Introduction
A manufacturing concern converts raw materials into finished products and sells them at a certain price. In the manufacturing process, it incurs different types of expenses such as manufacturing, administrative, and selling and distribution expenses.
Concept and meaning
Output or unit costing is one of the important methods of costing under which the cost of production and in turn the selling price unit is determined. This costing method is used by the manufacturing concern which produces homogeneous products such as sugar, cloth, cement, and so on. A costing method used to ascertain unit cost output is called the output-costing method.
Importance of output costing
A cost sheet is used to determine the total and unit cost of a product under the unit cost method. The followings are the importance;
Simple: This method is very simple and easy to understand.
Determination of cost: It helps to determine the total and unit cost if production for a given period of time.
Fixation of selling price: It helps to determine the selling price of the product.
Elements of cost: It provides the detail information of the cost under different heading incorporating step-wise cost as well as the total cost.
Comparison: It facilitates comparing the current cost with the previous period.
Corrective measures: It enables us to find out the causes of variation if any and take corrective measures.
Tender sheet: It helps in the preparation of tender sheets for submitting tender prices with fair degree of accuracy and reliability.
Decision making: It facilitates for making different types of decisions and formulation policy of the manufacturing concern.
Limitation of unit costing
Cost sheet is very importance method for determining the unit cost or total cost of production.
Not applicable for heterogeneous products: manufacturing concerns engaged in manufacturing different types of product cannot apply this method.
Not applicable for service sector: Services oriented concern like school, college, and hospital cannot apply this method.
Cost sheet or statement of cost
A cost sheet is a periodical statement, which is designed to show in detail all the elements of the cost of goods manufactured. The elements of costs are prime cost, factory cost, cost of production, and total cost. In simple words, a statement which is designed to show the total cost, as well as cost per unit of output for the given period of time, is called a cost sheet.
Components of cost sheet
Cost sheet is a statement, which collects detailed information about the cost of a different cost center for determining the total cost and unit cost of production. It is prepared for a specific period of time.
The main components of the statement of cost are as follows;
Prime cost
Prime costs of a product are the sum of direct costs, which varies in proportion to the volume of production. Prime cost includes direct expenses like the cost of materials, direct labour, and direct expenses. These costs are directly identifiable with the product and constitute the major part of the total cost of the product.
Factory cost
Factory cost is the total of prime costs and factory expenses. Factory expenses are also as factory, manufacturing, or work overheads. They include indirect expenses which are incurred inside the workplace where manufacturing takes place.
Factory cost= prime cost + factory overhead
Cost of production
Cost of production includes factory costs and office and administrative overheads. Office overheads include all expenses incurred in performing administrative activities like planning, coordinating, staffing, and controlling.
Cost of production = Factory cost +Office overheads
Total costs
Total costs are the sum of costs of production and selling and distribution overheads. Selling and distribution overheads are necessary for the promotion of sales.
Treatment or adjustment of stock
There are three types of stock, which are adjusted in the process of preparing statement of cost. They are as follows;
Stock of raw materials
Stock of work-in-progress or partly finished goods
Stock of finished goods
Stock of raw materials
The opening stock of raw materials value is added to the raw materials purchased and the closing stock of raw materials value is subtracted therefrom in order to calculate the cost of raw materials consumed. The cost of materials consumed is then considered as a direct material cost.
Stock of work-in-progress
The stocks of work-in-progress are those units of commodities on which some work has been done but are in process of completion. These units can neither be treated as raw materials nor finished products because such units require a further process to be completely finished products. The stock of work-in-progress maybe both opening and closing.
The stock of finished goods
All types of overhead other than selling and distribution overhead are absorbed by finished goods. Therefore, the stock of finished goods is adjusted after calculating the cost of production.
Tender or quotation price
It is the price to be quoted for the supply of the particular product or for executing the work order as quotation invited. The manufacturer has to quote the price of its product in advance. In the preparation of the tender sheet, direct materials, direct wages, and overhead are predetermined on the basis of the costs of the proceeding period. It takes into account the possible changes in price in the future.
The overhead costs can be estimated by taking a labour hour or machine hour basis. The basis of the machine hour rate or labour rate is used for the absorption of the overheads. In the preparation of the tender sheet, the following steps can be taken:
The direct materials direct wages, and overheads should be added along with any changes if any, to determine the prime cost.
The other overhead should be absorbed on the basis of the percentage of various years’ cost.
1. Absorption of factory overhead:
The factory overhead may be absorbed as a percentage on direct materials, direct wages, and chargeable expenses.
% of factory overhead on direct wages =
2. Absorption of office and administrative overhead:
The office and administrative overhead is absorbed as the same percentage of office and administrative overhead on the factory cost
% of office and administrative overhead=
3. Absorption of selling and distribution overhead
% of selling and distribution overhead
Manufacturing account
Manufacturing account is the alternative method of determination of total cost and fixation of the selling price. The manufacturing needs to ascertain the cost of goods manufactured and manufacturing profit or loss during the year. Therefore, an account is prepared for the purpose, which is known as a manufacturing account. Generally, it is prepared by such concerns which do not have cost office and maintain any cost account.
Features of manufacturing account
The opening and closing stock of finished goods are not recorded because the purpose of preparation of the account is, to determine the cost of goods manufactured and manufacturing profit during the specified period. This represents a ledger account consisting of the debit and credit side. the difference between the two sides will be the cost of goods manufactured or manufacturing profit/loss based on the type of manufacturing account.
Importance of manufacturing account
Cost of goods manufactured and manufacturing profit/loss can be determined.
o It helps to fix the selling price.
o It assists to reduce and control the cost of the manufacturing process.
o Performance of the manufacturing department can be evaluated by comparing profit/loss of the current year.
Preparation of manufacturing account
Preparation of the manufacturing account would depend upon the purpose that is sought to be obtained information therefrom. The purpose may be either to ascertain the cost of manufactured or manufacturing profit or loss. However, it is prepared in two different formats:
1. For showing cost of production
2. For showing manufacturing profit of loss
Reviewed by Bijay Munikar
on
March 15, 2021
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