Costing Techniques CBCAT5T08A

RTMNU B.Com Semester 5 · Major: Accounting and Taxation · Elective option A (choose one) · 4 units · notes for every unit

University	RTMNU – Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur
Course	B.Com (Four Year UG Programme, NEP 2020)
Semester	Semester V
Paper code	CBCAT5T08A
Paper title	Costing Techniques
Category	Major: Accounting and Taxation · Elective option A (choose one)
Credits	4 credits
Marks	80 marks theory paper (3 hours)
Syllabus	as per official RTMNU NEP 2020 B.Com syllabus for Sem V & VI (session 2026-27 onwards)

Unit topics below follow the official RTMNU syllabus. RTMNU official website · All RTMNU B.Com papers

RTMNU B.Com Sem 5 · CBCAT5T08A · Unit I

Unit I: Process Costing

Syllabus topics (RTMNU)

Meaning, Features and Applicability of Process Costing
Difference between Job Costing and Process Costing
Preparation of Process Accounts
Treatment of Normal Loss, Abnormal Loss and Abnormal Gain
By-products (Basic Concepts)

Meaning, Features and Applicability of Process Costing

Process costing is a method of costing used in industries where production passes through a series of continuous processes and the output of one process becomes the input (raw material) of the next. Cost is collected process-wise and the cost per unit is the average cost of the process.

Features:

Production is continuous and products are identical.
Output passes through two or more processes in a fixed order.
A separate account for each process is kept.
Output of one process is transferred at cost to the next process.
Losses (normal and abnormal) occur at different stages.
Cost per unit = total cost of the process ÷ net output (an average).
By-products and joint products may arise.

Applicability: textiles, sugar, paper, cement, chemicals, oil refining, soap, steel, pharmaceuticals, food processing.

Difference between Job Costing and Process Costing

Basis	Job Costing	Process Costing
Production	Against specific customer orders	Continuous, for stock
Products	Different jobs, not identical	Identical (uniform)
Cost unit	Each job	Each process / unit of output
Cost ascertained	When the job is completed	At the end of the period
Transfer	No transfer from job to job	Output transferred to next process
Work-in-progress	May or may not be there	Usually present at start and end
Example	Printing press, furniture to order	Sugar, cement, textiles

Normal Loss, Abnormal Loss and Abnormal Gain

Normal loss: the unavoidable loss expected under normal conditions (evaporation, shrinkage), fixed as a % of input. Its cost is borne by good units; scrap value is credited to the process account.
Abnormal loss: loss beyond the normal limit due to carelessness, machine breakdown or accident. It is valued like good units and transferred to the Abnormal Loss Account, and then (net of scrap value) to the Costing Profit & Loss Account.
Abnormal gain: when actual loss is less than normal loss. Valued like good units; debited to process account and credited to Abnormal Gain Account; the loss of scrap value on those units is adjusted, and the balance goes to Costing P&L.

Formula: Cost per unit = (Total cost − Scrap value of normal loss) ÷ (Input units − Normal loss units)
Abnormal loss/gain value = Units × Cost per unit

Illustration 1: Normal Loss and Abnormal Loss

Process A: 10,000 units introduced at ₹20 each; direct labour ₹75,000; overheads ₹50,000. Normal loss 10% of input; scrap sells at ₹10 per unit. Actual output 8,800 units transferred to Process B. Prepare Process A Account and Abnormal Loss Account.

Working: Normal loss = 1,000 units (scrap ₹10,000). Normal output = 9,000 units. Cost per unit = (3,25,000 − 10,000) ÷ 9,000 = ₹35. Abnormal loss = 9,000 − 8,800 = 200 units × ₹35 = ₹7,000.

Process A Account

Dr Particulars	Units	₹	Cr Particulars	Units	₹
To Materials	10,000	2,00,000	By Normal loss	1,000	10,000
To Direct labour		75,000	By Abnormal loss A/c	200	7,000
To Overheads		50,000	By Process B A/c (transfer @ ₹35)	8,800	3,08,000
Total	10,000	3,25,000	Total	10,000	3,25,000

Abnormal Loss Account

Dr Particulars	Units	₹	Cr Particulars	Units	₹
To Process A A/c	200	7,000	By Bank (scrap 200 × ₹10)	200	2,000
			By Costing P&L A/c (net loss)		5,000
Total	200	7,000	Total	200	7,000

Illustration 2: Abnormal Gain

Process B receives the 8,800 units (₹3,08,000) from Process A; labour ₹42,000; overheads ₹35,000. Normal loss 5% of input, scrap value ₹20 per unit. Actual output 8,500 units sent to finished stock.

