HomeAbout UsCapabilites
Services
Audit & Assurance
Financial Statement audit & attestationFinancial Reporting advisory
Advisory
Link 1Link 2Link 3
Tax
Link 1Link 2Link 3
Business Services & Outsourcing
Link 1Link 2Link 3

Service

Audit & Assurance

Tax & Regualtory

Advisory

Bussiness & Outsourcing

Audit & Assurance

Financial Atatement Audit & Attestation

Financial Reporting Advisory

Tax & Regualtory

Corporate Tax

Indirect Tax

Finacial Sector

Family Office,estate & succession Planing

Advisory

Mergers & acquisitions

Valuation

Due diligence

Corporate finance & investment banking

Start-up advisory

hgghhgdgfhhgd

IPO advisory

IT risk advisory & assurance

Sustainability & ESG

BFSI advisory

Management consulting

Business & Outsourcing

Finance & Accounting Outsourcing

Global Outsourcing

Compliance

Fund Accouting & Trust Accounting

Virtual CFO

Payroll

Services

Audit & Assurance
Tax & Regulatory
Advisory
Business & Outsourcing

Audit & Assurance

Financial Statement Audit & Attestation

Financial Reporting Advisory

Featured

What is the COSO framework?

September 24, 2024

Going Concern: What It Means for Your Business

August 8, 2024

Fraudulent Financial Reporting

June 19, 2024

Tax & Regulatory

Corporate Tax

Indirect Tax

Financial Sector  

Family, Office, Estate & Succession Planning

Featured

What is the COSO framework?

September 24, 2024

Going Concern: What It Means for Your Business

August 8, 2024

Fraudulent Financial Reporting

June 19, 2024

Advisory

Mergers & Acquisitions

Valuation

Due Diligence

Corporate Finance & Investment Banking

Start-up Advisory

Promoter Restructuring & Succession Planning

IPO Advisory

IT Risk Advisory & Assurance

Sustainability & ESG

BFSI Advisory

Management Consulting

Featured

What is the COSO framework?

September 24, 2024

Going Concern: What It Means for Your Business

August 8, 2024

Fraudulent Financial Reporting

June 19, 2024

Business & Outsourcing

Finance & Accounting Outsourcing

Global Outsourcing

Compliance

Fund Accounting & Trust Accounting

Virtual CFO

Payroll

Featured

What is the COSO framework?

September 24, 2024

Going Concern: What It Means for Your Business

August 8, 2024

Fraudulent Financial Reporting

June 19, 2024

Services

Services

Audit & Assurance
Tax & Regulatory
Advisory
Business & Outsourcing

Audit & Assurance

Financial Statement Audit & Attestation

Financial Reporting Advisory

Featured

What is the COSO framework?

September 24, 2024

Going Concern: What It Means for Your Business

August 8, 2024

Fraudulent Financial Reporting

June 19, 2024

Tax & Regulatory

Corporate Tax

Indirect Tax

Financial Sector  

Family, Office, Estate & Succession Planning

Featured

Invoice Management System (IMS) under GST

September 18, 2024

GST IMPORTANT ANNOUNCEMENTS via CIRCULAR NO. 230 to 233 dated. 11th Sept. 2024

September 18, 2024

GST IMPORTANT ANNOUNCEMENTS IN 54TH GST COUNCIL MEETING (September 9, 2024)

September 13, 2024

Advisory

Mergers & Acquisitions

Valuation

Due Diligence

Corporate Finance & Investment Banking

Start-up Advisory

Promoter Restructuring & Succession Planning

IPO Advisory

IT Risk Advisory & Assurance

Sustainability & ESG

BFSI Advisory

Management Consulting

Featured

TAXATION OF INFLUENCERS AND CONTENT CREATORS: THE NEW FRONTIER

June 24, 2025

Corporate Social Responsibility (CSR)

June 23, 2025

Compulsory Convertible Debentures (CCD) & Compulsory Convertible Preference Shares (CCPS)

July 29, 2024

Business & Outsourcing

Finance & Accounting Outsourcing

Global Outsourcing

Compliance

Fund Accounting & Trust Accounting

Virtual CFO

Payroll

Featured

LEAVE & LAW POLICIES FOR EMPLOYEES IN INDIA

May 9, 2024

SOCIAL SECURITY LAWS- PF & ESIC

April 20, 2024

SOX Compliances

January 6, 2023

Audit & Assurance
Financial Statement Audit & AttestationFinancial Reporting Advisory
Advisory
Mergers & AcquisitionsValuationDue DiligenceCorporate Finance & Investment BankingStart-up AdvisoryPromoter Restructuring & Succession Planning IPO Advisory IT Risk Advisory & AssuranceSustainability & ESGBFSI advisoryManagement Consulting
Tax & Regulatory
Corporate TaxIndirect taxFinancial sector  Family, office, estate & succession planning
Business & Outsourcing
Finance & Accounting OutsourcingGlobal outsourcingComplianceFund accounting & Trust AccountingVirtual CFOPayroll
Solutions
Multinational CorporatesIndian CorporatesStartups
BlogsBlogsCareersContact UsContact Us
Schedule a consultation

