UNIT COSTING - Accounts and Finance for Managers

Under costing, the role of unit costing is inevitable tool for the industries not only to identify the volume of costs incurred at every level but also to determine the rational price on the commodities in order to withstand among the competitors. The determination of the selling price is being done through the process of determining the cost of the product. After having been finalized the cost of the product, the profit margin has to be added in order to derive the final selling price of the product.

Cost Sheet - Definition

"It is a statement of costs incurred at every level of manufacturing a product or service".
"It is a statement prepared to depict the output of a particular accounting period along with break up of costs".
How to find a total cost of the product or service ?
To find the total cost of the product or service, the costs incurred are grouped under various categories.

Cost Sheet

The cost of the product or service should have to come across many stages. The determination of the unit cost involves two different major stages viz Direct and Indirect costs.

What is meant by direct cost ?
Direct cost is the cost incurred by the firm which can be ascertained and measured for a product.
Direct cost of the product can be classified into three major categories.

Direct Material

Direct material which is especially used as a major ingredient for the production of a product. For Example: The wood is a basic raw material for the wooden furniture. The cost of the wood procured for the furniture is known direct material cost.

The cotton is a basic raw material for the production of yarn. The cost of procuring the cotton is known as direct material for the manufacturing of yarn.

Direct Labour

Direct labour is the cost of the labour which is directly involved in the production of either a product or service. For e.g. The cost of an employee who is mainly working for the production of a product /service at the centre, known as direct labour cost.

Direct Expenses

Direct expenses which are incurred by the firm with the production of either a product or service. The excise duty, octroi duty are known as direct expenses in connection with the production of articles and so on.

Indirect cost is the cost whatever incurred by the firm can be ascertained but not measured more specifically for a product.

Indirect Material

The material which is spent cannot be measured for a product is known as indirect material. For e.g. the thread which is used for tailoring the shirt cannot be measured or quantified in specific length as well as ascertained the cost.

Indirect Labour

Indirect labour is the cost of the labour incurred by the firm other than the direct labour cannot be apportioned. For e.g: Cost of supervisor, cost of the inspectors and so on.

Indirect Expenses

Indirect expenses are the expenses other than that of the direct expenses in the production of a product. The expenses which are not directly part of the production process of a product or service known as indirect expenses. For e.g.: Rent of the factory, salesmen salary and so on.

Advantages of preparing the cost sheet:

  1. It is a only statement reveals the cost of the output as well as unit cost of the output
  2. It facilitates the manufacturer to access the control on the costs through breakups in the cost
  3. It extends room for the management to study the variations of the cost with the help of an effective comparison of standard costs
  4. The businessman is able to get an insight on the various components of cost as well as able to exercise the control on the excessive costs incurred
  5. It poses the firm to supply the goods against the orders with reasonable accuracy in submitting the orders.

To find out the unit cost of the product, the statement of cost plays pivotal role in determining the cost of production, cost of goods sold, cost of sales and selling price of the product at every stage.

During the preliminary stage of preparing the cost statement of the product, there are two things to be borne in our mind at the moment of classification.

  1. Direct cost classification
  2. Indirect cost classification

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