What is Unit or output costing? Single Unit or Output costing accounting & Meaning of unit or output costing?
Unit or output costing
Introduction
The method which is used to ascertain the cost of a product or services is called costing. The methods to be used for the ascertainment of cost differ from industry to industry. The unit of output costing is suitable for the industry, where goods are manufactured in units and are identical in nature. As
Meaning of unit or output costing
Unit or output costing is a method of costing, which is applied in those undertakings where units of output are identical and the cost units are physical and natural. It is ideally used in those concerns, which produce only one product or two or more grades of one product in large scale continuously. This method is, therefore, most commonly used in case of industries like mines, queries, collieries, breweries, brick-kilns, cement works, proper mills, sugar milks, textile industry, electrical appliances etc.
The basic concept of this method of costing is to ascertain the cost per unit of output. The cost per unit is ascertained by dividing the total cost incurred on the production of a product by the number of unit of that product. In other words, under this method, total cost is determined by adding all kinds of incurred costs first the total production units to determine cost per unit. This basis concept of this method can be expressed as follows:
Cost per unit or unit cost = total cost of production/ total quantity or number of units produced
This costing method is also knows as single costing since the process of production includes only one stage or a single operation. Under this method, generally a statement called cost sheet is prepared to determine cost per unit or total cost.
Importance of unit or output costing
Unit or output costing helps both in ascertainment and control of cost. It determines cost per unit of the products on the basis of which the selling price of products can be fixed. Thus, a unit or output costing has the following importance:
1. Ascertainment of cost: it helps in ascertainment of total and cost and cost per unit at different stages of production.
2. Controlling costs: it helps in controlling and reducing costs since time to time costs are compared from previous period and leakages and wastage are checked.
3. Fixation of selling price: it provides data about the cost of a job or product and on the basis of such data appropriate selling price of the product can be fixed.
4. Submitting tenders: it also helps the business in ascertaining the tender price by providing information about estimated cost on the basis of part data.
5. Formulating production policy: it acts as a guide to the manufacturer and helps him in formulation a profitable production policy.
Limitations of unit or output 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
Methods of unit or output costing
Unit or output costing is used to determine the cost per unit of production in a specific period of time. For this, the following methods are used:
• Cost sheet
• Manufacturing account
Cost sheet
Cost sheet is "a document which provides for the assembly of the estimated detailed cost in respect of a cost center pool a cost unit". It is a period's document of cost designed to
Cost sheet is an operating statement. It analyses and classifies the expenses on different items for a particular period in a tabular form. It may be prepared weekly, monthly, quantity, half yearly or yearly at any convenient interval of time. Similarly, it may be prepared on the basis of actual or estimated cost depending on the purpose to be achieved. It is online memorandum statement, not an account. It does not form a part of the double entry system.
Purposes of cost sheet
A properly prepared statement of cost serves the following purposes:
a. It helps in fixing selling pries more accurately.
b. It helps comparisons of costing of similar jobs or between costs of similar periods.
c. It gives information for compilation of estimates. Quotations or tenders.
d. It provides useful information to trace wastage, loses and inefficiencies and those affect economics.
e. If acts as a guide to the produced and help him in formulation a definitive production policy.
Element of cost sheet
Accounting to natural characteristics, cost can be classified into three group (a) materials cost (b) labor costs and (c) expenses. They are knows as elements of cost. There are three elements may be further sub-dividend as shown below:
Lets us explained each elements of cost in details:
1. Direct material: direct materials are those materials, which can be identified with and allocated to cost unit covertly. They become part of the production. For example, wood cost is direct material for any furniture's.
2. Indirect material: material used in the manufacture of a job a product which cannot be readily identified with, it will be indirect materials. For example, cost of nails, glue, polish etc. for any furniture.
3. Direct labor: direct labor is the wages which can be conveniently identified with and allocated to cost units. These comprise wage paid to workers who are engaged to producing a product in a manufacturing concern. As, in printing press, wages paid ton composites.
