by Unit costing, also known as output costing, is a method used to determine the cost of producing a single unit of a product when goods are identical, homogeneous, and mass-produced. This technique is commonly applied in industries such as cement, bricks, textiles, paper, or mining, where production is continuous and units are indistinguishable from each other.
Under unit costing, all costs incurred—including direct materials, direct labour, direct expenses, and overheads—are accumulated over a period. The total cost is then divided by the number of units produced during that period to find the cost per unit. This helps businesses evaluate efficiency, control costs, and set competitive selling prices.
The unit costing method ensures consistency in cost calculation, aids in identifying cost variances, and simplifies inventory valuation. It also supports managerial decisions related to pricing, budgeting, and cost control. In cost sheets prepared under this method, expenses are systematically recorded under headings like prime cost, factory cost, and cost of production.
Thus, unit costing is essential for organizations that deal with standardized products, offering a clear and systematic approach to cost determination and profit planning.
Formula for Unit Costing
Cost per unit = Total Cost of Production / Number of Units Produced
Preparation of Cost Sheet:
Cost sheet is a statement that shows the item-wise total cost incurred during a particular period for producing goods. It helps determine the cost per unit and assists in pricing decisions.
Format of a Cost Sheet:
| Particulars | Amount (₹) |
|---|---|
| Direct Materials | |
| Add: Direct Labour (Wages) | |
| Add: Direct Expenses | |
| Prime Cost | XXXX |
| Add: Factory Overheads | |
| Factory/Works Cost | XXXX |
| Add: Office and Administrative Overheads | |
| Cost of Production | XXXX |
| Add: Selling and Distribution Overheads | |
| Total Cost / Cost of Sales | XXXX |
| Add: Profit | |
| Sales Value | XXXX |
Illustration: Preparation of Cost Sheet:
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Direct Material: ₹50,000
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Direct Labour: ₹30,000
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Direct Expenses: ₹10,000
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Factory Overheads: ₹20,000
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Administrative Overheads: ₹15,000
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Selling & Distribution Overheads: ₹10,000
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Units Produced: 2,000
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Profit: 20% on Cost
Step-by-Step Cost Sheet Calculation:
| Particulars | Amount (₹) |
|---|---|
| Direct Material | 50,000 |
| Direct Labour | 30,000 |
| Direct Expenses | 10,000 |
| Prime Cost | 90,000 |
| Add: Factory Overheads | 20,000 |
| Factory/Works Cost | 1,10,000 |
| Add: Administrative Overheads | 15,000 |
| Cost of Production | 1,25,000 |
| Add: Selling & Distribution Overheads | 10,000 |
| Total Cost (Cost of Sales) | 1,35,000 |
| Add: Profit (20% of cost = 27,000) | 27,000 |
| Sales Value | 1,62,000 |
Unit Cost Calculation
