ICAI Notes: Unit & Batch Costing | Cost and Management Accounting for CA Intermediate PDF Download

 Page 1


    
 
 
CHAPTER 
8 
 
 
LEARNING OUTCOMES 
 
UNIT & BATCH COSTING 
 
? Describe Unit Costing method. 
? Prepare and calculate the cost under Unit Costing. 
? Describe Batch Costing methods. 
? Explain the accounting entries for cost elements under the 
method. 
? Determine the cost for a batch 
? Differentiate between Job Costing and Batch Costing.
Methods of 
Costing
Unit Costing
Meaning
Process of Cost Accumulation and Calculation
Batch Costing
Meaning
Process of Cost Accumulation and Calculation
Determination of Economic Batch Quantity (EBQ)
Difference between Job and Batch Costing
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
Page 2


    
 
 
CHAPTER 
8 
 
 
LEARNING OUTCOMES 
 
UNIT & BATCH COSTING 
 
? Describe Unit Costing method. 
? Prepare and calculate the cost under Unit Costing. 
? Describe Batch Costing methods. 
? Explain the accounting entries for cost elements under the 
method. 
? Determine the cost for a batch 
? Differentiate between Job Costing and Batch Costing.
Methods of 
Costing
Unit Costing
Meaning
Process of Cost Accumulation and Calculation
Batch Costing
Meaning
Process of Cost Accumulation and Calculation
Determination of Economic Batch Quantity (EBQ)
Difference between Job and Batch Costing
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
av
 
8.2 
1. INTRODUCTION  
So far, we have discussed in earlier chapters, the element wise cost collection, 
calculation and its accounting under integral and non- integral accounting systems. 
Now we will discuss how the cost accounting information can be presented and 
used according the needs of the management. To fulfil the need of the users of the 
cost accounting information, different methods of costing are followed. Costing 
methods enable the users to have customized information of any cost object 
according to the need and suitability. Different methods of costing have been 
developed according to the needs and nature of industries. For the sake of 
simplicity, industries can be grouped into two basic types i.e. Industries doing job 
work and industries engaged in mass production of a single product or identical 
products. 
1.1 For industry doing job work 
An entity which is engaged in the execution of special orders, each order being 
distinguishable from each other, such a concern is thought of involved in 
performing job works. Jobs are worked strictly in accordance with the customer’s 
specifications and requirements, thus, each job order is unique. Examples of job 
order types of production are: ship building, construction of road and bridges, 
manufacturing of heavy electrical machineries and tools, wood and furniture works 
etc. Here, each job or unit of production is treated as a separate identity for the 
purpose of costing. The methods of costing for ascertaining cost of each job are 
known as a job costing, contract costing and batch costing. 
1.2 For continuous or process type of industries 
The continuous or process type of industries are characterised by the continuous 
production of uniform products according to the standard specifications. In such a 
case the successive lots are generally indistinguishable as to size and form and, 
even if there is some variation in specifications, it is of a minor character. Examples 
of continuous type of industries are chemical and pharmaceutical products, 
paper/food products, canning, paints and varnish oil, rubber, textile etc. Here the 
methods of costing used for the purpose of ascertaining costs are: process costing; 
single output costing; operating costing etc. 
© The Institute of Chartered Accountants of India
Page 3


    
 
 
CHAPTER 
8 
 
 
LEARNING OUTCOMES 
 
UNIT & BATCH COSTING 
 
? Describe Unit Costing method. 
? Prepare and calculate the cost under Unit Costing. 
? Describe Batch Costing methods. 
? Explain the accounting entries for cost elements under the 
method. 
? Determine the cost for a batch 
? Differentiate between Job Costing and Batch Costing.
Methods of 
Costing
Unit Costing
Meaning
Process of Cost Accumulation and Calculation
Batch Costing
Meaning
Process of Cost Accumulation and Calculation
Determination of Economic Batch Quantity (EBQ)
Difference between Job and Batch Costing
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
av
 
