What are the Methods of Costing?
Various aspects of business enterprises depend on their product based on its nature, production, and particular conditions for business fixed costs. The costing of products is decided via methods of costing.
There are various methods of costing which helps a business entrepreneur to know how much money they should invest in a specific product. Many methods of costing have come into notice in the business world. But at the same time, all the methods have common principles that are based on collection, analysis, allocation, absorption, and apportionment.
Types of Methods
There are two types of methods that are used for costing:
Specific Order Costing.
Continuous Operation Costing.
Specific Order Costing
Among two types of costing method-specific costing is one of types. This type of costing is used for those business companies where they do the construction of the product or provide jobs. Specific order costing is further classified into three types.
Job costing
Contract costing
Batch costing
Job Costing
Job costing is the method of costing which comes under specific order costing. This method is used to affix the cost according to the job or the work type separately. Every job and every product has its different substances and properties and considering all the necessary costs is charged as a cost unit.
In this method, the first thing is to know about the production and its necessary substances which are required should be identified properly. Then after identifying the expenses related to it should find out. This method of costing is used for making the road, automobile works, repair shops, roads, etc.
In this method of cost, there are a few features:
The construction is against the customer’s order by the manufacturer.
Every work and job has its nature.
The works are done in the factory or workshops or repair shops.
A costing unit is a job or work.
Contract Costing
The contract is the job of a large scale. Contract costing method of another specific order costing which is not much different than the job costing method. It is mainly suitable for large-scale contracts. This type of costing method is used in the construction work of buildings which takes a tedious time to complete.
The features of Contract costing:
Contract costing is a large-scale costing method.
Contract consumes a lot of time.
Contraction works a site works.
Batch Costing
Batch costing is the last method of costing under specific order costing. It is used in a group of the same or similar products which are made and passed through a factor at a specified time and number. Every batch is a unit and their cost is fixed separately.
This method is mostly used in industries where ready-made garments, chip manufacture, etc have occurred.
Continuous Operation Costing
This type of method of costing is suitable for organizations that make products in mass production via continuous operations. After that these products are sold via the stock present. This is further classified into five more types.
Process costing
Service costing
Unit or single costing
Multiple costing
Operation costing
Process Costing
This method is the first type of costing method present in a continuous operation costing. This method is used to fix the cost of the product in every stage of product processing. The method in this type is mainly used for these which have various stages and processing ways and here each process has its separate center of the cost. This method is mainly used for producing gas, cement, sugar, textile, etc.
Its features are:
They have standardized units.
It occurs via the continuous process and is carried out by the stock.
Before the complete process, it has to go through many processes and stages.
Service Costing
This method is used for finding the cost of the provided service. The services used by the industries are the major users of this method.
Unit or Single Costing
This is the third costing method under continuous operational costing. It is also known as output costing. It is mainly used for manufacturing single products or similar products. This method is used for the costing of coal, brick, oil, drilling, etc.
The features in this method are:
The outputs are natural and identical.
The process is continuous.
The method fixes the cost per unit.
Multiple Costing
This type of method is used from those products where two or more products are combined and applied to fix the cost of the product. This is known as composite costing. This type of method is used where the product is produced separately. This method is suitable for manufacturing radios, airplanes, automobiles engines, cycles, etc.
Operation Costing
This is the last part of the costing of the method under the continuous operation method for costing. This method is similar to process costing only the difference is that its cost unit is not a process but an operation.
This costing method is suitable in industries that have repetitive production or have mass production or their components are in the semi-final state to processing orders to issues or later operations.
What is Commerce?
Commerce is the process of exchanging goods and services on a large scale. Commerce is an important academic stream that imparts detailed knowledge related to economy, finance, accounting, and other topics which you can easily relate to daily lives. Specifically, the subjects included in this stream are Economics, Business Studies, Accountancy, and English along with a choice of Maths or Computer Science. It is a very important subject that will help students learn about how the business world actually works. Since commerce involves a lot of processes to be completed it will have to employ lots of laborers in the process, thus it easily generates various employment opportunities in various other areas that involve transport and logistics, banking, and retail sectors. Commerce overall is an essential component of national development and wealth creation which highly contributes to the economy of the country. Commerce education is mainly aimed at giving adequate knowledge about the wholesale trade, retail, export trade, import trade, and entire- port trade. Moreover, it provides some knowledge about the movement of goods, etc., Transport, Communication Insurance, Ware-housing, Money, Banking & Finance, and Mercantile Agencies.
