Costing Methods and Techniques: 10 Methods of Costing (2023)

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Everything you need to know about the methods and techniques of costing. The methods or types of costing refer to the techniques and processes employed in the ascertainment of costs.

There are different methods of costing for different industries. The method of costing to be used in a particular concern depends upon the type of manufacturing and nature of industry.

In addition to the methods of costing, there are certain techniques of costing, which are used along with any of the method. These techniques serve the special purpose of managerial control and policy.

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Some of the methods of costing are:- 1. Job Costing 2. Contract Costing 3. Cost Plus Costing 4. Batch Costing 5. Process Costing 6. Operation Costing 7. Unit Costing 8. Operating Costing 9. Departmental Costing 10. Multiple Costing.

Some of the techniques of costing are:- 1. Budgetary Control 2. Standard Costing 3. Marginal Costing 4. Life Style Costing 5. Target Costing 6. Activity Based Costing.

Methods and Techniques of Costing: Job Costing, Batch Costing, Process Costing, Operation Costing, Single Costing and a Few Others

Methods and Techniques of Costing – Popular Methods and Techniques of Costing

Methods of Costing:

The various methods of costing are as follows:

1. Job Costing:

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This is a method where costs are collected and accumulated for each job separately. This is done because each job requires different mark and has separate identity and therefore it becomes essential to analyze and segregate costs according to each job separately.

2. Batch Costing:

Under this method, factories, which have to produce a large number of parts, in order to make a product undertake the production of each part in batches. Products are arranged in convenient batches and each batch is treated as one job and cost is calculated accordingly. For example, a bicycle factory may produce 10000 handles at one time and then take up the manufacture of other parts in other batches. The cost of each batch is ascertained separately and the method is known as batch costing.

3. Process Costing:

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It is a method where costs are collected and accumulated according to department or processes and cost of each department or process is divided by the quantity of production to arrive at cost per unit. This method is useful in industries such as paper, soap, textiles, chemicals, sugar and food processing products.

4. Operation Costing:

This is a more refinement and more detailed application of process costing. This involves costing by every operation instead of a process. Many operations are necessary to make an article. This method has greater accuracy and control.

5. Single (Unit or Output) Costing:

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This method is applied where production is uniform and consists of only a single product or two or three types of similar products with variation only in size, shape or quality. The information is presented in the form of a statement known as cost sheet.

6. Operating Costing:

Where a business does not produce tangible goods but renders some service, the system of costing would be known as operating costing. This is used to determine the costs of services rendered by airways, railways, roadways, hospitals, power houses etc. For example a transport company is interested in knowing the cost of carrying one ton of goods per kilometer.

7. Multiple Costing:

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This method is followed where the final product consists of a number of separate parts, e.g., radio set, motor car, bicycle etc. The cost of each part has to be ascertained and then the cost of assembling the parts will be tabulated. The cost of the final product will consist of the cost all the parts plus the cost of assembling them.

8. Uniform Costing:

When a number of firms in an industry agree to use the same costing principles, it is known as uniform costing. This method attempts to establish uniform costing method so that comparison of performance in various undertaking can be made to the common advantage of all the participating units.

Techniques of Costing:

Following are the main techniques of costing:

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1. Marginal Costing – It is the ascertainment of marginal cost differentiating between fixed cost and variable cost. The ascertainment by differentiating between fixed costs and variable costs, of marginal costs and of the effect on profit of changes in volume or type of output.

2. Standard Costing – The preparation and use of standard costs, their comparison with actual costs and the analysis of variance to their causes and points of incidence. This permits the management to investigate the reasons for these variances and take necessary corrective action.

3. Direct Costing – It is a practice of charging all direct costs into, variable and fixed cost relating to operations process or products leaving all other cost to be written off against profits in which they arise.

4. Absorption Costing – Absorption costing is also referred to as full costing. It is a costing technique in which all manufacturing cost (fixed and variable) are considered as cost of production and are used in determining the cost of goods manufactured and inventories. The fixed production costs are treated as part of the actual production costs.

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5. Uniform Costing – It is the use of the same costing principles and practices for common control or comparison of cost by different business units. CIMA has defined uniform costing as “the use by several undertakings of the same costing principles and or practices.” This helps to compare the performance one business with the other and to derive the benefit of anyone’s better experience and performance.

6. Budgetary Control – A Budget is used for controlling and co-ordination of business operations. A Budget is a quantitative or financial statement prepared for definite period of time. Budgetary control is a use of comprehensive system of budgeting to aid management in carrying out its functions of planning, coordinating, and controlling operations. A budgetary control is one of the important tools of control.

Methods and Techniques of Costing – Major Methods and Techniques of Costing

Methods of Costing:

The basic principles of ascertaining costs are the same in every system of cost accounting. However, the methods of analysing and presenting the cost may vary from industry to industry. The method to be used in collecting and presenting costs will depend upon the nature of production.

Basically there are two methods of costing, namely:

1. Job costing and

2. Process costing.

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Method # 1. Job Costing:

Job costing is used where production is not repetitive and is done against orders. The work is usually carried out within the factory. Each job is treated as a distinct unit, and related costs are recorded separately. This type of costing is suitable to printers, machine tool manufacturers, job foundries, furniture manufacturers etc.