8.2 
1. INTRODUCTION  
So far, we have discussed in earlier chapters, the element wise cost collection, 
calculation and its accounting under integral and non- integral accounting systems. 
Now we will discuss how the cost accounting information can be presented and 
used according the needs of the management. To fulfil the need of the users of the 
cost accounting information, different methods of costing are followed. Costing 
methods enable the users to have customized information of any cost object 
according to the need and suitability. Different methods of costing have been 
developed according to the needs and nature of industries. For the sake of 
simplicity, industries can be grouped into two basic types i.e. Industries doing job 
work and industries engaged in mass production of a single product or identical 
products. 
1.1 For industry doing job work 
An entity which is engaged in the execution of special orders, each order being 
distinguishable from each other, such a concern is thought of involved in 
performing job works. Jobs are worked strictly in accordance with the customer’s 
specifications and requirements, thus, each job order is unique. Examples of job 
order types of production are: ship building, construction of road and bridges, 
manufacturing of heavy electrical machineries and tools, wood and furniture works 
etc. Here, each job or unit of production is treated as a separate identity for the 
purpose of costing. The methods of costing for ascertaining cost of each job are 
known as a job costing, contract costing and batch costing. 
1.2 For continuous or process type of industries 
The continuous or process type of industries are characterised by the continuous 
production of uniform products according to the standard specifications. In such a 
case the successive lots are generally indistinguishable as to size and form and, 
even if there is some variation in specifications, it is of a minor character. Examples 
of continuous type of industries are chemical and pharmaceutical products, 
paper/food products, canning, paints and varnish oil, rubber, textile etc. Here the 
methods of costing used for the purpose of ascertaining costs are: process costing; 
single output costing; operating costing etc. 
© The Institute of Chartered Accountants of India
UNIT & BATCH COSTING 
 
 
8.3 
In this chapter two methods of costing are being discussed and distinguished from 
each type. Other methods will also be discussed in subsequent chapters. 
2. UNIT COSTING 
Unit costing is that method of costing where the output produced is identical 
and each unit of output requires identical cost. Unit costing is synonymously 
known as single or output costing, but these are sub-division of unit costing 
method. This method of costing is followed by industries which produce single 
output or few variants of a single output. Under this method costs, are collected 
and analysed element wise and then total cost per unit is ascertained by dividing 
the total cost with the number of units produced. If we have to state it in the form 
of a formula, then  
Cost per unit = 
Total Cost of Production
No. of units produced
 
This method of costing, therefore finds its application in industries like paper, 
cement, steel works, mining, breweries etc. These types of industries produce 
identical products and therefore have identical costs. 
3. COST COLLECTION PROCEDURE IN UNIT  
COSTING 
The cost for production of output is collected element wise and posted in the cost 
accounting system for cost ascertainment. The element-wise collection is done as 
below: 
Collection of Materials Cost 
Cost of materials issued for production are collected from Material 
Requisition notes and accumulated for a certain period or volume of activity. The 
cost of material so accumulated is posted in cost accounting system. Through the 
cost accounting system, cost sheet for the period or activity is prepared to know 
cost for the period element-wise and functions-wise. 
© The Institute of Chartered Accountants of India
Page 4


    
 
 
CHAPTER 
8 
 
 
LEARNING OUTCOMES 
 
UNIT & BATCH COSTING 
 
? Describe Unit Costing method. 
? Prepare and calculate the cost under Unit Costing. 
? Describe Batch Costing methods. 
? Explain the accounting entries for cost elements under the 
method. 
? Determine the cost for a batch 
? Differentiate between Job Costing and Batch Costing.
Methods of 
Costing
Unit Costing
Meaning
Process of Cost Accumulation and Calculation
Batch Costing
Meaning
Process of Cost Accumulation and Calculation
Determination of Economic Batch Quantity (EBQ)
Difference between Job and Batch Costing
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
av
 
8.2 
1. INTRODUCTION  
So far, we have discussed in earlier chapters, the element wise cost collection, 
calculation and its accounting under integral and non- integral accounting systems. 
Now we will discuss how the cost accounting information can be presented and 
used according the needs of the management. To fulfil the need of the users of the 
cost accounting information, different methods of costing are followed. Costing 
methods enable the users to have customized information of any cost object 
according to the need and suitability. Different methods of costing have been 
developed according to the needs and nature of industries. For the sake of 
simplicity, industries can be grouped into two basic types i.e. Industries doing job 
work and industries engaged in mass production of a single product or identical 
products. 
1.1 For industry doing job work 
An entity which is engaged in the execution of special orders, each order being 
distinguishable from each other, such a concern is thought of involved in 
performing job works. Jobs are worked strictly in accordance with the customer’s 
specifications and requirements, thus, each job order is unique. Examples of job 
order types of production are: ship building, construction of road and bridges, 
manufacturing of heavy electrical machineries and tools, wood and furniture works 
etc. Here, each job or unit of production is treated as a separate identity for the 
purpose of costing. The methods of costing for ascertaining cost of each job are 
known as a job costing, contract costing and batch costing. 
1.2 For continuous or process type of industries 
The continuous or process type of industries are characterised by the continuous 
production of uniform products according to the standard specifications. In such a 
case the successive lots are generally indistinguishable as to size and form and, 
even if there is some variation in specifications, it is of a minor character. Examples 
of continuous type of industries are chemical and pharmaceutical products, 
paper/food products, canning, paints and varnish oil, rubber, textile etc. Here the 
methods of costing used for the purpose of ascertaining costs are: process costing; 
single output costing; operating costing etc. 
© The Institute of Chartered Accountants of India
UNIT & BATCH COSTING 
 
