Unit- 3

What is Unit costing?

Unit costing is known as “output” or “single output” costing. Unit costing is
followed by the concern, which produces a single product on large scale
continuously. The cost units are identical costs. Moreover, the products are
having uniform homogeneous character. This product is not produced through
continuous process. This is the main difference between unit costing
and process costing.
Sometimes, two or more grades of one product is produced by a concern. If so,
the single or output costing is followed. If one product is produced, the cost
collection and cost ascertainment is very easy.

Under this method, the total cost incurred is divided by total production to
determine the cost per unit. Moreover, the cost is collected element wise and the
cost of each element is divided by total production to determine the cost per unit
of each element.

The statement of cost is prepared which includes the figures for previous period
to provide comparison and control. Unit costing is successfully followed in the
production of homogeneous products like bricks, pencil, pen, books, computer,
laptop and the like.

Definitions:
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.”

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

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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.

Features of Output Costing:

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.

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.

Objectives of Output Costing:

Output costing has the certain objectives.

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.

(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.

Important Items Regarding Preparation of

Statement of Cost and Cost Sheet:
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

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normal expenses which are necessarily to be incurred should be included in the
cost of production.

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.

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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.

Cost Collection or Cost Accumulation:

Usually the following procedure is adopted under output costing for the
cost accumulation of the various elements of cost:

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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.

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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.

Ascertainment of Cost Per Unit in Unit Costing

The main purpose of unit costing is the ascertainment of cost per unit. It is
followed by the object of analyzing the cost of each element and its share in the
total cost. For this purpose, costs are accumulated and analyzed under various
elements of cost.

The financial records are used for the collection of direct cost and expenses. The
costing records are used for the collection of indirect cost and expenses. The
cost records like materials abstract, wage abstract, time records and cost
ledger are some of the records used for the purpose of cost ascertainment
of a unit.

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The following formula is used to ascertain cost per unit.

Cost Per Unit = Total Cost / Number of Units Produced

Difference Between Cost Centre and Cost Unit

BASIS FOR
COST CENTRE COST UNIT
COMPARISON

Meaning Cost centre refers to a Cost unit implies any

subdivision or any part of the measurable unit of
organization, to which costs are product or service, with
incurred, but does not respect to which costs
contribute to the company's are assessed.
revenues directly.

Use It is used as a basis for It is used as a standard

classifying costs. for making a
comparison.

Cost Costs are collected and Measured and

absorbed by cost units. Expressed in terms of
cost units.

Ascertainment Ascertained as per the nature Ascertained as per the

and technique of production nature of the final
process, organization size and output and the existing
structure. trade practices.

Sequence First Second

How many? Several cost centres are there, Different cost units for
even if there is just one product different products or
or service offered. services.