Methods of Costing

1. Job Costing

Is a system of costing in which the

elements of cost are accumulated
separately for each job or works
order, undertaken by an organization.

The primary function of job costing is

to bring together all the costs
incurred for completing a job.
 Methods of Costing

1. Job Costing

The system is sub divided into

a] Factory Job Costing and
b] Contract Costing

A variant of job costing system is

batch costing in which costs are
accumulated for specific batches of
products of similar nature.
 Methods of Costing

1. Job Costing

The system is well suited for

industries like

◘ Engineering ◘ Ship Building

◘ Construction ◘ Furniture Making
◘ Auto Garages ◘ Machine Tools
 Methods of Costing

1. Job Costing

Production Planning prepares job order with

design of the product
a bill of materials
operation schedule
quantity required
time allowed.

This works as an order to proceed with manufacture.

 Methods of Costing

1. Job Costing

In addition job order can also contain

Sales Price.
Customer’s name & details.
Despatch instructions.
Value of labour & material.

With this data it serves as a cost sheet.

All orders are numbered for reference and
collection of costs.
 Methods of Costing

1. Job Costing : Accounting for materials-

► Materials required for a job are

withdrawn from stores against a
requisition bearing the job order number.
► On a periodic basis material issues
analysis sheet is prepared showing the
cost of materials issued against various
job orders.
► Direct material cost is transferred to
respective jobs & indirect materials to
overheads.
 Methods of Costing

1. Job Costing : Accounting for labour costs -

► On the authority of operation schedule, actual
time spent on a job is booked against a job
card.
► Job cards are valued by the costing department
and labour analysis prepared.
► Direct labour cost is charged to job order
numbers and indirect labour cost to
overheads.
► Costs arising out of overtime, idle time,
shift differentials, fringe benefits are also
included in this analysis.
 Methods of Costing

1. Job Costing : Accounting for Manufacturing overheads

► Overhead costs are accumulated against
standing order numbers and against cost
centers.

► Overhead rates, either actual or pre-

determined, are worked for each center.

► On completion of jobs, the amount of

overhead cost recoverable from each job
order is summarized in Overhead
Absorption Analysis sheet.
 Methods of Costing

1. Job Costing : Accounting for Manufacturing overheads

At the end of the accounting period

overheads are applied to incomplete
jobs to arrive the extent of
over- or under- absorption of
overheads.
 Methods of Costing

1. Job Costing :
Completion of jobs:

During the course of manufacture, direct

material, direct labour & manufacturing
overheads are posted on the job card.

On receipt of job completion notice,

expense booked under each element of cost
is totalled up to arrive at total cost of
the job.
 Methods of Costing

1. Job Costing : Job Account:

No. _________ Date : Total Cost Rs.
Particulars. ____ Date
completed :
Date Particulars Materials Wages Material xx
May xx Material xxx Labour xx
Analysis Prime Cost xx
May xx Labour xx Factory
Analysis Overheads xx
x% of Wages
Works Cost xx
Office/Admin
______ ______ overheads xx
______ _______ Total Cost Rs.
 Methods of Costing

1. Job Costing :
Work-in-progress
An incomplete job on which some manufacturing
is carried out is known as work-in-progress
(WIP).

At the end of accounting period stock lying

in WIP is correctly valued to arrive at
income for the period.

Valuation of WIP is essential where periodic

profit and loss is prepared.
 Methods of Costing

1. Job Costing :
Cost Control in Job Order System.

Control on job costs is exercised by

comparing actual costs with
◘ previous actual costs
◘ predetermined costs
◘ cost of similar product
manufactured in other factory,
if any.
◘ standard cost of the product.
 Methods of Costing

1. Job Costing :
Advantages of Job Order Costing.

√ Allows management to detect which jobs are

profitable & which not.

√ Availability of previous costs of the

product allows management to quote prices for
similar jobs without difficulty.

√ Efficiency of operations, material and

machines is controlled with the help of
trends of costs available under the system.
 Methods of Costing

1. Job Costing :
Advantages of Job Order Costing. contd.

√ Application of pre-determined overhead

rates , requires management to adopt
budgetary control.
√ Responsibility for spoilage and defective
work is fixed as these costs are associated
with specific jobs.
√ Very beneficial in an industry where price
is based on cost plus principle.
 Methods of Costing

1. Job Costing :
Report in Job Order Costing.
On completion of a job two reports are issued.

1. Report on ‘Profit on Completed jobs’:

The report is released periodically
indicating the extent of gross profit
earned on jobs completed during the
period.

