Module IV- (Methods of costing)

Job Costing
It means ascertaining costs of an individual job, work order or
projects separately.
Features of job costing
 Each job is treated as unit.
 Production is not continuous.
 Each job is unique.
 Each job is treated as a cost unit.
 A separate job cost sheet is made out for each job.
 The duration of the job is usually a short period.
 A separate working progress ledger is maintained for each job.
 Profit or loss is determined for each job independently.
Advantages of job costing
 It helps to control future cost.
 It helps to ascertain cost and profit of each job.
 It helps in future production planning.
 It helps to distinguish profitable jobs from unprofitable jobs.
 It helps to identify defective works.
 Selling prices of special orders can easily be fixed.
Disadvantages of job costing
 Job costing involves more clerical works.
 It is more expensive
 It does not facilitate cost control.
 It is difficulty to apply standard costing.
 It is historical costing.
Job costing procedure
 Receiving enquiry and sending quotations
 Receiving of order
 Production order
 Allotting production order number
 Recording of cost
 Completion of job
 Ascertainment of profit or loss
Job cost sheet
It is a cost sheet prepared in respect of a job. It is also called job cost
control.
Job evaluation
It is the assessment of the relative worth of a job within a company.
Job specification
Job specification is a statement of minimum acceptable human
qualities necessary to perform a job properly.
Specific order costing
It is a method of costing applicable where the work consist of
separate jobs of which is authorized by specific order.
Contract Costing
It is a form of specific order costing in which cost are attributed to
individual contracts.
Features of contract costing
 Contracts are generally at large size.
 Contract itself is a cost unit.
 A separate account is maintained for each contract.
 They are normally carried out for long period and completed.
 Common indirect expenses are apportioned over different
contracts.
Cost plus contract
It is a contract such that a contractor is paid for all of its allowed
expenses plus additional payment to allow for a profit.
Work in progress
It is the unfinished contract at the end of the accounting period and
it includes amount of work certified and amount of work uncertified.
Work certified
The sales value of work completed as certified by the architect is
known as work certified.
Work uncertified
It means work which has been carried out by the contractor but has
not been certified by the architect.
Notional profit
The profit upon the incomplete contract is called notional profit.
Retention money
The unpaid balance of work certified or the amount held back or
retained by contractee is known as retention money.
Sub contract
Sometimes the contractor enter into contracts with another
contractor to give a portion of the work undertaken by him. It is
called sub contract.
Extra work
Additional work outside the original contract is called extra work.
Escalation Clause
It is the provision allows for an automatic increase in the wages or
prices.
De-escalation clause
This is a clause which provided in the contract to reduce the price of
contract in the event of prices of material etc. going down beyond a
percentage.
Scrap
Scrap refers to any material or product that is produced during the
manufacturing process but is not usable or saleable due to defects,
damage, or other quality issues.
Difference between job costing and contract costing
Job costing Contract costing
Each job is treated as cost unit. Each contract is treated as cost
unit.
Job work is executed in factory Contract work is executed at the
premises. site of the contract.
Indirect cost are higher than Indirect cost are lower than
those under contract costing. those under job costing.
Job costing take less time for Contract costing takes more
completion. time for completion.
It is influenced by the individual It is influenced by the specific
condition and general policy of clauses of the contract.
the organization.
Treatment of profit on incomplete contract
 If the contract completed ¼ or less than ¼ = Full amount of
notional profit should be transferred to work in progress as
reserves.
 If the contract completed more than ¼ but less than ½ = 1/3 of the
notional profit should be taken into profit and loss account.
 If the contract completed ½ and more than ½ = 2/3 of the notional
profit should be credited to profit and loss account.
Process costing
Process costing is the method of costing used to ascertain the cost of
a product at each process.
Features/ Characteristics of process costing
 Production is continuous.
 Products are standardised.
 Products are homogeneous.
 Products passes through two or more process.
 Products are not distinguishable in processing stage.
 The finished products of one process becomes the raw materials
of the subsequent process.
Applications of process costing
 Where production is standardized.
 Where production is continuous.
 When output is uniform.
Advantages of process costing
 It is easy to compute average cost.
 It is simple.
 It is less expensive.
 It is possible to ascertain the process cost at short intervals.
Disadvantages of process costing
 Process cost are only historical.
 Difficult to value losses, waste, scrap etc.
 Difficult to value work in progress.
 These are not accurate. It’s only an average cost.
Difference between process costing and job costing
Process costing Job costing
Production is continuous Production according to
customers order.
Production is for stock. Production is not for stock.
Work in progress always exist. Work in progress may or may
not exist.
All units produced are Each job is different.
homogeneous.
There is a regular transfer of There is no such transfer.
cost of one process to another
process.
Each job is separate and Product lose their individual
independent of others. entities as they are
manufactured in a continuous
flow.
Normal process loss
This is the loss which is unavoidable on account of inherent nature of
production process.
Abnormal process loss
Any loss caused by unexpected or abnormal conditions such as plant
break down, substandard material, accident etc. Such loss are called
abnormal process loss.
Abnormal gain
It is the excess of actual production over normal output. It is also
called abnormal effective.
Difference between normal loss and abnormal loss
Normal loss Abnormal loss
It is unavoidable It is avoidable
It is recurring in nature It is accidental in nature
It can be estimated in advance It can’t be estimated in advance
It is non-insurable loss It is an insurable loss
Cost per unit is inflated Cost per unit is not affected
Operating costing/ Service costing
It is the method of costing designed to find out cost of operating or
rendering a service. It is also called service costing.
Characteristics/ Features of service costing
 It is used in rendering services.
 It is similar to unit costing.
 Uniform services are rendered to all customers.
 The portion of fixed cost is generally higher.
 Distinction between fixed cost and variable cost is important.
Objectives of service costing
 To ascertain cost of providing services.
 To provide cost information.
 To control cost,
 To eliminate waste.
 To helps in decision making.
 To measure the efficiency of service department.
Continuous operation cost
It is a costing method which is used where the goods or services
being costed are the results of continuous operation or process.
Cost sheet
Cost sheet is a statement showing various components of total cost
of output of a particular product or services produced during a
particular period.
Advantages of cost sheet
 It disclose the total cost and cost per unit of the product.
 It helps in fixing up selling price.
 It helps in formulating definite useful production policy.
 It enable control over cost of production.
 It facilitate comparison.
 It helps in submission of quotations.
Batch costing
It is a method of costing used in concerns that produce goods in
batches. Batch consist of a particular number of identical products.
Cost of each batch is ascertained separately.
Unit costing
It is a method of costing used to ascertain the cost of producing a
unit of output.
Transport costing
It is the determination of cost per unit of services rendered by a
vehicles.
Objectives of transport costing
 To compute operating cost of running vehicles.
 To control cost.
 To avoids all kinds of wastages.
 To ensure the proper utilization of vehicles.
 To determine the freight rate to be charged.

JUBAIR MAJEED
RAHUL MURALI

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