Concept, Importance & Components of Unit costing

Subject: Principles of Accounting

Overview

Unit or output costing is an important method of costing through which cost per unit is ascertained. The cost per unit of an article is obtained by dividing the total production cost by the number of units manufactured during a given period of time.It provides the necessary cost information to the management.

Concept of Unit Costing

This unit costing is also known as single costing. It is used in those industries where a single or only a few grades of similar articles are manufactured. For eg. paper, cement, bricks, coal, etc. Unit or output costing is an important method of costing through which cost per unit is ascertained. The cost per unit of an article is obtained by dividing the total production cost by the number of units manufactured during a given period of time.

Cost per unit = $\frac{Total cost of production}{Total number of units manufactured}$

Source:www.edupristine.com

Importance of Unit costing

• It discloses the total cost and cost per unit.
• It helps to determine the profitable volume of production.
• It helps to determine the selling price of the product.
• It enables a manufacturer to keep a close watch and control over the cost of production.
• It helps to prepare the tender sheet.
• It helps to make a comparison on current cost with the previous cost.
• It provides the necessary cost information to the management.

Limitation of Unit costing

• It is not suitable for those industries, which produce varieties of products.
• It is not suitable to the services oriented organizations like school, college, hospital, etc.
• It can be used only for homogeneous products and not for heterogeneous products.

Cost sheet

Under this costing, a cost is produced to determine the total and unit cost of an article. Cost sheet is a statement, which shows the detailed cost under different headings like factory on cost, office on cost and selling on cost for a particular period. It also shows the element of costs as prime cost, factory cost, the cost of production and total cost.

Cost sheet is an operating statement. It analyzes and classifies the expenses on different items for a particular period in a tabular form. It may be prepared weekly, monthly, quarterly, half yearly or yearly at any convenient interval of time. Similarly, it may be prepared on the basis of actual or estimated cost depending on the purpose to be achieved. It is only a memorandum statement, not an account. It does not form a part of the double entry system.

Purpose of cost sheet

• It helps in fixing selling price more accurately.
• It helps comparisons of costs of similar jobs or between costs of similar periods.
• It gives information for compilation of estimates i.e. Quotations or tenders.
• It provides useful information to trace wastages, loss and inefficiencies and thus, affects economics.
• It acts as a guide to the producer and helps him in formulating a definite production policy.

Components of Cost sheet

Cost sheet is a periodical statement prepared in a columnar form to know the total cost and per unit cost of production. It is a statement of costs which includes the total cost on the basis of the following cost components:

• Prime cost

The aggregate of all direct costs, which change in direction proportion to change in output, is called prime cost. It is the total of direction material cost, direct labour cost and direct expenses. The purpose of determining prime cost is to know about the share of the direct cost in the total cost of production. It is also known as basic cost, first cost or flay cost. It is computed as below:

Prime cost = Direct material + Direct labour + Direct expenses

• Factory or work cost

Factory or work cost is the total of prime cost and factory or works overheads, which include indirect material cost, indirect labour cost and indirect expenseswhich are added to prime cost then the total is called factory or work cost. It is also known as total manufacturing cost.

Factory cost or work cost = Prime cost + Factory overheads

• Cost of production

If office and administrative overheads are added to factory cost, then cost of production can be obtained. In other words, cost of production is the total of factory cost and office and administrative overheads.

Office and administrative overheads includes those expenses which are concerned with the management of office, administration, finance and other arrangements.

• Cost of sales or total cost

If selling and distribution overheads are added to the cost of production, it is called cost of sales or total cost. In other words, the total cost of production and selling and distribution overheads is known as the cost of sales or total cost.

Total cost or cost of sales = Cost of production + Selling and distribution overheads

Treatment of stocks in Cost sheet

• Opening and closing stocks of raw materials
• Opening and closing stocks of work in progress
• Opening and closing stock of finished goods

Opening and closing stocks of raw materials

Opening and closing stocks of raw materials are adjusted to ascertain the cost of materials consumed which is considered as a direct material cost, a part of the prime cost.

In a cost sheet, opening stock of raw materials is shown first. Thereafter, purchase of materials, carriage inward, import duty, etc. are added to it and closing stock of raw materials is deducted there from end result “ cost of materials consumed”.

Opening and closing stocks of work in progress

In the case of opening and closing stocks of work in progress, factory overheads are added to the prime cost and gross factory cost or cost of goods manufactured is determined first. Then after, opening stock of work in progress is deducted there from to get factory cost or works cost.

Opening and closing stock of finished goods

After ascertaining factory cost, office and administrative overheads are added to it and cost of production is determined. Thereafter, opening stock of finished goods is added to it and closing stock of finished goods is deducted there from to get “cost of goods sold”.

If opening and closing stocks of finished goods are given in units, then these units should be valued on the basis of cost per unit.

Cost per unit = $\frac{Cost of production}{Units produced}$

References:

Koirala, Madhav et.al., Principles of Accounting-XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy-XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

Things to remember
1. Unit costing is also known as single costing.
2. It provides useful information to trace wastages, losses and inefficiencies and thus affect economics.
3. It acts as a guide to the producer and helps him in formulating a definite production policy.
4. It discloses the total cost and cost per unit.
5. It helps to determine the profitable volume of production.

• It includes every relationship which established among the people.
• There can be more than one community in a society. Community smaller than society.
• It is a network of social relationships which cannot see or touched.
• common interests and common objectives are not necessary for society.