Unit costing refers to a method of costing used by industries engaged in mass production of homogeneous/identical products. The basic feature of unit costing is that the cost units are identical. Unit costing is also known as "Single Output Costing". Single or Output Costing is the term of unit costing used when the enterprise produces basically one homogeneous product or one homogeneous product in two or more grades. Under this method, the cost per unit is arrived at by dividing the total cost by the total number of units produced. Thus, the cost ascertainment involves the following two stages :

collection and functional analysis of all costs,

division of total cost by the total number of units produced in order to determine the cost per unit.

This procedure is applicable only when the organisation produces only one product, if, however, the organisation produces several grades of the same product, it becomes imperative to apportion the various costs between the various grades so that the cost of each grade can be determined separately.

Unit costing method can be successfully applied in those industries engaged in assembling, such as automobiles, electronics, typewriters, etc., and also in those industries engaged in production of homogeneous products, such as collieries, quarries, brick making, breweries, dairies, sugar, cement works etc.

Cost Sheet ( Statement of cost) for the period of…..

Particulars	Total Cost	Cost per Unit
Direct Materials Direct Labour Direct Expenses
Prime cost
Add: Works Overheads
Works Cost
Add: Administrative Overheads
Cost of Production
Add: Selling and Distribution Overheads
Total Cost or Cost of Sales
Profit
Selling Price/ Sales

Treatment of stock

Stock requires special treatment while preparing a cost sheet.

Stock may be of

a)raw materials,

b)work-in progress

c)finished goods.

Stock of Raw Materials

If opening stock of raw material, purchase of raw materials and closing stock of raw materials are given, then, raw material consumed can be calculated as follows:

Opening stock of raw materialsxx

Add: Purchase of raw materialsxx

Less: Closing stock of raw materials                                                        xx

Value of raw materials consumed xx

Stock of Work-in-Progress

Work-in-progress is valued at prime cost or works cost basis, but latter is preferred. If it is valued at works or factory cost then opening and closing stock will be adjusted as follows :

 Prime cost                                                                                                         xx

Add: Factory overheadsxx

Work-in-progress (beginning)xx

Less: Work-in-progress (closing) xx

 Works cost                                                                                                        xx

Stock of Finished Goods

If opening and closing stock of finished goods are given, then these must be adjusted before calculating cost of goods sold:

Cost of productionxx

Add: Opening stock of finished goodsxx

Less: Closing stock of finished goodsxx

 Cost of goods soldxx

USES OF COST SHEET

(i) It gives total cost and cost per unit for a particular period.

(ii) It gives information to management for cost control.

(iii) It provides comparative study of actual current costs with the cost of corresponding periods, thus causes of inefficiencies and wastage can be known and suitably corrected by management.

(iv) It acts as a guide to manufacture in formulation of suitable and definite policies and in fixing up the selling price.

ITEMS EXCLUDED FROM COST SHEET

The following items are of financial nature and thus not included while preparing a cost sheet.

 (i) Income tax paid

(ii) Interest paid

(iii) Damages payable at law etc.

 (iv) Goodwill written off

(v) Provision for taxation

(vi) Cash discount & Trade discount( Not recorded in the journal even)

(vii) Transfer to reserves

(viii) Donations

(ix) ) Preliminary expenses written off

(x) Dividend paid

(xi) Profit/loss on sale of assets

(xii) Provision for bad debts

Ascertainment of Cost of Other Direct Expenses/ Chargeable Expenses

Similarly, if there are outstanding or pre-paid direct/chargeable expenses, the same should be adjusted in the same manner as direct labour in order to ascertain the actual cost of direct/chargeable expenses. These expenses include hire-charges paid for special machinery or plant taken on hire, cost of special moulds, designs, and patterns, cost of patents and royalties, etc.

Ascertainment of Prime Cost

Prime cost refers to the direct cost. It is the sum total of three direct elements of cost i.e., direct materials, direct labour and other direct expenses. While determining the prime cost, we should always take the summation of the cost of direct materials, direct labour and expenses actually used in production. However, it is important to note here that direct materials will not form part of prime cost in those industries where the product is extracted from natural resources like collieries, quarries.

