Methods of Costing: Job, Batch, Contract, Process and Service
What this domain tests
You must choose and apply the correct method: job, batch, contract, process, service or output costing. Typical tasks are computing contract profit and the amount transferable to profit and loss, preparing a process account with normal loss, abnormal loss and abnormal gain, and costing a service unit.
Core rules
- Job costing collects cost by customer order; batch costing finds cost per unit as batch cost ÷ units in the batch.
- Contract costing keeps a separate account per contract. Notional profit = value of work certified + work uncertified − cost incurred to date. Retention money is the certified value not yet paid.
- Profit transfer on contracts: below one-quarter complete, transfer nothing; between one-quarter and one-half, transfer 1/3 × notional profit × (cash received ÷ work certified); above one-half, transfer 2/3 × notional profit × (cash received ÷ work certified).
- Process costing: normal loss carries only scrap value and is absorbed by the good units; abnormal loss or gain is valued at the cost per good unit and shown in a separate account.
- Service costing uses composite units such as passenger-km or tonne-km.
Worked example
Contract price ₹10,00,000; work certified ₹6,00,000; cash received ₹5,40,000; cost to date ₹4,80,000. Notional profit = 6,00,000 − 4,80,000 = ₹1,20,000. The contract is more than half complete, so profit transferred = 2/3 × 1,20,000 × (5,40,000 ÷ 6,00,000) = 2/3 × 1,20,000 × 0.9 = ₹72,000. The remaining ₹48,000 is held back as a reserve.
Traps
- Computing transferable profit on cash received alone instead of on the ratio of cash received to work certified.
- Valuing abnormal gain at selling price rather than at the cost per good unit.
- Giving normal loss a cost when it has only a scrap value.
- Counting retention money twice by adding it to cash received as well as to the certified value.