Useful in evaluating past performance.

 Methods of Costing

1. Job Costing :
Report in Job Order Costing.
On completion of a job two reports are issued.

2. Report on ‘Cost Variances’:

The report is released periodically
indicating the variances of actual costs,
from estimates / standards, on jobs
completed during the period.

Useful in identifying and correcting

causes for deviations and/or revising
estimates / standards .
 Methods of Costing

2. Contract Costing :

Contract or Terminal costing is a form of

job order costing applied to business
concerned with building or engineering
projects or structural or construction
contracts.
 Methods of Costing

2. Contract Costing :

Distinctive Features :

► Allocation of costs to cost centers

common in job order costing is not
applicable to contract costing as all
costs are chargeable to contracts.
Only Head Office or Central Warehouse
costs, which are a small percentage,
need to be allocated.
 Methods of Costing

2. Contract Costing :

Distinctive Features : contd.

► Pricing under job order costing is

determined by conditions of the specific
job. Under contract costing, it is a
matter of contract clauses & conditions.

► Unlike the job costing, each contract is

a cost unit in contract costing.
 Methods of Costing

2. Contract Costing :

Distinctive Features : contd.

► Under contract costing , the work is

carried out at a site away from
customer’s own premises. In case jobs are
carried out at contractee’s own
premises, Job Costing is applicable.
 Methods of Costing

2. Contract Costing :

Contract Ledger Account.

Normally a ledger account is opened for

each contract in Financial Accounts.

All direct & indirect expenses incurred

in relation to the contract are debited
to this ledger account.
 Methods of Costing

2. Contract Costing :

Contract Ledger Account.

It is credited with the amount of

contract price on completion of the
contract.
The balance represents profit (loss) made
on the contract & is transferred to the
Profit & Loss a/c.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Materials:
Materials are purchased and either issued
to contract directly or stored in a
warehouse & issued from there when
required against requisitions.
In former case purchases are directly
charged to contract. In latter case
materials are charged against
requisitions.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Labour:
Normally wages of all workers employed at
the contract site are charged to the
contract, irrespective of jobs performed
by them.
In case cost of operations is required
workers book time spent on operation on a job
card. Labour Analysis is prepared and cost
allocated to various operations.
Similar allocation procedure adopted when
workers work on more than one (nearby) sites.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Direct expenses:
Cost of special tools, cost of designs,
electricity charges, insurance and similar
direct expenses are charged to the contract
ledger a/c.
Plant :
The value of the plant used at site is
charged to the contract & written down value
at the time of completion credited to it.
Or only depreciation of the plant is charged.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Indirect expenses:
Only Head Office or Central Warehouse
costs, which are a small percentage,
need to be allocated.
Usually these are charged as percentage
of direct cost or distributed on the
basis of labour hours spent.
Sites located at remote or hazardous
locations need to be charged extra
overheads on a quota basis.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Extras:

Costs incurred on additional items not

forming a part of original contract are
segregated from general expenses and
shown as ‘extras’.
These then can be separately charged to
the customer depending on the clauses of
the contract.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Sub-contracts:

It is a common practice for contractors

to assign specialized work like
installation of lifts or laying of
special flooring to sub-contractors.

The cost of such sub-contracts is a

direct charge against the contract for
which work carried out.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Escalation Clause:

To safeguard interests of both the parties

against inflation, normally this clause is
added in contracts for large sums and with
long completion period.

The clause provides formula for adjustment to

the contract price, in the event there is
rise in prices of materials or labour beyond
an agreed limit.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Cost plus contract:

Cost plus contract is a contract in which

the value of the contract is ascertained
by adding an agreed percentage / amount
of profit over the total cost of the
work.
There is a clear, prior agreement as to
items of cost to be included, type of
material used, rates payable to workers,
normal wastages etc.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Cost plus contract:

This type of contract is undertaken -

♠ when the contractee is a government body.

♠ work is being carried for the first
time & past data is not there.
♠ contract involves manufacture of special
articles.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Cost plus contract: Advantages :-

1. A reasonable profit is earned by the

contractor , even when prices fluctuate.
2. Simplifies tendering and quoting
processes.
3. Provides escalation clause that
protects contractor.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Cost plus contract:
Advantages :- contd.

