however,itisdecidedtoincludethemthe
same alsoare estimatedonthe basisof past experience.Forshowingthe computationsof cost
accordingto thismethod,itiscustomary to draw up a memorandumstatementknow ascostsheet.
The variousitemsof expenditure relativetoproduction,forthe givenperiod,are includedtherein
fromfinancial booksand storesrecords.Whensucha statementalsoincludes amountsof salesand
figure of profits,itis describedasproductionoroutputstatement.The costsheetispreparedat
weekly,monthlyoranyotherconvenient,intervalsandusuallycontaininformationonthe
undermentionedgroups:(a)Costof Material consumed:Detailsasregardsquantitiesandvalue of
importantmaterialsare given.(b)Totalwagespaidforvarioustypesof labouremployed.
251
METHODS OF COSTING
(c) Works indirectExpensesforthe Product:Detailsthereofare shownunderappropriate heads.
(d)Office andadministrativeexpensesstate inlumpsum.(e)Theproportionorthe amountsof
differenttypesof expenditure comprisedinthe unitcostof the article produced,isstatedasa
percentage inthe firstcase and inrupeesinthe second.(f) For purpose of comparison,the
correspondingfiguresof the precedingweekormonthaswell asthose forthe precedingyearare
alsoincluded.(g)Abnormallossesorgainsshouldbe separatedandnotmixedwithcosts,for
example,costof material consumedshouldnotincludecostof material damageddue to
carelessness.Treatmentof stock:Stockrequiresspecial treatmentwhile preparingacostsheet.
Stock maybe of raw materials,work-in-progressandfinishedgoods.Stockof Raw Materials:If
openingstockof raw material,purchase of raw materialsandclosingstockof raw materials,are
given,then,rawmaterial consumedcanbe calculatedasfollows:Openingstockof raw materials""
Add:Purchase of raw materials""Less: Closingstockof raw materials"Value of raw material
consumed""Stock of work-in-progress:Work-in-progressisvaluedatprime costor workscost basis,
but latterispreferred.If itisvaluedatworksor factory cost thenopeningandclosingstockwill be
adjustedasfollows:Price cost" " " " " " " Add: factoryoverheads"" " "
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14. METHODS OF COSTING
Work-in-progress(beginning) """ Less:works-in-progress(closing)""Workscost "" " " " " " Stock of
FinishedGoodsIf openingandclosingstockof finishedgoodsare given,thenthese mustbe adjusted
before calculatingcostof goodssold:Costof production"" " " " Add:Openingstockof finished
goods"Less:closingstockof finishedgoods"Costof goodssold" " " " " ProductionAccountIf the
detailsof costsheetor productionstatementare showninthe formof a ledgeraccount,itis known
as productionaccount.Besidescostof productionitalsoincludessellinganddistributionexpenses.
It ispreparedinthree parts-the firstpart givesthe costof production,the secondpartgives the cost
of goodssoldandthe thirdpart showsprofitor lossfor the period.A specimenof aProduction
Accountis as follows:
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METHODS OF COSTING
PRODUCTION ACCOUNT_____________________________________________________________
Particulars"" " " Amount""Particulars""" " Amount
_____________________________________________________________ To Direct
materials""..........""ByCostof Production"".......... """""""""c/d ‘directlabour""".........." Prime
Cost"" " " .........." ‘worksoverheads"".......... ‘worksinprogress"".......... (opening) Less:work-
in-progress".......... (closing) Less:sale of by-products Orscrap""" " " .........." Workscost"" " "
.......... ‘Administrationoverhead".........."""""""""" """"""""""""""""" Tocostof productionb/d"
..........""Byclosingstockof ‘Openingstockof finished""""" Finishedgoods"".......... "Goods"" "
" ..........""Bycostof goodssold"".......... """""""""c/d""" " " " "" """"""""""""""""" Tocostof
goodssoldb/d"..........""Bysale""" " " .......... ‘Sellinganddistribution "Overheads""" .........." ‘
Profit"" " " " .........."""""""""" """""""""""""""""Usesof costsheet:(i)Itgivestotal costandcost per
unitsfora particularperiod.(ii)Itgivesinformationtomanagementforcostcontrol.(iii)Itprovided
comparative studyof actual current costswiththe cost of correspondingperiods,thuscausesof
inefficienciesandwastage canbe knownand suitablycorrectedbymanagement.(iv)Itactsasa
guide tomanufacture ininformationof suitable anddefinitepolicesandinfixingupthe sellingprice.