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 Methods of Costing
What are the Various Methods of Costing?
The main costing method available is
process costing - Process costing is usually used when large quantities of one same product are manufactured in batches, usually in long production runs.
job costing - This method is used when particular individual products or batches of various products are found different and unique, and especially when these jobs are being billed directly to end customers or are likely to be audited by customers themselves.
direct costing - This is a compilation of all costs directly attributable to the production unit and sale of a product, which includes direct materials, piece-rate labor, and commissions.
throughput costing - Here one additional unit is passed through the bottleneck operation which will impact the throughput (sales minus total variable costs) of the entire business.
Each of these methods applies to different production and decision environments keeping in mind the entire production and distribution unit.
What is the importance of the Costing Method?
Costing helps the government when assessing for income tax or any other such government liabilities. It also helps set industry standards and helps with fixing the price of the products, tariff plans, cost control, etc. The main focus point in costing is cost control and improvement in the efficiency rate. Hence, costing will help in performing the business and yield high profits.
How is Costing used during the Entire Production Period?
Costing is used for two main purposes:
Internal reporting - The Management uses costing to learn about the cost of operations involved in the production process so that it can work on refining operations to improve profitability and develop product prices.
External reporting - The various accounting frameworks require that costs be allocated to inventory on the balance sheet of any particular company at the end of their reporting period. This calls for the use of a cost allocation system that is consistently applied.
What is costing and its types?
The two basic types of costs incurred by businesses are fixed and variable costs. Fixed costs do not vary with output even if the company faces any form of loss, while variable costs do vary according to the percentage of profit yielded that year. Fixed costs are sometimes called overhead costs. In a production facility, labor and material costs are usually variable costs that will increase as the volume of production increases.
Why is the costing process important in a business?
Costing is very important to ensure that all expenses incurred in the business are covered and the development and accounting group fixes a price that ensures a profit. The first and foremost important step in the costing process is to identify all the general costs of a business: production, sales, administrative, overheads, etc. Then it is necessary to research and study every department and decide which part of the business needs attention and development.