Ascertainment of Factory/ Works Cost

Factory/Works Cost refers to the summation of prime cost and factory overheads. Factory overheads include cost of indirect materials, indirect labour and other indirect expenses incurred in the factory which are related to production.

Ascertainment of Total Cost/Cost of Sales

Total Cost/Cost of Sales refers to the summation of cost of production of goods produced and selling & distribution overheads. Selling and distribution overheads include cost of indirect materials, indirect labour and other indirect expenses which are incurred for the purpose of sale and distribution.

PREPARATION OF PRODUCTION ACCOUNT

Production Account is another way of presentation of cost information. It is prepared in the form of a ledger account. No separate column is shown for cost per unit. All the possible break up of cost should be shown in stages in the manner shown below.

Particulars	Amount	Particulars	Amount
To Direct materials To Direct labour To Direct expense To Prime Cost b/d To Factory/ Works overheadsXX Add: Work in progressXX(Beginning) Less: Work in progressXX(closing) Less: Sale of by- products or scrapXX To Cost of goods manufactured b/d To Opening stock of finished goods To Gross Profit c/d To Administration overhead To Selling and distribution overheads To Net Profit	XX XX XX XX XX XX XX XX XX XX	By Prime Cost c/d By Cost of goods manufactured By Sales By Closing stock of finished goods By Gross Profit b/d	XX XX XX XX XX XX XX

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COST SHEET AND PRODUCTION ACCOUNT

Basis	Cost sheet	Production Account
Statement vs account	It is prepared as a statement	It is prepared as an account.
Classification of expenses	Expenses are classified to ascertain prime cost, factory cost, total cost, etc.	Expenses are not classified.
Basis of comparison regarding figures	To enable comparison, figures of previous period are provided.	No figures of previous period are provided. Hence no comparison is possible
Actual vs estimated figures	It is based on actual and estimated figures of expenses.	It is based on actual figures.
Prepared for	It is prepared for each job and sometimes for the whole factory.	It is prepared for each production department.

SPECIAL POINTS TO BE NOTED

Scrap

Scrap refers to the incidental residue of certain types of manufacture or defective products beyond any rectification. If there is any realisable value of such scrap, the same should reduce the cost of goods produced and, as such, it should be deducted from cost of materials consumed or factory overheads or factory cost/works cost.

Opening and Closing Work-in-Progress

Work-in-progress refers to partly finished or semi-finished goods:

Work on such goods has already started but not completed till the end of a particular period. The cost incurred in respect of closing work-in-progress must be deducted from factory/works cost in order to ascertain the works cost of the completed units (finished goods). It should be noted that the work-in-progress of the previous period is the opening work-in-progress in the current period which has been converted into finished goods in the current period. Hence, the cost of opening stock of work-in-progress should be added to the works cost of the current period. The reason why the cost of opening and closing work-in-progress is adjusted in the work cost is that it (cost of uncompleted units) includes only the cost of raw materials, direct labour and factory overheads.

Opening and Closing Stocks of Finished Goods

It is unlikely that all the units of finished goods produced during a particular period will be sold in the same pried. In fact, it is the management policy to keep some closing stock of finished goods so that sales for the next period remain uninterrupted. The cost of closing . stock of finished goods should be deducted from the cost of production of goods produced in order to ascertain the cost of production of goods sold during the current period. Since the closing stock of finished goods of the preceding period i.e., the opening stock for the current period is likely to be sold during the current period (on FIFO basis), the same should be added to the cost of production.

Selling and Distribution Overheads

Quite often, instead of giving the selling and distribution overheads in the cost data the rate of 'selling and distribution overheads per unit' is given. In such a situation, the amount of selling and distribution overheads should be worked out by multiplying the number of units sold by the selling and distribution expenses per unit. It should be noted that this rate is to be applied to the units sold and not to the units produced.

 Computation of Recovery Rates for Overheads

Sometimes, you are required to calculate overheads recovery rates based on the cost sheet prepared by you. Such rates are usually in respect of factory overheads and administration overheads.

Factory overhead rate is usually calculated as a percentage of direct wages as follows :

Factory Overheads / Direct Wages x 100

Administration Overhead rate is usually calculated as a percentage of works cost as follows : Office Administration Overheads/ Factory or Works Cost x 100