batch cost
direct and indirect

He purchased a mold for making cups of 1000 INR. 20 cups require 1 kg of clay, which costs 200 INR. As the contract is undertaken at the contractee’s promises most of the items of cost chargeable to a contract are direct costs. Each contract or work involved in contract costing is executed or done as per the specifications given by the contractee. So one contract may be dissimilar to another contract. Each contract undertaken is treated as a cost unit.


Now, the total cost of production of cups is the total cost of mold, clay, labor, baker, painter, and transportation charges. The cost of production for 1000 cups here is 4200 INR. Contract costing is a variant of job costing. Like job costing, contract costing is also a form of specific order costing. So, both job costing and contract costing are based on the same costing principles.

Disadvantages of using cost units:

They can also be used to determine the cost of producing a specific quantity of a product or service. Cost units allow for easy comparison of costs between different products or services. Can lead to a lack of flexibility. By isolating the costs of specific departments or divisions, it can make it more difficult to respond to changes in the business environment. Provides a clear understanding of the costs incurred by a specific department or division within a company.

But for both years he has to pay the same rental charges for the building. Each contract is allotted a separate number and a separate account is opened for each contract. Contract costing is concerned with the costing of construction work or repair work and not with the costing of any goods.

Value-Added Services (VAS)

Can lead to a lack of transparency. By isolating the costs of specific departments or divisions, it can make it more difficult to understand the overall financial performance of the company. Can be used as a tool for cost-benefit analysis. By isolating the costs of a specific department or division, it becomes easier to conduct a cost-benefit analysis to determine the financial impact of a specific decision or action. Facilitates the allocation of costs to specific products or services. This allows for more accurate pricing and profitability analysis.

cost account

Setting up and maintaining cost centres requires a significant investment of time and resources. Facilitates the identification of trends and patterns in costs. By isolating the costs of a specific department or division, it becomes easier to identify trends and patterns in costs over time.

Expiry Management

By focusing on the costs of specific departments or divisions, it can be easy to lose sight of the overall performance of the company. A cost accountant has to ascertain cost by cost centre or cost unit or by both. It is always important to mention the time duration because the variable cost and the units produced could vary each month depending on the demand. The government of India has launched many roles in order to reduce the cost of production for producers. This might be a result of free service or setting up free infrastructure for the producer.

Alcohol cost: More expensive booze could save lives, study suggests – USA TODAY

Alcohol cost: More expensive booze could save lives, study suggests.

Posted: Sat, 25 Mar 2023 10:00:47 GMT [source]

Provides a basis for performance evaluation and accountability. By measuring the costs incurred by a specific department or division, it becomes easier to evaluate the performance of that department or division. Suppose you make 3,500 cups a month.

Which one of the following is not considered for preparation of cost sheet

Sometimes people misinterpret the cost of production or production costs as manufacturing costs. But there is a difference between Production and manufacturing cost. While the cost of production is an aggregated cost of different costs.

what is cost unit centres are primarily developed to assist management in operations like budgeting, strategic planning, decision-making, and control. Cost unit, on the other hand, serves no such purpose because it is simply a way of expressing cost. They may not accurately reflect the true cost of a product or service, especially if the cost of certain inputs is not included. Can be difficult to accurately allocate costs. Allocating costs to specific departments or divisions can be challenging and may not always be accurate. Allows for better decision-making.

This is a type of responsibility centre that is accountable for incurring expenses that are under their control. It indicates any section of the organisation’s product or service for which specific cost collection is looked for. For example, the rental expenditure of a building is included in the cost of production, but not in manufacturing costs.

Simple example to differentiate between cost and profit centres

The scheme ‘PM MITRA parks’ is one of the most recent steps of the government for reducing the cost of production of textile industries. Controlling the cost of production in an effective manner, can develop the market in an effective way. The cost of raw material for a textile mill is 50,000 INR and the mill pays 4000 INR as monthly rent. The total cost for the textile mill is 54,000 INR. Read this blog till the end to learn about the cost of production.

what is cost unit

This allows for better budgeting and cost control. The unit cost formula helps to determine profitability and is one of the most important KPIs to consider to improve revenue. The unit cost formula is useful to analyze a company’s investment in producing one product and the gross profit margin. This particular type of cost sheet application is illustrated above in a practical way.

Here is the formula of calculating cost of production. / cost units are known as indirect expenses. These expenses are incurred for the benefit of more than one product, job or activity and therefore, must be apportioned by appropriate bases to the various functions or products. For example, lighting and heating, maintenance factory manager’s salary, watch and ward department’s salary etc. A cost unit is a unit of production or service in relation to which costs are ascertained. A cost unit refers to the unit of quantity of product, service or time in relation to which costs may be ascertained or expressed.

The Cost of Production is also called production costs or cost price. It is the total cost sustained by a business to produce a specific quantity of a product. It includes all direct and indirect costs of manufacturing the product. Unit costing or output costing is that technique of cost accounting in which the cost of production of a unit of output and total cost of production is ascertained. This method is also called the single costing because the process of production comprises only one stage or a single operation.

Wages paid to labour form a part of factory overhead. Under this method, costs are collected and accumulated according to jobs, contracts, projects, or work orders. Each job has a separate identity and therefore, it becomes essential to analyse and segregate costs according to each job or order. This method is also known as specific order, production order.

Leave a Reply

Your email address will not be published. Required fields are marked *