6

Method of Costing (I)

(Job Costing, Contract Costing, Batch Costing and
Operating Costing)

LEARNING OBJECTIVES

When you have finished studying this chapter, you should be able to
• Understand the meaning and distinctive features of Job, Batch, Operating and
Contract Costing.
• Understand the accounting procedures to be applied in the above-mentioned different
methods of Costing.

6.1 Introduction
Today business and industry needs costing systems to meet their individual requirements.
Costing experts believe that it may not be possible to devise a single costing system to fulfill
everybody’s needs. They have developed different methods of costing for different industries
depending upon the type of manufacture and their nature. Mainly the industries can be
grouped into two basic types:
(1) Industries doing job work.
(2) Industries engaged in mass production of a single product or identical production.
A concern engaged in the execution of specification order is characterised as a firm producing
several items distinguishable from one another by respective specifications and other details.
Such a concern is thought of involved in performing job works.
Production under job work is strictly according to customer’s specifications and each lot, job or
production order is unique. Examples of jobs order type of production are : ships building,
roads, bridges, manufacture of heavy electrical machinery, machine tools, iron foundries,
wood working shops, etc. Here each job or unit of production is treated as a separate identity
for the purpose of costing. The methods of costing and for ascertaining cost of each job are
known as a job costing, contract costing and Batch costing.

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 6.2 Cost Accounting

The continuous or process type of industry is characterised by the continuous production of

uniform products according to standard specifications. In such a case the successive lots are
generally indistinguishable as to size and form and, even if there is some variation in
specifications, it is of a minor character. Examples of continuous type of industries are
chemical and pharmaceutical products, paper/food products, canning, paints, and varnish oil,
rubber, textile etc. Here the methods of Costing used for the purpose of ascertaining costs
are: process costing; single costing; operating costing etc.
6.2 Job Costing
According to this method costs are collected and accumulated according to jobs, contracts,
products or work orders. Each job or unit of production is treated as a separate entity for the
purpose of costing. Job costing is carried out for the purpose of ascertaining cost of each job
and takes into account the cost of materials, labour and overhead etc. The job costing method
is also applicable to industries in which production is in batches since batch production
basically is of the same character as the job order production, the difference being mainly one
in the size of different orders. The method then may also be described as “Batch Costing”.
The job costing method of costing may be regarded as the principal method of costing since
the basic object and purpose of all costing
¾ Analysis and ascertain cost of each unit of production
¾ Control and regulate cost
¾ Determine the profitability
The basic principles enunciated for the job costing method are, therefore, valid essentially for
all types of industry. For example, printing; furniture; hardware; ship-building; heavy
machinery; interior decoration, repairs and other similar work.
The job costing method essentially involves
¾ Prepare a separate cost sheet for each job
¾ Disclosed Cost of material issued for the job
¾ Labour charges incurred(on the basis of bill of material and time cards respectively)
¾ When job is completed,overhead charges are added for ascertaining total expenditure
Job Costing may be employed in the following cases:
¾ When jobs are executed for different customers according to their specifications.
¾ When no two orders are alike and each order/job needs special treatment.
¾ Where the work-in-progress differs from period to period on the basis of the number of
jobs in hand.
6.2.1 Procedure of job Cost Accounting
Accounting for Materials: An essential requirement of job cost accounting is that direct
materials and their cost must be traced to and identified with specific job or work order. This

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 Method of Costing (I) 6.3

segregation of materials cost by jobs or work orders is brought about by the use of separate
stores requisitions for each job or work order. Where a bill of material is prepared, it provides
the basis for the preparation of these stores requisitions. But when the entire quantity of
materials specified in the bill of materials is drawn in one lot or in instalments, the bill itself
could be made to serve as a substitute for the stores requisition.
After the materials have been issued and the stores requisitions have been priced, it is usual
to enter the value of the stores requisition in a material abstract or analysis book. It serves to
analyse and collect the cost of all direct materials according to job or work orders and
departmental standing orders or expense code numbers.
From the abstract book, the summary of materials cost of each job is posted to individual job
cost sheets or cards in the Work-in-Progress ledger. The postings are usually made weekly or
monthly. Similarly, at periodical intervals, from the material abstract books, summary cost of
indirect material is posted to different standing orders or expense code numbers in the
Overhead Expenses ledger. If any special material has been purchased for a particular job, it
is generally the practice to charge such special material direct to the job concerned without
passing it through the Stores Ledger, as soon as it is purchased.
If any surplus material is left over in the case of any job, unless it can be immediately and
economically used on some other job, the same is returned to the store room with a proper
supporting document/stores Debit Note or Shop Credit, and the relevant job account is
credited with the value of excess material returned to the store room.
If the surplus material is utilised on some other job, instead of being returned to the store room
first, a material transfer note is prepared. The transfer note would show the number of the
transfer to job as well as transferee job (or jobs) so that, on that basis, the cost thereof can be
adjusted in the Work-in-Progress Ledger.
Accounting for Labour: All direct labour cost must be analysed according to individual jobs
or work orders. Similarly, different types of indirect labour cost also must be collected and
accumulated under appropriate standing order or expenses code number.
The analysis of labour according to jobs or work orders is, usually, made by means of job time
cards or sheets. All direct labour is booked against specific jobs in the job time cards or
sheets. All the idle time also is booked against appropriate standing order expense code
number either in the job time card for each job or on a separate idle time card for each worker
(where the job time card is issued job-wise). The time booked or recorded in the job time and
idle time cards is valued at appropriate rates and entered in the labour abstract or analysis
book. All direct labour cost is accumulated under relevant job or work order numbers, and the
total or the periodical total of each job or work order is then posted to the appropriate job cost
card or sheet in Work-in-Progress ledger. The postings are usually made at the end of each

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 6.4 Cost Accounting

week or month.
The abstraction of idle time costs under suitable standing order or expenses code numbers is
likewise done and the amounts are posted to the relevant departmental standing order or
expense code number in the Overhead Expenses Ledger at periodical intervals. As regards
other items of indirect labour cost these are collected from the payrolls books for the purpose
of posting against standing order or expenses code numbers in the Overhead Expenses
ledger.
Accounting for Overhead: Manufacturing overheads are collected under suitable standing
order numbers and selling and distribution overheads against cost accounts numbers. Total
overhead expenses so collected are apportioned to service and production departments on
some suitable basis. The expenses of service departments are finally transferred to production
departments. The total overhead of production departments is then applied to products on
some realistic basis, e.g. machine hour; labour hour; percentage of direct wages; percentage
of direct materials; etc. It should be remembered that the use of different methods will lead to
a different amounts being computed for the works overhead charged to a job hence to
different total cost.
The problem of accurately absorbing, in each individual job or work order, the overhead cost
of different cost centres or departments involved in the manufacture is difficult under the job
costing method. It is because the cost or the expenses thereof cannot be traced to or
identified with any particular job or work order.
In such circumstances, the best that can be done is to apply a suitable overhead rate to each
individual article manufactured or to each production order. This is essentially an arbitrary
method.
Price of a job: Price of a job may be arrived by adding the desired percentage of profit to the total
cost of the job.
Treatment of spoiled and defective work: Spoiled work is the quantity of production that has
been totally rejected and cannot be rectified.
Defective work refers to production that is not as perfect as the saleable product but is
capable of being rectified and brought to the required degree of perfection provided some
additional expenditure is incurred.
Normally, all the manufacturing operations are not fully successful; they result in turning out a
certain amount of defective work. Nonetheless, over a period of time it is possible to work out
a normal rate of defectives for each manufacturing process which would represent the number
of defective articles which a process shall produce in spite of due care. Defects arise in the
following circumstances:

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 Method of Costing (I) 6.5

(1) Where a percentage of defective work is allowed in a particular batch as it cannot be

avoided.
(2) Where defect is due to bad workmanship.
(3) Where defect is due to the Inspection Department wrongly accepting incoming material of
poor quality.
(1) In the first case, when a normal rate of defectives has already been established, if
the actual number of defectives is within the normal limit or is near thereto the cost
of rectification will be charged to the whole joband spread over the entire output of
the batch. If, on the other hand, the number of defective units substantially exceeds
the normal, the cost of rectification of the number which exceeds the normal will be
written off as a loss in the Costing Profit and Loss Account.
(2) In the second case, when the defective work is due to bad workmanship the cost of
rectification will be abnormal cost, i.e., not a legitimate element of the cost.
Therefore, the cost of rectification shall be written off as a loss, unless by an ar-
rangement, it is to be recovered as a penalty from the workman concerned. It is
possible, however that the management did provide for a certain proportion of
defectives on account of bad workmanship as an unavoidable feature of production.
If that be the case, the cost of rectifying to the extent provided for by the
management will be treated as a normal cost and charged to the batch.
(3) In the third case the defect being due to negligence of the Inspection Department,
the cost of rectification will be charged to the department and will not be considered
as cost of manufacture of the batch. Being an abnormal cost, it will be written off to
the Costing Profit and Loss Account.
Illustration 1
The manufacturing cost of a work order is ` 1,000; 8% of the production against that order
spoiled and the rejection is estimated to have a realisable value of ` 20 only. The normal
rate of spoilage is 2%. Record this in the costing journal.
Solution
Actual loss is ` 60, i.e. ` 80 less ` 20 recoverable as materials. Of this net loss of ` 15 is
normal; ` 45 is the abnormal loss to be debited to the Costing Profit and Loss Account.
The accounting entries necessary for recording the above facts would be :
` `
Materials Control Account Dr. 20
Overhead Control Account Dr. 15
Costing Profit and Loss Control Account Dr. 45
To Work-in-Progress Control Account 80
In the case of defectives being inherent in the manufacturing process, the rectification cost
may be charged to the specific jobs in which they have arisen. In case detectives cannot be

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 6.6 Cost Accounting

identified with jobs, the cost of rectification may be treated as factory overheads. Abnormal
defectives should be written off to the Costing Profit and Loss Account.
Illustration 2
A shop floor supervisor of a small factory presented the following cost for Job No. 303, to
determine the selling price.
Per Unit
`
Materials 70
Direct wages 18 hours @ ` 2.50 45
(Deptt. X 8 hours ; Deptt. Y 6 hours; Deptt. Z 4 hours)
Chargeable expenses 5
120
Add : 33-1/3 % for expenses cost 40
160
Analysis of the Profit/Loss Account
(for the year 2011)
` `
Materials used 1,50,000 Sales less returns 2,50,000
Direct wages:
Deptt. X 10,000
Deptt. Y 12,000
Deptt. Z 8,000 30,000
Special stores items 4,000
Overheads :
Deptt. X 5,000
Deptt. Y 9,000
Deptt. Z 2,000 16,000
Works cost 2,00,000
Gross profit c/d 50,000 _______
2,50,000 2,50,000
Selling expenses 20,000 Gross profit b/d 50,000
Net profit 30,000 ______
50,000 50,000
It is also noted that average hourly rates for the three Departments X, Y and Z are similar.
You are required to:
Draw up a job cost sheet.
Calculate the entire revised cost using 2011 actual figures as basis.
Add 20% to total cost to determine selling price.