The following methods are commonly associated with job costing:

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i. Batch Costing:

Where the cost of a group of product is ascertained, it is called ‘batch costing’. In this case a batch of similar products is treated as a job. Costs are collected according to batch order number and the total cost is divided by the numbers in a batch to find the unit cost of each product. Batch costing is generally followed in general engineering factories which produce components in convenient batches, biscuit factories, bakeries and pharmaceutical industries.

ii. Contract Costing:

A contract is a big job and, hence, takes a longer time to complete. For each individual contract, account is kept to record related expenses in a separate manner. It is usually followed by concerns involved in construction work, building roads, bridges and buildings etc.

Method # 2. Process Costing:

Where an article has to undergo distinct processes before completion, it is often desirable to find out the cost of that article at each process. A separate account for each process is opened and all expenditure is charged thereon. The cost of the product at each stage is, thus, accounted for. The output of one process becomes the input to the next process.

Hence, the process cost per unit in different processes is added to find out the total cost per unit at the end. Process costing is often found in such industries as chemicals, oil, textiles, plastics, paints, canneries, rubber, food processors, flour, glass, cement, mining and meat packing.

The following methods are used in process costing:

i. Output/Unit Costing:

This method of costing is followed by concerns producing a single article or a few articles which are identical and capable of being expressed in simple, quantitative units. This is used in industries like mines, quarries, oil drilling, cement works, breweries, brick works etc. for example, a tonne of coal in collieries , one thousand bricks in brick works etc.

The object here is to find out the cost per unit of output and the cost of each item of such cost. A cost sheet is prepared for a definite period. The cost per unit is calculated by dividing the total expenditure incurred during a given period by the number of units produced during the same period.

ii. Operating Costing:

This method is applicable where services are rendered rather than goods produced. The procedure is same as in the case of unit costing. The total expenses of the operation are divided by the units and cost per unit of service is arrived at. This is followed in transport undertakings, municipalities, hospitals, hotels etc.

iii. Multiple Costing:

Some products are so complex that no single system of costing is applicable. Where a concern manufactures a number of components to be assembled into a complete article, no one method would be suitable, as each component made differs from the other in respect of materials and the manufacturing process.

In such cases, it is necessary to find out the cost of each component as also the final product by combining the various methods. This type of costing is followed to cost such products as radios, aeroplanes, cycles, watches, machine tools, refrigerators, electric motors etc.

iv. Operation Costing:

In this method each operation at each stage of production or process is separately identified and costed. The procedure is somewhat similar to the one followed in process costing. Process costing involves the costing of larger areas of activity whereas operation costing is confined to every minute operation of each process.

This method is followed in industries with a continuous flow of work, producing articles of a standard nature, and which pass through several distinct operations in a sequence to completion. Since this method provides for a minute analysis of costs, it ensures greater accuracy and better control of costs.

The costs of each operation per unit and cost per unit up to each stage of operation can be calculated quite easily. This method is in force in industries where toys, leather and engineering goods are manufactured.

v. Departmental Costing:

When costs are ascertained department by department, such a method is called ‘departmental costing’. Where the factory is divided into a number of departments, this method is followed. The total cost of each department is ascertained and divided by the total units produced in that department in order to obtain the cost per unit. This method is followed by departmental stores, publishing houses etc.

Techniques of Costing:

In addition to the different costing methods, various techniques are also used to find out costs.

These techniques may be grouped under the following heads:

Technique # 1. Historical or Absorption Costing:

It is the ascertainment of costs after they have been incurred. It is defined as the ‘practice of charging all costs, both variable and fixed, to operations, processes or products’. It is also known as traditional costing. Since costs are ascertained after they have been incurred, it does not help in exercising control over costs. However, it is useful in submitting tenders, preparing job estimates etc.

Technique # 2. Marginal Costing:

It refers to the ascertainment of costs by differentiating between fixed costs and variable costs. In this technique fixed costs are not treated as product costs. They are recovered from the contribution (the difference between sales and variable cost of sales). The marginal or variable cost of sales includes direct material, direct wages, direct expenses and variable overhead.

This technique helps management in taking important policy decisions such as product pricing in times of competition, whether to make or buy, selection of product mix etc.

Technique # 3. Differential Costing:

Differential cost is the difference in total cost between alternatives evaluated to assist decision making. This technique draws the curtain between variable costs and fixed costs. It takes into consideration fixed costs also (unlike marginal costing) for decision making under certain circumstances.

This technique considers all the revenue and cost differences amongst the alternative courses of action to assist management in arriving at an appropriate decision.

Technique # 4. Standard Costing:

It refers to the ascertainment and use of standard costs and the measurement and analysis of variances. Standard cost is a predetermined cost which is computed in advance of production on the basis of a specification of all factors affecting costs. The standards are fixed for each element of cost. To find out variances, the standard costs are compared with actual costs.

The variances are investigated later on and wherever necessary, rectificational steps are initiated promptly. The technique helps in measuring the efficiency of operations from time to time. By focusing attention on critical variances, it helps management in controlling costs.

