Chapter 06 Costing Methods

JOB COSTING
BATCH COSTING
CONTRACT COSTING
PROCESS COSTING

1. CHAPTER 06: Methods of costing JOB COSTING BATCH COSTING CONTRACT COSTING PROCESS COSTING CONDUCTED BY: P. Ayanthi Madumali

2. Intended Learning Outcomes At the end of the chapter, you will able to To understand the meaning of ‘Costing Methods .’ To know various methods of costing. 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. Batch Costing B atch 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: H andout Example 10.2 & 10.3

7. 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

8. 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..

9. 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

10. Concepts relating to Contract Accounts 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

11. 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.

12. Contract Account Contract account is a nominal account & its main purpose is to estimate the profit earned each year in case of contract. Advertisement & Financial expenses not consider

13. Example 01 :From the following particulars relating to a contract ,prepare the contract account. Labour engaged on site 300,000 Wages accrued on end of year 20,000 Material purchased 500,000 Depreciation of plant & machinery 60,000 Establishment charges 10,000 Rent paid for machinery 25,000 Technical planning charges 15,000 Compensation for central environment Athoutity 35,000 Material return to stores 20,000 Material on hand 31 st Dec 100,000 Sells of scraps 2,000 Overhead cost 30,000 Advertisement cost 5,000 Interest of loan 3,000 Sub contractors wages 25,000 (paid) , 3,000( accrued)

14. 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

15. 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]

16. 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

17. Extract of Balance Sheet

18. 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

19. Important aspects an Process Accounts 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. I f 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.

20. Process Account [Without normal/abnormal loss/gain ]

21. Situations which may be found in a production Process costing having no process loss or gain & no opening & closing WIP Process costing having process loss or gain Process costing having opening & closing WIP Process costing having opening & closing WIP with process losses or gain Inter process profits.

22. Process costing having no process loss or gain & no opening & closing WIP Example 01:

23. Solution:

24. 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

25. 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.

26. 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

27. Example 02:

28. 380

29. 27,762

30. 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.

31. 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

32. Thank You….