4. Customer pays only normal profit to

the supplier and is protected from being
overcharged.
5. Customer has a right to conduct cost
audit and assure himself that there is no
overcharge.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Cost plus contract:
Disadvantages :-

1. Since profit is assured the contractor has no

incentive to increase efficiency and reduce
cost.
2. Customer does not know the final price that
is payable, and hence cannot plan for it.
3. Negligence on the part of contractor causes
extra costs which customer has to bear with
resultant higher profit payable on it.
 Methods of Costing

3. Specific Aspects of Contract Costing :

Surveyor’s or architect’s certificate:

When a contractor is engaged on a

contract that lasts several years, he
cannot wait for payment until completion
of the contract.
In such cases a Surveyor or an architect
certifies the extent to which work has been
completed at regular intervals. Based on
these certificates, partial payments are made
to the contractor
 Methods of Costing

4. Batch Costing :
This is another form of job costing
adopted in case of manufacturing a large
quantity of components of machines or
other article.

All costs for the batch of components are

collected together. Cost of each component in
a batch is calculated by dividing the cost of
the batch by number of components produced in
the batch.
 Methods of Costing

5. Process Costing :
This is the method according to which cost
data of production are collected according
to departments or processes and thereafter
total cost is divided by the quantity of
production, to arrive at cost per unit.
The method is suitable for industries where
production flows from the beginning to the
end continuously through various stages.
e.g. textile mill that has carding, warping,
spinning, drawing, sizing, winding, weaving
and dyeing stages.
 Methods of Costing

5. Process Costing :

Other industries where process

costing is adopted:

Cotton, paper, sugar, chemicals,

rubber, paints and food where the
final product is large, mass of a
uniform quality.
 Methods of Costing

5. Process Costing :
Principles of process costing.
The majority of costs can ordinarily be
identified with specific processes and
collected and accumulated for each period.

Production records of each process are so

designed that as would show the quantum of
production for each period.

Total cost of each process divided by total

production provides unit costs of production.
 Methods of Costing

5. Process Costing : comparison with job costing

Job Costing Process Costing
Production against specific Production is
orders. Continuous.

Costs accumulated and Costs accumulated and

applied to specific jobs. applied process wise.

Costs computed on Costs computed after

Completion of jobs. expiry of cost period
 Methods of Costing

5. Process Costing : comparison with job costing - contd

Job Costing Process Costing

Jobs independent of Continuous production,

each other. lots indistinguishable.

No transfer of products Costs are transferred

from one job to another. from process to process
and finished product of
one process is a raw
material of the next.
 Methods of Costing

5. Process Costing : comparison with job costing - contd

Job Costing Process Costing

Each job is different hence Standard, mass and

more management control reqd. continuous production
eases mgmt control.

Jobs may not have work in Opening and closing

progress. Work in progress
is always there, as
production continuous.
 Methods of Costing

6. Process Losses and Wastages:

In process industries some loss or

wastage is caused by evaporation,
shrinkage, chemical changes, moisture
content, or spoilage.

This process loss can be normal or

abnormal.
 Methods of Costing

6. Process Losses and Wastages:

NORMAL process loss is

◘ unavoidable because of the nature of
the raw material or the production
technique.
◘ inherent in the normal course of
production.
◘ estimated in advance.
◘ forms a part of the product cost.
◘ recorded in quantity for monitoring.
 Methods of Costing

6. Process Losses and Wastages:

ABNORMAL process loss is caused by

◘ unexpected conditions.
◘ sub-standard materials’
◘ careless workers
◘ accidents
◘ faulty machines etc.
 Methods of Costing

6. Process Losses and Wastages:

ABNORMAL process loss - accounting

Units representing abnormal loss are

valued like good units, but their cost is
debited to abnormal loss account and
credited to process account.
Thus process cost consists only for good
units.
 Methods of Costing

6. Process Losses and Wastages:

Abnormal gains:
If the quantum of process loss is less
than the determined percentage, the
difference is called abnormal gain of
effectives.
Like with abnormal loss these abnormal
effectives are also valued at the cost of
good units. Their cost is debited to the
process cost and credited to abnormal
gain account.
 Methods of Costing

7. Equivalent Production

Is defined as notional whole units

representing uncompleted work and is used
to apportion costs between work in
progress (WIP) and completed output.