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 Method of Costing (I) 6.7

Solution
Job Cost Sheet
Customer Details ——— Job No._________________
Date of commencement —— Date of completion _________

Particulars Amount
`
Direct materials 70
Direct wages :
Deptt. X ` 2.50 × 8 hrs. = ` 20.00
Deptt. Y ` 2.50 × 6 hrs. = ` 15.00
Deptt. Z ` 2.50 × 4 hrs. = ` 10.00 45
Chargeable expenses 5
Prime cost 120
Overheads:
` 5,000
Deptt. X = × 100 = 50% of ` 20 = ` 10.00
` 10,000
` 9,000
Deptt. Y = × 100 = 75% of ` 15 = ` 11.25
` 12,000
` 2,000
Deptt. Z = × 100 = 25% of ` 10 = ` 2.50 23.75
` 8,000
Works cost 143.75
` 20,000
Selling expenses = × 100 = 10% of work cost 14.38
` 2,00,000
Total cost 158.13
Profit (20% of total cost) 31.63
Selling price 189.76
6.3 Contract Costing
6.3.1 Introduction : A contract usually takes several years to get itself completed. If the profit
on such contracts is recorded only after their completion, then wide fluctuations may be noted
in the profit figures of contractors from year to year. To avoid these fluctuations in the reported
profits and to reflect the revenue in the accounting period during which the activity is
undertaken, the profit in respect of each contract in progress is transferred to the profit and
loss account of the year by calculating the notional profit. The portion of notional profit to be
transferred to the profit and loss account depends on the stage of completion of a contract. To
determine such a profit figure the knowledge of various concepts as discussed below is
essential in contract costing.
6.3.2 Meaning of Contract Costing: Contract or terminal costing, as it is termed, is one form

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of application of the principles of job costing. In fact a bigger job is referred to as a contract.
Contract costing is usually adopted by building contractors engaged in the task of executing
Civil Contracts. Contract costing have the following distinct features:
1. The major part of the work in connection with each contract is ordinarily carried out at the
site of the contract.
2. The bulk of the expenses incurred by the contractor are considered as direct.
3. The indirect expenses, mostly consist of office expenses of the yards, stores and works.
4. A separate account is usually maintained for each contract.
5. The number of contracts undertaken by a contractor at a time is not usually very large.
6. The cost unit in contract costing is the contract itself.
6.3.3 Recording of contract costs
Material Cost: All materials supplied from the stores or purchased directly for the contract are
debited to the concerned contract account. In the case of transfer of excess material from one
contract to other contract, their costs would be adjusted on the basis of material transfer note,
signed both by the transferee and the transferor foreman. In case the return of surplus
material appears uneconomical on account of high cost of transportation, the same is sold and
the concerned contract account is credited with the sale price. Any loss or profit arising there-
from is transferred to the Profit and Loss Account. Any theft, or destruction of material by fire
represent a loss and as such, the same is transferred to the Profit and Loss Account. If any
stores items are used for manufacturing tools, the cost of such stores items are charged to the
work expenses account. If the contractee has supplied some materials without affecting the
contract price, no accounting entries will be made in the contract account, only a note may be
given about it.
Labour Cost: Labour actually employed on the site of the contract is regarded as direct
(irrespective of the nature of the task performed) and the wages paid to them are charged to
the concerned contract directly or on the basis of a wage analysis sheet (if concurrently a
number of contracts are carried on and labourers are required to devote their time on two or
more contracts).
Direct Expenses: Direct expenses (if any) are directly charged to the concerned contract.
Indirect Expenses: Indirect expenses (such as expenses of engineers, surveyors,
supervisors etc.) may be distributed over several contracts as a percentage of cost of
materials, or wages paid or of the prime cost. If however, the contracts are big, the labour hour
method may be used for the distribution of expenses.
Plant and Machinery : The value of the plant in a contract may be either debited to contract
account and the written down value thereof at the end of the year entered on the credit side
for closing the contract account, or only a charge (depreciation) for use of the plant may be

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 Method of Costing (I) 6.9

debited to the contract account.

Sub-Contract : Sub-contract costs are also debited to the Contract Account.
Extra work : The extra work amount payable by the contractee should be added to the
contract price. If extra work is substantial, it is better to treat it as a separate contract. If it is
not substantial, expenses incurred should be debited to the contract account as “Cost of Extra
work”.
Cost of work certified : All building contractors received payments periodically known as
“running payment” on the basis of the architect’s or surveyor’s certificates. But payments are
not equal to the value of the work certified, a small percentage of the amount due is retained
as security for any defective work which may be discovered later within the guarantee period.
Mathematically :
Cost of work certified = Cost of work to date – (Cost of work uncertified + Material in hand
+ Plant at site)
The amount retained is called retention money. The full value of the work certified should be
credited to the Contract Account and debited to the account of the contract. Since the cash
received from him will be less, the balance in his account will be shown as an asset in the
balance sheet.
Work uncertified : It represents the cost of the work which has been carried out by the
contractor but has not been certified by the contractee’s architect. It is always shown at cost
price. The cost of uncertified work may be ascertained as follows :
`
Total cost to date —
Less: Cost of work certified —
Material in hand —
Plant at site — —
Cost of work uncertified —
Retention money : A contractor does not receive full payment of the work certified by the
surveyor. Contractee retains some amount (say 10% to 20%) to be paid, after sometime, when
it is ensured that there is no fault in the work carried out by contractor. If any deficiency or
defect is noticed in the work, it is to be rectified by the contractor before the release of the
retention money. Retention money provides a safeguard against the risk of loss due to faulty
workmanship.
Cash received : It is ascertained by deducting the retention money from the value of work
certified i.e.,

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 6.10 Cost Accounting

Cash received = Value of work certified – Retention money.

Work-in-progress: In Contract Accounts, the value of the work-in-progress consists of
(i) the cost of work completed, both certified and uncertified;
(ii) the cost of work not yet completed; and
(iii) the amount of profit taken as credit.
In the Balance Sheet, the work-in-progress is usually shown under two heads, viz., certified
and uncertified. The cost of work completed and certified and the profit credited will appear
under the head ‘certified’ work-in-progress, while the completed work not yet certified and the
cost of labour, material and expenses of work which has not yet reached the stage of
completion are shown under the head “uncertified” work-in-progress.
Notional profit: It represents the difference between the value of work certified and cost of
work certified. It is determined :
Notional profit = Value of work certified – (Cost of work to date – Cost of work not yet certified)
Estimated profit: It is the excess of the contract price over the estimated total cost of the
contract.
Illustration 3
Compute a conservative estimate of profit on a contract (which has been 90% complete) from
the following particulars : ( `)
Total expenditure to date 22,50,000
Estimated further expenditure to complete the contract (including contingencies) 2,50,000
Contract price 32,50,000
Work certified 27,50,000
Work uncertified 1,75,000
Cash received 21,25,000
Solution:
Calculation of conservative Estimate of Profit (`)
Total expenditure to date 22,50,000
Estimated further expenditure to complete the contract
(including contingencies) 2,50,000
25,00,000
Estimated profit on contract 7,50,000
Contract price 32,50,000

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 Method of Costing (I) 6.11

Profit to be transferred to Profit and Loss A/c

Cash received
Estimated profit ×
Contract price
` 21,25,000
= ` 7,50,000 × = ` 4,90,385
` 32,50,000
6.3.4 Profit/loss on incomplete contracts: To determine the profit to be taken to Profit and
Loss Account, in the case of incomplete contracts, the following four situations may arise:
(i) Completion of contract is less than 25 per cent: In this case no profit should be taken to
profit and loss account.
(ii) Completion of contract is upto 25 per cent or more than 25 per cent but less than 50 per
cent: In this case one-third of the notional profit, reduced in the ratio of cash received to
work certified, should be transferred to the Profit and Loss Account. Mathematically:
1 Cash received
× Notional Pr ofit ×
3 Work certified
(iii) Completion of contract is upto 50 per cent or more than 50 per cent but less than 90 per
cent: In this case, two-third of the notional profit, reduced by proportion of cash received
to work certified, is transferred to the Profit and Loss Account. Mathematically :
2 Cash received
× Notional Pr ofit ×
3 Work certified
(iv) Completion of contract is upto 90 per cent or more than 90 per cent i.e. it is nearing
completion: In this case the profit to be taken to Profit and Loss Account is determined by
determining the estimated Profit and using any one of the following formulas :
Work certified
(a) Estimated Profit ×
Contract price
Work certified Cash received
(b) Estimated Profit × ×
Contract price Work certified
OR
Cash received
Estimated Profit ×
Contract price
Cost of work to date
(c) Estimated Profit ×
Estimated total cost
Cost of work to date Cash received
(d) Estimated Profit × ×
Estimated total cost Work certified

