Methods of Costing
➥ In every system of cost accounting, the basic principles of cost determination are the same, but the methods of analysis and presentation of costs differ.
➥ There are different methods used by businesses because they differ in nature and in what products or services they produce.
a) Job Costing
➥ It refers to a method of costing that determines costs based on specific jobs or orders that are not comparable with each other.
➥ Printing presses, automobile garages, repair shops, shipyards, housebuilding, engine and machine fabrication are all industries where this method of costing is generally used.
➥ It is a method for tracking the costs of individual projects and jobs. The study looks at direct and indirect costs, which are typically broken down into labor, materials, and overhead.
➥ You may learn some ways to cut costs or identify items that should be billed to the customer by understanding the costs for this level of work.
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Example: Customized furniture manufacturing, where each piece of furniture is produced according to a customer’s specific requirements. |
Features of job costing
- The cost of each job is determined separately using job costing. Therefore, finding out the profit or loss from each job is made easier.
- Management is able to identify which jobs are more profitable and which are not.
- Based on job costing, future planning can determine the cost of similar jobs to be performed in the future.
- Compares the actual cost to the estimated cost to manage and control costs. Hence, the variance calculation.
b) Contract Costing
➥ It is convenient to keep contract cost accounts separate even though contract costing is the same as job costing in principle.
➥ In the construction industry, the term typically refers to a method of costing applied to large scale contracts at multiple sites.
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Example: Construction of a new building or a bridge where the project spans an extended period, and costs are tracked for the entire project. |
c) Batch Costing
➥ This method is also a type of job costing. The cost of a batch of similar products is determined based on the complete batch.
➥ The unit cost of the products is determined based on the complete batch.
➥ However, it is important to note that the articles produced should not lose their identity as a result of production operations.
| Example: Production of pharmaceutical drugs in specific batches, where a set quantity of medicine is produced at once. |
d) Terminal Costing
➥ Terminal costing is also a type of job costing.
➥ By using this method, one emphasizes the essence of job costing, which is that a cost can be properly terminated at some point and related to a specific job.
➥ Terminal costing is applied when goods or services go through various processes or stages before reaching the final point of completion or delivery.
| Example: Manufacturing of a complex electronic gadget where different components are assembled in stages before the final product is obtained. |
e) Operation Costing
➥ When it is necessary to determine the cost of carrying out an operation in a department, for instance, welding, this method may be used.
➥ The cost of various operations is frequently required for large undertakings.
➥ Operation costing is used when products pass through different operations or stages, and costs are accumulated for each operation.
| Example: Manufacturing of garments, where each step like cutting, stitching, and finishing represents a distinct operation. |
f) Process Costing
➥ The cost of each stage or process of production is frequently desired when a product has passed through distinct stages or processes, where the output of one process forms the input for the next.
➥ It is called process costing. When the item of prime cost cannot be traded to a particular order because its identity is lost in continuous production, this method is used.
➥ The process costing method is typically used in textile industry, chemical industry, oil refinery, soap-making operation, paper manufacturing operation, tanneries, etc.
| Example: Production of beverages, where each bottle of soda goes through various stages of production on a continuous assembly line. |
g) Unit or Single or Output or Single-output Costing
➥ When continuous manufacturing activities are used to produce one item or provide one service, this method is used.
➥ We determine the cost of the production cycle as a process or series of processes, and calculate the cost per unit by dividing the total cost by the number of units produced.
➥ Depending on the product, we determine the costing unit. The unit cost of production is determined by dividing the total expenditure by the quantity produced on the cost statement or cost sheet.
➥ In industries like brick-making, coal mining, flour milling, cement manufacturing, etc., this method is suitable.
➥ Assemblies in a factory producing mechanical articles, such as bicycles, can use this method.
| Example: Handcrafted artwork or sculptures, where each piece is unique and produced as a single unit. |
h) Operating Costing
➥ This method is used when services instead of goods are rendered. It follows the same process as single output costing.
➥ A cost per unit of service is calculated by dividing the total operation expenses by the number of units.
➥ There are numerous industries that employ this method, including railways, road transport, water supply, telephone services, electric power companies, hospitals, and municipal services.
| Example: Costing of services in a hospital, where costs are assigned to different departments such as surgery, radiology, or laboratory services. |
i) Multiple or Composite Costing
➥ A single system of costing does not apply to all products. In complex production, it is used when a variety of components are separately manufactured and then assembled.
➥ By computing component costs, which are gathered by job or process costing, and then aggregating them under the single or output costing system, the total cost can be determined.
➥ It can be applied to all manufacturing concerns producing motor vehicles, aeroplanes, machine tools, typewriters, radios, cycles, sewing machines, etc.
| Example: A manufacturing company that uses both job costing and process costing methods based on the nature of its production processes. |
j) Departmental Costing
➥ A method of determining costs department by department is called “Departmental Costing”.
➥ A department’s total costs will have to be determined, for example, using job costing or unit costing, in order to determine the cost of its different goods and services.
➥ Departmental costing is used when a business has multiple departments, and costs are allocated to each department separately.
| Example: Manufacturing company with separate departments for production, marketing, and administration, where costs are allocated to each department for accurate cost analysis. |
References
- Kumar, P. (2015, July 3). Top 8 Methods of Costing – Explained! Your Article Library. https://www.yourarticlelibrary.com/cost-accounting/costing-cost-accounting/top-8-methods-of-costing-explained/62123
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Damini. (2022, December 1). Costing Methods: A complete guide. Deskera Blog. https://www.deskera.com/blog/costing-methods/
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I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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