Management Notes

Reference Notes for Management

Method of Costing – Introduction to Cost Accounting | Management Notes

Method 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

You may also like:

Leave a Comment