Introduction to Costing:
1) Job Costing: Companies which produce goods against order use this methodology to ascertain profit or loss from a particular order.
This kind of a costing method is generally used for custom goods that are made to order. Thus profit is calculated against a given job.
Eg. In the business of making wedding cards, certain big card makers have separate cost sheets prepared for every new card that is shown to a prospective customer. There are separate cost sheets for modifiers as well. Thus there is no standardization process involved.
2) Process Costing: Used in case of operation costing mostly in industries like food processing, textile, oil, and paints.
In this kind of costing, the methodology for production varies with different processes; thus for every process of manufacturing or at each stage of the production process, a different cost sheet is made.
3) Farm Costing: It is the extension of utilization of costing principles to the farms where the land is used for agricultural production like paddy, potato, mustard, onion etc. Farm costing is relevant in India as agriculture is the most inefficient industry in the country and it can be optimized with the use of costing principles.
(According to Prof. Dhaval, farm costing does not have a lot of relevance for the Syllabus)
Techniques of Costing:
1) Absorption Costing: Both fixed and variable costs are allotted to cost units.
2) Standard Costing: It uses standard cost and standard revenues for the purpose of control through variance analysis.
In essence, standard costing examines the difference between expectations and actuals. Thus it takes into accounts projected costs and compares its variance with actual costs. Such an exercise is undertaken in order to analyse where a company may have over/ underestimated costs and it thus aids better cost/ revenue forecasting in the future.
3) Marginal Costing: It is the term used in the UK. In the US, direct costing is more popular. According to this technique, variable costs are charged to cost units and the fixed cost attributable to the relevant period is written off in full against the contribution for that period.
Thus Selling Price – Variable Cost = Contribution
Contribution – Fixed Cost = Profit
Contribution margin is sales revenue less variable costs. It is the amount available to pay for fixed costs and provide any profit after variable costs have been paid.
Variable Costs: Costs that vary with a change in per unit production of output.
Semi Variable Costs: Semi-variable costs are those that have both fixed cost and variable cost elements. Eg. Telephone, electricity. For electricity a fixed per month rental has to be paid irrespective of whether one uses any electricity or not.
Fixed Costs: Costs that do not depend on a per unit production of output. Eg. The cost of rent is fixed whether one produces 5 units or 500.
4) Uniform Costing: It is not the separate method of costing and it uses the same costing principles or practices undertaken by several other enterprises in the similar industries.
All industries within an industry can have same/ similar cost sheets.
A Proforma of a Cost Sheet:
Particulars | Total Cost | Cost per Unit |
| Opening Stock of Raw Material | | |
| Add Purchases | | |
| Add Carriage Inwards | | |
| Add Octroi & Customs | | |
| Less Closing Stock of Raw Material | | |
| Less Purchase Returns | | |
| Cost of Raw Materials Consumed | | |
| Add Direct Wages | | |
| Add Direct Expenses | | |
| Prime Cost | | |
| Add Indirect Factory Material | | |
| Add Indirect Factory Wages | | |
| Add Indirect Factory Expenses | | |
| Gross Factory Cost | | |
| Add Opening Stock of Work in Progress | | |
| Less Cosing Stock of Work in Progress | | |
| Net Factory Cost | | |
| Add Office & Admin Overheads | | |
| Cost of Production | | |
| Add Opening Stock of Finished Goods | | |
| Less Closing Stock of Finished Goods | | |
| Cost of Goods Sold | | |
| Add Selling & Distribution Expenses | | |
| Cost of Sales | | |
| Add Profit | | |
| Sales | |
|
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