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Work certified
(e) Notional Profit ×
Contract price
(This formula may be preferably used in the absence of estimated profit figure).
It is preferable to use formula (b) in the absence of specific instructions.
6.3.5 Cost plus Contract: Under Cost plus Contract, the contract price is ascertained by
adding a percentage of profit to the total cost of the work. Such type of contracts are entered
into when it is not possible to estimate the Contract Cost with reasonable accuracy due to
unstable condition of material, labour services, etc.
Cost plus contracts have the following advantages and disadvantages:
Advantages:
(i) The Contractor is assured of a fixed percentage of profit. There is no risk of incurring any
loss on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time of making
the estimate.
(iii) Contractee can ensure himself about ‘the cost of the contract’, as he is empowered to
examine the books and documents of the contractor to ascertain the veracity of the cost
of the contract.
Disadvantages - The contractor may not have any inducement to avoid wastages and effect
economy in production to reduce cost.
Escalation Clause - If during the period of execution of a contract, the prices of materials, or
labour etc., rise beyond a certain limit, the contract price will be increased by an agreed
amount. Inclusion of such a clause in a contract deed is called an “Escalation Clause”.
Illustration 4
The following expenses were incurred on a contract : `
Material purchased 6,00,000
Material drawn from stores 1,00,000
Wages 2,25,000
Plant issued 75,000
Chargeable expenses 75,000
Apportioned indirect expenses 25,000
The contract was for ` 20,00,000 and it commenced on January 1, 2011. The value of the work
completed and certified upto 30th November, 2011 was ` 13,00,000 of which ` 10,40,000 was
received in cash, the balance being held back as retention money by the contractee. The value of
work completed subsequent to the architect’s certificate but before 31st December, 2011 was
` 60,000. There were also lying on the site materials of the value of ` 40,000. It was estimated that
the value of plant as at 31st December, 2011 was ` 30,000.

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 Method of Costing (I) 6.13

Solution :
Dr. Contract Account Cr.
` `
To Material purchased 6,00,000 By Work-in-progress :
” Stores issued 1,00,000 Work certified 13,00,000
” Wages 2,25,000 Work uncertified 60,000
” Plant 75,000 Material unused 40,000
” Chargeable expenses 75,000 Plant less depreciation 30,000
” Indirect expenses 25,000
” Profit and Loss Account,
2/3rds of profit on cash basis 1,76,000*
” Work-in-progress
balance of profit c/d 1,54,000 ________
14,30,000 14,30,000
” Balance b/d: Work certified 13,00,000
Uncertified 60,000
Material at site 40,000
Plant at site 30,000
14,30,000
Less: Reserve 1,54,000
12,76,000
*Computation of Profit : `
Apparent profit 3,30,000
2/3rd of that since 65% of the work is complete 2,20,000
80% of that on cash basis 1,76,000
An alternative method of presentation can be to deduct the balance of profit to be carried
down (` 1,54,000 in the above case) from the work certified before it is entered in the contract
account. It will be ` 11,46,000 in the illustration given above. Of course, the reserve to be so
deducted from the work certified will have to be first ascertained by considering the value of
the work certified.
Illustration 5
A contractor prepares his accounts for the year ending 31st December each year. He
commenced a contract on 1st April, 2011.
The following information relates to the contract as on 31st December, 2011 :
`
Material issued 2,51,000
Labour charges 5,65,600
Salary to Foreman 81,300
A machine costing ` 2,60,000 has been on the site for 146 days, its working life is estimated

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 6.14 Cost Accounting

at 7 years and its final scrap value at ` 15,000.

A supervisor, who is paid ` 8,000 p.m. has devoted one-half of his time to this contract.
All other expenses and administration charges amount to ` 1,36,500.
Material in hand at site costs ` 35,400 on 31st December, 2011.
The contract price is ` 20,00,000. On 31st December, 2011 two-third of the contract was
completed. The architect issued certificates covering 50% of the contract price, and the
contractor had been paid ` 7,50,000 on account.
Prepare Contract A/c and show how much profit or loss should be included in financial
accounts to 31st December, 2011.
Solution
Dr. Contract Account Cr.
` `
To Material issued 2,51,000 By Machine 2,46,000
” Labour charges 5,65,600 (See note 1)
” Foreman salary 81,300 By Material (in hand) 35,400
” Machine 2,60,000 By Works cost 10,49,000
” Supervisor’s salary 36,000
(` 8,000 × 9)/2
” Adm. charges 1,36,500 ________
13,30,400 13,30,400

To Works cost 10,49,000 By Work certified 10,00,000

To Notional profit 2,13,250 By Work uncertified 2,62,250
________ (See Note 2) ________
12,62,250 12,62,250
To Profit & Loss A/c 1,06,625 By Notional Profit 2,13,250
To Work-in-Progress 1,06,625 ________
2,13,250 2,13,250
Notes :
1. Machine :
146
[(` 2,60,000 – ` 15,000) ÷ 7] × = ` 14,000
365
Hence the value of machine after the period of 146 days is
` 2,60,000 – ` 14,000 = ` 2,46,000
2. The cost of 66.67% of the contract is ` 10,49,000

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 Method of Costing (I) 6.15

` 10,49,000
∴Cost of 100% " " " " × 100 = ` 15,73,500
66.67
∴Cost of 50% of the contract which has been certified by the architect is ` 7,86,750.
Also the cost of 16.67% of the contract, which has been completed but not certified by
the architect is ` 2,62,250.
Illustration 6
M/s. Bansals Construction Company Ltd. took a contract for ` 60,00,000 expected to be
completed in three years. The following particulars relating to the contract are available:
2009 2010 2011
` ` `
Materials 6,75,000 10,50,000 9,00,000
Wages 6,20,000 9,00,000 7,50,000
Cartage 30,000 90,000 75,000
Other expenses 30,000 75,000 24,000
Cumulative work certified 13,50,000 45,00,000 60,00,000
Cumulative work uncertified 15,000 75,000 —
Plant costing ` 3,00,000 was bought at the commencement of the contract. Depreciation was
to be charged at 25% per annum, on the written down value method. The contractee pays
75% of the value of work certified as and when certified, and makes the final payment on
completion of the contract.
You are required to make a contract account and contractee account as they would appear in
each of the three years. Also show how the work-in-progress and other items should appear in
the balance sheet.
Solution
Dr. Contract Account Cr.
` `
2009 2009
To Materials 6,75,000 By Plant at site c/d 2,25,000
To Wages 6,20,000 By work-in-progress c/d : `
To Cartage 30,000 Work certified 13,50,000
To Other expenses 30,000 Work uncertified 15,000 13,65,000

To Plant 3,00,000 By Profit & Loss A/c 65,000

________ (Loss transferred) ________
16,55,000 16,55,000

2010 ` 2010 `
To Work-in-progress b/d : By Work-in-progress c/d :

© The Institute of Chartered Accountants of India

 6.16 Cost Accounting

Work certified 13,50,000 Work certified 45,00,000

Work uncertified 15,000 13,65,000 Work uncertified 75,000 45,75,000
To Plant b/d 2,25,000 By Plant at site c/d 1,68,750
To Materials 10,50,000
To Wages 9,00,000
To Cartage 90,000
To Other expenses 75,000
To Notional profit c/d 10,38,750
47,43,750 47,43,750
To Profit & loss A/c 5,19,375 By Notional profit b/d 10,38,750
To Work-in-progress c/d 5,19,375
(profit in reserve)
(Refer to working note 2) ________ ________
10,38,750 10,38,750
2011 ` 2011 `
To Work-in-progress b/d: By Work-in-progress b/d 5,19,375
Work certified 45,00,000 (profit in reserve)
Work uncertified 75,000 45,75,000 By Plant at site 1,26,562

By Contractee’s A/c 60,00,000

(contract price)
To Plant b/d 1,68,750
To Materials 9,00,000
To Wages 7,50,000
To Cartage 75,000
To Other expenses 24,000
To Profit & loss A/c 1,53,187 ________
66,45,937 66,45,937
Working Notes :
1. In 2009 there is a loss, and so the whole of it will be transferred to the profit and loss
account.
2. In 2010, the contract is 3/4th complete. Hence, the profit to be transferred to the profit
and loss account will be determined as under :
2 Cash received
= × Notional Profit ×
3 Work received
2 ` 33,75,000
= × = ` 5,19,375
3 45,00,000

© The Institute of Chartered Accountants of India

 Method of Costing (I) 6.17

Contractee’s account

2009 ` 2009 `
To Balance c/d 10,12,500 By Bank 10,12,500
2010 2010
To Balance c/d 33,75,000 By Balance b/d 10,12,500
________ By Bank 23,62,500*
33,75,000 33,75,000
2011 2011
To Contract A/c 60,00,000 By Balance b/d 33,75,000
(Contract price) ________ By Bank 26,25,000
60,00,000 60,00,000
*The total value of work certified at the end of 2010 was ` 45,00,000 of that worth ` 13,50,000
was certified in 2009. Hence, the cash to be received in 2010 is 75% of ` 31,50,000 (`
45,00,000 − ` 13,50,000) i.e. ` 23,62,500.
Balance sheet (Extract) 2009

Liabilities ` Assets `
Capital − Plant at site 2,25,000
Less : Loss during the year 65,000
Work-in-progress : `
Work certified 13,50,000
Work uncertified 15,000
13,65,000
Less: Cash received 10,12,500 3,52,500
Balance sheet (Extract) 2010

Liabilities ` Assets `
Capital − Plant at site 1,68,750
Add: Profit during the year 5,19,375 Work-in-progress : `
Work certified 45,00,000
Work uncertified 75,000
45,75,000
Less: Profit in reserve 5,19,375
40,55,625
Less Cash received 33,75,000 6,80,625
Balance sheet (Extract) 2011

Liabilities ` Assets `
Capital − Plant at site 1,26,562
Add: Profit during the year 1,53,157