Working: Normal loss = 440 units (scrap ₹8,800); normal output = 8,360 units. Cost per unit = (3,85,000 − 8,800) ÷ 8,360 = ₹45. Actual output 8,500 > 8,360, so abnormal gain = 140 units × ₹45 = ₹6,300.

Process B Account

Dr Particulars	Units	₹	Cr Particulars	Units	₹
To Process A A/c	8,800	3,08,000	By Normal loss	440	8,800
To Labour		42,000	By Finished stock (@ ₹45)	8,500	3,82,500
To Overheads		35,000
To Abnormal gain A/c	140	6,300
Total	8,940	3,91,300	Total	8,940	3,91,300

Abnormal Gain Account

Dr Particulars	Units	₹	Cr Particulars	Units	₹
To Normal Loss A/c (140 × ₹20)	140	2,800	By Process B A/c	140	6,300
To Costing P&L A/c (net gain)		3,500
Total	140	6,300	Total	140	6,300

Normal Loss Account: Dr — To Process B 440 units ₹8,800; Cr — By Abnormal Gain A/c 140 units ₹2,800, By Bank (actual scrap 300 × ₹20) ₹6,000. Total ₹8,800.

By-products (Basic Concepts)

A by-product is a product of small value produced incidentally along with the main product, e.g. molasses and bagasse in sugar, buttermilk in dairy. Treatment: (1) sales value credited to the process account or treated as other income (if small); (2) net realisable value (sales value less further processing and selling cost) credited to the main process; (3) standard cost method. Joint products, by contrast, are two or more products of almost equal importance (e.g. petrol, diesel, kerosene).

Likely exam questions

(Long, 8/16 marks) What is process costing? Explain its features and distinguish between job costing and process costing.
(Long, 8/16 marks) A product passes through Process X. Input 5,000 units at ₹30 each; labour ₹44,000; overheads ₹24,000. Normal loss 4% of input, scrap value ₹10 per unit. Actual output 4,750 units. Prepare Process X Account and Abnormal Loss Account.
(Short, 4 marks) Distinguish between normal loss and abnormal loss.
(Short, 4 marks) What is abnormal gain? How is it treated in cost accounts?
(Short, 4 marks) What is a by-product? Give two examples.

Unit II →

RTMNU B.Com Sem 5 · CBCAT5T08A · Unit II

Unit II: Contract Costing

Syllabus topics (RTMNU)

Meaning and Features of Contract Costing
Types of contracts
Elements of contract cost
Nature of contract - completed contract
Work Certified and Work Uncertified
Determination of Profit on Incomplete Contracts

Meaning and Features of Contract Costing

Contract costing is a form of job costing used by contractors (builders, civil engineers, ship-builders) where each contract is a big job, usually carried out at the site and taking more than one accounting year. A separate Contract Account is kept for each contract.

Features: (1) work done at the customer's site; (2) each contract is a cost unit; (3) long duration; (4) most expenses are direct (materials, wages, plant); (5) progress payments are received on the basis of work certified by the architect, less retention money; (6) profit on incomplete contracts is taken on a conservative basis; (7) sub-contracting is common.

Types of Contracts

Fixed price contract: a fixed total price agreed in advance.
Cost-plus contract: contractee pays actual cost plus an agreed % of profit — used where cost cannot be estimated (e.g. defence, new projects).
Escalation clause contract: price is increased if costs of materials/labour rise beyond a limit.
Unit-rate contract: payment per unit of work (per sq. metre).

Elements of Contract Cost

Materials — purchased for or issued to the contract (less returned, sold or at site at the end).
Wages — paid and outstanding.
Direct expenses — sub-contract charges, architect's fees, hire charges.
Plant and machinery — either depreciation only, or full value debited and closing value credited.
Overheads — share of head-office expenses.

Completed Contract; Work Certified and Uncertified

Completed contract: the full profit (contract price − total cost) is transferred to the P&L Account.
Work certified: value of work completed and approved by the contractee's architect/engineer, at contract price. Cash received = work certified − retention money.
Work uncertified: work completed but not yet certified; shown at cost.
Retention money: part of work certified held back by the contractee as security against defects.

Determination of Profit on Incomplete Contracts

Notional profit = (Work certified + Work uncertified) − Cost of work to date. Only part of it is taken to P&L (prudence; AS 7/Ind AS 115 apply in financial accounts, but the exam follows the traditional rule):

Stage of completion (Work certified ÷ Contract price)	Profit to be credited to P&L
Less than 25%	Nil — whole notional profit kept as reserve
25% or more but less than 50%	1/3 × Notional profit × Cash received ÷ Work certified
50% or more (but not nearly complete)	2/3 × Notional profit × Cash received ÷ Work certified
Nearly complete (90% and above)	Estimated total profit × Work certified ÷ Contract price (or × Cash received ÷ Contract price)

Remember: If there is a notional LOSS, the whole loss is transferred to P&L immediately.

