Costing Methods — In Detail
(Job, Process, Contract, Batch, Service — How Different Industries Find Their Costs!)
A ship builder uses Job Costing. An oil refinery uses Process Costing. A construction company uses Contract Costing. A hospital uses Service Costing. This chapter covers each method in detail — with process losses, equivalent units, joint products, by-products, escalation clauses, and retention money.
Banky Learns: Different Industries, Different Costing! 🏗️🏭⛽
When a borrower submits a project report, the bank checks the cost estimates. Are they realistic? This chapter teaches Banky how different industries calculate their costs — so he can verify borrower claims!
All Costing Methods — Detailed
📖 Part 1 — Unit/Output Costing + Job Costing + Contract Costing
Unit/Single-Output: Total cost ÷ units = cost per unit. For single product, continuous manufacture, identical units. Industries: brick, cement, sugar, mining. Cost sheet records material + labour + direct expenses + admin. Does NOT include: taxes, interest, dividends, provisions, P&L on asset sale.
Job Costing: Each job = unique. Costing done per job. Job Cost Card records materials, labour, overheads, time. Industries: ship building, construction, repair shops, garages. Direct costs collected first, then fixed overheads allocated at pre-decided %.
Contract Costing: Like job costing but for LARGE, LONG (>1 year) projects. Separate account per contract. Most costs = direct. Features: Progress Payments (periodic based on certified completion), Retention Money (customer keeps some as security for quality), Escalation Clause (price adjusted if input costs change), Penalty Clause (for delays). Types: Fixed price, Cost-plus, Time & material. Profit on incomplete contracts: (Cost done ÷ Total estimated cost) × Estimated profit = cumulative profit to date.
📋 Part 2 — Process Costing (Normal/Abnormal Loss, Joint/By-Products)
Process Costing: Continuous mass production of similar products. Output of one process = input of next. Each unit = same cost. Industries: oil refinery, chemicals, food, textiles, paper, brewing.
Normal Loss: Inherent, unavoidable (evaporation, scrap). Cost per unit = (Total Cost − Scrap value) ÷ (Input − Normal loss). Allocated to good output.
Abnormal Loss: Beyond normal — theft, breakdown, negligence. Value = (Total Cost − Normal scrap) ÷ (Input − Normal loss) × Abnormal units. Written off to P&L (NOT added to product cost!).
Abnormal Gain: Actual loss < expected normal loss. Gain value calculated similarly. Taken to P&L.
Equivalent Units: WIP at 50% completion: 60 units = 30 equivalent finished units. Formula: Actual WIP units × % completion.
Joint Products: Multiple main products from one process (petrol, diesel, LPG from crude). Costs allocated by volume/weight up to split point. After split = separate costing.
By-Products: Low value, incidental product (coal tar from refinery). Pre-split cost NOT allocated. Net revenue from by-product reduces main product cost.
🏭 Part 3 — Batch, Service & Multiple Costing
Batch Costing: Group of identical items = one batch = one job. Total batch cost ÷ units in batch = cost per unit. Industries: pharma, garments, toys, tyres. Combines elements of job + process costing.
Service Costing (Operating Costing): For services, not goods. Total cost over period ÷ units of service = cost per unit. Cost unit must match service (kWh for electricity, km for transport, operation for hospital). Features: internal (canteen) or external (hospital). CIMA definition used.
Multiple/Composite Costing: Complex products with many components (aircraft, cars). Uses multiple methods combined. No single method sufficient.
Cement company: does NOT use service costing (it produces GOODS, not services!). Uses unit/output costing.
Exam-Ready Points
🎯 Must Remember!
- Non-manufacturing overheads = NOT a direct cost! Materials, labour, manufacturing overheads = direct.
- Petroleum refinery = uses PROCESS costing (not hotel, not ship, not construction!).
- Escalation clause = part of CONTRACTS (not jobs, not hospitals, not process industry).
- Cost unit examples: kWh, Barrel, Metric ton — ALL of the above.
- Cement company = NOT likely to use service costing (it makes goods!). Uses unit/output costing.
- Normal loss: Included in product cost. Abnormal loss: Written off to P&L, NOT product cost.
- Joint products: Allocated costs up to split point by volume/weight. After split = separate.
- By-products: Pre-split cost NOT allocated. Net revenue reduces main product cost.
- Equivalent units: WIP × % completion. Used for WIP valuation in process costing.
- Contract profit on incomplete: (Cost done ÷ Total estimated) × Estimated profit = cumulative to date.
- Retention money: Customer keeps as quality guarantee. Returned after completion.
📝 Past Exam Questions
Last-Minute Flash Cards
⚡ Module D • Chapter 4 (Unit 32) Done!
- 2 Broad categories: Job costing (unique) vs Process costing (continuous).
- Contract: Large + long. Progress payments, retention, escalation. Profit on incomplete = proportional.
- Process: Normal loss = product cost. Abnormal = P&L. Equivalent units for WIP.
- Joint products: Cost by volume to split point. By-products: net revenue reduces main cost.
- Service: For services (hospital, transport). NOT cement. Batch = identical group as one job.
Banky says: “Job = unique! Process = continuous! Normal loss = in cost! Abnormal = P&L! Escalation = contracts! Cement ≠ service costing!” 🎉🏗️🏭
Next: Chapter 33 — Standard Costing! 💪