Technique # 5. Uniform Costing:

It is the use of same costing principles and/or practices by several undertakings for common control or comparison of costs. When used and operated under a centralized control system, uniform costing will promote operating efficiency by ensuring inter-firm comparisons. It is not a separate method of costing but is usually designed by trade associations to ensure control over members.

Methods and Techniques of Costing – Frequently Used Methods and Techniques of Costing

Methods of Costing:

A regular and systematic process or technique of ascertaining the cost of manufacturing a product or providing a service is known as “Costing Method”.

The following are the different methods of costing and the situation in which they are applicable:

1. Unit or Output or Single Costing:

It is a method of costing used to ascertain the cost of manufacturing a standardised product in a single process. Under this method, a cost sheet or a statement of cost is prepared for a definite period and the cost per unit is determined by dividing the total expenses by the number of units produced. This method is suitable for Brick-manufacturing, Cement manufacturing, Colliery, etc.

2. Job Costing:

It is a method of costing used to ascertain the cost of making a single unit of customized product. Under this method, a job cost sheet is prepared for each job and all costs related to the specific job are recorded. The total cost of job is determined by aggregating all the expenses related to the specific job. This method is suitable for jobs like making a wooden dinner table, designing a software, painting a house, repairing a car, etc.

3. Batch Costing:

It is a method of costing used to ascertain the cost of making a number of similar units of a customised product. This method is similar to job costing. Under this method, a batch cost sheet is prepared for each batch of products and all costs related to the specific batch are recorded.

The total cost of each batch is determined by aggregating all the expenses related to the specific batch and the cost per unit is determined by dividing the total cost by the number of units in each batch. This method is suitable for activities like printing of visiting cards, preparation of sweets boxes for a function etc.

4. Contract Costing:

It is a method of costing used to ascertain the cost of executing a work involving heavy expenditure and extending over a long period of time. The work is executed according to customer specifications. Under this method, a separate account is opened for each individual contract and the same is debited with expenses and credited with Closing Stock of various items and the value of work completed. This method is suitable for activities like construction of a building, construction of ship, etc.

5. Process Costing or Operation Costing:

It is a method of costing used to ascertain the cost of making a number of similar units of a single product through a series of processes. Under this method, a separate account is prepared for each process and all expenses related to such process is debited to it The cost of output of one process becomes the cost of input of next process and the total expense of the last process is considered as the total cost of manufacturing of the products.

Cost per unit is determined by dividing the total expense by the number of units of output. This method is suitable for industries that manufacture fertilizers, chemicals, textiles, processing and bottling of mineral water etc.

6. Operating Costing:

It is a method of costing used to ascertain the cost of rendering services. Under this method an “Operating Cost Sheet” is prepared. The various expenses are classified into standing charges and variable charges. This method is suitable for transport undertakings, hospitals, educational institutions, etc.

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7. Multiple Costing or Composite Costing:

It is a method of costing used when a number of component parts are separately produced and subsequently assembled into a final product. In such a case, the cost of each component is determined separately by adopting a suitable primary method of costing for each component and then the total cost of the final product is arrived. This method is suitable for industries engaged in manufacturing and/or assembling of televisions, motor cars, electronic gadgets, etc.

Techniques of Costing:

Techniques of costing are those which help in cost control and cost reduction.

The following are the different techniques of costing:

1. Budgetary Control:

It is defined as the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide a base for its revision.

2. Standard Costing:

It refers to the preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence.

3. Marginal Costing:

It is defined as the ascertainment of marginal cost and the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs.

4. Life Cycle Costing:

Life cycle costing aims at ascertainment of cost of product or project, etc., over its projected life. It is a system that tracks and accumulates the actual costs and .revenues attributable to cost object from its inception to its abandonment. It is also called ‘cradle-to-grave costing’ or ‘womb- to-tomb costing’.

5. Target Costing:

It is defined as a structured approach to determine the cost at which a proposed product with specified functionality and quality must be produced, to generate a desired level of profitability at its anticipated selling price.

6. Activity Based Costing:

Activity based costing refers to the technique of determining the cost of activities and the cost of output that those activities produce. It is a process of identification of the activities that have taken place in the organisation, assigning costs to cost pool for each activity, spreading of support activities across the primary activities, determining cost driver for each activity and managing the costs of activities.

Methods and Techniques of Costing – 10 Methods and 5 Techniques of Costing

Methods of Costing:

Costing has been defined as “the technique and process of ascertaining costs”.

The principles in every type of costing are the same but the methods of analysing and presenting the costs differ with the nature of business.

Method # 1. Job Costing:

Where production is not highly repetitive and, in addition, consists of different jobs or lots so that material and labour costs can be identified by order number, the system of job costing is used. This method of costing is very common in commercial foundries and drop forging shops and in plants making specialised industrial equipments. In all these cases an account is opened for each job and all appropriate expenditure is charged thereto.

Method # 2. Contract Costing:

Contact costing does not in principle differs from job costing. A contract is a big job while a job is a small contract. The term is usually applied where at different sites large scale contracts are carried out. In case of ship-builders, printers, building contractors, etc., this system of costing is used.

