## Unit Costing (Single / Output Costing)

### Definition

Unit Costing is a costing method where the output is identical and each unit of output requires the same cost. Also known as:

Single Costing — single type of product
Output Costing — cost per unit of output

$$\text{Cost per Unit} = \frac{\text{Total Cost Incurred}}{\text{Number of Units Produced}}$$

### Applicability

Used when an industry produces a single homogeneous product or a few variants:

Paper mills, Cement plants, Steel works, Mining, Breweries

### Cost Collection Procedure

#### 1. Materials Cost

Source: Material Requisition Notes
Accumulated over a period or volume of activity
Posted to the cost accounting system
Cost sheet prepared showing element-wise and function-wise costs

#### 2. Labour Cost

Type	Source Document
Direct labour	Job time cards / sheets
Indirect labour	Payroll books with expense code numbers

#### 3. Overheads

Collected under standing order numbers per department
Selling & distribution overheads → allocated to cost account numbers
Total overheads apportioned to departments on a suitable basis
Service department costs → transferred to production departments
Production overheads applied to products using a realistic factor (machine hours, labour hours)

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### Treatment of Spoiled and Defective Work

Circumstance	Treatment
Normal defectives — actual defectives within established normal limit	Cost of rectification / loss charged to entire output (spread across all units as part of normal production cost)
Abnormal defectives — actual defectives exceed normal limit	Excess rectification cost / loss written off to Costing P&L Account
Loss due to abnormal reasons	Treated as abnormal cost; written off to Costing P&L Account

> Key principle: Normal losses are product costs; abnormal losses are period losses charged to Costing P&L.

Worked example

### Example 1

Unit Cost Calculation:

A cement factory produces 50,000 bags in April.

Cost Element	Amount (₹)
Direct materials	2,50,000
Direct labour	80,000
Overheads	1,20,000
Total Cost	4,50,000

Cost per bag = ₹4,50,000 ÷ 50,000 = ₹9.00 per bag

Defective Work Treatment:

Normal defective rate = 1% of output (500 bags). Actual defectives = 480 bags (within normal limit). Rectification cost = ₹1,800.

Treatment: ₹1,800 is absorbed into total production cost → cost per unit rises slightly to (₹4,50,000 + ₹1,800) ÷ 50,000 = ₹9.036 per bag.

If actual defectives = 800 bags, excess = 800 − 500 = 300 bags (abnormal). Abnormal rectification cost is written off to Costing P&L Account separately.

⚠️ Common exam mistakes

Dividing total cost by only the good units produced — unit cost is computed over total units (including normal defectives), unless a question explicitly asks for cost of good output only
Charging abnormal loss to the product cost instead of writing it off to Costing P&L Account — abnormal losses must never be carried into inventory valuation
Confusing unit costing with job costing — unit costing applies to homogeneous, identical output in continuous industries; job costing applies to unique, customer-specific outputs
Applying overheads without first apportioning service department costs to production departments — service department costs must be redistributed before applying overheads to products

Reference:

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