Unit Costing - AjNext

Unit Costing

BACKGROUND

In today’s world where there are so many industries ranging from agriculture, mining, manufacturing, electricity, water supply, construction, transportation, hotels to aerospace, telecommunication, computer, education, etc. The diversified nature will further diversify in years to come and the types of industries will keep on increasing so will the requirements of users to obtain in depth information regarding costs, profits and selling price of the products manufactures or services rendered by these industries. Based on different industries, different costing systems will be implemented because it is not possible to devise a single system to fulfil everyone’s needs. These methods depend upon the type of manufacturing done but the basic principle remains same in every method. Now this entire discussion is helpful for presentation of cost accounting information.

 

Unit costing is a method of costing where identical / same / homogenous products are made on a large scale through continuous manufacturing. Unit cost is the total expenditure incurred by the company to produce, store & sell one unit of a company’s product. Unit costing is synonymously known as Single / Output costing and this costing is followed by industries which produce Single output or few variants of a single output. Here costs are accumulated and analysed under various elements of cost and the cost per unit is ascertained by dividing the total cost by the number of units produced. In order to arrive at the Total cost by adding up Direct Materials, Direct labour, Direct expenses, Administration overheads and for factory overheads we recover on the basis of absorption costing. The formula of calculating cost per unit is as follows:

 

Cost Per Unit = Total Cost / Number of units produced

Do remember it is not necessary to maintain separate accounts under this system as all information can be obtained easily by organising and analysing financial accounts. On dividing the total expenditure incurred by the number of units we get cost per unit. This method is suitable for industries such as sugar, cement, steel, Brick making, etc. Here the cost unit is the unit in which output is produced. Some examples of cost unit for different products are as follows

 

Sr. No. Nature of Industry Unit of Measurement
1 Pens, Pencils Dozen, Gross
2 Petrol / Diesel Per litre
3 Printing Per thousand impressions
4 Gold Per 10 gram / per gram
5 Cement Tonnes / Per bag
6 Breweries A litre
7 Road Transport Passenger kilometres
8 Dairies A litre of milk
9 Steel Tonnes
10 Automobile No of units
11 Gas Cubic metre

IMPORTANCE

1. It discloses the total cost and cost per unit.
2. It helps to determine the selling price of the product.
3. It helps to determine profitable volume of production.
4. Identifying and analysing a companys unit cost is a quick way to check if a company is producing product efficiently or not.
5. It helps us to compare current cost with previous cost and helps identifying variations.
6. Provides useful information to trace wastages, losses & inefficiencies and thus affect economies.

LIMITATIONS

1. Not suitable for companies manufacturing varied range of products
2. Not suitable for service organisations.

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