Output Costing: Definition

Output costing is concerned with analyzing the different elements of expenditure so as to determine the factory cost, office cost, and total cost per unit. The per-unit cost is calculated by dividing the total expenditure by the quantity produced.

Output Costing: Explanation

This system of costing is used in industries with the following characteristics:

  • Production is uniform and a continual affair
  • Units of production are identical
  • Cost units are physical and natural.

Here, the cost sheet is prepared with a view to illuminating every aspect of cost. This is why comparative figures for a preceding period are also made available in the cost statement, enabling the management to assess the progress of the business.

In place of (or in addition to) the preceding period’s figures, the budgeted figures may also be made available so as to enable the management to understand the targeted figures and take decisions accordingly.

Example 1

If the cost price of a product is $10,000 and profit is expected to be realized at 10% of the cost, then what profit will be earned? How will you arrive at the figure?

Solution

First, take the cost price as $100. The profit on cost is 10%. This means the profit is $10 on a cost of $100, as assumed. Therefore, the profit on a cost of $10,000 is $10,000 x (10/100) = $1,000

Example 2

If the cost price of a product is $10,000 and profit is expected to be realized at 10% on the selling price, then what will the profit be? How will you arrive at the figure?

Solution:

First, take the selling price as $100. The cost price will, then, naturally be 10% less, which is $100 – 10% (i.e., $10), which equals $90.

Now, profit of $10 is on a cost of $90. Therefore, profit on a cost price of $10,000 will amount to $10,000 x (10/90) = $1,111.11 or 1,111.

Example 3

If the selling price of a particular product is $10,000 and profit is 10% on cost, then what profit will be earned? How will you arrive at the figure?

Solution:

First, take the cost price as $100. The selling price will, then, naturally be 10% more, which is $100 + 10% = $110. Now, the profit on a selling price of $110 is $10. Hence, the profit on a selling price of $10,000 will be $10,000 x (10/100) = $909 (approximately).

Frequently Asked Questions

What is the main use of output costing?

The main use of output costing is to ascertain the cost per unit of a product and thereby determine the profitability of a product.

How does one calculate the profit on a product?

To calculate the profit on a product, one takes the cost price of the product and then multiplies it by the profit percentage on cost.

What is the difference between output costing and absorption costing?

The main difference between output costing and absorption costing is that output costing takes into account only the direct costs, while absorption costing takes into account both the direct and indirect costs.

How are budgeted figures useful in output costing?

Budgeted figures are useful in output costing as they help to assess the targeted profit figure and enable proper decision-making.

Is it necessary to have comparative figures for a preceding period in order to use output costing?

No, it is not necessary to have comparative figures for a preceding period in order to use output costing; however, it can be useful to have such figures in order to get a better understanding of the progress of the business.

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