Unit 3
Cost ascertainment
Q1) What is unit costing?
A1) Unit costing or output costing is that technique of cost accounting in which the cost of production of a unit of output and total cost of production is ascertained. This method is also called the single costing because the process of production comprises only one stage or a single operation.
For example: brick work, paper mills, milk dairies etc.
DEFINITION
Walter W. Bigg, “ Unit costing method is a method of costing applied to ascertain the cost per unit of a production where standard and identical products are manufactured.”
J. R. Batliboi, “Unit costing or output costing may be defined as, Single or output cost system is used in business were a standard product is turned out and it is desired to find out the cost of a basic unit f production.”
Name and cost per unit of specific industries
Name of Industry Cost Unit
1 Textile Industry Per Metre
2 Brick Industry Per 1000 Bricks
3 Milk Industry Per Liter
4 Paper industry Per Rim or Per Kg.
5 Sugar Industry Per Quintal
6 Cement Industry Per Ton
7 Wine Industry Per Gallon
8 Mine Industry Per Ton
9 Coal Industry Per Ton
10 Steel Industry Per Ton
Q2) What are the objectives of unit costing?
A2) Unit costing or output costing is that technique of cost accounting in which the cost of production of a unit of output and total cost of production is ascertained. This method is also called the single costing because the process of production comprises only one stage or a single operation.
For example: brick work, paper mills, milk dairies etc.
DEFINITION
Walter W. Bigg, “ Unit costing method is a method of costing applied to ascertain the cost per unit of a production where standard and identical products are manufactured.”
J. R. Batliboi, “Unit costing or output costing may be defined as, Single or output cost system is used in business were a standard product is turned out and it is desired to find out the cost of a basic unit f production.”
Name and cost per unit of specific industries
Name of Industry Cost Unit
1 Textile Industry Per Metre
2 Brick Industry Per 1000 Bricks
3 Milk Industry Per Liter
4 Paper industry Per Rim or Per Kg.
5 Sugar Industry Per Quintal
6 Cement Industry Per Ton
7 Wine Industry Per Gallon
8 Mine Industry Per Ton
9 Coal Industry Per Ton
10 Steel Industry Per Ton
Objectives
1. To find out the total cost of production for a particular period.
2. To disclose the break-up of total cost i.e. different elements of cost
3. To present comparative cost information and find out the causes of changes in cost.
4. To find out the percentage of each element of cost over total cost.
5. To determine the selling price and tender price.
Q3) What is cost sheet?
A3) Cost sheet is a statement prepared to present the detailed costs of total output during a period. It provides information relating to cost per unit at different stages of total cost of production. The preparation of cost sheet is one of the important and primary function of cost accounting. Cost sheet is not an account. There is a prescribed form for preparation of cost sheet. A cost sheet is a statement of cost prepared for a given period of time in such a manner that it indicates various elements of cost as clearly as possible. A cost sheet is useful in ascertaining the total cost of production per unit, formulation of production plan, fixing up the selling price and minimizes the production cost. Sometimes standard cost data are provided to facilitate comparison with the actual cost increased. The preparation of the cost sheet requires understanding of the treatment of the following items:-
Stock of raw materials: The opening and closing stock of raw materials are to be adjusted with purchase of Raw materials in order to determine the value of raw materials consumed for the output produced. Carriage/Freight inward and Octroi on purchase etc. also to be added to purchases. This is a part of Prime Cost.
Stock of Work in Process: The value of stock of work in process is a part of Factory cost and therefore, it should be adjusted with factory overheads. Sale of scrap should be deducted from the factory overheads in order to determine the total factory cost.
Stock of Finished goods: Finished goods cover the products on which factory work has been completed. It is the cost of completed production. The opening and closing values of finished goods are to be adjusted with the total cost of production in order to arrive at cost of sales.
Expenses excluded from cost sheet:
There are certain expenses /costs which do not form a part of cost sheet. Some of these expenses are an apportionment of profit. Examples of these expenses are -
- Dividend to shareholders
- Income Tax
- Interest on loan
- Donations paid
- Capital expenditure
- Capital loss on sale of assets.