4. Indirect labor: indirect labor is the wages which cannot be conveniently with or allocated to cost units. It implies that the time paid for was not used for a particulars cost unit but for work in general as, wages paid to storekeeper in a printing press.
5. Direct expenses: direct expenses consist of any expenditure (other than direct material and direct labor) which can be identified with and allocated to cost units. These are called as chargeable expenses. Example of direct are:
a. Fees paid to architects of building.
b. Hire of equipment for a particulars.
c. Cost of special layout, design or drawing
d. Royalty paid to mine
e. Experiment work cost.
6. Indirect expenses: indirect expenses are expenses which cannot be conveniently allocated to cost units. As for example, (i) rent, rates, insurance of factory premises (ii) depreciation and repairs of machine (iii) welfare and medical expenses.
Actually, indirect expenses divided under three group (I) factory overhead (ii)office and administrative overhead (III) selling and distribution overhead.
Component of cost sheet
Cost sheet is a periods statement prepared in a columnar from to know the total cost and per unit cost of production. It is a statement of cost which indulges the total on the basis of the following cost components.
Prime cost
The aggregate of all direct costs, which change in direct proportion to change in output, is called prime cost. It is the total of direct materials cost, direct labor cost and direct ex
Factory or works cost or manufacturing cost
Factory or work cost is the total of prime cost and factory or work overhead, which include indirect materials, cost indirect cost, indirect cost and indirect expenses of factory. In other words, when all factory or production or manufacturing expenses are added to prime cost then the total is called factory or work cost. It is also known as total manufacturing cost.
Cost of production
If office and administrative overhead are added to factory cost, then cost of production can be obtained. In other words, cost of production is the total of factory cost and office and administrative overhead.
Office and administrative overhead includes those expenses, which are concerned with the management of office, administrative, finance and other arrangement.
Cost of sales or total cost
If selling and distribution overhead are added to cost of production, it is called cost of sales or total cost. In other words, the total of cost of production and selling and distribution overhead in knows as cost of sales or total cost.
Total cost or cost of sales = cost of production + selling and distribution overheads
Selling and distribution overhead includes those expenses, which are used in selling or distributing to the customer. Generally, these overhead include the following expenses.
Determination of profit or loss
After determining the amount of total cost or cost of sales, the amount of profit is added to determine the amount of sales or selling price, generally, the amount of profit is calculated on the basis of given percentage as under:
(I) When sales is given:
Net profit= sales –total cost
Treatment of stock in cost sheet
Generally the following three types of stocks are observed which should be adjusted in different components of cost –sheet:
• Opening and closing stocks of raw materials
• Opening and closing stocks of work-in-progress
• Opening and closing stock of finished goods.
Stock of raw materials
Opening and closing stocks of raw materials are adjustment to ascertain the "cost of materials consumed" which is considered as direct materials cost, a part of prime cost.
In a cost sheet, opening stock of row materials is shows first. Thereafter, purchase of materials, carriage inward, input important duty etc are added to it closing stock of raw materials is deducted there from for end result "cost of materials consumed".
Stock of work-in-progress (w-i-p)
Work-in-progress means partly finished goods. These are goods which are not yet completed but in the process of manufacturing. Such goods bear a proportionate part of factory overheads besides prime cost, therefore, opening and closing stocks of such goods i.e. work in progress are adjustment while calculating factory cost in a cost sheet.
Stock of finished goods
After ascertaining factory cost, office and administrative overhead are added to it and cost of production is determined. Thereafter, opening stock of finished goods is added to it and closing stock of finished goods is deducted goods is deducted there from to get "cost of goods sold".
If opening and closing stocks stocks of finished goods are given in units, th
ese units should be valued on the basis of cost per unit (i.e. cost of production per unit).
Here,
Cost per unit = cost of production/units produced
Similarly, if production units exceed sales units, the different will be units of closing stock of finished goods, which will be valued on the basis of cost per unit and will be deducted from cost of production.
