All About Costing

1. What is Cost of Goods Sold
Cost of goods sold (COGS) is a calculated amount showing the value of goods used to produce products for sale. Cost of goods sold is turned into inventory and then into sales. Cost of goods sold includes value of products, of labor, and production facilities.
Check This Video for Further Explanation

Costing Methods


By "Costing Method" mean the procedure adopted to ascertain costs. The Method adopted would be dependent on the circumstances in which accounting is required to be made which is dependent on the product being manufactured and the nature of the industry making the product.

Depending on the nature of the business i.e. the type of the product made and the procedure adopted to make it, all the different costing methods are classified

1. Input Units
The units that are introduced at the stare of the process in the form of raw material. {Here for example 400 units.}

2. Actual Output
The output that is actually achieved after the production. Normally in questions it gives a percentage of output that would be achieved after process.

3.Normal Loss
Normal loss is that which is uncontrollable it must be occurred during the production. For example the shrinking of units in some process is normal loss.

Number of methods for calculating the loss. It is always calculated on the input.
{Here it would be 40 units (10% of input ⇒ 400 units × 10% = 40 units)}

4. Normal Output
The output that we obtained after the process under normal conditions.
[Normal Output = Gross Input − Normal Loss]
{Here it would be 360 units (400 units − 40 units)}

5. Abnormal Loss
The loss that is occurred due to inefficiency. This is controllable loss.

Method of calculating of Abnormal Loss
["Abnormal Loss" = "Normal Output" − "Actual Output"]
{Here, Normal Output (360 units) = Actual Output (360 units),
⇒ There is no abnormal loss.}

Calculation of Absorption Rate:

Production Overhead is absorbed on the bases of percentage of direct labor.

Calculation of Rate of Production Overhead= (Total Production Overhead/ Total Direct Labor Cost)*100
Suppose,
We have Total Production Overhead is Rs. 7000 and Total Direct Labor Cost is Rs. 7000 then,
Apply the above formula and we get the absorption rate,

                                                                 (7000/7000)*100
                                                                = 100%
Production Overhead is 100% of Direct Labor
Now cosider the previous exemple and apply the rate on that labor cost

Process I = Rs. 2200*100%
               = Rs. 2200

Process II = .Rs. 3500*100%
                =  Rs 3500

Process III = Rs. 1500*100%
                  = Rs. 1500