Job or contract costing is also termed as ‘Terminal Costing’.

Method # 3. Cost plus Costing:

In contracts where besides ‘cost’ an agreed sum or percentage to cover overheads and profit is paid to the contractor, the system is termed as cost plus costing. The term ‘cost’ here includes material, labour, and expenses incurred directly in the process of production. The system is used generally in cases where Government happens to be the contractee.

Method # 4. Batch Costing:

Where orders or jobs are arranged in different batches after taking into account the convenience of producing articles, batch costing is employed. Thus, in this method, the cost of a group of products is ascertained. The unit of cost is a batch of group of identical products, instead of a single job order or contract. The method is particularly suitable for pharmaceutical industries and general engineering factories which produce component in convenient economic batches.

Method # 5. Process Costing:

If a product passes through different stages, each distinct and well-defined, it is desired to know the cost of production at each stage. In order to ascertain the same, process costing is employed under which separate account is opened for each process.

The system of costing is suitable for the extractive industries, e.g., chemical manufacture, paints, foods, explosives, soap making etc.

Method # 6. Operation Costing:

Operation costing is a further refinement of process costing. The system is employed in industries where mass or repetitive production is carried out or where articles or components have to be stocked in semi-finished stage, to facilitate the execution of special orders, or for convenience of issue for later operations.

The procedure of costing is broadly the same as for process costing except that cost unit is an operation instead of a process. For example, the manufacturing of handles for bicycles involves a number of operations such as those of cutting steel sheets into proper strips, moulding, machining and finally polishing. The cost of each one of these operations may be found out separately.

Method # 7. Unit Costing (Output Costing or Single Costing):

In this method cost per unit of output or production is ascertained and the amount of each element constituting such cost is determined. Where the products can be expressed in identical quantitative units and where manufacture is continuous, this type of costing is applied. Cost statements of cost-sheets are prepared under which the various items of expense are classified and the total expenditure is divided by total quantity produced in order to arrive at per unit cost of production. The method is suitable in industries such as brick- making, collieries, flour mills, paper mills, cement manufacturing etc.

Method # 8. Operating Costing:

The system is employed where expenses are incurred for provision of services such as those rendered by bus companies, electricity companies or railway companies. The total expenses regarding operation are divided by the units as may be appropriate (e.g., total number of passenger-kms. in case of bus company) and cost per unit of service is calculated.

Method # 9. Departmental Costing:

Ascertainment of the cost of output of each department separately is the objective of departmental costing. Where a factory is divided into a number of departments, this method is adopted.

Method # 10. Multiple Costing (Composite Costing):

Under this system the costs of different sections of production are combined after finding out the cost of each and every part manufactured. The system of ascertaining cost in this way is applicable where a product comprises of many assembled parts, e.g., motor cars, engines, machine tools, typewriters, radios, cycles etc.

As various components differ from each other in a variety of ways such as to price, materials used and manufacturing process, a separate method of costing is employed in respect of each component. It is multiple costing in the sense that more than one method of costing is employed.

It is to be noted that basically there are only two methods of costing viz., Job costing and Process costing. Job costing is employed in cases where the items of prime cost (i.e. direct material, direct labour and direct expenses) are traceable to specific jobs or orders, e.g., house building, ship building etc. But where it is impossible to trace the items of prime cost to a particular order because their identity is lost in manufacturing operations, process costing is used. For example, in a refinery where several tonnes of oil are being produced at the same time, the price cost of specific order of 10 tonnes cannot be traced.

The cost can be found out only by finding out the cost per tonne of total oil produced and then multiplying it by ten. It may, therefore, be concluded that the methods of batch, contract and cost plus costing are only the variants of ‘job costing’, while the methods of unit, operation and operating costing are only the variants of ‘process costing’.

Techniques of Costing:

Besides the above methods of costing, the following techniques of costing are used by management only for controlling costs and making some important managerial decisions. As a matter of fact they are not independent methods of cost findings such as job or process costing but are basically costing techniques which can be used with advantage with any of the methods discussed above.

Technique # 1. Marginal Costing:

It is a technique of costing in which allocation of expenditure to production is restricted to those expenses which arise as a result of production i.e., direct materials, direct labour, direct variable expenses, and variable overheads. Fixed overheads are excluded on the ground that in cases where production varies, the inclusion of fixed overheads may give misleading results.

This technique is useful in manufacturing industries with varying levels of output.

Technique # 2. Direct Costing:

The practice of charging all direct costs to operation, process or products, leaving all indirect costs to be written off against profits in the period in which they arise, is termed as direct costing.

The technique differs from marginal costing because some fixed costs can be considered as direct costs in appropriate circumstances.

Technique # 3. Absorption Costing:

The practice of charging all costs, both variable and fixed, to operations, products or processes is termed as absorption costing.

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The Institute of Cost and Works Accountant of India defines Absorption Costing as “a method of costing by which all direct costs and applicable overheads are charged in products or cost centres for finding out the total cost of production. Absorbed cost includes production cost as well as administrative and other costs.”