- Commission to Partners / Managing Director
- Discount on issue of shares/ debentures
- Underwriting commission.
- Writing of goodwill/ bad debts
- Provision for Taxation, Bad Debts or any kind of Fund or reserves.
Q4) Draw the performa of cost sheet?
A4) Specimen of Cost Sheet
Cost Sheet for the period
(Production ------ Units)
Particulars | Total Cost Rs. | Cost Per Unit Rs. |
Direct Materials Raw Materials Opening stock Materials : Add : Purchases Add : Carriage / Freight Inwards Less : Closing stock Cost of materials consumed Direct Labour Direct Expenses
Prime cost Factory overheads Add: Work in Progress (Opening ) Less : Work in Progress (Closing )
Works /Factory cost Add: Office and administrative expenses
Cost of Production (of goods produced)
Add: Op. Stock of finished goods Less closing of finished goods
Cost of production (of goods sold) Add: Selling & Distribution expenses
Cost of Sales Add: Profit (Loss) Sales |
|
|
Q5) Explain the elements of total cost?
A5) Costs are classified under different heads which represent the successive stages through which the cost flow.
Prime Cost
Prime cost is the basic cost of any product. It comprises of those expenses which could be traced directly to it. The prime cost consists of cost of direct materials, direct labour and direct expenses. Direct expenses include special expenses which can be identified with product or job and are charged directly to the product as part of the prime cost. For example cost of hiring special plant or machinery, cost of special moulds, design or patterns, Architect’s fees, Royalties, License fees etc.
Works cost:
Works cost of a Product consists of prime cost plus the portion of works or factory expenses chargeable against the Production. Works or factory expenses include indirect materials indirect labour and indirect expenses. Indirect materials refer to those materials that are needed for the completion of the product but the consumption of these materials is either so small or complex that it would not be appropriate to treat it as direct materials. These are supplies that cannot be conveniently and economically charged to a specific unit of output. For example, lubricants, cotton waste, works stationery etc.
Indirect labour is that labour which does not affect the construction or the composition of the finished product. This is the labour cost of production related activities that cannot be associated with or conveniently traced to specific product through physical observation. For example, Foremen’s salary and salary of employees engaged in maintenance or service work. Indirect expenses cover all expenditure incurred by the manufacturer from the time of production to its completion as delivery to customer by way of rate of product. Any expense that cannot be allocated but which can be apportioned to or absorbed by the cost centres/ cost units are known as indirect expenses. These expenses are incurred for the benefit of more than one product, job or activity and therefore, must be apportioned by appropriate bases to the various functions or products. For example, lighting and heating, maintenance factory manager’s salary, watch and ward department’s salary etc.
Cost of Production:
Cost of Production consists of works cost plus an additional amount of office and administrative expenses. It includes all expenses connected with the managerial functions such as planning, organizing, directing, coordinating and controlling the operations of the manufacturing business. For example, office rent, salary, lighting, stationery, repairs and maintenance and depreciation of office building, audit fees, legal expenses.
Cost of Sales:
Cost of sales consists of cost of production plus proportionate selling and distribution expenses of the product. Selling expenses include the expenses incurred for creating demand for the product such as advertisement, salaries of salesmen, selling expenses and show room expenses. Distribution expenses are those expenses incurred in connection with the delivery of goods to the customers such as packing, carriage outwards, warehouse expenses.
Q6) What is work cost?
A6) Works cost of a Product consists of prime cost plus the portion of works or factory expenses chargeable against the Production. Works or factory expenses include indirect materials indirect labour and indirect expenses. Indirect materials refer to those materials that are needed for the completion of the product but the consumption of these materials is either so small or complex that it would not be appropriate to treat it as direct materials. These are supplies that cannot be conveniently and economically charged to a specific unit of output. For example, lubricants, cotton waste, works stationery etc.
