UNIT COSTING
Unit costing refers to the costing procedure, under which costs are accumulated and analyzed under different elements of cost and then cost per unit is ascertained by dividing the total cost by number of units produced.
It is ideally used in case of concerns producing a single article on large scale by continuous manufacture. The units of output are identical. The products are homogenous. Concern using single or output costing produces basically one product or two or more grades of one product.
It is not necessary to maintain separate cost accounts under this system. as all the information required can be obtained only by organizing and analyzing the financial accounts. On dividing the total expenditure incurred by the number of units produced, the cost per unit is ascertained.
ACCORDING TO J.R BATLIBOI
“Single or output cost system is used in business where a standard product is turned out and it is desired to find out the cost of a basic unit of production.”
ACCORDING TO WALTER W. BIGG,
“Unit Costing Method is a method of costing applied to ascertain the cost per unit of production where standard and identical products are manufactured.”
ACCORDING TO HAROLD J. WHELDON,
“Production Cost Accounting or Unit Cost Accounting is such a method of cost ascertainment which is based on production unit. It is applicable where the production work is done continuously and the units are of same types or manufactured identical.”
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS, LONDON,
“Output costing is the basic costing method applicable where goods or services result from a series of continuous or repetitive operations or processes to which costs are charged before being averaged over the units produced during the period.”
This system of costing is suitable for breweries, collieries, cement works, steel, brick making, floor mills etc. In all these cases the unit cost of the article produced requires to be ascertained.
FEATURES OF UNIT COSTING
SUITABILITY OF UNIT COSTING:
Output costing is the method of costing adopted in concerns where there is a production of single product or a few grades of the same product differing only in size, shape or quality by continuous process of manufacture. The units of production or output are identical and the costs of units are physical and natural.
ASCERTAINMENT OF COST PER UNIT:
Under this method, the cost per unit of output, say, per ton, per barrel, per kilogram, per metre, per quintal, per bag, etc. is ascertained. The cost per unit of output is ascertained by dividing the total cost incurred on a product during a given period of time by output produced during the period. Where the products manufactured are of different grades, first, the costs of products are ascertained grade-wise, and then the total cost of each grade of the product is divided by the number of units of that grade so as to ascertain the cost per unit of each grade of the product.
EQUALITY OF COST:
Equality of cost is an important feature of this method. That is, under this method, cost units, which are identical, will have identical cost.
COST ASCERTAINMENT AT END OF THE YEAR:
Under this method, the cost of product is ascertained at the end of the accounting period.
ACCOUNTS PREPARED:
Under this method, the cost information relating to a product may be presented in the form of either cost sheet or production account.
SIMPLE METHOD OF COSTING:
This method is the simplest method of all the methods of costing; in the sense that the cost collection and the cost ascertainment are quite simple.
HELPFUL TO MANAGEMENT:
The cost per unit of output, determined under single or unit costing enables the management to make real comparison between different periods and between different firms within the same industry, as the unit of output is a common factor between different periods and between different firms within the same industry.
OBJECTIVES OF UNIT COSTING
Unit costing has the certain objectives which are as follows:
TO FIND OUT TOTAL COST AND COST PER UNIT
Main object of this method is to determine total cost and cost per unit of goods produced in a certain period of time.
ANALYSIS OF EXPENSES INCURRED ON COST UNIT
To analyse element-wise total cost and cost per unit of each element unit costing method is useful. Cost is divided into four parts prime cost, works cost, cost of production and total cost.
COMPARATIVE STUDY
If we want information regarding any increase or decrease in any expense is possible through comparative analysis for the year and years. Over expenses can be controlled under output costing method by providing data in case of any increase.
TO FIND OUT PERCENTAGE OF EACH ELEMENT OF COST TO TOTAL COST
Under this method proportionately share of each element in total cost can be determined. This will help in estimating cost of each element in future. Control can be exercised through this method on the elements having large amounts.
TO FIND OUT SELLING PRICE AND PROFIT
Selling price per unit computed after adding a certain percentage of profit in per unit, Profit or Loss can be ascertained by comparing total cost when Amount of sales has been given.
