Cost Accounting Methods and Systems
Cost Accounting Methods and Systems tests whether you can match the costing method to the production process and then apply its accounting rules - especially process losses, equivalent units and incomplete contracts.
Choosing a method
Job costing suits customised orders; batch costing suits homogeneous batches; contract costing suits long-term site work; process costing suits continuous mass production; operating costing suits services; unit or single costing suits one product. Systems describe the recording framework: integrated or non-integrated, absorption or marginal.
Process costing rules
Normal loss is expected, is valued at scrap or realisable value, and is removed from both the cost numerator and the unit denominator. Cost per unit = (total cost − scrap value of normal loss) ÷ (input − normal loss units). Abnormal loss is valued at that unit cost and debited to the abnormal loss account. Abnormal gain is credited to the process account and debited to the abnormal gain account. Equivalent units convert partly complete output into finished equivalents; closing WIP is valued at the equivalent-unit rate.
Worked example
1,000 units introduced; 800 completed; 200 units in closing WIP, 50% complete; costs ₹18,000; no opening WIP. Equivalent units = 800 + (200 × 50%) = 900. Cost per equivalent unit = ₹18,000 ÷ 900 = ₹20. Finished output = 800 × ₹20 = ₹16,000; closing WIP = 100 × ₹20 = ₹2,000. If a normal loss existed, its scrap value and its units would be removed before this division.
Contract costing
Profit on incomplete contracts is recognised only on certified work, typically notional profit × (cash received ÷ work certified), with the balance carried in WIP. Full profit is taken only on completion.
Traps
Counting normal loss units in equivalent production; valuing abnormal gain at selling price instead of cost; recognising full contract profit before completion; and crediting by-product sale proceeds to sales instead of reducing joint cost.