Meaning
Generally, the method of costing in commerce refers to a particular system of cost ascertainment and cost accounting. Each industry in the market differs in its nature, in the products they produce and sell, and the kind of services they offer. Hence, different types of methods of costing are utilized by various different industries in the market. Job costing and process costing are the two main types of basic methods involved in costing.
FAQs on Costing Methods: An Overview
1. What is meant by 'costing' in a business context, and what are its main objectives?
Costing is the process of ascertaining and controlling the cost of a product or service. The primary objectives are to determine the total cost per unit to aid in price fixation, provide detailed cost information to management for cost control, and offer insights for strategic decisions to improve overall efficiency and profitability.
2. What are the two principal classifications of costing methods used in cost accounting?
The methods of costing are broadly classified into two main categories based on the nature of production and operations:
- Specific Order Costing: This is used where work consists of separate jobs, batches, or contracts. Each order is a distinct cost unit. Examples include Job Costing, Contract Costing, and Batch Costing.
- Continuous Operation Costing: This is applied where goods are produced in a continuous flow and products are homogenous. The cost is averaged over the units produced. Examples include Process Costing, Unit Costing, and Service Costing.
3. What is Job Costing, and in which types of industries is it typically used?
Job Costing is a method used to determine the cost of a specific job or work order that is performed according to the customer's specifications. Each job is treated as a separate cost unit. This method is suitable for industries where products are unique and not mass-produced, such as automobile repair shops, printing presses, furniture manufacturing, and construction companies building individual houses.
4. Can you explain Process Costing and provide examples of its application?
Process Costing is a method used when a single product is manufactured through a series of continuous processes or stages. The cost is determined for each process and then averaged over the total units produced. It is ideal for mass production industries where products are identical. Examples include industries like chemicals, textiles, sugar, cement, and oil refining.
5. How does Contract Costing fundamentally differ from Job Costing?
While both Contract Costing and Job Costing fall under Specific Order Costing, they differ primarily in scale and duration. A contract is essentially a very large-scale job, often taking months or years to complete, and the work is typically performed at the client's site rather than in a factory. Key differences include:
- Scale: Job costing is for smaller tasks; contract costing is for large projects like building construction, bridge building, or shipbuilding.
- Time: Jobs are usually short-term, while contracts are long-term.
- Location: Jobs are often completed in a workshop, whereas contracts are executed on-site.
6. What is the key difference between a costing 'method' and a costing 'technique'?
A costing method refers to the system used to ascertain costs based on the industry's production process, such as Job Costing or Process Costing. In contrast, a costing technique is a procedure or tool, like Standard Costing or Marginal Costing, that can be applied within any costing method to help with cost control, performance analysis, and decision-making. A technique is a tool for analysis, while a method is the framework for cost collection.
7. Why can't a single costing method be universally applied to all types of businesses?
A single costing method is not suitable for all businesses because the choice of method is dictated by the unique nature of the product and the production process. A company making custom furniture (unique products) needs Job Costing to track costs for each piece. Conversely, a soft drink manufacturer (homogenous, mass-produced items) needs Process Costing to average costs over thousands of identical units. Using an inappropriate method would result in inaccurate cost allocation and poor business decisions.
8. Beyond just calculating product costs, how do costing methods support strategic business decisions?
Costing methods provide critical data that supports several strategic decisions. For example, accurate cost information helps management in:
- Make-or-buy decisions: Deciding whether it's cheaper to produce a component internally or purchase it from an external supplier.
- Performance evaluation: Assessing the efficiency and profitability of different departments or product lines.
- Quoting prices for tenders: Submitting competitive yet profitable bids for new contracts.
- Identifying areas for cost reduction: Pinpointing inefficiencies in the production process to enhance overall profitability.