TO FIND OUT TENDER PRICE
Selling price of a commodity is to be informed to customer prior to its order or estimate for a work is to be given termed as “Tender price”. This price is ascertained on the basis of previous year’s costs.
ACCOUNTING FOR UNIT COSTING
The analysis of the cost by adopting the method of unit costing is presented in the form of a statement known as cost sheet or an account i.e. Production account.
COST SHEET
Cost sheet is a device used to determine and present the cost under unit costing. It is a statement of costs incurred at each level of manufacturing a product or service. In a Cost sheet all the elements of cost is taken into consideration. It includes Prime cost, Factory/manufacturing cost, cost of production, cost of sale, Profit/loss etc.
ACCORDING TO C.I.M.A, LONDON
“Cost sheet is a cost schedule or document which provides for the assembly of the estimated detailed cost in respect of a cost center or cost unit”.
ACCORDING TO WHELDON
“Cost sheets are prepared for the use of management and consequently, they must include all the essential details which will assist the manager in checking the efficiency of production”
Items excluded from Cost Sheet:
1. Pure financial expenses like interest on capital, interest on loan, discount on debentures, loss on sale of fixed asset provision for bad debts and doubtful debts, writing off goodwill, copyright, preliminary expenses etc.
2. Pure financial incomes like interest received, profit on sale of investment, dividend received, rent received, commission received, discount received etc.
In addition to the above, no appropriation items will include in cost sheet.
Form of a Cost Sheet: Cost sheet for the period ending
| PARTICULARS | AMOUNT |
| Direct material Direct wages Direct Expenses | |
| Prime Cost | |
| Add: Factory Overheads | |
| Factory Cost | |
| Add: Administration Overheads | |
| Cost of Production | |
| Add: Selling and Distribution Overheads | |
| Total Cost /Cost of sale |
TREATMENT OF STOCK
While preparing a cost sheet we have to consider the opening and closing stocks of the following three items
- Stock of Raw materials
- Stock of finished goods
- Stock of work in progress
Stock of Raw materials: In order to get the cost of material consumed, opening stock of material is added to the cost of raw materials purchased and closing stock of raw materials is deducted from it.
| Opening stock of raw materials | |
| ADD: Purchase of raw material | |
| LESS: Closing stock of raw material | |
| Cost of materials consumed |
Stock of Work – in – progress: The Cost of work in progress are adjusted at the work cost stage
| PRIME COST | |
| ADD: Works Overhead | |
| ADD: Opening stock of work-in-progress | |
| LESS: Closing stock of work-in-progress | |
| WORKS COST |
Stock of finished goods: It is adjusted immediately after ascertaining the cost of production.
| Cost of production | |
| ADD: Opening stock of finished goods | |
| LESS: Closing stock of finished goods | |
| Cost of goods sold |
TENDERS OR QUOTATIONS
A tender or quotation is an offer made by a person to supply certain goods at a specified price. It is an estimated price which is determined in advance of production. A reasonable margin of profit is added to the estimated cost to get the tender price. A tender has to be prepared very carefully as the receipts of orders depend upon the acceptance of quotations or tenders supplied by the manufacturers. It requires information regarding Prime cost, works cost, administration and selling overhead cost and profit of the preceding period.
Computation of Tender price
I. Calculation of Tender price on the basis of Percentages of Overheads
In this case a cost sheet is prepared for the past period with the total amount of different elements of cost. Here Indirect or overhead costs are charged on a percentage basis. The percentage is calculated on the basis of the past year’s cost sheet. These are calculated as follows:
a. Factory OH is charged as a percentage if direct wages. =Factory OH x 100/Direct wages
b. Administration OH is charged as a percentage of Factory cost = Administration OH x 100/ Factory Cost
c. Selling and Distribution OH is charged as percentage of Factory cost = Selling and Distribution x 100/ Factory cost
Profit may be calculated either as a percentage of cost or selling price. If the given percentage of profit is on selling price, the percentage of profit on selling price should be converted into percentage of profit on cost.