Indirect labour is that labour which does not affect the construction or the composition of the finished product. This is the labour cost of production related activities that cannot be associated with or conveniently traced to specific product through physical observation. For example, Foremen’s salary and salary of employees engaged in maintenance or service work. Indirect expenses cover all expenditure incurred by the manufacturer from the time of production to its completion as delivery to customer by way of rate of product. Any expense that cannot be allocated but which can be apportioned to or absorbed by the cost centres/ cost units are known as indirect expenses. These expenses are incurred for the benefit of more than one product, job or activity and therefore, must be apportioned by appropriate bases to the various functions or products. For example, lighting and heating, maintenance factory manager’s salary, watch and ward department’s salary etc.
Q7) What is job costing?
A7) Job costing is also known as job order costing. It is a method of costing in which costs are accumulated for each job.
Under this method, costs are collected and accumulated according to jobs, contracts, projects, or work orders. Each job has a separate identity and therefore, it becomes essential to analyse and segregate costs according to each job or order. This method is also known as specific order, production order.
Job costing, also known as job order costing, is a method of costing in which costs are accumulated for each job or work order undertaken.
Characteristics of Job Costing:
1. The production is always against customer's orders and not for stock.
2. Each job has its own characteristics and needs special treatment.
3. There is no uniformity in the flow of production from department to department.
4. The department through which the job has to be processed depends purely on the nature of each job.
5. The work-in-progress differs from period to period according to the number of jobs on hand. Therefore, cost is ascertained for each job.
6. Job costing is applicable to engineering concerns, printing presses, repair shops, automobile garages.
7. There is no uniformity in the flow of production from one department to another.
8. It is the nature of each job which determines the departments through which it is to be processed.
9. The main purpose of job costing is to determine the profit or loss made on each job.
10.Job costing is applicable to repair shops, printing press, engineering companies, etc.
Q8) What are the characteristics of job costing?
A8) Job costing is also known as job order costing. It is a method of costing in which costs are accumulated for each job.
Under this method, costs are collected and accumulated according to jobs, contracts, projects, or work orders. Each job has a separate identity and therefore, it becomes essential to analyse and segregate costs according to each job or order. This method is also known as specific order, production order.
Job costing, also known as job order costing, is a method of costing in which costs are accumulated for each job or work order undertaken.
Characteristics of Job Costing:
1. The production is always against customer's orders and not for stock.
2. Each job has its own characteristics and needs special treatment.
3. There is no uniformity in the flow of production from department to department.
4. The department through which the job has to be processed depends purely on the nature of each job.
5. The work-in-progress differs from period to period according to the number of jobs on hand. Therefore, cost is ascertained for each job.
6. Job costing is applicable to engineering concerns, printing presses, repair shops, automobile garages.
7. There is no uniformity in the flow of production from one department to another.
8. It is the nature of each job which determines the departments through which it is to be processed.
9. The main purpose of job costing is to determine the profit or loss made on each job.
10.Job costing is applicable to repair shops, printing press, engineering companies, etc.
Q9) Explain job costing procedure?
A9) I. Job Order Number: Job costing accumulates costs by specific jobs, a number must be assigned to each job.
II. Production Order: It is a written order to the foreman to proceed with a job. It gives the foreman instruction relating to the job and also authorizes him to start the work.
III. Job Cost Sheet: Cost of for each job are accumulated on job cost sheets.
The various elements of cost are treated as shown below:
a) Materials: Materials are issued to the job on the basis of bill of materials or stores requisitions.
b) Labour: The information regarding direct labour cost of different jobs can be drawn from time and job cards. Wages paid to indirect labour form a part of factory overhead.
c) Overhead: Overheads are usually charged at predetermined rates. Separate charges are made for factory, administration and selling & Distribution overheads.
IV. Completion of Job: when the work on a job is completed, a completion report is end to costing department. The cost under each element of cost is ascertained and totalled to compute the total cost of the job concerned.
V. Profit or Loss on each Job: The total cost of each job is compared against its price to determine the profit or loss of each job.