© The Institute of Chartered Accountants of India

 6.18 Cost Accounting

Illustration 7
Compute a conservative estimate of profit on a contract (which has been 90% complete) from
the following particulars. Calculate the proportion of profit to be taken to Profit & Loss Account
under various methods and give your recommendation.
`
Total expenditure to date 4,50,000
Estimated further expenditure to complete the contract (including contingencies) 25,000
Contract price 6,12,000
Work certified 5,50,800
Work uncertified 34,000
Cash received 4,40,640
Solution
Computation of notional profit `
Value of work certified 5,50,800
Less: Cost of work certified
(` 4,50,000 – ` 34,000) 4,16,000
Notional profit 1,34,800
Computation of estimated profit `
Contract price 6,12,000
Less: Cost of work to date 4,50,000
Estimated further expenditure to complete the contract 25,000
Estimated total cost 4,75,000
Estimated profit 1,37,000
Profit to be transferred under various methods
Work certified
(i) Notional profit ×
Contract price
` 5,50,800
= ` 1,34,800 × = ` 1,21,320
` 6,12,000
Work certified
(ii) Estimated profit ×
Contract price
` 5,50,800
= ` 1,37,000 × = ` 1,23,300
` 6,12,000
Work certified Cash received
(iii) Estimated profit × ×
Contract price Work certified
` 5,50,800 ` 4,40,640
= ` 1,37,000 × × = ` 98,640
` 6,12,000 ` 5,50,800

© The Institute of Chartered Accountants of India

 Method of Costing (I) 6.19

Cost of work date

(iv) Estimated profit ×
Estimated total cost
` 4,50,000
= ` 1,37,000 × = ` 1,29,790
` 4,75,000
Cost of work date Cash received
(v) Estimated profit × ×
Estimated total cost Work certified
` 4,50,000 ` 4,40,640
= ` 1,37,000 × × = ` 1,03,832
` 4,75,000 ` 5,50,800
Recommendation : It is recommended that a sum of ` 98,640 may be transferred to the profit
and loss account. This amount is the least and has been arrived by using the formula (iii)
above. According to this formula, profit transferred to the profit and loss account is generally
kept the minimum and allows withholding in reserve a larger portion of notional profit to meet
future unforeseen expenses and contingencies.
Illustration 8
A contractor has entered into a long term contract at an agreed price of ` 1,75,000 subject to
an escalation clause for materials and wages as spelt out in the contract and corresponding
actuals are as follows :
Standard Actual
Materials Qty (tonnes) Rate (`) Qty (tonnes) Rate (`)
A 5,000 5 5,050 4.80
B 3,500 8 3,450 7.90
C 2,500 6 2,600 6.60
Labour Hours Hourly Hours Hourly
Rate (`) Rate (`)
X 2,000 7.00 2,100 7.20
Y 2,500 7.50 2,450 7.50
Z 3,000 6.50 3,100 6.60
Reckoning the full actual consumption of material and wages the company has claimed a final
price of ` 1,77,360. Give your analysis of admissible escalation claim and indicate the final
price payable.
Solution
Statement showing final claim
Standard Standard Actual Rate Variation in Escalation
Qty/Hrs. Rate (`) (`) Rate (`) Claim (`)
Materials (a) (b) (c) (d) = (c)–(b) (e) =(a) × (d)
A 5,000 5.00 4.80 (–) 0.20 (–) 1,000

© The Institute of Chartered Accountants of India

 6.20 Cost Accounting

B 3,500 8.00 7.90 (–) 0.10 (–) 350

C 2,500 6.00 6.60 (+) 0.60 1,500
Materials escalation claim : (P) 150
Labour
X 2,000 7.00 7.20 (+) 0.20 400
Y 2,500 7.50 7.50 − −
Z 3,000 6.50 6.60 (+) 0.10 300
Wages escalation claim : (Q) 700
Final claim: (P) + (Q) 850
Statement showing final price payable
Agreed price ` 1,75,000
Agreed escalation :
Material cost ` 150
Labour cost ` 700 ` 850
Final price payable ` 1,75,850
The claim of ` 1,77,360 is based on the total increase in cost. This can be verified as shown
below:
Statement showing total increase in cost
Standard Cost Actual Cost Increase/
Qty/hrs Rate Amount Qty/hrs Rate Amount (Decrease)
(`) (`) (`) (`)
(a) (b) (c) = (a) × (b) (d) (e) (f) =(d) × (e) (g)=(f) – (c)
I. Materials
A 5,000 5.00 25,000 5,050 4.80 24,240 (760)
B 3,500 8.00 28,000 3,450 7.90 27,255 (745)
C 2,500 6.00 15,000 2,600 6.60 17,160 2,160
68,000 68,655 655
II. Labour
X 2,000 7.00 14,000 2,100 7.20 15,120 1,120
Y 2,500 7.50 18,750 2,450 7.50 18,375 (375)
Z 3,000 6.50 19,500 3,100 6.60 20,460 960
52,250 53,955 1,705
Total (I + II) 2,360
The final price claimed by the company is contract price ` 1,75,000
Add : Increase in cost ` 2,360
` 1,77,360
This claim is not admissible because escalation clause covers only that part of increase in
cost, which has been caused by inflation.
Note : It is fundamental principle that the contractee would compensate the contractor for the

© The Institute of Chartered Accountants of India

 Method of Costing (I) 6.21

increase in costs which are caused by factors beyond the control of contractor and not for
increase in costs which are caused due to inefficiency or wrong estimation.
Illustration 9
AKP Builders Ltd. commenced a contract on April 1, 2010. The total contract was for
`5,00,000. Actual expenditure for the period April 1, 2010to March 31, 2011 and estimated
expenditure for April 1, 2011 to December 31, 2011 are given below :
Particulars 2010-11 2011-12
(actual) (9 months)
(estimated)
Materials issued 90,000 85,750
Labour : Paid 75,000 87,325
Outstanding at the end 6,250 8,300
Plant 25,000 -
Sundry expenses : Paid 7,250 6,875
Prepaid at the end 625 -
Establishment charges 14,625 -
A part of the material was unsuitable and was sold for `18,125 (cost being `15,000) and a
part of plant was scrapped and disposed of for `2,875. The value of plant at site on 31 March,
2011 was ` 7,750 and the value of material at site was ` 4,250. Cash received on account to
date was ` 1,75,000, representing 80% of the work certified. The cost of work uncertified was
valued at ` 27,375.
The contractor estimated further expenditure that would be incurred in completion of the contract :
¾ The contract would be completed by 31st December, 2012.
¾ A further sum of `31,250 would have to be spent on the plant and the residual value of
the plant on the completion of the contract would be `3,750.
¾ Establishment charges would cost the same amount per month as in the previous year.
¾ `10,800 would be sufficient to provide for contingencies.
Required: Prepare Contract Account and calculate estimated total profit on this contract. Profit
transferrable to Profit and Loss Account is to be calculated by reducing estimated profit in
proportion of work certified and contract price.
Solution: AKP Builders Ltd.
Contract Account (2010-11)
Particulars ` Particulars `
To Materials issued 90,000 By Material sold 18,125
To Labour 75,000 By Plant sold 2,875
Add: Outstanding 6,250 81,250 By Plant at site 7,750
To Plant 25,000 By Material at site 4,250

© The Institute of Chartered Accountants of India

 6.22 Cost Accounting

To Sundry Expenses 7,250 By Work-in-progress

Less : Prepaid 625 6,625 Work certified 2,18,750
To Establishment charges 14,625 Work uncertified 27,375 2,46,125
To Profit & Loss A/c 3,125
(profit on sale of
material)
To Notional profit c/d 58,500
2,79,125 2,79,125
To Profit & 29,960 By Notional profit b/d 58,500
LossA/c(transfer)
To Work-in-progress (reserve) 28,540
58,500 58,500

Profit to be transferred to Profit and Loss Account

Work Certified
= Estimated profit ×
Contract price
2,18,750
= ` 68,481 × = ` 29,960
5,00,000
Calculation of Estimated Profit (`)
(1) Material consumed (90,000 + 3,125 – 18,125) 75,000
Add : Further consumption 85,750 1,60,750
(2) Plant used (25,000 – 2,875) 22,125
Add:Further plant introduced 31,250
Less:Closing balance of plant 3,750 49,625
(3) Establishment charges 14,625
Add: Further charges for nine month (14,625 × 9/12) 10,969 25,594
(4) Sundry expenses 6,625
Add: Further expenses 6,875
Add: Prepaid expenses 625 14125
(5) Labour cost 81,250
Add: Further cost (87,325 – 6,250) 81,075
Add: Outstanding 8,300 1,70,625
(6) Reserve for contingencies 10,800
Estimated profit (balancing figure) 68,481
Contract price 5,00,000

© The Institute of Chartered Accountants of India

 Method of Costing (I) 6.23

Illustration 10
RST Construction Ltd. commenced a contract on April 1, 2011. The total contract was for
`49,21,875. It was decided to estimate the total profit on the contract and to take to the credit of Profit
and Loss A/c that proportion of estimated profit on cash basis, which work completed bore to total
contract. Actual expenditure for the period April 1, 2011 to March 31, 2012 and estimated expenditure
for April 1, 2012 to September 30, 2012 are given below :
(`)
April 1, 2011 to April 1, 2012 to
March 31, 2012 Sept. 30, 2012
(Actuals) (Estimated)
Materials issued 7,76,250 12,99,375
Labour : Paid 5,17,500 6,18,750
Prepaid 37,500 -
Outstanding 12,500 5,750
Plant purchased 4,00,000 -
Expenses: Paid 2,25,000 3,75,000
Outstanding 25,000 10,000
Prepaid 15,000 -
Plant returns to store (historical cost) 1,00,000 3,00,000

(on September 30, 2011 (on September 30, 2012

Work certified 22,50,000 Full
Work uncertified 25,000 -
Cash received 18,75,000 -
Materials at site 82,500 42,500

The plant is subject to annual depreciation @ 25% on written down value method. The
contract is likely to be completed on September 30, 2012.
Required : Prepare the Contract A/c. Determine the profit on the contract for the year 2011-12 on
prudent basis, which has to be credited to Profit and Loss A/c.
Solution:
Calculation of written down value of plant as on 30-9-2012. (`)