 
8.3 
In this chapter two methods of costing are being discussed and distinguished from 
each type. Other methods will also be discussed in subsequent chapters. 
2. UNIT COSTING 
Unit costing is that method of costing where the output produced is identical 
and each unit of output requires identical cost. Unit costing is synonymously 
known as single or output costing, but these are sub-division of unit costing 
method. This method of costing is followed by industries which produce single 
output or few variants of a single output. Under this method costs, are collected 
and analysed element wise and then total cost per unit is ascertained by dividing 
the total cost with the number of units produced. If we have to state it in the form 
of a formula, then  
Cost per unit = 
Total Cost of Production
No. of units produced
 
This method of costing, therefore finds its application in industries like paper, 
cement, steel works, mining, breweries etc. These types of industries produce 
identical products and therefore have identical costs. 
3. COST COLLECTION PROCEDURE IN UNIT  
COSTING 
The cost for production of output is collected element wise and posted in the cost 
accounting system for cost ascertainment. The element-wise collection is done as 
below: 
Collection of Materials Cost 
Cost of materials issued for production are collected from Material 
Requisition notes and accumulated for a certain period or volume of activity. The 
cost of material so accumulated is posted in cost accounting system. Through the 
cost accounting system, cost sheet for the period or activity is prepared to know 
cost for the period element-wise and functions-wise. 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
av
 
8.4 
Collection of Employees (Labour) Cost 
All direct employee (labour) cost is collected from job time cards or sheets and 
accumulated for a certain period or volume of activity. The time booked or recorded 
in the job time and idle time cards is valued at appropriate rates and entered in the 
cost accounting system.  Other items of indirect employee (labour) costs are 
collected from the payrolls books for the purpose of posting against standing order 
or expenses code numbers in the overhead expenses ledger. 
Collection of Overheads 
Overheads are collected under suitable standing orders numbers, and selling and 
distribution overheads against cost accounts numbers. Total overhead expenses so 
collected are apportioned to service and production departments on some suitable 
basis. The expenses of service departments are finally transferred to production 
departments. The total overhead of production departments is then applied to 
products on some realistic basis, e.g. machine hour; labour hour; percentage of 
direct wages; percentage of direct materials; etc.  
3.1 Treatment of spoiled and defective work 
Circumstances Treatment
(1) Loss due to 
normal reasons 
 
When a normal rate of defectives has already been 
established and actual number of defectives is 
within the normal limit, the cost of rectification or 
loss will be charged to the entire output.  If, on 
the other hand, the number of defective units 
substantially exceeds the normal limits, the cost of 
rectification or loss beyond normal limits are written 
off in Costing Profit and Loss Account. 
(2) Loss due to 
abnormal reasons 
 
In this case cost of rectification and loss is treated as 
abnormal cost and the cost of rectification or loss 
is written off as loss in Costing Profit and Loss 
Account.  
© The Institute of Chartered Accountants of India
Page 5


    
 
 
CHAPTER 
8 
 
 
LEARNING OUTCOMES 
 
UNIT & BATCH COSTING 
 
? Describe Unit Costing method. 
? Prepare and calculate the cost under Unit Costing. 
? Describe Batch Costing methods. 
? Explain the accounting entries for cost elements under the 
method. 
? Determine the cost for a batch 
? Differentiate between Job Costing and Batch Costing.
Methods of 
Costing
Unit Costing
Meaning
Process of Cost Accumulation and Calculation
Batch Costing
Meaning
Process of Cost Accumulation and Calculation
Determination of Economic Batch Quantity (EBQ)
Difference between Job and Batch Costing
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
av
 
8.2 
1. INTRODUCTION  
So far, we have discussed in earlier chapters, the element wise cost collection, 
calculation and its accounting under integral and non- integral accounting systems. 
Now we will discuss how the cost accounting information can be presented and 
used according the needs of the management. To fulfil the need of the users of the 
cost accounting information, different methods of costing are followed. Costing 
methods enable the users to have customized information of any cost object 
according to the need and suitability. Different methods of costing have been 
developed according to the needs and nature of industries. For the sake of 
simplicity, industries can be grouped into two basic types i.e. Industries doing job 
work and industries engaged in mass production of a single product or identical 
products. 
1.1 For industry doing job work 
An entity which is engaged in the execution of special orders, each order being 
distinguishable from each other, such a concern is thought of involved in 
performing job works. Jobs are worked strictly in accordance with the customer’s 
specifications and requirements, thus, each job order is unique. Examples of job 
order types of production are: ship building, construction of road and bridges, 
manufacturing of heavy electrical machineries and tools, wood and furniture works 
etc. Here, each job or unit of production is treated as a separate identity for the 
purpose of costing. The methods of costing for ascertaining cost of each job are 
known as a job costing, contract costing and batch costing. 
1.2 For continuous or process type of industries 
The continuous or process type of industries are characterised by the continuous 
production of uniform products according to the standard specifications. In such a 
case the successive lots are generally indistinguishable as to size and form and, 
even if there is some variation in specifications, it is of a minor character. Examples 
of continuous type of industries are chemical and pharmaceutical products, 
paper/food products, canning, paints and varnish oil, rubber, textile etc. Here the 
methods of costing used for the purpose of ascertaining costs are: process costing; 
single output costing; operating costing etc. 
© The Institute of Chartered Accountants of India
UNIT & BATCH COSTING 
 
