In this article we will discuss about:- 1. Meaning of Output Costing 2. Features of Output Costing 3. Objectives 4. Important Items Regarding Preparation of Statement of Cost and Cost Sheet 5. Cost Collection or Cost Accumulation.
Contents:
- Meaning of Output Costing
- Features of Output Costing
- Objectives of Output Costing
- Important Items Regarding Preparation of Statement of Cost and Cost Sheet
- Cost Collection or Cost Accumulation
1. Meaning of Output Costing:
Unit or output costing is that method of costing in which cost are ascertained per unit of a single product in a continuous manufacturing activity. Per unit cost is calculated by dividing total production cost by number of units produced. This method is also known as single costing. This method is known as ‘single costing’ as industries adopting this method manufacture, in most cases, a single variety of product.
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This method is also known as ‘unit costing’, as not only the cost of the total output, but also the cost per unit of output is ascertained under this method. Under this method cost units are identical. This method is also called ‘output costing’, as cost is ascertained for the total output of a product.
1. According to J.R. Batliboi, “Unit costing or output costing may be defined as 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.”
2. 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.”
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3. 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.”
4. 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.”
From above definitions it is clear that single costing is a method of costing under which there is the costing of a single product which is produced by a continuous manufacturing activity. Though under this method of costing a single variety of product is manufactured, it may vary in respect of size, grade, colour, etc. The example of industries which make use of this method of costing are – brick, sugar, cloth, coal, cement, fisheries, food canning, quarries, plantation industries, etc.
2. Features of Output Costing
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Output costing has certain characteristics features.
The important features of output costing are:
(1) 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.
(2) 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.
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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.
(3) Equality of cost is an important feature of this method. That is, under this method, cost units, which are identical, will have identical cost.
(4) Under this method, the cost of product is ascertained at the end of the accounting period.
(5) Under this method, the cost information relating to a product may be presented in the form of either cost sheet or production account.
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(6) 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.
(7) The cost per unit of output, determined under single. 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.
3. Objectives of Output Costing
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Output costing has the certain objectives.
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They are:
(1) To ascertain the total cost of the output as well as the cost per unit of output.
(2) To ascertain the profit or loss on production.
(3) To analyse the expenditure by nature, classify them into element of cost and know the extent to which each element of cost contributes to the total cost.
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(4) To facilitate comparison of the cost of one period with the cost of another period to know the efficiency or otherwise of the production.
(5) To facilitate the preparation of tender or quotation.
(6) To control the cost of the product through comparative study of the costs of any two periods or through the comparison of the actual costs with the pre-determined standard cost.
4. Important Items Regarding Preparation of Statement of Cost and Cost Sheet
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1. Normal Loss of Materials:
This type of loss is unavoidable and arises due to the nature of material. For example – loss by evaporation of liquid materials, loss due to loading and unloading of materials, etc. This loss is not deducted from the cost of material rather it is charged to the output because it is a principle of costing that all normal expenses which are necessarily to be incurred should be included in the cost of production.
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Therefore, in order to absorb normal material losses in cost, the rates of usable materials are inflated so that such losses are covered. In other words, such normal loss should be ignored and this will get automatically charged to output.
2. Abnormal Loss of Materials:
Abnormal losses are those losses which arise due to abnormal reasons such as loss by theft, loss by fire, careless handling etc. The cost of materials abnormally lost should be deducted from the value of materials purchased so that output is charged only for the materials used in production. Abnormal losses are charged to Costing Profit and Loss Account.
3. Wages of Normal Idle Time:
Normal idle time is inherent in any work situation and cannot be reduced. The cost of normal idle labour time is charged to the cost of production. Hence, wages of normal idle time is not subtracted from the labour cost.
4. Wages of Abnormal Idle Time:
Abnormal idle time arises due to unanticipated causes such as strikes, lockouts, fire, accidents, major machine break-down, earthquakes, etc. Loss of time due to such abnormal causes cannot be planned. Such causes are sudden and non-frequent.
The cost of abnormal idle time is not included in cost of production. The wages paid for abnormal idle time should be debited to Costing P/L A/c. Hence, wages of abnormal idle time is subtracted from the labour cost.
5. Sale of Scrap, Defective, Salvage or Residue:
If clear information is given, then adjustment of these sales will be made accordingly. But, if it is not clear that what the nature of scrap defective, etc., the sale value of scrap etc. is deducted before computing factory cost.
6. Defective or Rejected Work:
Sometimes, under production process there might be defective goods. The production not conforming to the standard set is known as defective. If such goods cannot be rectified, then it may be sold in the market at lower rate. Whatever the amount is collected from such sale is deducted from the factory cost. Similarly the defective units are also deducted from the number of units produced.
On the other hand, the defective units which can be rectified by incurring extra expenses, then such extra expenses incurred on such a rectification can be added in factory overhead as an extra factory overhead. After that the saleable units and their costs can be determined.
7. Cash Discount and Trade Discount:
Cash discount is not considered as the part of cost of production, since it is of financial nature. Whereas, trade discount is treated as sales promotion expense and is included in selling and distribution expenses or may be deducted from gross sales.
8. Allocation of Joint Expenses:
In absence of clear-cut information factory overhead is allocated on the basis of wages ratio and office and administration expenses and selling and distribution expenses on the basis of works cost ratio.
9. Packing Charges:
Treatment of packing charges depends upon its nature. If, in absence of packing, goods cannot be sold, then it should be treated as direct expense (i.e. packing of mustard oil etc.). Packing charges in respect of partly finished goods are considered as factory overhead. In the same way, packing expenses concerned with finished goods are included in selling and distribution expenses.
5. Cost Collection or Cost Accumulation:
Usually the following procedure is adopted under output costing for the cost accumulation of the various elements of cost:
1. Materials:
As materials both direct and indirect are issued to production against properly authorised material requisitions. The direct and indirect material costs can be ascertained through material requisitions.
Through the analysis of material requisitions, the quantities of direct and indirect materials issued to production can be ascertained, and on the basis of the prevalent method of pricing material issues, the direct and indirect material costs can be ascertained.
Accounting of Materials:
Materials are dealt in cost accounting as follows:
(i) The direct material costs are taken as a part of Prime Cost.
(ii) Indirect material costs are charged to Factory Overheads.
(iii) Normal loss of materials is adjusted by inflating the issue price of materials.
(iv) Abnormal loss of materials is not taken into account in the cost of production. It is charged to the Costing Profit and Loss Account.
2. Labour:
The labour costs are collected periodically through pay rolls kept separately for each section or type of work without the detailed job cards or chits required in job costing.
Treatment of Labour Cost in Cost Accounting:
Labour cost is dealt as follows:
(i) Direct labour costs are treated as a part of Prime Cost.
(ii) Indirect labour costs are charged to Factory Overheads.
3. Direct Expenses:
Direct expenses or chargeable expenses are separately collected from the financial record where the actual direct expenses incurred are recorded.
The main expenses under this head are:
(i) Royalty
(ii) Architect and surveyor’s fees
(iii) Expenses of drawing and designs
(iv) Excise duty etc.
Treatment:
It is treated as a part of Prime Cost.
4. Overheads:
Where cost finding is undertaken at the end of long interval, i.e., at the end of the year, after the overheads incurred are actually recorded in the financial book, the actual overheads incurred during the year are collected from the financial records.
The actual overheads collected from the financial records are analysed into three broad categories, viz.:
(1) Factory Overheads,
(2) Office and Administration Overheads, and
(3) Selling and Distribution Overheads and are treated as such for cost finding.