Technique # 4. Uniform Costing:

A technique, where standardised principles and methods of cost accounting are employed by a number of different companies and firms, is termed as uniform costing. Standardisation may extend to methods of costing, accounting, classification including codes, methods of defining costs and charging depreciation, methods of allocating or apportioning overheads to cost centres or cost units. The techniques thus facilitates inter-firm comparisons, establishment of realistic pricing policies etc.

Technique # 5. Activity Based Costing:

It is a recent technique basically used for apportionment of overheads costs in an organisation having products that differ in volume and complexity of production. Under this technique, the overhead costs of the organisation are identified with each activity which is acting as the cost driver i.e., the cause for incurrence of overhead cost. Such cost drivers may be purchase orders issued, quality inspections, maintenance requests, material receipts, inventory movements, power consumed, machine time, etc.

Having identified the overhead costs with each cost centre, cost per unit of cost driver can be ascertained. The overhead costs can now be assigned to jobs on the basis of the number of activities required for their completion.

Activity Based Costing may, therefore, be defined as a technique which involves identification of costs with each cost driving activity and making it as the basis for apportionment of costs over different products or jobs. The Chartered Institute of Management Accountants (CIMA), London, defines it as a technique of “cost attribution to cost units on the basis of benefits received from indirect activities e.g. ordering, setting up, assuring quality.”

Methods and Techniques of Costing – Job Costing, Process Costing, Absorption Costing, Standard Costing, Direct Costing and Uniform Costing

Methods of Costing:

Basically, there are only two methods of costing, viz.,:

1. Job Costing, and

2. Process Costing.

All other types are either variation of these two systems of costing or techniques used for particular purpose under specific conditions.

1. Job Costing:

This method of costing is used to ascertain the cost of jobs, separate contracts, batches or individual orders, which are made according to customer’s specifications. Here each job order can be identified at each stage of production and costs which can be directly identified with the job or order are charged to it. Also a portion of indirect expenses are charged to it.

It is a ‘one-off’ operation and each job is considered as a cost unit and to some extent the cost centre also. When a job is finished its cost is compiled separately by adding all materials, labour and overhead costs booked against it. Each job is distinct or of different nature and needs special treatment, more detailed supervision and control. If a job has several parts, cost of the job is compiled only when all the parts are complete and assembled. There is no question of work-in-progress, and transfer of costs from one job to another.

Since each job uses different materials and labour, costs of jobs cannot be ascertained by averaging. This method is applied in ship building, house building, engine and machinery construction and repairs, contractor’s work e.g., construction of reinforced concrete structures, foundries, garage and repair shops, general engineering workshops, printing press, interior decorators, painters, etc. Under job costing, each job or order is given a number and all costs are booked in a form called “Job order cost sheet”. Losses are generally not segregated.

Other variations of Job Costing are:

(i) Contract Costing or Terminal Costing- Here each contract is considered as a big job and given a number where all direct and indirect costs relating to the contract are booked. It is used for big jobs which continue over more than one financial year, e.g., building construction, ship building, dams, civil construction, structural for bridge, etc. This method is also called ‘terminal costing’. This work is generally done outside the factory.

(ii) Batch Costing- It is a form of specific order costing which is used in manufacturing concerns producing similar small components or articles in batches or groups in large quantities for sale or internal use e.g., aircraft, ready- made garments, shoes, bicycle parts, printing industries, toy making, biscuit, drugs, general engineering factories etc. Here costs are booked against a batch order number and total costs are divided by total quantity in a batch to get the unit cost of each job.

(iii) Departmental Costing- If the output or service performed by a department is sufficiently uniform, then it is possible to establish unit cost of output by dividing the total cost of the department by the total units produced. This departmental rate is then applied to all jobs passing through that department.

2. Process Costing:

It is used in cases where the identity of individual orders is lost in the general flow of production. This method is suitable for continuous and mass production industries where standardised goods are produced and each unit is processed in a similar way. Thus, same amount of material, labour and overhead is chargeable to each unit processed. Here costs are collected by process and divided by output for a period to get the average cost per unit.

Products are produced without reference to the specific requirements of customers and units of product are homogenous and indistinguishable. Since the unit of production may remain incomplete at different stages of production, cost of the finished units as well as work-in-progress is computed at the end of the period. The finished product of one process becomes the starting material for the subsequent process. While transferring output from one process to another, costs are transferred as well. Normal losses are carefully predetermined and abnormal losses segregated. Production and costs can be easily controlled.

Kohler defined process costing as “a method of cost accounting whereby costs are charged to process or operations and averaged over units produced”. ICMA, London defines process costing as that form of operation costing, where standardised goods are produced.

Process costing is extensively used in paints, chemical, paper, soap, textile, food-processing, dairies, biscuit making, sugar, refineries, etc.

Other variations of process costing are:

(i) Unit, Single or Output Costing- It is used for organisations producing uniform and single article on large scale or two or, three varieties of the same product by continuous manufacture. When the product is produced in various grades, costs are found grade-wise. The entire production cycle is costed as a process or series of processes. In unit costing the total production cost is divided by the number of units produced to obtain unit cost since the units of output are identical. The method is extensively used in mining, brick- making, breweries, typewriters, automobiles, wireless sets, paper mills, steel work, marble quarry, flour mills, etc.

