Fundamentals of Cost Accounting

Methods of Costing

Every business and organization has different nature and characteristics. So it also needs to employ different costing systems to ascertain the cost of their products. So let us look at some of the most common and popular methods of costing.

Methods of Costing

Methods of Costing

1] Job Costing

Many firms and businesses work on a job work basis. In such cases, we use the job costing method. Here the cost is assigned to a specific job, assignment etc.

There is no pre-production here, each order is made to the specifications needed. If the system is implemented accurately we can find the profitability of each job. Some important features of job costing are,

  • It concerns itself with specific order costing, i.e the cost of each order or job regardless of the time taken to finish the job. But usually, the duration of each job is relatively short.
  • The costs are collected at the completion of the job
  • Prime costs are traced and overheads are assigned to each job on some appropriate proportionate basis.

Learn more about Scope and Functions of Costing here in detail.

2] Batch Coting

Batch costing is used when the goods are not produced to demand but are pre-produced. Here the production process is continuous and occurs in batches.

These batches may be for a specific order or some pre-determined quantity. In this system, the goods are more or less uniform.

The total cost incurred during the production of one such batch of goods is divided by the number of units produced to give us the cost per unit.

This method is very useful for consumer electronic goods such as televisions, washing machines etc.

3] Process Costing

This is one of the most popular methods of costing. There are many goods that are produced continuously.

These goods are homogeneous and are usually produced in huge quantities. So the method of process costing is used to find the cost of production of each unit.

In continuous processing, the output of one process becomes the input of the next process and so on until we achieve our finished product.

So for the purposes, we find out the costs of each process and divided it by the number of units produced in this process. Some examples of products that use process costing are sugar, edible oil, chemicals, salt etc.

4] Operating Costing

Among all the methods of costing, the one best suited to the service sector is operating costing. We use operating costs to calculate the cost of the services provided to the customers.

The service must be uniform service provided to all customers, not specialized services. And to ascertain the cost we average the total cost over the total services rendered.

5] Contract Costing

To work out the cost of a contract undertaken we employ contract costing. So it will help us track the costs of a specific contract with a specific customer.

These methods of costing are mainly used for construction contracts, like the construction of complexes, highways, bridges, dams etc.

As you can see there are a lot of similarities between job costing and contract costing. But job costing is usually for a shorter period.

While contract costing is for a much longer time, several years usually. So there is work-in-progress at the end of a year in contract costing

Solved Question for You

Q: What is unit costing?

Ans: Unit costing is one of the methods of costing. It is also known as output costing. The objective of unit costing is to ascertain the cost per unit of output.

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