Plant purchased on 1-4-2011 4,00,000

Less: Plant returned to store on 30-9-2011 1,00,000
(Depreciation on it `1,00,000 × 25/100 × 6/12 = `12,500)
3,00,000
Less: Depreciation on Balance plant (3,00,000 × 25/100) 75,000

© The Institute of Chartered Accountants of India

 6.24 Cost Accounting

WDV of Plant on 1-4-2012 2,25,000

Less : Depreciation (2,25,000 × 25/100 × 6/12) 28,125
WDV of plant returned to store on 30-9-2012 1,96,875

Contract A/c (1-4-2011 to 31-3-2012)

Particulars ` Particulars `
To Materials issued 7,76,250 By Plant returned to
To Labour 5,17,500 Store on 30-9-2011 1,00,000
Less: Prepaid 37,500 Less: 12,500 87,500
Depreciation(1/2)
4,80,000
Add : 12,500 4,92,500 By Plant at site on 3,00,000
Outstanding 31.3.12
To Plant purchased 4,00,000 Less: Depreciation 75,000 2,25,000
To Expenses 2,25,000 By Materials at site 82,500
Less : Prepaid 15,000 By Work-in-progress
2,10,000 Work certified 22,50,000
Add : 25,000 2,35,000 Work uncertified 25,000
Outstanding
To Notional profit c/d 7,66,250 -
26,70,000 26,70,000
To Profit & Loss A/c 3,89,000 By Notional profit b/d 7,66,250
(Tr.)
To Work-in-progress
(Res.) 3,77,250 -
7,66,250 7,66,250

Computation of Estimated Profit

Contract A/c (1-4-2011 to 30-9-2012)
Particulars ` Particulars `
To Materials issued 20,75,625 By Materials at site 42,500
(7,76,250+12,99,375)
To Labour 11,42,000 By Plant returned to store on 87,500
(5,17,500 - 37,500 + 12,500 30.9.2005 (1,00,000 –
12,500)
+ 6,18,750+37,500 -12,500 By Plant returned to store on 1,96,875
+ 5,750) 30.9.06
To Plant purchased 4,00,000 (4,00,000 – 1,00,000 –
1,03,125)
To Expenses 6,10,000 By Contractee A/c 49,21,875
(2,25,000+25,000 -15,000+
3,75,000 - 25,000 + 15,000 +

© The Institute of Chartered Accountants of India

 Method of Costing (I) 6.25

10,000)
To Estimated profit 10,21,125 ________
52,48,750 52,48,750

Since the contract is nearing completion, the following formula is used for transfer of profit to Profit and
Loss Account.
Cash received
Estimated profit ×
Contract price
18,75,000
= 10,21,125 × = `3,89,000.
49,21,875
Illustration 11:
A contractor commenced a building contract on October 1, 2010. The contract price is
` 4,40,000. The following data pertaining to the contract for the year 2011-2012 has been
compiled from his books and is as under :
`
April 1, 2011 Work-in-progress not certified 55,000
Materials at site 2,000
2011–12 Expenses incurred :
Materials issued 1,12,000
Wages paid 1,08,000
Hire of plant 20,000
Other expenses 34,000
March 31, 2012 Materials at site 4,000
Work-in-progress : Not certified 8,000
Work-in-progress : Certified 4,05,000
The cash received represents 80% of work certified. It has been estimated that further costs to
complete the contract will be ` 23,000 including the materials at site as on March 31, 2012.
Required :
Determine the profit on the contract for the year 2011-12 on prudent basis, which has to be
credited to P/L A/c.
Solution
Contract Account
for the year 2011-12
Dr. Cr.
Particulars (`) Particulars (`)
1.4.11
To Work-in-progress 55,000 By Materials at site 4,000

© The Institute of Chartered Accountants of India

 6.26 Cost Accounting

(not certified)
To Materials at site 2,000
2011–12
To Materials issued 1,12,000 By Cost of contract c/d (to date) 3,27,000
To Wages paid 1,08,000
To Hire of plant 20,000
To Other expenses 34,000 _______
3,31,000 3,31,000
31.3.12
To Cost of contract b/d 3,27,000 By Work-certified 4,05,000
(to date) By Work-not certified 8,000
To Profit & loss A/c 66,273
To Profit in reserve 19,727 _______
4,13,000 4,13,000
Profit for the year 2011-12 = ` 4,13,000 – ` 3,27,000 = ` 86,000
Estimated profit (on the completion of the contract)
`
Cost of the contract (to date) 3,27,000
Further cost of completing the contract 23,000
Total cost: (A) 3,50,000
Contract price: (B) 4,40,000
Estimated profit on the completion of contract: {(A) – (B)} 90,000
⎛ Work certified ⎞ ` 4,05,000
Since ⎜⎜ ⎟⎟ × 100 = × 100 = 92.05%
⎝ Contract price ⎠ ` 4,40,000
Illustration 12
A construction company under-taking a number of contracts, furnished the following data
relating to its uncompleted contracts as on 31st March, 2012 :
(` in lacs)
Contract Numbers
723 726 729 731
Total Contract Price 23.20 14.40 10.08 28.80
Estimated Costs on completion of contract 20.50 11.52 12.60 21.60
Expenses for the year ended 31.3.12 :
Direct Materials 5.22 1.80 1.98 0.80
Direct Wages 2.32 4.32 3.90 2.16
Overheads (Excluding Depreciation) 1.06 2.60 2.62 1.05
Profit Reserve as on 1.4.11 1.50 — — —

© The Institute of Chartered Accountants of India

 Method of Costing (I) 6.27

Plant issued at Cost 5.00 3.50 2.75 3.00

Materials at Site on 1.4.11 0.75 — — —
Materials at Site on 31.3.12 0.45 0.20 0.08 0.05
Work Certified till 31.3.11 4.65 — — —
Work Certified during the year 2011-12 12.76 13.26 7.56 4.32
Work Uncertified as on 31.3.12 0.84 0.24 0.14 0.18
Progress payments received during the year 9.57 9.0 5.75 3.60
Depreciation @ 20% per annum is to be charged on plant issued. While the Contract No. 723
was carried over from last year, the remaining contracts were started in the 1st week of April,
2011. Required :
(i) Determine the profit/loss in respect of each contract for the year ended 31st March,
2012.
(ii) State the profit/loss to be carried to Profit & Loss A/c for the year ended 31st March,
2012.
Solution
(i) Statement of Profit/Loss in respect of following contract numbers
for the year ended 31st March, 2012
(` in lacs)
Contract Numbers
723 726 729 731
A. Contract completion percentage :
Work certified : (a) 17.41 13.26 7.56 4.32
Contract price : (b) 23.20 14.40 10.08 28.80
Percentage of completion : [(a) – (b)] 75.04 92.08 75.00 15.00
B. Estimated profit on completion :
Contract price : (c) 23.20 14.40 10.08 28.80
Estimated costs on completion : (d) 20.50 11.52 12.60 21.60
Estimated profit (loss) on completion : [(c) – (d)] 2.70 2.88 (2.52) 7.20
C. Profit of the year :
Opening stock of materials 0.75 — — —
Materials issued 5.22 1.80 1.98 0.80
Direct wages 2.32 4.32 3.90 2.16
Overheads 1.06 2.60 2.62 1.05
Depreciation 1.00 0.70 0.55 0.60
Total : (P) 10.35 9.42 9.05 4.61
Profit in reserve 1.50 — — —
Material at site on 31/3/12 0.45 0.20 0.08 0.05
Total : (Q) 1.95 0.20 0.08 0.05
Cost of contract : (R) = [(P) – (Q)] 8.40 9.22 8.97 4.56

© The Institute of Chartered Accountants of India

 6.28 Cost Accounting

Work certified 12.76 13.26 7.56 4.32

Work not certified 0.84 0.24 0.14 0.18
Total : (S) 13.60 13.50 7.70 4.50
Profit (loss) for the year [(R) – (S)] 5.20 4.28 (1.27) (0.06)
(ii) Profit to be taken to Profit & Loss Account of the
year in respect of respective contract
2 Cash received
Contract 723 = × Notional profit ×
3 Work certified
2 9.57
= × 5.20 × = ` 2.60 lacs
3 12.76
= Balance ` 2.60 lacs to reserve.
Work certified Cash received
Contract 726 = Estimated total profits on completion × ×
Contract price Work certified
Illustration 13
MNP Construction Ltd. commenced a contract on April 1, 2010. The total contract was for `
17,50,000. It was decided to estimate the total profit and to take to the credit of P/L A/c the
proportion of estimated profit on cash basis which work completed bore to the total contract.
Actual expenditure in 2010-11 and estimated expenditure in 2011-2012 are given below :
2010-2011 2011-2012
(Actual) (Estimated)
` `
Materials issued 3,00,000 5,50,000
Labour : Paid 2,00,000 2,50,000
: Outstanding at end 20,000 30,000
Plant purchased 1,50,000 —
Expenses : Paid 75,000 1,50,000
: Prepaid at end 15,000 —
Plant returns to store (historical cost) 50,000 1,00,000
(on Dec. 31, 2011)
Material at site 20,000 50,000
Work certified 8,00,000 Full
Work uncertified 25,000 —
Cash received 6,00,000 Full
The plant is subject to annual depreciation @ 25% of WDV Cost. The contract is likely to be
completed on Dec. 31, 2011. Prepare the Contract A/c. Determine the profit on the contract for
the year 2010-2011 on prudent basis, which has to be credited to P/L A/c.