(ii) Operation Costing- In this method, each operation, in each stage of production or process is separately costed instead of a process and then the cost of finished unit is computed. The unit operation cost is computed at the end of each operation by dividing the total operation cost by total output units. It offers better scope for control since a process may consist of several operations. It is suitable for industries involving mass production of repetitive nature, e.g., cycles, motor cars, toys, etc.

(iii) Operating Costing- Service organisations like transport, powerhouse, hospitals, telephone, hotels, schools, cinemas, canteen, etc., which do not make or sell tangible goods but render services, ascertain operating costs. Usually composite cost units, i.e., tonne-Km, KWH, passenger – Km, a room per day in a hotel, a seat per show in cinema etc., are used. Here, cost of providing and operating a service is determined and unit cost is computed by dividing total cost by units of services rendered.

(iv) Composite or Multiple Costing- The production of some products (e.g., motor cars, radios, aeroplanes, cycles, T.V., locomotive, refrigerator, coolers, etc.,) is so complex that job costing or process costing alone cannot be used for collecting and presenting product cost. For this reason a combination of different costing methods, called composite or multiple costing, is applied.

Techniques of Costing:

Besides the methods of costing explained above there are some costing techniques which are used for the purpose of control and managerial decision making.

(i) Absorption Costing- Here cost is ascertained after it is incurred and fixed as well as variable costs are allotted to cost units and total overheads are absorbed by actual activity level. It is also called ‘total costing’ or ‘historical costing’. It does not help to control cost as costs are determined after they have been incurred and there is substantial time-gap between occurrence of expenditure and reporting of cost information.

(ii) Standard Costing- Here standards for costs and revenues are used for the purpose of control through variance analysis. Standards for each cost element are established on scientific basis in monetary terms, actuals are compared against it, variances are analysed and corrective action taken to stop inefficient operation in future.

It is generally used along with budgetary control, which establishes budgets defining responsibilities of executives for the implementation of a policy, compares actual with budgeted results and takes corrective action (i.e., individual action to achieve the policy or revision of the budget). Absorption costing and marginal costing can be used in conjunction with standard costing.

(iii) Direct Costing- Here all direct costs are charged to jobs, operations, processes and all indirect costs are charged to profit and loss account of the period in which they arise. Some fixed costs are considered as direct cost in appropriate circumstances in direct costing and are charged to products, processes, etc., whereas in marginal costing all fixed costs are charged to profit and loss account.

(iv) Uniform Costing- ICWA (Eng.) has defined it as “the use by several undertakings of the same costing principles and/or practices”. Thus when a number of units of the same undertaking or several undertakings within the same industry, decide to adhere to one set of accepted costing principles; they are said to be following uniform costing.

In fact, uniformity should be with regard to (i) size of the various units; (ii) production methods, type of products and (iii) accounting methods, principles and procedures used. It makes inter-unit and inter-firm comparison easy and helps the firms to submit reliable cost data to price fixing bodies to ascertain the average cost and fix the fair selling prices of various products. It is a pre- requisite to cost audit. It helps to derive the benefit of anyone’s better experience and performance.

Methods and Techniques of Costing – 2 Most Important Methods and 3 Techniques of Costing

Methods of Costing:

The methods or types of costing refer to the techniques and processes employed in the ascertainment of costs. There are different methods of costing for different industries. The method of costing to be used in a particular concern depends upon the type of manufacturing and nature of industry.

Basically, there are two methods of costing:

1. Job costing.

2. Process costing.

All other methods are variations of either job costing or process costing.

The various methods of costing are given below:

Method # 1. Job Costing (or Job-Order Costing):

In this method, costs are collected and accumulated separately for each job or work order. This is because each job work is done according to customer’s specifications. Each job has a separate identity and makes a cost unit.

The industries where this method of costing is used are:

(i) Repair shops.

(ii) Printing press.

(iii) Painting and decorating.

(iv) Production of made to order articles, etc.

Contract Costing:

This method is based on the principles of job costing. If a job is big, it is known as a contract. Contract is a big job and job is a small contract. Each contract is taken as a separate cost unit for the purpose of cost ascertainment.

Contract costing is most suited to:

(i) Construction work.

(Video) INTRODUCTION TO COST ACCOUNTING PART - 7 METHODS OF COSTING

(ii) Ship building.

(iii) Architects.

(iv) Constructional engineers, etc.

Batch Costing:

Like contract costing, it is also a variation of job costing. In this method, productions of identical products are arranged in convenient groups or batches. Each batch is treated as a cost unit and costs are accumulated for each batch separately.

It is used in the production of:

(i) Ready-made garments.

(ii) Toys.

(iii) Bicycle parts.

(iv) Biscuits and confectionary.

Method # 2. Process Costing:

In this method costs are separately collected and accumulated for each process or department. In order to arrive at the cost per unit, the total cost of the process or department is divided by the quantity of production. This method is used in mass production industries manufacturing standardised products in continuous process of manufacturing. In such industries finished product of one process becomes raw material for the next process.

Examples of such industries are:

(i) Textile mills.

(ii) Chemical works.

(iii) Sugar mills.

(iv) Paper mills.

