Course Title: Cost and Management Accounting

Term – I– Sem I
Course code:
Unit 1 – Introduction to Financial Statements

Prof. Dr. Uma Shankar

Department of Finance
School of Business
Dr. Vishwanath Karad
MIT World Peace
University, Pune, INDIA
 Cost and Management Accounting

MODULE / UNIT – 2
Methods of Costing (5 Sessions):
• Job Costing,
• Batch Costing
• Contract Costing,
• Process Costing – theory
MODULE / UNIT – 2
Methods of Costing
Methods of Costing :

(1) Job Costing

(2) Contract Costing
(3) Batch Costing
(4) Process Costing
(5) Operation Costing
(6) Unit Costing
(7) Operating Costing
(8) Multiple Costing
1. Job Costing:

• Under this method costs are collected and accumulated for each job or
work order or project separately. Each job can be identified separately
and hence becomes essential to analyze the costs according to each job.

• Normally production consists of distinct jobs or lots so that order

numbers can identify costs. A job card is prepared for each job for cost
accumulation.

• This method is suitable for Printers, Machine tool manufacturers,

Foundries(a place where metal or glass is melted and shaped into
objects), and general engineering workshops.
2. Contract Costing:
• Contract costing does not in principle differ from job costing. When the job
is big and spread over a long period of time, the method of contract
costing is used.
• A separate account is kept for each individual contract.
• Civil engineering contractors, construction and mechanical engineering
firms, builders, etc. use this method.
• In contracts, when it is agreed to pay an agreed sum or percentage to cover
overheads and profit to the contractors, it will be termed as ‘cost plus
costing’. The term cost here refers to the prime cost. Usually, government
contracts are assigned on this basis.
3. Batch Costing:

• This is an extension of job costing. A batch may represent a number of small

orders or groups of identical products passed through the factory in batch.

• Each batch is treated as a cost unit and cost is ascertained separately.

• The cost per unit is determined by dividing the cost of the batch by the
number of units produced in a batch.

• The manufacturers of biscuits, garments, spare parts, and components mainly

use this method.
4. Process Costing:
• A process refers here to a stage of production. If a product passes
through different stages, each distinct and well-defined, then in order
to ascertain the cost at each stage or process, process costing is used.
• Under this method, a separate process account is prepared and all costs
incurred in that process are charged.
• Normally the finished product of one process becomes the raw material
of the subsequent process and a final product is obtained in the last
process.
• As the products are manufactured in a continuous process, this is also
known as continuous costing.
• Process costing method is generally followed in textile units, chemical
industries, refineries, tanneries, paper manufacture, etc.
5. Operation Costing:

• It is a further refinement of process costing. It is suitable to

industries where mass or repetitive production is carried
out or where the goods have to be stocked in a semi-
finished stage, to enable the execution of special orders, or
for convenient use in later operations.

• In this method, the cost unit is an operation.

• It is used in cycle manufacturing, automobile units, etc.

6. Unit Costing:
• This is also known as single or output costing. This method is suitable for
industries where the manufacture is continuous and units are identical. This
method is applied in industries like mines, quarries, cement works,
brickworks, etc.
• In all these industries there is the natural or standard unit of cost, for
example, a tonne of coal in collieries, a tonne of cement, one thousand
bricks, etc. The object of this method is to ascertain the cost per unit of
output and the cost of each element of such cost.
• Here the cost account takes the form of a cost sheet or statement prepared
for a definite period.
• The cost per unit is determined by dividing the total expenditure incurred
during a given period by the number of units produced during that period.
7. Operating Costing:

• This is suitable for industries, which render services as distinct from those,
which manufacture goods. This is applied in transport undertakings, power
supply companies, gas, waterworks, municipal services, hospitals, hotels,
etc.
• It is used to ascertain the cost of services rendered.
• There is usually a compound unit in such undertakings, for example, tonne-
kilometers or passenger-kilometers in transport companies, kilo-watt-hour
in power supply, patient-day in hospitals, etc.
8. Multiple Costing:
• It is also called composite costing. It represents the application of more than
one method of costing (for example, process and batch costing) in respect of
the same product.
• This is suitable for industries where a number of component parts are
separately produced and subsequently assembled into a final product. In such
industries, each component differs from others as to price, materials used, and
manufacturing processes.
• So it will be necessary to ascertain the cost of each component. For this
purpose process costing may be applied. To ascertain the cost of the final
product batch costing may be applied.
• This method is used in factories manufacturing cycles, automobiles, engines,
radios, typewriters, airplanes, and other complex products.
 1. Job Costing,

Job Costing: Under this method, costs are collected and accumulated for each
job or work order or project separately. Each job can be identified separately
and hence becomes essential to analyze the costs according to each job.
Normally production consists of distinct jobs or lots so that order numbers can
identify costs. A job card is prepared for each job for cost accumulation. This
method is suitable for Printers, Machine tool manufacturers, Foundries(a place
where metal or glass is melted and shaped into objects), and general engineering
workshops.