Q10) Write the advantages and limitations of job costing?
A10) Advantages:
1. It gives a detailed analysis of costs of materials, labour and overheads.
2. It enables the management to detect which jobs are more profitable than others, which are less profitable and which are incurring losses.
3. It provides a basis for estimating the cost of similar jobs taken upon future.
4. It also helps in future production planning.
5. Spoilage and defective work can be easily identified and responsibility may be fixed on departments.
6. It estimates have been prepared in advance, actual can be compared with estimates for controlling costs.
7. In case of Government contracts on cost-plus basis, it gives cost data which determines contract price.
Limitations:
1. It involves more clerical work. This leads to more expensive.
2. With the increase in clerical work, the chances of errors also increase.
3. Job costing is an actual costing method. It does not give for the control of cost unless it is used with standard costing system.
4. Determination of predetermined overhead rates may involve budgeting of overhead expenses.
Q11) What is batch costing?
A11) According to CIM.A. Terminology, London, Batch Costing is' 'that form of specific order costing which applies where similar articles are manufactured in batches either for sale or use within the undertaking." Batch costing is similar to job costing as each batch of output is a cost unit and is costed separately just like each job is costed separately. However, each batch consists of a number of identical units of a product so that total batch cost divided by number of units produced in a batch gives cost per unit. In case of jobs, production is to satisfy a specific order and not for stock. In batch costing production is generally for stock though a batch of output may be undertaken when there is an immediate demand for a part of the batch output. Batch costing is generally undertaken in case of pharmaceutical production, components of automobiles, shoes, garments, engineering products, instrumentations, etc.
Features of Batch Costing
The following are main features of batch costing:
1. Each batch is a cost unit.
2. All units produced as part of a batch are identical.
3. Each batch is to be costed separately.
4. Each batch generally involves a set up cost.
5. Set up cost for each batch is more or less same irrespective of size of the batch.
6. Higher the size of a batch, lower is cost per unit.
7. Cost per unit may differ in case of different batches, though the size of the batch is same because of changes in production conditions and input costs.
8. Batch production is generally for stock.
9. In case the policy of the firm is to have batches of equal size, the size of the batch is equal to annual output requirement of the product divided by the number of batches.
10. Larger the batch size, longer is the time interval between batches.
11. The method is used where small parts are produced in significantly large number.
12. The advantage of the method is that cost and profit per unit can be known without preparing
Cost sheet for each unit but by determining cost of the batch as a whole and dividing it by number of units constituting the batch.
13.Where the size of batch differs frequently, it becomes difficult to ascertain equitable charge to the batch for various types of overheads.
Q12) Write the features of job costing?
A12) According to CIM.A. Terminology, London, Batch Costing is' 'that form of specific order costing which applies where similar articles are manufactured in batches either for sale or use within the undertaking." Batch costing is similar to job costing as each batch of output is a cost unit and is costed separately just like each job is costed separately. However, each batch consists of a number of identical units of a product so that total batch cost divided by number of units produced in a batch gives cost per unit. In case of jobs, production is to satisfy a specific order and not for stock. In batch costing production is generally for stock though a batch of output may be undertaken when there is an immediate demand for a part of the batch output. Batch costing is generally undertaken in case of pharmaceutical production, components of automobiles, shoes, garments, engineering products, instrumentations, etc.
Features of Batch Costing
The following are main features of batch costing:
1. Each batch is a cost unit.
2. All units produced as part of a batch are identical.
3. Each batch is to be costed separately.
4. Each batch generally involves a set up cost.
5. Set up cost for each batch is more or less same irrespective of size of the batch.
6. Higher the size of a batch, lower is cost per unit.
7. Cost per unit may differ in case of different batches, though the size of the batch is same because of changes in production conditions and input costs.
8. Batch production is generally for stock.
9. In case the policy of the firm is to have batches of equal size, the size of the batch is equal to annual output requirement of the product divided by the number of batches.
