Output Costing | Meaning | Importance | Limitation | Cost Accounting

 

 

Concept of Output Costing

Output costing is also known as unit costing, single costing, process costing or operation costing.

This costing method is used in those manufacturing companies where standard or similar products are produced through a single process.

This method is also applicable where production is uniform and continuous.

This method is suitable to industries of mines, collieries, breweries, flour mills, brick factories, cement factories, paper mills, sugar mills, pencils manufacturing, cigarettes company, dairy products, steel works etc.

 

The total cost of the product is ascertained by accumulating all the elements cost like prime cost, factory cost, office or administrative cost, selling and distribution cost.

The output units must be a standard unit like a ton, a quintal, a kilogram etc.

 

The formula of total cost per unit

Total cost per unit = Total cost ÷ Output units

 

Importance of Unit Costing

Unit costing is important because of the following reasons:

It shows the total cost and cost per unit of production during a period.

It helps the manufacturers to control the cost of production.

It helps the management in fixing up the selling price of their products.

It acts as a guide to the manufactures.

It helps the management for comparative study of the various costs with past data.

It helps to minimize the cost of production when there is competition.

It helps the businessmen to submit a quotation for tender work etc.

 

Limitations of Unit Costing

The main limitations of unit costing are as follows:

It is not useful to those industries where the production is not uniform.

It is not suitable for process production.

It cannot be used by those industries, which are engaged in service providing.

The secrecy of cost cannot be maintained because the cost is shown in every stage etc.

 

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Calculation of Profit

For determination of selling price, the profit should be determined first.

The profit percentage may be on cost price or selling price in cost sheet.

 

Formula of profit on cost sheet   

Profit on cost = Total cost x (Profit % ÷ 100)

Profit on sales = Total cost x [Profit % ÷ (100 – Profit %)]

 

 

Component of Cost Sheet

The statement of cost according element-wise is known as the cost sheet.

It shows the details of the total cost of a job. It also shows the total cost per unit.

Cost of materials used

Prime costs

Factory costs (manufacturing cost, work cost, production cost)

Cost of production

Total cost or total cost

Profit

Sales

 

Cost Sheet

Particulars	Amount	Amount
Direct material		xxx
Direct labour		xxx
Direct expenses		xxx
Prime cost		xxx
Add: Factory expenses or work cost		xxx
Factory cost		xxx
Add: Office or administrative expenses		xxx
Cost of production		xxx
Add: Selling and distributing expenses		xxx
Total cost or cost of sales		xxx
Add: Profit		xxx
Sales		xxx

 

Or

Format of Cost Sheet

For ……….. units

Particulars		Amount	Amount
Opening stock of raw materials			xxxx
Add:	Purchase		xxxx
	Carriage on purchase (carriage inward, purchase expenses)		xxxx
Less:	Closing stock of raw materials		(xxx)
	Raw materials consumed or used		xxxxx
Add:	Direct materials		xxxx
	Direct or productive labour (wages)		xxxx
	Direct expenses		xxxx
	Prime cost		xxxxx
Add:	Factory overheads:
	Indirect/Unproductive wage	xxxx
	Indirect materials	xxxx
	Consumed store	xxxx
	Estimating expenses, drawing	xxxx
	Rent, rates, phone/mobile/internet expenses	xxxx
	Lighting, heating, power	xxxx
	Salary to general staff, Manager or director salary	xxxx
	Depreciation on factory machine, furniture and building	xxxx
	Repairs and maintenance	xxxx
	Stationery	xxxx
	Other factory expenses	xxxx
Less:	Scrap sold	(xxx)
Add:	Opening work-in-progress	xxxx
Less:	Closing Work-in-progress	(xxx)	xxxx
	Factory or Work Cost		xxxxx
Add:	Office overheads:
	Establishment charge	xxxx
	Manager or director salary	xxxx
	Salary to office staff	xxxx
	Rent, rates and tax	xxxx
	Stationery, postage, phone/mobile/internet expenses	xxxx
	Bank charge, audit fee, Insurance	xxxx
	Depreciation on office equipment, furniture and building	xxxx
	Repairs and maintenance	xxxx
	Other office expenses	xxxx
	Cost of Production	?	xxxxx
Add: Less:	Opening stock of finished goods Closing stock of finished goods	? ?	xxxx xxxx
	Cost of Goods Sold	–	xxxxx
Add:	Selling and distribution overheads:	–
	Carriage outward (on sales)	xxxx
	Packaging (secondary)	xxxx
	Advertisement or free sample	xxxx
	Salary and commission to sales agent or boy	xxxx
	Rent to warehouse or godown	xxxx
	Stationery, postage, phone/mobile/internet expenses	xxxx
	Insurance of warehouse	xxxx
	Depreciation on warehouse and delivery van	xxxx
	Repairs and maintenance	xxxx	xxxx
Cost of Sales or Total Cost			xxxxx
Add: Profit			xxxx
Sales			xxxxx

  

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