(v) Soap manufacturing.

Single, Output or Unit Costing:

This method is used when production is uniform and consists of only a single product or two or three types of similar products or different grades of the same product.

This method is applied in the following types of industries:

(i) Mines.

(ii) Oil drilling.

(iii) Steel works.

(iv) Brick works.

Operating Costing:

Operating costing method of cost ascertainment is applicable to those undertakings that render services. They do not manufacture goods. Such undertakings are – transport companies (road transport, railways, airways, and ship­ping companies) electricity companies, cinemas, schools, hospitals, gas and steam generating concerns etc. As the activities of such undertakings are of di­verse nature, the cost system used is obviously different from that of manufac­turing concerns.

Multiple or Composite Costing:

It is an application of more than one method of costing in respect of the same product. This method is used in industries in which a number of compo­nents are separately manufactured and assembled to produce a single unit of product. For example, manufacture of different types of components may require different production methods and hence different methods of costing may have to be applied. Assembly of these components into one finished unit may require still another method of costing.

Multiple costing is applicable to manufacturing and assembly concerns like:

(i) Television, radio manufacturing.

(ii) Scooter and other motor vehicles.

(iii) Refrigerator manufacture.

(iv) Electric motors.

(v) Locomotive works etc.

Techniques of Costing:

In addition to the above methods of costing, there are certain techniques of costing, which are used along with any of the above method. These techniques serve the special purpose of managerial control and policy.

Some of the important techniques are as follows:

Technique # 1. Standard Costing:

This connotes the setting up in advance of definite standards or targets of performance and the expression of these standards in monetary terms. Actual performance is measured against these standards and differences are extracted to indicate where corrective action is needed. This technique is a valuable aid in cost control.

Technique # 2. Budgetary Control:

Closely allied to standard costing is the technique of budgetary control. A budget is an expression of a firm’s plan in financial form and budgetary control is a technique applied to the control of total expenditure on materials, wages and overhead by comparing actual performance with planned performance. Thus, in addition to its use in planning, the budget is also used for control and co-ordination.

Technique # 3. Marginal Costing:

In this technique, separation of cost into fixed and variable (marginal) is of special interest and importance. This is so because marginal costing regards only variable costs as the cost of the products. Fixed cost is treated as period cost and no attempt is made to allocate or apportion this cost to individual cost centres or cost units. It is transferred to costing profit and loss account of the period. This technique is used to study the effect on profit of changes in volume or type of output.

Cost Ascertainment and Cost Estimation:

Cost Ascertainment:

Cost ascertainment refers to the methods used and process of finding costs. It is concerned with computation of actual costs after cost has been incurred. In different types of industries, different methods are employed for cost ascertainment, such as- job costing, contract costing, batch costing, operating costing, process costing, etc. The basic principles underlying all these methods are the same, but these methods have been designed to suit the needs of individual business conditions.

Cost Estimation:

Cost estimation is the process of pre-determining the cost of products or services. The costs are ascertained in advance of production and precede the operations. Estimated costs are definitely future costs and are based on the average of the past actual figures adjusted for anticipated changed in the future.

Cost estimates are often required for bidding for contracts or for offering quotations of prices in respect of jobs to be undertaken. Extreme care has to be taken in cost estimation, as a high quotation may result in a loss of business and a low quotation may lead to lower profits or sometimes losses. Thus, in order to safeguard against errors in cost estimation, the estimates should be reviewed and checked by someone other than the person responsible for its preparation.

Home ›› Cost Accounting ›› Costing ›› Costing Methods

FAQs

What are the methods and techniques of costing? ›

Product costing methods are used to assign a cost to a manufactured product. The main costing methods available are process costing, job costing, direct costing, and throughput costing. Each of these methods applies to different production and decision environments.

What are the methods of costing PDF? ›

The various methods of costing are as follows:
  • Job Costing: ADVERTISEMENTS: ...
  • Batch Costing: ...
  • Process Costing: ...
  • Operation Costing: ...
  • Single (Unit or Output) Costing: ...
  • Operating Costing: ...
  • Multiple Costing: ...
  • Uniform Costing:

How many types of costing methods are there? ›

There are two types of methods that are used for costing: Specific Order Costing. Continuous Operation Costing.

What are the 4 types of costing? ›

Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.

Which costing is a technique of costing? ›

Standard costing is a technique where the firm compares the costs that were incurred for the production of the goods and the costs that should have been incurred for the same. Essentially it is the comparison between actual costs and standard costs. The differences between the two are variances.

What is the full form of PV ratio? ›

by Prince Kumar. Last updated on Oct 12, 2020. Profit-volume ratio indicates the relationship between contribution and sales and is usually expressed in percentage. The ratio shows the amount of contribution per rupee of sales.

What is classification of cost? ›

What is Cost Classification? Cost classification involves the separation of a group of expenses into different categories. A classification system is used to bring to management's attention certain costs that are considered more crucial than others, or to engage in financial modeling.

What is unit cost? ›

A unit cost is a total expenditure incurred by a company to produce, store, and sell one unit of a particular product or service.

