Costing Methods and Techniques
Domain 5 matches costing methods to production settings and tests techniques for assigning cost. Methods include job, batch, contract, process, service and output costing; techniques include absorption, marginal, standard and activity-based costing.
Method selection
Job costing: customer-specific, each job separately costed. Batch costing: identical units produced in batches; unit cost = batch cost ÷ batch quantity. Contract costing: long-term, site-based, with work certified and retention. Process costing: continuous production, with normal loss, abnormal loss/gain and equivalent production. Service costing: composite cost units such as passenger-km or bed-day.
Process costing rule
Normal loss is expected and its scrap value reduces the cost of good units. Abnormal loss is valued at the cost per good unit; abnormal gain is valued similarly and credited to the process account.
Worked example: input 1,000 units at Rs. 20 = Rs. 20,000; conversion cost Rs. 5,000; normal loss 10% (100 units) with scrap value Rs. 5 per unit = Rs. 500. Good units = 900. Cost per good unit = (20,000 + 5,000 − 500) ÷ 900 = Rs. 27.22. Actual output is 880 units; abnormal loss is 20 units, valued at 20 × 27.22 = Rs. 544.44. Output is valued at 880 × 27.22 = Rs. 23,955.56.
Traps: charging normal loss to good output without deducting scrap; valuing abnormal gain at selling price; in contract costing, confusing work certified with work uncertified; in joint products, apportioning joint cost on final sales value instead of sales value at split-off; ignoring degree of completion in equivalent units.