Costing Methods | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE D: TAXATION AND FUNDAMENTALS OF COSTING

Costing Methods

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1. Unit and Output Costing

Used in industries producing a single product in mass. Example: Brick, cement, and oil industries.

Cost per unit = Total cost / Number of units produced

2. Job Costing

Costing for specific jobs with unique specifications. Each job is separately identifiable.

Job Cost Card includes direct materials, labor, and overheads.

3. Batch Costing

Used when similar items are produced in batches. Example: Pharmaceuticals, toys.

Cost per unit = Total batch cost / Number of units in batch

4. Contract Costing

Used for long-term construction contracts. Example: Road, bridge construction.

• Progress Payments: Made during contract progress.
• Retention Money: Portion withheld until contract completion.
• Escalation Clause: Compensates for price fluctuations in materials/labor.

5. Process Costing

Used where products go through continuous processes. Example: Textiles, sugar, chemicals.

• Normal Loss: Expected loss during process.
• Abnormal Loss: Unexpected extra loss.
• Equivalent Units: Work done on incomplete units.

6. Service Costing

Used in service-oriented organizations. Example: Transport, hospitality.

Unit cost = Total cost / Units of service rendered

Mathematical Examples

Example 1: Job cost card includes: Material = ₹25,000, Labor = ₹15,000, Overheads = ₹10,000.
Job Cost = ₹25,000 + ₹15,000 + ₹10,000 = ₹50,000

Example 2: Batch cost = ₹2,00,000 for 5,000 units.
Cost per unit = ₹2,00,000 / 5,000 = ₹40

Example 3: Contract revenue = ₹20 lakhs, cost = ₹16 lakhs.
Contract profit = ₹4 lakhs

Example 4: Process input = 10,000 units, normal loss = 5%, actual output = 9,400 units.
Abnormal loss = (10,000 - 5% of 10,000) - 9,400 = 100 units

Example 5: Equivalent units for 50 units 60% complete = 50 × 60% = 30 units

Example 6: Total contract value ₹50 lakhs, retention money 10%.
Retention money = ₹50 lakhs × 10% = ₹5 lakhs

Example 7: Total transport cost ₹1,00,000 for 5,000 km.
Cost per km = ₹1,00,000 / 5,000 = ₹20

Example 8: Material issued = ₹10,000, returned = ₹1,000.
Net material cost = ₹10,000 - ₹1,000 = ₹9,000

Example 9: Plant cost ₹5,00,000, life = 5 years. Annual depreciation = ₹1,00,000

Example 10: Joint product A and B: Sale value A = ₹40,000, B = ₹60,000. Total cost = ₹75,000. Allocate A = ₹30,000, B = ₹45,000

Multiple Choice Questions

1. Which costing is best suited for transport services?
   a) Job Costing
   b) Unit Costing
   c) Process Costing
   d) Service Costing
2. Job costing is used when:
   a) Products are homogeneous
   b) Large contracts are executed
   c) Each job is different
   d) Services are offered
3. Retention money is:
   a) Part of profit
   b) Overhead cost
   c) Portion withheld until completion
   d) Not relevant in contract costing
4. Equivalent units are used in:
   a) Job Costing
   b) Process Costing
   c) Contract Costing
   d) Service Costing
5. Batch costing is used in:
   a) Hospital industry
   b) Road construction
   c) Pharmaceutical production
   d) Textile mills
6. Which of these is NOT a feature of job costing?
   a) Continuous production
   b) Customized jobs
   c) Separate cost for each job
   d) Use of job cost cards
7. Which item appears in contract account?
   a) Equivalent units
   b) Process loss
   c) Work certified
   d) Job number
8. In process costing, abnormal loss is:
   a) Unexpected extra loss
   b) Normal loss
   c) Part of output
   d) Ignored
9. Inter-process profit is used in:
   a) Service Costing
   b) Contract Costing
   c) Process Costing
   d) Job Costing
10. Cost per unit in unit costing is computed by:
    a) Total sales / number of jobs
    b) Total cost / number of units
    c) Unit sales – unit cost
    d) Average batch cost