Methods of Costing

The general fundamental principles of ascertaining costs are the same in every system of cost accounting, but the methods of analysis and presenting the costs vary from industry to industry. Different methods are used because business enterprises vary in their nature and in the type of products or services they produce or render.

• Job Costing: It refers to a system of costing in which costs are ascertained in terms of specific jobs or orders which are not comparable with each other Industries where this method of costing is generally applied are printing press, automobile garage, repair shop, ship-building, house building, engine and machine construction, etc.
• Contract Costing: Although contract costing does not differ in principle from job costing, it is convenient to treat contract cost accounts separately. The term is usually applied to the costing method adopted where large scale contracts at different sites are carried out, as in the case of building construction.
• Batch Costing: This method is also a type of job costing. A batch of similar products is regarded as one job and the cost of this complete batch is ascertained. It is then used to determine the unit cost of the articles produced. It should, however, be noted that the articles produced should not lose their identity in manufacturing operations.
• Terminal Costing: This method is also a type of job costing. This method emphasizes the essential nature of job costing, i.e. the cost can be properly terminated at some point and related to a particular job.
• Operation Costing: This method is adopted when it is desired to ascertain the cost of carrying out an operation in a department, for example, welding. For large undertakings, it is frequently necessary to ascertain the cost of various operations.
• Process Costing: Where a product passes through distinct stages or processes, the output of one process being the input of the subsequent process, it is frequently desired to ascertain the cost of each stage or process of production. This is known as process costing. This method is used where it is difficult to trade the item of prime cost to a particular order because its identity is lost in volume of continuous production. Process costing is generally adopted in textile industries, chemical industries, oil refineries, soap manufacturing, paper manufacturing, tanneries, etc.
• Unit or Single or Output or Single-output Costing: This method is used where a single article is produced or service is rendered by continuous manufacturing activity. The cost of whole production-cycle is ascertained as a process or series of processes and the cost per unit is arrived at by dividing the total cost by the number of units produced. The unit of costing is chosen according to the nature of the product. Cost statements or cost sheets are prepared under which various items of expenses are classified and the total expenditure is divided by total quantity produced in order to arrive at unit cost of production. This method is suitable in industries like brick-making, collieries, flour mills, cement manufacturing, etc. This method is useful for the assembly department in a factory producing a mechanical article e.g., bicycle.
• Operating Costing: This method is applicable where services are rendered rather than goods produced. The procedure is same as in the case of single output costing. The total expenses of the operation are divided by the units and cost per unit of service is arrived at. This method is employed in railways, road transport, water supply undertakings, telephone services, electricity companies, hospital services, municipal services, etc.
• Multiple or Composite Costing: Some products are so complex that no single system of costing is applicable. It is used where there are a variety of components separately produced and subsequently assembled in a complex production. Total cost is ascertained by computing component costs which are collected by job or process costing and then aggregating the costs through use of the single or output costing system. This method is applicable to manufacturing concerns producing motor cars, aero planes, machine tools, type-writers, radios, cycles, sewing machines, etc.
• Departmental Costing: When costs are ascertained department by department, the method is called “Departmental Costing”. Usually, for ascertaining the cost of various goods or services produced by the department, the total costs will have to be analyzed, say, by the use of job costing or unit costing.