Equivalent units of work in progress are

calculated by multiplying actual units in
WIP by percentage of work completed.
If there are 1,500 units in WIP at 30% of
completion stage, equivalent production is 450
units.
 Methods of Costing

8. By-Products and Joint Products

By-product:
Any saleable or usable value incidentally
produced in addition to the main product
is known as by-product.

In a refinery processing crude oil

refined oil is the main product.
sulfur, bitumen, chemicals,
fertilizer are by-products.
 Methods of Costing

8. By-Products and Joint Products

Joint Products
Two or more products separated in
processing, each having a sufficiently high
saleable value to merit recognition as a main
product are termed joint products.

Features : i] produced from the same material.

ii] carry equal importance. iii] produced
simultaneously by the process. iv] normally
require further processing after separation.
 Methods of Costing

8. By-Products and Joint Products

Co-Products

Two or more products of similar nature like

table fan, ceiling fan, pedestal fan, cabin
fan etc. are termed co-products.

These are independently produced, in

different quantities , from different raw
materials.
 Methods of Costing

8. By-Products and Joint Products

Objectives of Joint Cost Analysis

1. Correct collection and compilation of process

costs.

2. Determination of profit & loss on each line.

3. Data for price collection.

4. Determination of the pattern of production &

most profitable product mix.
 Methods of Costing

8. By-Products and Joint Products

Objectives of Joint Cost Analysis

5. Marginal contribution analysis.

6. Study of the effect on costs and profit due

to increase or decrease in production of
joint products.

7. Determining the profitability of selling

products and by-products as they come out or
after further processing.
 Methods of Costing

8. By-Products and Joint Products

Limitations and Problems of Joint Cost
Analysis

Apportionment of costs is arbitrary.

Different methods do not provide the same
results.
Inter-firm comparisons not meaningful.
Analysis is not economic, if by-products
have insignificant sale value.
Several assumptions required & must be
adhered to.
 Methods of Costing

9. Operating Costing
Suitable for service industries where
articles are not produced but service
provided.
It is a variant unit or output costing.
and differs from manufacturing as
► adoption of multiple cost units.
► a cost unit is not a job or
process but service unit like kwh, tonne
km.
► collection and allocation of costs
in a different manner.
 Methods of Costing

9. Operating Costing

Operating costs are collected under

following headings.

A] Fixed or standard charges.

B] Semi fixed or maintenance charges.
C] Variable or running costs.
Fixed expenses are apportioned to cost units
based on availability – number of buses in a
fleet or beds in a hospital. Running costs to
cost units based on use – km traveled or occupied
bed days.
 Methods of Costing

10. Operation Costing

Under this method each operation in each

stage of production is separately costed.
The procedure followed is same as for
process costing.
Rejections occur at each operation, hence
when a series of operations is carried
out to convert raw material into a
finished product, cumulative effect on
conversion cost at each operation is
considered.
 Methods of Costing

11. Single/ Output / Unit Costing

Suitable for firms producing a single

article on a large scale by continuous
manufacture. e.g.
Breweries, collieries, cement works etc.
Under this method, by proper organization
of financial accounts, all cost data is
obtained without a separate cost
accounting system.
The cost sheets are prepared at regular
intervals.
 Methods of Costing

11. Single/ Output / Unit Costing

contents of the cost sheet –
Cost of materials – with quantity/ value of main items.
Total wages.
Works indirect expenses. – with details.
Office & administrative expenses in lump sum.
The costs are expressed in total ^ per unit,
as % of total cost. For comparison figures of
the previous period are provided along side.
Abnormal losses / gains are separated.
 Methods of Costing

11. Single/ Output / Unit Costing

Valuation
Raw materials – (Opening stock plus
purchases} less closing stock = materials
consumed.
Work in progress (WIP) – (Prime cost plus
factory overheads) plus (opening wip less
closing wip) = Works cost.
Finished Goods – (Works cost of production
plus opening stock of finished goods)
less closing stock of finished goods =
Cost of Goods sold.
 Methods of Costing

11. Single/ Output / Unit Costing

Uses of cost sheet.

☻ Total & unit cost available for each

period.
☻ Data available to management for cost
control
☻ comparison with earlier cost data pin
points causes of inefficiencies, wastage
for corrective action by management.

Next ‘Standard Costing & Variance Analysis’

bye . . . .