10. Larger the batch size, longer is the time interval between batches.
11. The method is used where small parts are produced in significantly large number.
12. The advantage of the method is that cost and profit per unit can be known without preparing
Cost sheet for each unit but by determining cost of the batch as a whole and dividing it by number of units constituting the batch.
13.Where the size of batch differs frequently, it becomes difficult to ascertain equitable charge to the batch for various types of overheads.
Q13) Write the advantages and disadvantages of batch costing?
A13) Advantages
- The accounting work is considerably reduced as a group of homogeneous jobs constitute a batch.
- The variations in the costs arising under job costing is smoothened by means of averaging such costs and spreading over the batch of articles. This gives a consistent cost of production of every article in the batch.
- It takes the benefit of reduced cost of production arising out of EBQ.
- Supervision becomes very easy and effective. So idle time is eliminated.
- The loss of time due to inter job transfer of materials, labourers and tools is minimised under batch costing.
Disadvantages
- Determination of a batch from various jobs often poses problem. It is difficult to come across absolute homogenity of jobs.
- When quantity of goods to be manufactured differs from customer to customer, it becomes difficult to determine the batch.
- If the production of a batch is wrongly undertaken due to sub-standard of materials or defective operation, the whole batch of articles are required to be discarded which causes a great loss to the manufacturing concern.
Q14) Explain economic batch quantity?
A14) In order to control batch cost it is important to decide the quantity to be produced in each batch which enables to keep the batch cost at optimum level. Economic batch quantity is that quantity of a batch which enables the management to keep the batch cost at minimum level. If the quantity of a batch is either increased or decreased from the economic batch quantity determined the batch cost will increase and become more than the batch cost incurred when economic batch quantity is produced.
It has already been mentioned that the batch cost consists of two types of costs as under:
- Setting-up cost: The cost associated with setting up a piece of production equipment. This would include the cost of the setup mechanic, the cost of scheduling, record keeping, moving the starting material, and testing the first few units of output to be certain the equipment is set up properly.
- Carrying Cost: Carrying costs, also known as holding costs and inventory carrying costs, are the costs a business pays for holding inventory in stock. A business can incur a variety of carrying costs, including taxes, insurance, employee costs, depreciation, the cost of keeping items in storage, the cost of replacing perishable items, and opportunity costs. Even the cost of capital that helps to generate income for the business is a carrying cost.
Q15) What is contract costing?
A15) Contract costing is a variant of job costing. Like job costing, contract costing is also a form of specific order costing. So, both job costing and contract costing are based on the same costing principles. In fact, a big order is termed as a contract and a small order as a job. Contract costing is also known as terminal costing as the preparation of Contract Account is terminated or closed after the completion of contract.
Example of undertakings which adopt contract costing are builders, civil engineering contractors, road making or repairing concerns, dams and bridge constructional concerns. The person who undertakes the work to complete is known as ‘Contractor’ and the person who gets the work done through contractor is known as ‘Contractee’.
The Institute of Cost and Management Accountants (I.C.M.A.) London, defines contract costing as, “that form of specific order costing which applies where work is undertaken to customer’s special requirements and each order is of long duration.”
“Contract or terminal costing is the term applied to the system adopted by those businesses which carry out substantial building or constructional contracts.” —Walter W. Bigg
Features
(1) Contracts are generally of large size and, therefore, a contractor usually carries out a small number of contracts in the course of one year.
(2) A contract generally takes more than one year to complete.
(3) Work on contract is carried out at the site of contracts and not in factory premises.
(4) Each contract undertaken is treated as a cost unit.
(5) Separate Contract Account is prepared for each contract in the books of contractor to ascertain profit or loss on each contract.
(6) Most of the materials are specially purchased for each contract. These will, therefore, be charged direct from the supplier’s invites. Any materials drawn from the store are charged to contract on the basis of material requisition notes.
(7) Generally, all labourers are treated as direct labourers.
(8) Most expenses, such as, electricity, telephone, insurance, etc. are also direct in nature.