What are the 2 main type of cost? ›

Fixed and Variable Costs

The two basic types of costs incurred by businesses are fixed and variable. Fixed costs do not vary with output, while variable costs do. Fixed costs are sometimes called overhead costs. They are incurred whether a firm manufactures 100 widgets or 1,000 widgets.

What is meant by costing method? ›

Definition; Costing method is the approach or style or tactic adopted by an organization to collect cost data in a more appropriate manner. There are several methodologies utilized by different organizations, which is determined by the nature of products being manufactured.

What is costing with example? ›

Costing may involve only the assignment of variable costs, which are those costs that vary with some form of activity (such as sales or the number of employees). This type of costing is called direct costing. For example, the cost of materials varies with the number of units produced, and so is a variable cost.

What are the 5 types of cost? ›

The 5 costs they cover are:
  • Direct cost.
  • Indirect cost.
  • Fixed cost.
  • Variable cost.
  • Sunk cost.

What are the main 3 types of cost? ›

These expenses include:
  • Variable costs: This type of expense is one that varies depending on the company's needs and usage during the production process. ...
  • Fixed costs: Fixed costs are expenses that don't change despite the level of production. ...
  • Direct costs: These costs are directly related to manufacturing a product.

What is total cost? ›

total cost, in economics, the sum of all costs incurred by a firm in producing a certain level of output.

What's Prime cost? ›

A prime cost is the total direct costs of production, including raw materials and labor. Indirect costs, such as utilities, manager salaries, and delivery costs, are not included in prime costs. Businesses need to calculate the prime cost of each product manufactured to ensure they are generating a profit.

What is importance of cost accounting? ›

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency.

What are the main aims of costing? ›

The aim is to determine the cost of each product, process, or operation, and to ensure that all expenses are absorbed into the cost of the products, the techniques, and the process of costing used.

What is the basic concept of cost? ›

It is the measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering of services. It is the price paid for acquiring or maintaining the resources which are used in the course of business operation.

What is direct costing? ›

A direct cost is a price that can be directly tied to the production of specific goods or services. A direct cost can be traced to the cost object, which can be a service, product, or department. Direct and indirect costs are the two major types of expenses or costs that companies can incur.

Is a technique of cost control? ›

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. Cost control is an important factor in maintaining and growing profitability.

What are the three methods of costing? ›

The main costing methods available are process costing, job costing and direct costing. Each of these methods apply to different production and decision environments.

What is the method of cost accounting? ›

The cost accounting method is an internally focused, firm-specific system used to estimate cost control, inventory, and profitability. It can be much more flexible and specific when compared to general accounting methods. The complexity of cost accounting, however, means that it can be costly in a number of ways.

What is the difference between costing methods and costing techniques? ›

The difference between costing method and costing techniques is that that costing techniques uses methods for reducing and controlling the costs. The costing method is used to find out the costs of goods and services.

What are the types of costing? ›

Types of costing
  • Absorption costing. Absorption costing, sometimes referred to as full costing, is used by a company to determine all costs that go into the manufacturing of a specific product. ...
  • Historical costing. ...
  • Marginal costing. ...
  • Standard costing. ...
  • Lean costing. ...
  • Activity-based costing.

How is the unit cost? ›

Unit cost is determined by combining the variable costs and fixed costs and dividing by the total number of units produced.

What is process costing method? ›

A process costing system is a method typically used within certain sectors of the manufacturing industry to determine the total production cost for each unit of product. It accumulates cost from each process or department and allocates them to the individual products produced.

What are the 2 methods of costing? ›

Job costing and process costing are the two basic methods of costing. Job costing is suitable to industries which manufacture or execute the work according to the specifications of the customers. Process costing is suitable to industries where production is continuous and the units produced are identical.

What is the concept of cost? ›

The concept of cost is a key concept in Economics. It refers to the amount of payment made to acquire any goods and services. In a simpler way, the concept of cost is a financial valuation of resources, materials, risks, time and utilities consumed to purchase goods and services.

What is the basic concept of cost? ›

It is the measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering of services. It is the price paid for acquiring or maintaining the resources which are used in the course of business operation.

What's Prime cost? ›

A prime cost is the total direct costs of production, including raw materials and labor. Indirect costs, such as utilities, manager salaries, and delivery costs, are not included in prime costs. Businesses need to calculate the prime cost of each product manufactured to ensure they are generating a profit.

Why are costing methods important? ›

1. Help to understand the value of inputs and outputs in production process. 2. Helps the management to find the actual cost per unit of each product.

What is the technique of cost control? ›

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. Cost control is an important factor in maintaining and growing profitability.

Which is not a technique of costing? ›

Marginal Costing is not a method of costing like process, batch or contract costing.

What is total cost? ›

total cost, in economics, the sum of all costs incurred by a firm in producing a certain level of output.

What is direct costing? ›

A direct cost is a price that can be directly tied to the production of specific goods or services. A direct cost can be traced to the cost object, which can be a service, product, or department. Direct and indirect costs are the two major types of expenses or costs that companies can incur.

What is FIFO method? ›

First In, First Out, commonly known as FIFO, is an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first. For tax purposes, FIFO assumes that assets with the oldest costs are included in the income statement's cost of goods sold (COGS).

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