Treatment of sale of scrap, wastage or defective work
In manufacturing process, some units or certain proportion of production is obtained as wastage, scrap or defective work. If any amount is received from the sales of such wastage or scrap, then if should be deducted either from total factory overhead or from grocers factory cost.
Tender or quotation sheet
A manufacturing concern is frequently requirement to give tenders or quotations for supply of goods manufactured by it. Again sometimes, it needed to make and estimate of the price of the product to plan the production wisely. The price at which a manufacturing concern agrees to supply its goods is knows as tender or quotation price. Similarly, an estimation of the price of the product in advance is knows as price estimation.
A tender or quotation is a formal written to supply goods or services or to do a job for an agreed price i.e. tender or quotation price.
Preparation of tender sheet
Tender or quotation price is estimated price for future period. For determination of tender or quotation price generally the following based are used:
One the basis of percentages of overheads
When separate materials and labor costs, other overheads are given and information for units are not given. Then tender or quotation price is determined on the basis of percentages of overheads'. In this situation, the following formulae are used to determine the percentages of overheads:
On the basis of output units
When units or quantity of production for previous period and units or quantity for tender or quotation are given but not the separate materials and labor costs for tender or quotation, then tender or quotation price is determined on the basis of per unit cost. In this situation, the following steps are used:
(i) The period cost-sheet is prepared by taking by previous period data and by determining cost per unit of different components of costs.
(ii) Then after, an estimated cost sheet (i.e. statement of tender or quotation) is prepared by multiplying tender or quotation units by cost per unit of each components of past cost-sheet.
On the basis of special instruction
If specific instructions are given regarding materials, labor and different overhead for tender or quotation, then such instruction should be followed according to determined tender or quotation price.
Manufacturing Account
When the data related with the cost of goods manufactured of a commodity are presented is a conventional form of account i.e. in T shape from, and then it is known as manufacturing account. Generally, a manufacturing concern prepares this account to exhibit cost of production or cost
of goods manufactured.
Preparation of manufacturing account
A manufacturing account is based on the principle of national account. Therefore, it shows opening stock of work-in-progress and other direct and indirect costs of goods manufactured ( i.e. factory costs) on its debit side and closing side and closing stock of work-in-progress and sale of scrap or wastage on its credit side. Generally, the balancing figure takes palace in credit side which is called "cost of goods manufactured or cost of production C/D". This account show the cost production which is transferred to the trading account.
Manufacturing account for manufacturing profit and loss
When a manufacturing account is prepared to ascertain manufacturing profit and loss, then trading value of manufacturing cost is kept in credit side inserted of cost of production. In other words, all items on debit and credit side will be the same as mentioned above. But, trading price or trading value of cost of production will be shown on the credit side and balancing figure or trading value of cost of production will be shown on the credit side and balancing figure will be put on debit side of this account as "manufacturing profit" or "manufacturing loss".
Manufacturing Account
When the data related with the cost of goods manufactured of a commodity are presented is a conventional form of account i.e. in T shape from, and then it is known as manufacturing account. Generally, a manufacturing concern prepares this account to exhibit cost of production or cost
Preparation of manufacturing account
A manufacturing account is based on the principle of national account. Therefore, it shows opening stock of work-in-progress and other direct and indirect costs of goods manufactured ( i.e. factory costs) on its debit side and closing side and closing stock of work-in-progress and sale of scrap or wastage on its credit side. Generally, the balancing figure takes palace in credit side which is called "cost of goods manufactured or cost of production C/D". This account show the cost production which is transferred to the trading account.
Manufacturing account for manufacturing profit and loss
When a manufacturing account is prepared to ascertain manufacturing profit and loss, then trading value of manufacturing cost is kept in credit side inserted of cost of production. In other words, all items on debit and credit side will be the same as mentioned above. But, trading price or trading value of cost of production will be shown on the credit side and balancing figure or trading value of cost of production will be shown on the credit side and balancing figure will be put on debit side of this account as "manufacturing profit" or "manufacturing loss".
Really impressive post Aluminium Scaffolding Manufacturer In Chennai
ReplyDelete