Illustration 1: Contract Account (Incomplete Contract)

Contract price ₹20,00,000. Materials ₹4,00,000; wages ₹3,50,000; direct expenses ₹50,000; plant issued ₹2,00,000; overheads ₹60,000. At year-end: materials at site ₹30,000; plant at site (after depreciation) ₹1,60,000; work certified ₹12,00,000; work uncertified ₹50,000; cash received ₹10,80,000 (90% of work certified). Prepare Contract Account.

Contract Account

Dr Particulars	₹	Cr Particulars	₹
To Materials	4,00,000	By Materials at site	30,000
To Wages	3,50,000	By Plant at site	1,60,000
To Direct expenses	50,000	By Work-in-progress: Work certified	12,00,000
To Plant	2,00,000	By Work-in-progress: Work uncertified	50,000
To Overheads	60,000
To Notional profit c/d	3,80,000
Total	14,40,000	Total	14,40,000
To Costing P&L A/c	2,28,000	By Notional profit b/d	3,80,000
To Reserve (WIP) c/d	1,52,000
Total	3,80,000	Total	3,80,000

Working: Stage = 12,00,000 ÷ 20,00,000 = 60% (above 50%). Profit to P&L = 2/3 × 3,80,000 × 10,80,000 ÷ 12,00,000 = 2/3 × 3,80,000 × 90% = ₹2,28,000. Reserve = 3,80,000 − 2,28,000 = ₹1,52,000.

Balance sheet extract: Work-in-progress (12,00,000 + 50,000) ₹12,50,000 less Reserve ₹1,52,000 less Cash received ₹10,80,000 = ₹18,000 shown on the assets side.

Illustration 2: Profit at Different Stages

Notional profit on a contract is ₹1,20,000 and cash received is always 80% of work certified. Find profit to be credited to P&L if work certified is (a) 20%, (b) 40% and (c) 70% of the contract price.

Case	Stage	Calculation	Profit to P&L ₹
(a)	20% (below 25%)	Nil	Nil
(b)	40% (25%–50%)	1/3 × 1,20,000 × 80%	32,000
(c)	70% (50% and above)	2/3 × 1,20,000 × 80%	64,000

Likely exam questions

(Long, 8/16 marks) What is contract costing? Explain its features and the rules for determining profit on incomplete contracts.
(Long, 8/16 marks) Contract price ₹10,00,000; materials ₹2,00,000; wages ₹1,80,000; plant ₹50,000 (value at end ₹40,000); overheads ₹20,000; materials at site ₹10,000; work certified ₹5,00,000; work uncertified ₹20,000; cash received ₹4,00,000. Prepare Contract Account showing profit to be taken to P&L.
(Short, 4 marks) Distinguish between work certified and work uncertified.
(Short, 4 marks) Explain cost-plus contract and escalation clause.
(Short, 4 marks) What is retention money?

← Unit I Unit III →

RTMNU B.Com Sem 5 · CBCAT5T08A · Unit III

Unit III: Standard Costing

Syllabus topics (RTMNU)

Meaning and Objectives of Standard Costing
Types of Standards
Variance Analysis
Material Variances (Cost, Price, Usage)
Labour Variances (Cost, Rate, Efficiency)

Meaning and Objectives of Standard Costing

Standard cost is a pre-determined cost of a product or operation, worked out scientifically, showing what the cost should be under efficient conditions.

Standard costing is a technique of cost control in which standard costs are set in advance, actual costs are recorded, the two are compared, differences (variances) are analysed into causes, and corrective action is taken.

Objectives:

Cost control by comparing actual with standard.
Fixing responsibility — variances show which department is at fault.
Management by exception — focus only on significant variances.
Price fixing and quotations on a reliable cost basis.
Budgeting and planning.
Inventory valuation at standard cost.
Cost consciousness and efficiency among employees.

Steps: set standards → record actual costs → compare → analyse variances → report → take corrective action.

Types of Standards

Ideal standard: attainable only under perfect conditions (no waste, no idle time) — rarely achieved; may demotivate.
Basic standard: set for a long period and not changed; used to study trends.
Current standard: set for a short period, reflecting current conditions.
Expected (attainable) standard: what can be achieved with efficient working, allowing for normal losses — most practical.
Normal standard: average standard expected over a business cycle.