(9) Plant and equipment may be purchased for the contract or may be hired for the duration of the contract.
(10) Payments by the contractee are made at various stages of completion of the contract based on architect’s certificate for the completed stage. An amount known as retention money is withheld by the contractee as per agreed terms.
(11) Penalties may be incurred (paid) by the contractor for failing to complete the work within the agreed period.
(12) Contract costing is less detailed and simpler than job costing.
(13) Each contract or work involved in contract costing is executed or done as per the specifications given by the contractee. So one contract may be dissimilar to another contract.
(14) Contract costing is concerned with the costing of construction work or repair work and not with the costing of any goods.
(15) As the contract is undertaken at the contractee’s promises most of the items of cost chargeable to a contract are direct costs. Indirect costs are very few.
(16) As the contract or work is done at the contract site far away from the premises of the contractor, the problem of cost control is greater in the case of contract costing. There can be loss of materials and equipment, damage to plants and wastage of labour, posing problem of cost control.
(17) In the case of contract costing, work commences on receipt of order from the customer.
(18) In case of complete contract, there is the problem of determination of the amount of profit to be carried to current year’s Profit and Loss Account, and the amount of profit to be carried forward.
(19) There is no heavy investment on assets initially in the case of contract costing.
Q16) What are the features of contract costing?
A16) Contract costing is a variant of job costing. Like job costing, contract costing is also a form of specific order costing. So, both job costing and contract costing are based on the same costing principles. In fact, a big order is termed as a contract and a small order as a job. Contract costing is also known as terminal costing as the preparation of Contract Account is terminated or closed after the completion of contract.
Example of undertakings which adopt contract costing are builders, civil engineering contractors, road making or repairing concerns, dams and bridge constructional concerns. The person who undertakes the work to complete is known as ‘Contractor’ and the person who gets the work done through contractor is known as ‘Contractee’.
The Institute of Cost and Management Accountants (I.C.M.A.) London, defines contract costing as, “that form of specific order costing which applies where work is undertaken to customer’s special requirements and each order is of long duration.”
“Contract or terminal costing is the term applied to the system adopted by those businesses which carry out substantial building or constructional contracts.” —Walter W. Bigg
Features
(1) Contracts are generally of large size and, therefore, a contractor usually carries out a small number of contracts in the course of one year.
(2) A contract generally takes more than one year to complete.
(3) Work on contract is carried out at the site of contracts and not in factory premises.
(4) Each contract undertaken is treated as a cost unit.
(5) Separate Contract Account is prepared for each contract in the books of contractor to ascertain profit or loss on each contract.
(6) Most of the materials are specially purchased for each contract. These will, therefore, be charged direct from the supplier’s invites. Any materials drawn from the store are charged to contract on the basis of material requisition notes.
(7) Generally, all labourers are treated as direct labourers.
(8) Most expenses, such as, electricity, telephone, insurance, etc. are also direct in nature.
(9) Plant and equipment may be purchased for the contract or may be hired for the duration of the contract.
(10) Payments by the contractee are made at various stages of completion of the contract based on architect’s certificate for the completed stage. An amount known as retention money is withheld by the contractee as per agreed terms.
(11) Penalties may be incurred (paid) by the contractor for failing to complete the work within the agreed period.
(12) Contract costing is less detailed and simpler than job costing.
(13) Each contract or work involved in contract costing is executed or done as per the specifications given by the contractee. So one contract may be dissimilar to another contract.
(14) Contract costing is concerned with the costing of construction work or repair work and not with the costing of any goods.
(15) As the contract is undertaken at the contractee’s promises most of the items of cost chargeable to a contract are direct costs. Indirect costs are very few.
(16) As the contract or work is done at the contract site far away from the premises of the contractor, the problem of cost control is greater in the case of contract costing. There can be loss of materials and equipment, damage to plants and wastage of labour, posing problem of cost control.
(17) In the case of contract costing, work commences on receipt of order from the customer.
(18) In case of complete contract, there is the problem of determination of the amount of profit to be carried to current year’s Profit and Loss Account, and the amount of profit to be carried forward.