© The Institute of Chartered Accountants of India

 Method of Costing (I) 6.29

Solution
MNP Construction Ltd.
Contract Account (1st April, 2010 to 31st March, 2011)
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
Materials issued 3,00,000 By Plant returned to store 37,500
Labour : Paid 2,00,000 (Refer to working note 1)
Outstanding 20,000 2,20,000 By Materials at site 20,000
To Plant purchased 1,50,000 By Work certified 8,00,000
(Refer to working note 4) By Work uncertified 25,000
To Expenses 60,000 By Plant at site 75,000
To Notional profit c/d 2,27,500 (Refer to working note 2) ________
9,57,500 9,57,500
To Profit and Loss A/c 66,321,43 By Notional profit b/d 2,27,500,00
(Refer to working note 5)
To Work in Progress A/c 1,61,178,57
(Profit in reserve) ___________ ___________
2,27,500,00 2,27,500,00
MSP Construction Ltd.
Contract Account (1st April, 2010 to 31st December, 2011)
(For computing estimated profit)
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Materials issued 8,50,000 By Materials at site 50,000
(` 3,00,000 + `5,50,000) By Plant returned to store on 37,500
To Labour (paid & outstanding) 4,80,000 31st March, 2011
(` 2,20,000 + ` 2,30,000 + ` 30,000) (Refer to working note 1)
To Plant purchased 1,50,000 By Plant returned to store 60,937.50
To Expenses 2,25,000 on 31st December, 2011
(` 60,000 + ` 1,65,000) (Refer to working note 3)
To Estimated profit 1,93,437.50 By Contractee’s A/c 17,50,000
18,98,437.50 18,98,437.50
Working Notes :
1. Value of the plant returned to store on 31st March, 2011 `
Historical cost of the plant returned 50,000
Less : Depreciation @ 25% of WDV cost for 1 year 12,500
Value of the plant returned to store on 31st March, 2011 37,500

© The Institute of Chartered Accountants of India

 6.30 Cost Accounting

2. Value of plant at site : `

Historical cost of the plant at site 1,00,000
Less : Depreciation @ 25% of WDV cost for 1 year 25,000
Value of the plant at site on 31st March, 2011 75,000
3. Value of the plant returned to store on 31st December, 2011 `
Value of the plant on 31st March, 2011 75,000.00
Less : Depreciation @ 25% of WDV for a period of 9 months 14,062.50
Value of the plant on 31-12-2011 60,937.50
4. Expenses paid :
Total expenses paid 75,000
Less : Prepaid expenses at end 15,000
Expenses paid for the year 2010-2011 60,000
5. Profit to be credited to P/L A/c on 31st March, 2011 for the contract likely to be
completed on 31st December, 2011
Cash received Work certified
Estimated profit × ×
Work certified Total Contract price
6,00,000 8,00,000
= ` 1,93,437.50 × × = ` 66,321.43
8,00,000 17,50,000
6.4 Batch Costing
6.4.1 Meaning of Batch Costing: In batch costing articles are produced in a lot i.e. one unit
of product is not produced but a lot of ‘say’ 500 or 1000 units of such product is produced.
This is a form of job costing. Under job costing, executed job is used as a cost unit, whereas
under batch costing, a lot of similar units which comprises the batch may be used as a cost
unit for ascertaining cost.
In the case of batch costing separate cost sheets are maintained for each batch of products
by assigning a batch number. Cost per unit in a batch is ascertained by dividing the total cost
of a batch by number of items produced in that batch.In batch costing Material cost,direct
labour engaged in batch wise and overhead are also recovered in batchwise. Such a method
of Costing is used in the case of pharmaceutical or drug industries, ready-made garments,
industries manufacturing electronic parts of T.V., radio sets etc
Cost per unit in a batch= Total cotst of a batch/Number of item produced.
Illustration 14
A jobbing factory has undertaken to supply 200 pieces of a component per month for the
ensuing six months. Every month a batch order is opened against which materials and labour
hours are booked at actuals. Overheads are levied at a rate per labour hour. The selling price
contracted for is ` 8 per piece. From the following data present the cost and profit per piece of

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 Method of Costing (I) 6.31

each batch order and overall position of the order for 1,200 pieces.
Month Batch Material Direct Direct
Output cost wages labour hours
` `
January 210 650 120 240
February 200 640 140 280
March 220 680 150 280
April 180 630 140 270
May 200 700 150 300
June 220 720 160 320
The other details are :
Month Chargeable expenses Direct labour
` hours
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800

Solution
Jan. Feb. March April May June Total
Batch output (in units) 210 200 220 180 200 220 1,230
Sale value ` 1,680 1,600 1,760 1,440 1,600 1,760 9,840
Material cost ` 650 640 680 630 700 720 4,020
Direct wages ` 120 140 150 140 150 160 860
Chargeable expenses* ` 600 672 672 621 780 800 4,145
Total cost ` 1,370 1,452 1,502 1,391 1,630 1,680 9,025
Profit per batch ` 310 148 258 49 –30 80 815
Total cost per unit ` 6.52 7.26 6.83 7.73 8.15 7.64 7.34
Profit per unit ` 1.48 0.74 1.17 0.27 –0.15 0.36 0.66
Overall position of the order for 1,200 units
Sales value of 1,200 units @ ` 8 per unit ` 9,600
Total cost of 1,200 units @ ` 7.34 per unit ` 8,808
Profit ` 792
Chargeable exp enses
× Direct labour hours for batch
Direct labour hour for the month

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 6.32 Cost Accounting

6.4.2 Economic Batch Quantity: In batch costing the most important problem is the
determination of optimum size of the batch (how much to produce) or Economic Batch
Quantity.
The determination of economic batch quantity involve two types of costs viz.,
(i) Set up cost (or preparation cost) and
(ii) Carrying cost.
With the increase in the batch size, there is an increase in the carrying cost but the set up cost
per unit of product is reduced; this situation is reversed when the batch size is reduced. Thus
there is one particular batch size for which both set up and carrying costs are minimum. This
size is known as economic or optimum batch quantity.
Economic batch quantity can be determined with the help of a table, graph or mathematical
formula. The mathematical formula usually used for its determination is as follows :
2 DS
EBQ =
C
Where, D = Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production
Note : If the rate of interest (I) and unit cost of production (C) are given, the following formula
should be used for determining EBQ.
2 DS
EBQ =
C
Illustration 15
Monthly demand for a product 500 units
Setting-up cost per batch ` 60
Cost of manufacturing per unit ` 20
Rate of interest 10% p.a.
Determine economic batch quantity.
Solution
2DS 2 × 500 × 12 × 60
EBQ = = = 600 units.
C 0.1× 20
6.5 Operating Costing
6.5.1 Meaning of Operating Costing: It is a method of ascertaining costs of providing or
operating a service. This method of costing is applied by those undertakings which provide

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 Method of Costing (I) 6.33

services rather than production of commodities. The emphasis under operating costing is on
the ascertainment of cost of services rather than on the cost of manufacturing a product. This
costing method is usually made use of by transport companies, gas and water works depart-
ments, electricity supply companies, canteens, hospitals, theatres, schools etc.
For computing the operating cost, it is necessary to decide first, about the unit for which the
cost is to be computed, this may often require the study of some technical and operating data,
for finding out the factors which have a bearing on cost. The cost units usually used in the
following service undertakings are as below :
Transport service − Passenger km., quintal km., or tonne km.
Supply service − Kw hr., Cubic metre, per kg., per litre.
Hospital − Patient per day, room per day or per bed, per operation etc.
Canteen − Per item, per meal etc.
Cinema − Per ticket.
Composite units i.e. tonnes kms., quintal kms. etc. may be computed in two ways.
(i) Absolute (weighted average) tonnes-kms., quintal kms. etc.
(ii) Commercial (simple average) tonnes-kms., quintal kms. etc.
(i) Absolute (weighted average) tonnes-kms. Absolute tonnes-kms., are the sum total of
tonnes-kms., arrived at by multiplying various distances by respective load quantities
carried.
(ii) Commercial (simple average) tonnes-kms. Commercial tonnes-kms., are arrived at by
multiplying total distance kms., by average load quantity.
Note: To understand the concept of absolute tonnes-kms., and commercial tonnes-kms.,
students should refer to the following illustration.
Illustration 16
A lorry starts with a load of 20 tonnes of goods from station A. It unloads 8 tonnes at station B
and rest of goods at station C. It reaches back directly to station A after getting reloaded with
16 tonnes of goods at station C. The distance between A to B, B to C and then from C to A are
80 kms., 120 kms., and 160 kms., respectively. Compute ‘Absolute tonnes-kms.,’ and
‘Commercial tonnes-kms.
Solution
Absolute tonnes-kms. = 20 tonnes × 80 kms + 12 tonnes × 120 kms + 16 tonnes × 160 kms.
= 5,600 tonnes-kms.
Commercial tonnes-kms. = Average load × total kilometres travelled

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 6.34 Cost Accounting

⎛ 20 + 12 + 16 ⎞
= ⎜ ⎟ tonnes × 360 kms. = 5,760 tonnes-kms.
⎝ 3 ⎠
6.5.2 Preparation of Cost Sheet under Operating Costing: For preparing a cost sheet
under operating cost, costs are usually accumulated for a specified period viz., a month, a
quarter, or a year etc.
All of the accumulated costs should be classified under the following three heads:
1. Fixed costs or standing charges,
2. Variable costs or running charges,
3. Semi-variable costs or maintenance costs.
Note : In the absence of information about semi-variable costs, the costs may be shown under
two heads only, i.e., fixed and variable.
Under operating costing, the per unit cost of service may be calculated by dividing the total
cost for the period by the total units of service in the period.
Treatment of depreciation and interest - Depreciation if related to effluxion of time, may be
treated as fixed. If it is related to the activity level, it may be treated as variable.
If information about interest is explicitly given, it may be treated as fixed cost.
Illustration 17
You have been given a permit to run a bus on a route 20 Km. long. The bus costs you
` 90,000. It has to be insured @ 3% p.a. and the annual tax will be ` 1,000. Garage rent is
` 100 p.m. Annual repairs will be ` 1,000 and the bus is likely to last for 5 years at the end of
which the scrap value is likely to be ` 6,000.
The driver’s salary will be ` 150 p.m. and the conductor’s ` 100 together with 10% of the
takings as commission (to be shared equally by both). Stationery will cost ` 50 p.m. The
manager-cum-accountant’s salary will be ` 350 p.m.
Diesel and oil be ` 25 per hundred kilometres. The bus will make 3 round trips for carrying on the
average 40 passengers on each trip. Assuming 15% profit on takings, calculate the bus fare to be
charged from each passenger. The bus will work on the average 25 days in a month.
Solution
Operating Cost Statement
Bus No. : Per annum Per 100
Carrying capacity : 40 passenger km.
` P. ` P.
1 2 3
A. Standing Charges
Depreciation (90,000 – 6,000) ÷ 5 16,800