II. Computation of Tender price on the basis of Previous year’s per unit cost:
Under this situation, previous periods cost and output figures are available. Tender price is fixed by multiplying the quantity with previous periods per unit cost and adding the required percentage of profit. There are three different situations under this method.
a. When there is no change in past cost and past percentage of profit: In this case a detailed probable cost sheet is prepared by multiplying previous period’s cost of each unit with the quantity of tender. Profit is added at the same percentage of profits of the past period.
b. When there is change in past cost, but no change in past percentage of profit: Here the cost of the tender is calculated by making necessary adjustments in the elements of cost. Same percentage of cost is added as profit to get tender price.
c. When there is change in past cost and past percentage of profit: Here the total cost tender is calculated by making necessary adjustments in the cost and the tender price is then calculated by adding the required percentage of profit.
III Calculation of Tender price based on fixed and variable costs: Here, costs are classified according to variability into three types,, fixed, variable and semi variable. Tender price is calculated on the basis of degree of variability.
PRODUCTION ACCOUNT
If the details of cost sheet or production statement are shown in the form of a ledger account, it is known as production account. Besides cost of production it also includes selling and distribution expenses. It is prepared in three parts – the first part gives the cost of production, the second part gives the cost of goods sold and the third part shows cost of sales or total cost for the period. A specimen of a Production Account is as follows:
UNIT OF MEASUREMENT
Unit of measurement is the vital factor for cost ascertainment under unit costing method. There are many units of measurements. They are units, liter, a dozen, yards or meters, sq.ft., gross, tones, bales, milliliter, kilogram’s, bags and the like.
The company can select or adopt any one of the above units of measurement according to the nature of industry.
| Sl. No | Nature of Industry | Unit of Measurement |
| 1 | Sugar | A Quintal |
| 2 | Bricks | Thousand |
| 3 | Collieries | A tone of Coal |
| 4 | Pens, Pencils | Dozen, Gross |
| 5 | Breweries | A liter |
| 6 | Cement | Tones |
| 7 | Paper Mills | A kg of paper, Tones |
| 8 | Hospitals | Patient – days |
| 9 | Dairies | A liter of milk |
| 10 | Road Transport | Passenger – Kilometers |
| 11 | Automobile | No. of units |
| 12 | Electricity | Kilowatts – hour |
| 13 | Cable | Meter or Kilometer |
| 14 | Steel | Tones |
| 15 | Chemical | Liter, Kilogram, Tone |
| 16 | Canteen | Number of Meals, Number of cups of tea or coffee |
| 17 | Gas | Cubic Meter |
| 18 | Boiler | Kilograms |
| 19 | Metal Plating | Square meters |
| 20 | Flour Mills | Sack of flour |
ASCERTAINMENT OF COST PER UNIT
The main purpose of unit costing is the ascertainment of cost per unit. It is followed by the object of analyzing the cost of each element and its share in the total cost. For this purpose, costs are accumulated and analyzed under various elements of cost.
The financial records are used for the collection of direct cost and expenses. The costing records are used for the collection of indirect cost and expenses. The cost records like materials abstract, wage abstract, time records and cost ledger are some of the records used for the purpose of cost ascertainment of a unit.
The following formula is used to ascertain cost per unit.
Cost Per Unit = Total Cost / Number of Units Produced
LIMITATIONS OF UNIT COSTING
Unit or output costing is very much important method for ascertaining the total cost and cost per unit, but it is not free from certain limitations. These are as under:
1. Limitations of historical cost: Unit or output costing, being basically of historical nature, suffers from all the defects of historical costing.
2. Useful only for homogeneous products: This costing method can be used only for homogeneous products and not for heterogeneous products.
3. Not sufficient for cost control: This costing system simply determines total cost and per unit cost of the products which is by itself not sufficient for cost control.
4. Arithmetical accuracy cannot be checked: Under this system, generally a statement is prepared which does not from a part of the double entry system. Therefore, arithmetical accuracy cannot be checked under this system.