In this method of cost, there are a few features:

1. It concerns itself with specific order costing, i.e. the cost of each order or
job regardless of the time taken to finish the job. But usually, the duration of
each job is relatively short.
2. The costs are collected at the completion of the job.
3. Prime costs are traced and overheads are assigned to each job on some
appropriate proportionate basis.
Problem 1
Job No. 58 passes through three departments: X, Y, and Z. The following
information is given regarding this job, Required: Calculate the cost of Job No. 58
from the above figures.
Solution
Problem 2 (class work)
Job No. 10 passes through three departments: A, B, and C. The following
information is given regarding this job, Required: Calculate the cost of Job No. 10
from the above figures.
Departments
A B C
Materials issued to job 30,000 50,000 40,000
Direct Labour hours for the job 8,000 4,000 6,000
Rate of direct labour per hour 2 3 2.5
Sale of scape material arising from the job 3,000 1,000 800
Total overhead for the departments 15,000 20,000 10,000
Total labour hours for the departments 30,000 40,000 50000
Problem 3: The expenses shown below were incurred for a job
during the year ended on 31 March 2019.

The total price for the above job was $180,000.

Required:

1. You are required to prepare a statement showing the profit earned

from the job during the year ended 31 March 2019, as well as an
estimated price of a job that is to be executed in the year 2020.

2. You should charge the same percentage of profit on sales as was the
case for the year 2020. Materials, wages, and chargeable expenses
will be required at $50,000, $70,000, and $20,000, respectively, for
the job.

3. The various overheads should be recovered on the following basis

while calculating the estimated price:
A. Factory overheads a percentage of direct wages
B. Administrative and selling and distribution overheads as a
percentage of factory cost
Solution
Note: Calculation of overhead rates and percentage
of profit on sales took place as follows:
Problem 4: The expenses shown below were incurred for a job
during the year ended on 31 March 2020.

Direct Material 5,00,000

Direct Labour 4,00,000
Chargable expenses 3,00,000
Factory overheads 6,00,000
Office and administrative overheads 2,00,000
Selling and distribution overheads 4,00,000

The total price for the above job was 30,00,000.

Required:

1. You are required to prepare a statement showing the profit earned

from the job during the year ended 31 March 2020, as well as an
estimated price of a job that is to be executed in the year 2021.

2. You should charge the same percentage of profit on sales as was the
case for the year 2021. Materials, wages, and chargeable expenses
will be required at $50,000, $70,000, and $20,000, respectively, for
the job.

3. The various overheads should be recovered on the following basis

while calculating the estimated price:
A. Factory overheads a percentage of direct wages
B. Administrative and selling and distribution overheads as a
percentage of factory cost
 2. Batch Costing:

• This is an extension of job costing. A batch may represent a number of small

orders or groups of identical products passed through the factory in batch.

• Each batch is treated as a cost unit and cost is ascertained separately.

• The cost per unit is determined by dividing the cost of the batch by the
number of units produced in a batch.

• The batch costing method is also known as lot costing because products are
produced in lots of, for example, 500, 1,000, or any other number.

• Batch costing is commonly used in the pharmaceutical industry. It is also

applied in ready-made garment factories, watch factories, production facilities
for radios, and televisions, manufacturers of biscuits, and spare parts.
• The total cost of a batch, as shown in the batch cost sheet,
divided by the total number of products in the batch yields the
cost per product in the batch.

Total cost of a batch

• Cost per product in the batch = ------------------------------------------------------
Total number of products in the batch
Example
• You are required to prepare a batch cost sheet for an engineering company showing the cost of Batch No. 8801,
which contains 1,000 units.
• The batch passes through three departments: X, Y, and Z. The costs incurred for the batch are as follows:
• After the batch is complete, 600 kgs. of raw materials issued to department X are found to be surplus and returned
to the storehouse.
.
Solution