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 Method of Costing (I) 6.35

Tax 1,000
Insurance 2,700
Stationery 600
Manager’s salary 4,200 _____
Total 25,300 1.756
B. Maintenance charges
Garage rent 1,200
Repairs 1,000 _____
Total 2,200 0.152
C. Operating or running charges
Diesel and oil 9,000
Driver’s salary 1,800
Conductor’s salary 1,200 _____
Total 12,000 0.833
Grand Total (A+B+C) 2.741
Loading @ 25/75 0.91
Fare per passenger-km. 3.65
Notes :
(1) Number of kms. run in a month : 3 × 2 × 20 × 25 = 3,000
25
(2) Diesel & Oil : 3,000 × = ` 750
100
(3) Number of passenger-kms. per month : 3,000 × 40 = 1,20,000
per annum : 1,20,000 × 12 = 14,40,000
(4) Loading - If taking is ` 100, 10 will have to be given as commission and 15 must remain
as profit; the cost must therefore be 75. On 75 the loading must be 25 to make the taking
equal to 100.
Illustration 18
SMC is a public school having five buses each plying in different directions for the transport of
its school students. In view of a larger number of students availing of the bus service the
buses work two shifts daily both in the morning and in the afternoon. The buses are garaged in
the school. The work-load of the students has been so arranged that in the morning the first
trip picks up senior students and the second trip plying an hour later picks up the junior
students. Similarly in the afternoon the first trip takes the junior students and an hour later the
second trip takes the senior students home.
The distance travelled by each bus one way is 8 kms. The school works 25 days in a month
and remains closed for vacation in May, June and December. Bus fee, however, is payable by
the students for all 12 months in a year.

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 6.36 Cost Accounting

The details of expenses for a year are as under :

Driver’s salary ` 450 per month per driver
Cleaner’s salary ` 350 per month
(Salary payable for all 12 months)
(one cleaner employed for all the five buses)
Licence fee, taxes, etc. ` 860 per bus per annum
Insurance ` 1,000 per bus per annum
Repairs & maintenance ` 3,500 per bus per annum
Purchase price of the bus ` 1,50,000 each
Life 12 years
Scrap value ` 30,000
Diesel cost ` 2.00 per litre
Each bus gives an average mileage of 4 km. per litre of diesel.
Seating capacity of each bus is 50 students.
The seating capacity is fully occupied during the whole year.
Students picked up and dropped within a range upto 4 kms. of distance from the school are
charged half fare and fifty per cent of the students travelling in each trip are in this category.
Ignore interest. Since the charges are to be based on average cost you are required to :
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of five
buses for a year.
(ii) Work out the average cost per student per month in respect of –
(A) students coming from a distance of upto 4 kms. from the school and
(B) students coming from a distance beyond 4 kms. from the school.
Solution
(i) SMC Public School
Operating Cost Statement
Particulars Rate Per Bus Fleet of 5
Per annum buses p.a.
` No. ` No. `
Driver’s salary 450 p.m. 1 5,400 5 27,000
Cleaner’s salary 350 p.m. 1/5 840 1 4,200
Licence fee, taxes etc. 860 p.a. 860 4,300
Insurance 1,000 p.a. 1,000 5,000
Repairs & maintenance 3,000 p.a. 3,500 17,500
Depreciation 10,000 p.a. 10,000 50,000

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 Method of Costing (I) 6.37

Diesel (see Note 1) — 7,200 36,000

Total : 28,800 1,44,000
Cost per month 2,400 12,000
(ii) No. of students on half fare basis
(See note 2) 150 750
(A) Cost per student (half fare) ` 16.00 ` 16.00
(B) Cost per student (full fare) ` 32.00 ` 32.00
Working Notes :
1. Calculation of diesel cost per bus :
Number of trips of 8 kms. each/day : 8
Distance travelled per day by a bus : 8 × 8 km/trip=64 km.
Distance travelled during a month : 64 × 25=1,600 km.
Distance travelled p.a. (May, June : 1,600 × 9=14,400 km.
and December being vacation)
Mileage : 4 Km./litre.
Diesel required : 14,400/4=3,600 litres.
Cost of diesel : 3600 litres × ` 2 per litre = ` 7,200 p.a. per bus.
2. Calculation of number of students per bus :
Bus capacity 50 students
Half fare 50% i.e., 25 students
Full fare 50% i.e., 25 students
Full fare students as equivalent
to half fare students i.e., 50 students
Total number of half fare students per trip 75 students
Total number of half fare students in two trips. 150 students
On full fare basis number of students in two trips. 75 students
Illustration 19
Global Transport Ltd. charges ` 90 per ton for its 6-tons truck lorry load from city ‘A’ to city ‘B’.
The charges for the return journey are ` 84 per ton. No concession or reduction in these rates
is made for any delivery of goods at intermediate station ‘C’. In January 2012, the truck made
12 outward journeys for city ‘B’ with full load out of which 2 tons were unloaded twice in the
way at city ‘C’. The truck carried a load of 8 tons in its return journey for 5 times but was once
caught by police and ` 1,200 was paid as fine. For the remaining trips the truck carried full
load out of which all the goods on load were unloaded once at city ‘C’, but it returned without
any load once only from ‘C’ station to ‘A’ station. The distance from city ‘A’ to city ‘C’ and city
‘B’ are 140 kms. and 300 kms. respectively.

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 6.38 Cost Accounting

Annual fixed costs and maintenance charges are ` 60,000 and ` 12,000 respectively. Running
charges spent during January 2012 are ` 2,944.
You are required to find out the cost per absolute ton-kilometre and the profit for January, 2012.
Solution
Statement showing the Operating Cost per ton-km. and Profit for January, 2012.
(i) Costs incurred ` `
Fixed charges 60,000
Maintenance cost 12,000
72,000
Cost for the month (` 72,000 ÷ 12) 6,000
Monthly running charges 2,944
Total monthly running cost 8,944
Cost per absolute tons-km. ` 8,944 ÷ 44,720 absolute ton-km. = `0.20.
(ii) Statement of Profit ` `
Receipts 13,368
Less:Cost 8,944
Fine 1,200 10,144
Profit 3,224
Comments:
(i) Transporters often carry overloads, which attract fines and penalties. In this question
absolute cost per ton-kilometre is required. This can be arrived at by considering both the
entire receipts from the overloading as well as fines paid.
(ii) Normally fines will not form part of cost. It is to be debited to profit and loss account
directly.
Illustration 20
Mr. X owns a bus which runs according to the following schedule:
(i) Delhi to Chandigarh and back, the same day.
Distance covered: 150 kms. one way.
Number of days run each month : 8
Seating capacity occupied 90%.
(ii) Delhi to Agra and back, the same day.
Distance covered: 120 kms. one way.
Number of days run each month : 10
Seating capacity occupied 85%.
(iii) Delhi to Jaipur and back, the same day.

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 Method of Costing (I) 6.39

Distance covered: 270 kms. one way.

Number of days run each month : 6
Seating capacity occupied 100%.
(iv) Following are the other details:
Cost of the bus ` 6,00,000
Salary of the Driver ` 2,800 p.m.
Salary of the Conductor ` 2,200 p.m.
Salary of the part-time Accountant ` 200 p.m.
Insurance of the bus ` 4,800 p.a.
Diesel consumption 4 kms per litre at ` 6 per litre
Road tax ` 1,500 p.a.
Lubricant oil ` 10 per 100 kms.
Permit fee ` 315 p.m.
Repairs and maintenance ` 1,000 p.m.
Depreciation of the bus @ 20% p.a.
Seating capacity of the bus 50 persons.
Passenger tax is 20% of the total takings. Calculate the bus fare to be charged from each
passenger to earn a profit of 30% on total takings. The fares are to be indicated per
passenger for the journeys:
(i) Delhi to Chandigarh
(ii) Delhi to Agra
(iii) Delhi to Jaipur.
Solution
Students are expected to work out the fare to be charged per passenger for different journeys.
Before the same is found out, it is necessary to find out the preliminary data, i.e. kms. per
month and passenger km. per month.
Total kms. covered per month
Bus route Km. per trip Trips per day Days per month Km. per
month
Delhi to Chandigarh 150 2 8 2,400
Delhi to Agra 120 2 10 2,400
Delhi to Jaipur 270 2 6 3,240
8,040
Passenger kms. per month

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 6.40 Cost Accounting

Total seats Capacity utilised Km. per Passenger

available trip Km. per
per month month
(100% % Seats
capacity)
Delhi to Chandigarh & Back 800* 90 720 150 1,08,000
Delhi to Agra & Back 1,000@ 85 850 120 1,02,000
Delhi to Jaipur & Back 600# 100 600 270 1,62,000
Total 3,72,000
* 50 seats × 2 trips × 8 days = 800 seats
@ 50 seats × 2 trips × 10 days = 1,000 seats
# 50 seats × 2 trips × 6 days = 600 seats
Now, the operating cost can be found out as under:
Monthly Operating Cost Statement
Variable Costs ` `
Diesel [(8,040 km ÷ 4 km) × ` 6] 12,060
Lubricant oil [(8,040 km ÷ 100) × ` 10] 804
Total variable cost (A) 12,864
Maintenance costs (B) 1,000
Fixed costs
Salary of driver 2,800
Salary of conductor 2,200
Salary of part-time accountant 200
Insurance 400
Road tax 125
Permit fee 315
Depreciation (` 6,00,000 × 20%) ÷ 12 10,000
Total fixed cost (C) 16,040
Total costs per month (A+B+C) 29,904
Profit and Passenger tax @ 100% of cost (Note 29,904
below)
Total takings per month 59,808
Passenger km. per month 3,72,000
Rate per passenger km. = (` 59,808 ÷ 3,72,000) = ` 0.1607741 say ` 0.16.