(19) There is no heavy investment on assets initially in the case of contract costing.
Q17) Explain contact costing procedure?
A17) The basic procedure for costing of contracts is as follows:
1. Contract Account:
Each contract is allotted a separate number and a separate account is opened for each contract.
2. Direct Costs:
Most of the costs of a contract can be allocated direct to the contract. All such direct costs are debited to the Contract Account.
Direct costs for contract include:
(i) Direct cost of materials,
(ii) Direct labour and supervision,
(iii) Direct Expenses,
(iv) Depreciation of Plant and Machinery,
(v) Sub-contract costs, etc.
3. Indirect Costs:
Contract cost is also debited with overheads which tend to be small in relation to direct costs. Such costs are often absorbed on same arbitrary basis as a percentage on prime cost, or material or wages, etc. Overheads are normally restricted to head office and storage costs.
4. Transfer of Materials or Plant:
When materials, plant or other items are transferred from the contract, the Contract Account is credited by that amount.
5. Contract Price:
The Contract Account is also credited with the contract price. However, when a contract is not complete at the end of financial year, the Contract Account is credited with the value (cost) of work-in-progress as on that date. Work- in-progress includes value of work certified and the cost of work uncertified.
6. Profit or Loss Account:
The balance of Contract Account represents profit or loss which is transferred to Profit and Loss Account. However, when contract is not completed within the financial year, only the part of the profit arrived is taken into account and the remaining profit is kept as reserve to meet any contingent loss on the complete portion of the contract.
Q18) Write a short note on contract costing and batch costing?
A18) Contract costing is a variant of job costing. Like job costing, contract costing is also a form of specific order costing. So, both job costing and contract costing are based on the same costing principles. In fact, a big order is termed as a contract and a small order as a job. Contract costing is also known as terminal costing as the preparation of Contract Account is terminated or closed after the completion of contract.
Example of undertakings which adopt contract costing are builders, civil engineering contractors, road making or repairing concerns, dams and bridge constructional concerns. The person who undertakes the work to complete is known as ‘Contractor’ and the person who gets the work done through contractor is known as ‘Contractee’.
The Institute of Cost and Management Accountants (I.C.M.A.) London, defines contract costing as, “that form of specific order costing which applies where work is undertaken to customer’s special requirements and each order is of long duration.”
“Contract or terminal costing is the term applied to the system adopted by those businesses which carry out substantial building or constructional contracts.” —Walter W. Bigg
Batch costing
According to CIM.A. Terminology, London, Batch Costing is' 'that form of specific order costing which applies where similar articles are manufactured in batches either for sale or use within the undertaking." Batch costing is similar to job costing as each batch of output is a cost unit and is costed separately just like each job is costed separately. However, each batch consists of a number of identical units of a product so that total batch cost divided by number of units produced in a batch gives cost per unit. In case of jobs, production is to satisfy a specific order and not for stock. In batch costing production is generally for stock though a batch of output may be undertaken when there is an immediate demand for a part of the batch output. Batch costing is generally undertaken in case of pharmaceutical production, components of automobiles, shoes, garments, engineering products, instrumentations, etc.
Q19) What is prime cost?
A19) Prime cost is the basic cost of any product. It comprises of those expenses which could be traced directly to it. The prime cost consists of cost of direct materials, direct labour and direct expenses. Direct expenses include special expenses which can be identified with product or job and are charged directly to the product as part of the prime cost. For example cost of hiring special plant or machinery, cost of special moulds, design or patterns, Architect’s fees, Royalties, License fees etc.
Q20) What is cost of sales?
A20) Cost of sales consists of cost of production plus proportionate selling and distribution expenses of the product. Selling expenses include the expenses incurred for creating demand for the product such as advertisement, salaries of salesmen, selling expenses and show room expenses. Distribution expenses are those expenses incurred in connection with the delivery of goods to the customers such as packing, carriage outwards, warehouse expenses.