Variance Analysis

A variance is the difference between standard cost and actual cost. It is Favourable (F) when actual cost is less than standard, and Adverse (A) when actual cost is more.

Material Variances

Formula:
Material Cost Variance (MCV) = (SQ × SP) − (AQ × AP)
Material Price Variance (MPV) = AQ × (SP − AP)
Material Usage Variance (MUV) = SP × (SQ − AQ)
Check: MCV = MPV + MUV
SQ = standard quantity for actual output; AQ = actual quantity; SP/AP = standard/actual price

Causes: price variance — change in market price, emergency purchases, loss of discounts, different quality; usage variance — wastage, poor quality material, unskilled workers, theft, faulty machines.

Illustration 1: Standard: 2 kg of material per unit at ₹50 per kg. Actual output 1,000 units used 2,100 kg at ₹48 per kg. Calculate material variances.

Item	Working	₹
SQ for actual output	1,000 × 2 = 2,000 kg
Standard cost (SQ × SP)	2,000 × 50	1,00,000
Actual cost (AQ × AP)	2,100 × 48	1,00,800
MCV	1,00,000 − 1,00,800	800 (A)
MPV	2,100 × (50 − 48)	4,200 (F)
MUV	50 × (2,000 − 2,100)	5,000 (A)
Check	4,200 (F) + 5,000 (A)	800 (A) ✓

Interpretation: the purchase department bought cheaply (favourable price), but the production department wasted 100 kg (adverse usage).

Labour Variances

Formula:
Labour Cost Variance (LCV) = (SH × SR) − (AH × AR)
Labour Rate Variance (LRV) = AH × (SR − AR)
Labour Efficiency Variance (LEV) = SR × (SH − AH)
Check: LCV = LRV + LEV
SH = standard hours for actual output; AH = actual hours; SR/AR = standard/actual rate per hour

Causes: rate variance — wage increase, overtime, using higher-grade workers; efficiency variance — poor supervision, bad tools, untrained workers, poor material, low morale.

Illustration 2: Standard: 3 hours per unit at ₹40 per hour. Actual output 500 units took 1,450 hours at ₹42 per hour. Calculate labour variances.

Item	Working	₹
SH for actual output	500 × 3 = 1,500 hours
Standard cost (SH × SR)	1,500 × 40	60,000
Actual cost (AH × AR)	1,450 × 42	60,900
LCV	60,000 − 60,900	900 (A)
LRV	1,450 × (40 − 42)	2,900 (A)
LEV	40 × (1,500 − 1,450)	2,000 (F)
Check	2,900 (A) + 2,000 (F)	900 (A) ✓

Interpretation: workers were paid more per hour than standard (adverse rate), but they finished the work in 50 hours less (favourable efficiency).

Advantages and Limitations of Standard Costing

Advantages: effective cost control, fixing responsibility, simplifies accounting and stock valuation, helps price fixing, encourages efficiency. Limitations: costly to set up, standards become outdated, difficult for small firms and non-standard products, may demotivate if standards are too tight.

Exam tip: Always write (F) or (A) after each variance and show the check (MCV = MPV + MUV). Many students lose marks for missing signs.

Likely exam questions

(Long, 8/16 marks) What is standard costing? Explain its objectives and the types of standards.
(Long, 8/16 marks) Standard: 4 kg per unit at ₹25 per kg; 5 hours per unit at ₹30 per hour. Actual output 800 units used 3,300 kg at ₹24 per kg and 3,900 hours at ₹32 per hour. Calculate material and labour cost, price/rate and usage/efficiency variances.
(Short, 4 marks) What is a variance? Distinguish between favourable and adverse variance.
(Short, 4 marks) State the causes of material usage variance.
(Short, 4 marks) Calculate labour rate variance: actual hours 2,000 at ₹55; standard rate ₹50 per hour.

← Unit II Unit IV →

RTMNU B.Com Sem 5 · CBCAT5T08A · Unit IV

Unit IV: Operating Costing

Syllabus topics (RTMNU)

Operating Costing: Meaning and Features of Service Costing
Transport Costing (Passenger and Goods)
Cost Unit and Cost Sheet in Service Industry
Costing in Hospitality (Hotel/Restaurant) - Basic Concepts

Meaning and Features of Operating (Service) Costing

Operating costing (service costing) is the method of costing used by undertakings that provide services rather than goods — transport, hotels, hospitals, power supply, canteens, cinemas. Its aim is to find the cost per unit of service.

Features:

No tangible product; services are rendered.
Costs are mostly fixed (depreciation, salaries, insurance).
A suitable composite cost unit is used (passenger-km, tonne-km, room-day).
Costs are classified as standing (fixed) charges, running (variable) charges and maintenance charges.
Cost per unit = Total cost ÷ Total units of service.
Used for fixing fares/rates and comparing efficiency.