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 Method of Costing (I) 6.41

Proposed fare to be charged per passenger km.

Delhi to Chandigarh = ` 0.16 × 150 km = ` 24.00
Delhi to Agra = ` 0.16 × 120 km = ` 19.20
Delhi to Jaipur = ` 0.16 × 270 km = ` 43.20
Note:
1. Passenger tax = 20% of total takings
2. Profit = 30% of total takings
3. Passenger tax + Profit = 50% of total takings
4. Cost (balance) = 50%
5. Total takings = 100%
6. Item 3 as a % of item 4 = 100%
Passenger tax (20% of ` 59,808) = ` 11,961.60
Profit (30% of ` 59,808) = ` 17,942.40
` 29,904.00
Illustration 21
The Union Transport Company has been given a twenty kilometer long route to ply a bus. The
bus costs the company ` 1,00,000. It has been insured at 3% per annum. The annual road tax
amounts to ` 2,000. Garage rent is ` 400 per month. Annual repair is estimated to cost
` 2,360 and the bus is likely to last for five years.
The salaries of the driver and the conductor are ` 600 and ` 200 per month respectively in
addition to 10% of the takings as commission to be shared equally by them. The manager’s
salary is ` 1,400 per month and stationery will cost ` 100 per month. Petrol and oil will cost `
50 per 100 kilometres. The bus will make three round trips per day carrying on an average 40
passengers in each trip. Assuming 15% profit on takings and that the bus will ply on an
average 25 days ina month, prepare operating cost statement on a full year basis and also
calculate the bus fare to be charged from each passenger per kilometer.
Solution
Union Transport Company
Statement showing operating cost of the bus per annum
A – Standing Charges: `
Manager’s salary (` 1,400 × 12) = 16,800
Driver’s salary (` 600 × 12) = 7,200
Conductor’s salary (` 200 × 12) = 2,400
Road tax = 2,000
Insurance (3% of ` 1,00,000) = 3,000
Garage rent (` 400 × 12) = 4,800

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 6.42 Cost Accounting

Stationery (` 100 × 12) = 1,200

Depreciation (` 1,00,000 ÷ 5 years) = 20,000
57,400
B – Maintenance Costs – Repairs 2,360
C – Running charges:
Petrol and oil (36,000* km. × ` 50)/100 18,000
Total costs (A+B+C) 77,760
Add: 10% of takings for commission of
driver and conductor
15% Profit – desired on takings
25% on total takings = 33-1/3 of cost 25,920
1,03,680
*Calculation of total distance covered: (20 km. × 2 × 3 × 25 × 12) = 36,000 km. per annum.
Calculation of bus fare to be charged:
Effective passenger – kilometers:
(2 × 20 km × 3 trips × 40 passengers × 25 days × 12 months) = 14,40,000.
Rate to be charged per km. from each passenger = ` 1,03,680 ÷ 14,40,000 = ` 0.072.
Illustration 22
A company is considering three alternative proposals for conveyance facilities for its sales
personnel who have to do considerable traveling, approximately 20,000 kilometres every year.
The proposals are as follows:
(i) Purchase and maintain its own fleet of cars. The average cost of a car is ` 1,00,000.
(ii) Allow the Executive use his own car and reimburse expenses at the rate of ` 1.60 paise
per kilometer and also bear insurance costs.
(iii) Hire cars from an agency at ` 20,000 per year per car. The company will have to bear
costs of petrol, taxes and tyres.
The following further details are available:
Petrol `0.60 per km. Repairs and maintenance `0.20 per km.
Tyre `0.12 per km. Insurance ` 1200 per car per annum
Taxes ` 800 per car per annum Life of the car: 5 years with annual mileage of 20,000
kms.
Resale value: ` 20,000 at the end of the fifth year.
Work out the relative costs of three proposals and rank them.

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 Method of Costing (I) 6.43

Solution
Alternative Proposals
I II III
Use of company’s car Use of own Use of
car hired car
` per annum ` per km. ` per km. ` per km.
Reimbursement (A) − 1.60 1.00 @
Fixed cost: (B)
Per car per annum
Insurance 1,200 0.06* −
Taxes 800 − 0.04**
Depreciation −
(` 1,00,000 – 20,000)/5 16,000
Total 18,000
Fixed cost per km
(` 18,000 ÷ 20,000 km.) 0.90
Running and Maintenance
Cost (C)
Per car per km.
Petrol 0.60 − 0.60
Repairs and Maintenance 0.20 − −
Tyre 0.12 − 0.12
Total cost per km. (A+B+C) 1.82 1.66 1.76
Cost for 20,000 km. ` 36,400 ` 33,200 ` 35,200
Ranking of alternative III I II
proposals

Decision : II alternative i.e., use of own car, is the best alternative from company’s point of
view. III alternative, i.e. hiring cars from outside agency is the second best alternative. I
alternative, i.e. maintaining the fleet is the costliest alternative.
* ` 1200/20000 Kms. = `0.06; ** ` 800 /20,000 Kms. = `0.04;
@ ` 20,000/20,000Kms = `1.
Illustration 23
From the following data pertaining to the year 2011-12 prepare a cost sheet showing the cost
of electricity generated per k.w.h. by Chambal Thermal Power Station.

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 6.44 Cost Accounting

Total units generated 10,00,000 k.m.h.

`
Operating labour 50,000
Repairs & maintenance 50,000
Lubricants, spares and stores 40,000
Plant supervision 30,000
Administration overheads 20,000
Coal consumed per k.w.h. for the year is 2.5 k.g. @ `0.02 per kg. Depreciation charges @ 5%
on capital cost of ` 2,00,000.
Solution
Power House Cost Statement
Total units generated 10,00,000 k.w.h.
Per annum Per k.w.h.
` `
Fixed costs :
Plant supervision 30,000
Administration overheads 20,000
Depreciation (5% of ` 2,00,000 p.a.) 10,000
Total fixed cost: (A) 60,000 0.06
Variable costs
Operating labour 50,000 0.05
Lubricating, spares & stores 40,000 0.04
Repairs & maintenance 50,000 0.05
Coal cost (Refer to working note) 50,000 0.05
Total variable cost: (B) 1,90,000
Total cost [(A) + (B)] 2,50,000 0.25
Working Note:
Coal cost 10,00,000 k.w.h. × 2.5 kg × 0.02 per kg. = ` 50,000
Standard Load - An alternative unit for the distribution of transport cost is the ‘standard’ load.
Where the goods to be transported are of varying bulk and weight, the calculation of actual
number of tonne-kilometres is not an easy matter. For example, if a business delivers its own
products by its own transport, the cost per tonne-kilometres may be most misleading, for an
article may have a bulk which is twice that of the other, though of the same weight. In such a
case ‘standard load’ is selected as the unit, i.e., the load which a lorry would carry. This would
have reference both to bulk and weight and would give an efficient method for distributing the
cost of transport over different departments. Thus, if the turnover of various departments is

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 Method of Costing (I) 6.45

reduced to ‘standard load’ by first calculating their weight and then the bulk of article
produced, the costs of distributing the product would be easily ascertained.
This principle also can be extended for associating cost with convenient units of service
rendered by an organisation so that management is able to judge whether the organisation is
running efficiently and in the manner in which the service requires to be improved or be made
more economical. The cost of generation of electricity on the same principle is correlated with
units generated and also with units sold; in hospitals the cost of their maintenance is co-
related to units of ‘available bed-days’.
6.6 Multiple Costing
It refers to the method of costing followed by a business wherein a large variety of articles are
produced, each differing from the other both in regard to material required and process of
manufacture. In such cases, cost of each article is computed separately by using, generally,
two or more methods of costing. For instance, for ascertaining the cost of a bicycle, cost of
each part will be ascertained by using batch or job costing method and, then the cost of
assembling the parts will be ascertained by following the method of single or output costing.
6.7 Summary
¾ JOB Costing : Production/work done as per customer specification
¾ Meaning of spoiled and decective work under job costing:-
♦ Spoiled :- Produced units can not be rectified.
♦ Defective:- Units can be rectified with some additional cost.
¾ Contract costing:-
♦ Accounts maintained as per contract wise.
♦ Some contract not complete with in the Financial year so computation of profit
are main point so profit computation is as follow:-.
the case of incomplete contracts, the following four situations may arise:
(i) Completion of contract is less than 25 per cent: No profit should be taken to
profit and loss account.
(ii) Completion of contract is upto 25 per cent or more than 25 per cent but less than
50 per cent:
1 Cash received
× Notional Pr ofit ×
3 Work certified
(iii) Completion of contract is upto 50 per cent or more than 50 per cent but less than
90 per cent:

© The Institute of Chartered Accountants of India

 6.46 Cost Accounting

2 Cash received
× Notional Pr ofit ×
3 Work certified
(iv) Completion of contract is upto 90 per cent or more than 90 per cent i.e. it is
nearing completion:
Work certified
(a) Estimated Profit ×
Contract price
Work certified Cash received
(b) Estimated Profit × Contract price × Work certified
OR
Cash received
Estimated Profit × Contract price
Cost of work to date
(c) Estimated Profit × Estimated total cost
Cost of work to date Cash received
(d) Estimated Profit × Estimated total cost × Work certified
Work certified
(e) Notional Profit × Contract price
¾ Batch Costing:- Articles are produced in a lot and cost are computed per unit in a batch.
Cost per unit in a batch= Total cost of a batch/Number of item produced.
EBQ = Points where Set up and carrying cost are minimum.
2DS
EBQ =
IC
¾ Operating Costing:-Use those undertaking which provide services rather than production
in commodities.
Cost units used in the following services undertaken as below:-
Transport service − Passenger km., quintal km., or tonne km.
Supply service − Kw hr., Cubic metre, per kg., per litre.
Hospital − Patient per day, room per day or per bed, per operation etc.
Canteen − Per item, per meal etc.
Cinema − Per ticket.

© The Institute of Chartered Accountants of India