How to Determine Costing in a Manufacturing

By
Team Bilimoria
May 30, 2021

Introduction:

Determining an appropriate costing of your product can make or break your business. Most business owners fail to understand the importance of costing which can actually help your business avoid running into troubles such as loss of profits, time mismanagement and over budgeting. Knowing how much the company spends to produce a product is not enough when it comes to figuring out the product’s costing value. Furthermore, selling a product with a wrong value can have a great impact on your company’s sustainability. To run a successful business, you need to think ahead against your competitors and one way of doing so is to understand what product costing needs to be followed.

Costing techniques can be tricky and complicated to understand and hence requires a systematic approach in determining the same. This article broadly covers determining the costing in case of Manufacturing industry.

Determining costing in a Manufacturing Industry:

  1. Inventory:

  2. For a manufacturing industry, inventories play a major role because a manufacturer relies on inventory to complete a finished product for which It expects to be paid and hence efficient management of inventory Is the goal of every manufacturer because inventory has a direct impact on profits through an income statement item called Cost of Goods Sold. Here comes the role of Inventory costing.

    Inventory costing determines how purchased materials and materials made to stock are priced. Mostly companies will employ one of the following types of inventory costing methodologies:

  3. a. First-In, First-Out (FIFO)
  4. - FIFO establishes that the oldest layers of inventory (based on received date or manufacturing date) are used before the newer layers. Most companies employ this method as it is usually a better correlation of material costs associated with a sale.

  5. b. Last-In, First-Out (LIFO)-
  6. LIFO establishes that the newest layers of inventory (based on received date or manufacturing date) are used up before the older layers. Few manufacturers employ this method.

  7. c. Average or Weighted Average Cost-
  8. Average or Weighted Average essentially establishes that there is only one inventory layer in inventory. That layer is the “average cost” of all the items currently in existence in the inventory pool. Any time a new layer is added to inventory, a new “per unit output price” is computed and applied to any outbound inventory transaction

  9. ii. Implementation of BOM:

  10. The BOM or the product structure as they call it, is a list of all the raw materials needed to run the manufacturing process. BOM consists of a list of all the items & components needed to manufacture a particular product. Testing of BOM should be first step before finalizing BOM list for finished goods. A solid BOM calls for a healthy business and that’s why it serves as an indispensable part of manufacturing process which must be handled with extreme care.

iii. Production Costing:
There are a number of varying methods of production costing to choose from, each with their own benefits and drawbacks.

Major Production Costing Approaches:


Example:

Pk Limited is newly incorporated in the business of manufacturing of Electrical products. They have 2 Special Product namely one-way Switch and 3 PIN Multiple Plug. On the basis of forecasted sales, Company has decided to produce 7500 units of one-way switch and 2750 units of 3 PIN Multiple plugs, to produce 1 unit of each product they require following raw material and packing material

FG

Type

Particulars

UOM

Qty

Rate (Rs.)

One-way Switch

Raw Material

Switch Base

No

1

2.60

Raw Material

Wire Screw

No

4

0.60

Raw Material

PG Wire

Cm

25

0.05

Packing Material

Switch Label

No

2

0.40

Packing Material

Outer Box

No

1

0.50

3 PIN Multiple Plug

Raw Material

Multi Socket

No

3

4.00

Raw Material

Plug Inner

No

1

2.50

Packing Material

Box label

No

2

0.90

Packing Material

Outer box

No

1

0.60

Since the raw material and packing material were purchase during the year company has decided to considered standard costing and have considered rate as mentioned in above table which is including buffering rate (i.e., 5%)

Raw material gets converted into finished goods by passing through 2 stages, each stage is Labour and machine oriented. To produce 500 units of the finished goods required labour hours and machine hours are as below:

Labour cost

Machine Cost

Type of Labour

Labour Hour

Rate per Hour

Machine hour

Kilowatt per hour

Rate per Kilowatt

Un-skilled

5

100

8

100

4

Skilled

1

600

Apart from above mentioned cost company has to incurred following variable overheard of 25 Paise per unit and Fixed Overhead as below

Fixed Overhead

Amount (Rs.)

Factory Rent

2,50,000

Salary

75,000

Repairs and maintenance

50,000

Sundries

35,000

Total

4,10,000

Company also has decided to apportion of fixed overhead in the ratio of quantity produced. Here is how cost per unit is calculated.