 
8.3 
In this chapter two methods of costing are being discussed and distinguished from 
each type. Other methods will also be discussed in subsequent chapters. 
2. UNIT COSTING 
Unit costing is that method of costing where the output produced is identical 
and each unit of output requires identical cost. Unit costing is synonymously 
known as single or output costing, but these are sub-division of unit costing 
method. This method of costing is followed by industries which produce single 
output or few variants of a single output. Under this method costs, are collected 
and analysed element wise and then total cost per unit is ascertained by dividing 
the total cost with the number of units produced. If we have to state it in the form 
of a formula, then  
Cost per unit = 
Total Cost of Production
No. of units produced
 
This method of costing, therefore finds its application in industries like paper, 
cement, steel works, mining, breweries etc. These types of industries produce 
identical products and therefore have identical costs. 
3. COST COLLECTION PROCEDURE IN UNIT  
COSTING 
The cost for production of output is collected element wise and posted in the cost 
accounting system for cost ascertainment. The element-wise collection is done as 
below: 
Collection of Materials Cost 
Cost of materials issued for production are collected from Material 
Requisition notes and accumulated for a certain period or volume of activity. The 
cost of material so accumulated is posted in cost accounting system. Through the 
cost accounting system, cost sheet for the period or activity is prepared to know 
cost for the period element-wise and functions-wise. 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
av
 
8.4 
Collection of Employees (Labour) Cost 
All direct employee (labour) cost is collected from job time cards or sheets and 
accumulated for a certain period or volume of activity. The time booked or recorded 
in the job time and idle time cards is valued at appropriate rates and entered in the 
cost accounting system.  Other items of indirect employee (labour) costs are 
collected from the payrolls books for the purpose of posting against standing order 
or expenses code numbers in the overhead expenses ledger. 
Collection of Overheads 
Overheads are collected under suitable standing orders numbers, and selling and 
distribution overheads against cost accounts numbers. Total overhead expenses so 
collected are apportioned to service and production departments on some suitable 
basis. The expenses of service departments are finally transferred to production 
departments. The total overhead of production departments is then applied to 
products on some realistic basis, e.g. machine hour; labour hour; percentage of 
direct wages; percentage of direct materials; etc.  
3.1 Treatment of spoiled and defective work 
Circumstances Treatment
(1) Loss due to 
normal reasons 
 
When a normal rate of defectives has already been 
established and actual number of defectives is 
within the normal limit, the cost of rectification or 
loss will be charged to the entire output.  If, on 
the other hand, the number of defective units 
substantially exceeds the normal limits, the cost of 
rectification or loss beyond normal limits are written 
off in Costing Profit and Loss Account. 
(2) Loss due to 
abnormal reasons 
 
In this case cost of rectification and loss is treated as 
abnormal cost and the cost of rectification or loss 
is written off as loss in Costing Profit and Loss 
Account.  
© The Institute of Chartered Accountants of India
UNIT & BATCH COSTING 
 
 
8.5 
ILLUSTRATION 1 
The following data relate to the manufacture of a standard product during the 4-
week ended 28th February: 
Raw Materials Consumed ` 4,00,000 
Direct Wages ` 2,40,000
Machine Hours Worked 3,200 hours 
Machine Hour Rate ` 40 
Office Overheads 10% of works cost 
Selling Overheads ` 20 per unit 
Units produced and sold 10,000 at ` 120 each 
You are required to FIND OUT the cost per unit and profit for the 4-week ended 28th 
February. 
SOLUTION 
Statement of Cost per Unit No. of units produced: 10,000 units
Particulars Cost per 
unit (`) 
Amount  
(`) 
Raw Materials Consumed 40.00 4,00,000 
Direct Wages 24.00 2,40,000 
Prime cost 64.00 6,40,000 
Add: Manufacturing Overheads (3,200 hours × ` 40) 12.80 1,28,000 
Works cost 76.80 7,68,000 
Add: Office Overheads (10% of Works Cost) 7.68   76,800 
Cost of goods sold 84.48 8,44,800 
Add: Selling Overheads (10,000 units × ` 20) 20.00 2,00,000
Cost of sales / Total cost 104.48 10,44,800 
Add: Profit (Bal Figure) 15.52 1,55,200 
Sales 120.00 12,00,000 
© The Institute of Chartered Accountants of India