Accounting School

Unit & Batch Costing

1. Unit Costing

• Meaning: Used when identical, homogeneous products are produced on a large scale.
• Formula: [ Cost per unit = Total Cost of Production / Units Produced ]
• Industries: Paper, cement, steel, mining, breweries.

Cost Collection

• Materials: From requisition notes.
• Labour: From job time cards.
• Overheads: Apportioned on basis like machine hours, labour hours, % of wages/materials.

Spoiled/Defective Work

• Normal loss: Spread over all units.
• Abnormal loss: Written off to Costing P&L.

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2. Batch Costing

• Meaning: Specific order costing where cost unit = batch.
• Procedure: Materials, labour, overheads collected for batch → cost/unit = total batch cost ÷ units.
• Industries: Pharmaceuticals, bakeries, components.

Formula – Economic Batch Quantity (EBQ)

EBQ = sqrt [(2DS)/C] Where:

• (D) = Annual demand
• (S) = Setup cost per batch
• (C) = Carrying cost per unit per annum

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3. Difference: Job vs Batch Costing

Job Costing	Batch Costing
Unique, non-standard jobs	Homogeneous products in lots
Cost per job	Cost per batch, then per unit
Jobs independent	Units in batch identical

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Process & Operation Costing

1. Process Costing

• Meaning: Costs charged to processes, averaged over units.
• Industries: Steel, paper, medicines, soaps, chemicals, rubber, oil, paints.
• Features: Continuous production, output of one process = input of next.

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2. Costing Procedure

• Elements: Materials, labour, direct expenses, overheads.
• Each process account debited with costs → output transferred to next process.

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3. Treatment of Losses

• Normal Loss:
  • Inherent/unavoidable.
  • Cost absorbed by good units.
  • Scrap value credited to process account.
• Abnormal Loss:
  • Excess over normal.
  • Cost/unit = cost of good unit.
  • Written off to Costing P&L.
• Abnormal Gain:
  • Actual loss < normal loss.
  • Credited to Costing P&L.

Formulae

• Cost per good unit: [ Cost per unit = (Total Cost – Scrap Value of Normal Loss) / (Input Units – Normal Loss Units) ]
• Value of Abnormal Loss: [ Abnormal Loss Value = Cost per unit x Abnormal Loss Units ]
• Value of Abnormal Gain: [ Abnormal Gain Value = Cost per unit x Abnormal Gain Units ]

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4. Work-in-Process Valuation

• Use equivalent units concept to value partially completed units.
• Average cost per unit = total cost ÷ equivalent units.

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Joint Products & By‑Products

1. Definitions

• Joint Products: Two or more products of equal importance produced simultaneously from same process (e.g., petroleum → gasoline, kerosene).
• By‑Products: Secondary products of relatively small value (e.g., molasses in sugar).
• Split‑off Point: Stage where products become separately identifiable.

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2. Methods of Apportionment of Joint Costs

• Physical Units Method:
  [ Joint Cost Share = Units of Products / Total Units x Total Joint Cost ]
• Net Realizable Value (NRV) Method:
  [ NRV = Sales Value – Post Split-off Costs – Selling Expenses
  Joint costs apportioned in NRV ratio.
• Market Value at Split-off: Apportion based on sales revenue at split-off.
• Market Value after Further Processing: Apportion based on finished sales value.
• Average Unit Cost Method:
  [ Average Cost per Unit = Total Joint Cost / Total Units Produced ]
• Contribution Margin Method: Variable cost apportioned by units; fixed cost apportioned by contribution ratio.

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3. By‑Product Costing Methods

• Net Realisable Value: Deduct NRV of by-product from main product cost.
• Standard Cost Estimates: Value by-products at standard cost.
• Comparative Price: Value at price of similar material.
• Re-use Basis: Value same as input material cost if reused.

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