Note 1: Apportionment of Fixed Cost

Particular

Qty

Calculation

Amount

One-way Switch

7,500

4,10,000 x 7500/10250

3,00,000

3 PIN Multiple Plug

2,750

4,10,000 x 2750/10250

1,10,000

Total

10,250

4,10,000

Note 2: Kilowatt hours

Rate per kilowatt hours = 100 Kilowatt per hour x 4 Per hour

= Rs.400 Per Kilowatt hour

Calculation of cost per Unit

Cost

Bifurcation

Total Cost

One-way Switch

3 PIN Multiple Plug

Raw Material

Switch Base

7500 x 1 x 2.6

19,500

Wire Screw

7500 x 4 x 0.6

18,000

PG Wire

7500 x 25 x 0.05

9,375

Multi Socket

2750 x 3 x 4

33,000

Plug Inner

2750 x 1 x 2.5

6,875

Packing Material

Switch Label

7500 x 2 x 0.4

6,000

Outer Box

7500 x 1 x 0.5

3,750

Box label

2750 x 2 x 0.9

4,950

Outer box

2750 x 1 x 0.6

1,650

Direct Labour

One-way Switch

Un Skilled

75 hrs x 100

7,500

Skilled

15 hrs x 600

9,000

3 PIN Multiple Plug

Un Skilled

27.5 hrs x 100

2,750

Skilled

5.5 hrs x 600

3,300

Machine Cost

One-way Switch

120 hrs x 400

48,000

3 PIN Multiple Plug

44 hrs x 400

17,600

Fixed Cost

3,00,000

1,10,000

Total cost

1,21,125

70,125

No. of units

7,500

2,750

Cost per unit

16.15

25.50

Add: Overhead

0.25

0.25

Final Cost per Unit

16.40

25.75

So, which costing model should manufacturers choose?

The costing philosophy/model that is best for a manufacturer is largely a cost-benefit relationship decision, and there really is no wrong answer if it makes sense for your business. For manufacturers that produce relatively few products, job costing may be a justifiable approach. For manufacturers that have a wider array of products or mass produce similar products, being able to directly associate costs to a specific product can be very difficult, if not impossible (at a minimum not worth the time and effort to attempt to achieve it). For them, standard costing or activity-based costing would likely be a better approach.

Regardless of which costing method works best, each has virtues that can help drive accurate pricing decisions.

III. Conclusion:

Determining appropriate costing helps to measure and develop competitive strategies which can be helpful to improve efficiency of internal operating processes. It provides basis for valuing manufactured inventory, Cost of Goods Sold (COGS) for external reporting and helps in making day-to-day decision. As significant and growing economic activity is being observed everywhere, Profitability needs to be improved with better understanding of the increased overheads, customer’s requirements, innovation and market condition for which costing is of great help. Costing helps to compare benchmarks, to provide cost causation and rational ascertainment of cost information for Managerial Decision Making. To conclude, costing system helps an organization to improve profitability, achieve organizational goals, target growth, sustainability and development.

Authors:
CA Aakash Mehta
Partner, MASD
E-mail ID: aakash.mehta@masd.co.in

Poojan Joshi
Associate Consultant, MASD
E-mail ID: poojan.joshi@masd.co.in

Sahil Rathod
Associate Consultant, MASD
E-mail ID: sahil.rathod@masd.co.in

Explore More

June 24, 2025

Team Bilimoria

TAXATION OF INFLUENCERS AND CONTENT CREATORS: THE NEW FRONTIER

In recent years, the rise of social media has given birth to a new and powerful profession: AN INFLUENCER What began as individuals sharing their personal lives, opinions, and talents online has now evolved into a full-fledged marketing industry. Influencers are people with a dedicated following on social media platforms like Instagram and YouTube who partner with brands to promote products and services in a relatable & authentic way. This form of marketing, known as influencer marketing, has gained immense attraction due to its ability to reach niche audiences and drive engagement.

Read More

June 23, 2025

Team Bilimoria

Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) is outlined in Section 135 of Companies Act, 2013 and has been made mandatory for the companies following the specified criteria from April 1, 2014. CSR Activities were introduced with an intention to allow companies to contribute to the social, environmental, and economic development of the country.

Read More

Read All Blogs

BILiMORIA MEHTA & CO. is a leading Chartered Accountancy firm with a rich legacy of serving clients in India and internationally.

info@bilimoriamehta.com

+91 (22) 6697-2111

Company

  • About Us
  • Contact Us
  • Careers
  • Resources

Solutions

  • for Startups
  • for Indian Corporates
  • for Multinational Clientele

Solutions

  • Multinational Corporates
  • Indian Corporates
  • Startups

Services

  • Audit & Assurance
  • Tax & Regulatory
  • Advisory
  • Business & Outsourcing

Resources

  • Blogs
  • Regulatory Updates
© 2024 BILiMORIA MEHTA & Co. All Rights Reserved
Privacy PolicyTerms & Conditions