Methods of Costing

 

Methods of Cost Accounting signify the systems used to assign cost elements to cost objects. These are the procedures by which product costs are accumulated. Different methods of Cost determination are used because business vary in their nature and the type of products or services they produce. Following are the different methods of costing.

Job costing

Job costing is designed to accumulate cost data for a manufacturing firm which produces goods to specific order. It is also known as specific orders costing or production order costing. According to “ICMA”, London, it is that category of basic costing method which is applicable where the work consists of separate contract job or batches each of which is authorized by specific order or contract. It is followed by manufacturing and non-manufacturing concerns.

It is employed in industries in which –

a) A production is done on the basis of customers own specifications.

b) Products are manufactured in distinguishable lots.

c) Products are not uniform.

d) It is practical to maintain a separate record of each lot from the time production is begun until it is completed.

 

Following is the list of concerns which generally employ job costing method.

a) Printing Work.

b) Design Engineering Concerns.

c) Repair Works.

d) Construction companies.

e) Furniture makers.

f) Hardware industry.

g) Automobile garages.

h) Interior decoration etc.

 

 Batch Costing :-

Batch Costing It is a form of job costing in which a batches of identical products is taken as the cost unit. It is used when production consists of limited repetition work and a definite number of articles are manufactured in each batch to be held in stock for sale to customers generally.

Thus batch is a cost unit consisting of a group of identical units. Batch costing is applied in the manufacture of shoes, readymade garments, component parts of cars, radios, watches etc and manufacture of drugs, engineering equipments etc.

This method of costing is used in those firms where production is made on continuous basis. Each unit coming out is uniform in all respects and production is made prior to the demand, i.e. in anticipation of demand. One batch of production consists of the units produced from the time machinery is set to the time when it will be shut down for maintenance.

For example, if production commences on 1st January 2007 and the machine is shut down for maintenance on 1st April 2007, the number of units produced in this period will be the size of one batch. The total cost incurred during this period will be divided by the number of units produced and unit cost will be worked out. Firms producing consumer goods like television, air-conditioners, washing machines etc use batch costing.

 

Process Costing :- Some of the products like sugar, chemicals etc involve continuous production process and hence process costing method is used to work out the cost of production. The meaning of continuous process is that the input introduced in the process I travels through continuous process before finished product is produced. The output of process I becomes input of process II and the output of process II becomes input of the process III. If there is no additional process, the output of process III will be the finished product. In process costing, cost per process is worked out and per unit cost is worked out by dividing the total cost by the number of units. Industries like sugar, edible oil, chemicals are examples of continuous production process and use process costing.

 

Operating Costing :- This type of costing method is used in service sector to work out the cost of services offered to the consumers. For example, operating costing method is used in hospitals, power generating units, transportation sector etc. A cost sheet is prepared to compute the total cost and it is divided by cost units for working out the per unit cost.

Contract Costing :- This method of costing is used in construction industry to work out the cost of contract undertaken. For example, cost of constructing a bridge, commercial complex, residential complex, highways etc is worked out by use of this method of costing. Contract costing is actually similar to job costing, the only difference being that in contract costing, one construction job may take several months or even years before they are complete while in job costing, each job may be of a short duration. In contract costing, as each contract may take a long period for completion, the question of computing of profit is to be solved with the help of a well defined and accepted method.

 

 

 

 

 

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