Cost Units in Service Industries

Service	Cost unit
Bus/passenger transport	Passenger-kilometre
Goods transport (truck)	Tonne-kilometre
Hotel	Room-day / room-night
Hospital	Patient-day / bed-day
Electricity	Kilowatt-hour (kWh)
Canteen	Meal / cup served
Cinema	Seat-show

Cost Sheet in Service Industry (Transport) — Format

Particulars	Per month ₹	Per unit ₹
A. Standing (fixed) charges: salaries of driver/conductor, garage rent, insurance, road tax, depreciation, salary of the manager	xxx	xxx
B. Running charges: diesel/petrol, lubricants, tyres, trip allowance of driver	xxx	xxx
C. Maintenance charges: repairs, overhaul, spare parts	xxx	xxx
Total operating cost (A + B + C)	xxx	xxx
Add: Profit	xxx	xxx
Fare / Charges	xxx	xxx

Transport Costing: Passenger and Goods

Passenger-km = Number of passengers × Distance travelled (km).
Tonne-km (absolute) = Σ (Weight carried × Distance) for each stage.
Tonne-km (commercial) = Total distance × Average load per trip (average of loads at each stage).

Illustration 1: Passenger Transport

A bus with 50 seats runs between City A and City B, 40 km apart, making 2 round trips a day (160 km a day) for 25 days a month. On average 80% seats are occupied. Monthly costs: salaries ₹43,000; insurance ₹7,000; garage ₹5,000; depreciation ₹20,000; diesel ₹1,00,000; repairs ₹18,000; lubricants ₹7,000. Profit is 25% on cost. Find cost per passenger-km and fare per passenger from A to B.

Passenger-km per month = 50 × 80% × 160 × 25 = 1,60,000.

Particulars	₹
Standing charges: Salaries 43,000 + Insurance 7,000 + Garage 5,000 + Depreciation 20,000	75,000
Running charges: Diesel 1,00,000 + Lubricants 7,000	1,07,000
Maintenance: Repairs	18,000
Total operating cost	2,00,000
Add: Profit 25% on cost	50,000
Total takings required	2,50,000

Cost per passenger-km = 2,00,000 ÷ 1,60,000 = ₹1.25. Fare per passenger-km = 2,50,000 ÷ 1,60,000 = ₹1.5625. Fare from A to B = 1.5625 × 40 = ₹62.50.

Illustration 2: Goods Transport (Tonne-km)

A lorry carries 6 tonnes from A to B (100 km), then 4 tonnes from B to C (50 km), and returns empty from C to A (80 km). Total cost of the round trip ₹9,200. Find absolute and commercial tonne-km and cost per absolute tonne-km.

Stage	Load (tonnes)	Distance (km)	Tonne-km
A to B	6	100	600
B to C	4	50	200
C to A	0	80	0
Total		230	800

Absolute tonne-km = 800. Commercial tonne-km = 230 × (6 + 4 + 0) ÷ 3 = 230 × 3.33 = 766.67. Cost per absolute tonne-km = 9,200 ÷ 800 = ₹11.50.

Costing in Hospitality (Hotel/Restaurant) — Basic Concepts

Hotels use room-day (one room occupied for one day) as cost unit for rooms, and cover/meal for restaurants. Costs: staff salaries, depreciation of building and furniture, electricity, laundry, linen, repairs, housekeeping supplies, food cost. Occupancy rate is very important because most costs are fixed.

Example: A hotel has 50 rooms; average occupancy 80% in a 30-day month = 50 × 80% × 30 = 1,200 room-days. Monthly cost ₹18,00,000 → cost per room-day = ₹1,500. With 20% profit on cost, room rent = ₹1,800 per day.

Exam tip: In transport problems, first calculate the composite unit (passenger-km or tonne-km) in a working note; then prepare the cost sheet with standing, running and maintenance charges separately.

Likely exam questions

(Long, 8/16 marks) What is operating costing? Explain its features and the cost units used in different service industries.
(Long, 8/16 marks) A bus of 40 seats runs 120 km a day for 30 days a month with 75% occupancy. Monthly fixed charges are ₹60,000 and running and maintenance charges ₹1,02,000. Calculate cost per passenger-km and fare per passenger-km if profit is 20% on cost.
(Short, 4 marks) Distinguish between absolute tonne-km and commercial tonne-km.
(Short, 4 marks) State the standing, running and maintenance charges of a transport undertaking.
(Short, 4 marks) What cost units are used in hotel costing?

← Unit III