Ceylon Biscuit Limited

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cost. Under this system a job cost sheet is required to be prepared to find out profit or losses for each job or work order. An example of an industry where job order costing is used is the building construction industry since each building is unique. The manufacturers of custom equipment or custom cabinetry are also examples of companies that will keep track of production costs by item or job. Job costing is commonly used in printing, apparel industry, furniture making, ship building, etc.

2.3.2 Batch Costing

In batch costing quite a lot of identical items are produced as a batch. Each batch will be receiving a number that costs can be calculated into the batch. Batch costing is used in a similar way to job costing, where a specific customer order decides the work to be done. However, job costing is suitable for situations where a single cost unit is produced (e.g. a single item of bespoke furniture), whereas batch costing is used in a unique batch consists of identical items (e.g. a printing company producing a bespoke batch of 1000 identical A4 adverts). In batch costing, cost per unit of product is determined by dividing the total cost of a batch by the number of units of the batch. Batch Costing is used in Production of engineering components, Medicine industries, ready-made garments industries, Radios/television sets & electronic components manufacturing, Bakery, and Footwear etc.

2.3.3 Process Costing

Process costing is a term used to describe one method for collecting and assigning manufacturing costs to the units produced. Processing cost is used when there is mass production of identical units and the cost combined with single units of output cannot separate from each other. Under this concept, costs are accumulated over a fixed period of time, summarized, and then allocated to all of the units produced during that period of time on a consistent basis. Examples of the industries where this type of costing take place include oil refining, sugar, food production, and chemical processing. For example, how to determine the precise cost required creating one gallon of aviation fuel, when thousands of gallons of the same fuel are gushing out of a refinery every hour? The cost accounting methodology used for this scenario is process costing.

2.3.4 Contract Costing

Contract costing is the identifying of costs associated with a particular contract with a customer. This costing method is applied for contract work, like civil engineering constructions. This can engage a great amount of overhead allocation work. Customer contracts usually specify exactly which overhead costs can be allocated to their projects, and this calculation may vary by contract. For example, a company bids for a large construction project with a potential customer, and the two parties agree in a contract for a certain type of settlement to the company. This settlement is based, at least in part, on the costs gained by the company in order to fulfill the terms of the contract. The company must then follow the costs associated with that contract so that it can justify its billings to the customer. Contract costing vastly used in government contracting and commercial constructions.

3.0 Marginal & Absorption Costing

3.1 Marginal Costing

Marginal cost is the change of total production cost that occurs from producing or making one additional item. The main purpose of studying marginal cost is to find out at what point an organization can attain economies of scale. The calculation is most often used among manufacturers as a means of dividing a best possible production level.

Marginal costs are variable costs consisting of labor and material costs, and an estimated segment of fixed costs (i.e. administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost.

(Businessdictionary, 2016)

3.2 Income statement - Marginal costing

Rs Rs

Sales w1 350,000

(-)variable cost of production

Opening stock

(+) variable production cost w2 225,000

(-) Closing stock w3 (15,000)

Variable production cost of sales 210,000

(+)other variable selling expenses w4 43,000 (253,000)

Contribution 97,000

(-)fixed cost

Fixed production cost 12,000

Fixed selling cost 6,000

Fixed administration cost 18,000 (36,000)

Net profit 61,000

Table 4 Income statement - Marginal costing

Workings

W1 May Sales Revenue = Actual Sales * Selling price

= 14,000 * 25

= 350,000

W2-variable cost per unit = Direct material + Direct labor + Direct expense = 8 + 5 + 2

= RS15.00 per unit

Variable production cost = Actual units produced * Variable cost per unit

= 15,000 * 15

= 225,000

W3 - Closing Stock = (Total production – sales) * Variable cost per product

= (15,000 – 14,000) * 15

= 15000

W4

Selling and distribution =14,000×2 =28,000.00

Administration =15,000×1 =15,000.00

= 43,000.00

3.3 Absorption Costing

Absorption