Methods of Costing

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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 for 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 the collection, analysis, allocation, absorption, and apportionment.

There are two types of methods which are used for costing:

  1. Specific Order Costing.

  2. Continuous Operation Costing.

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1. Specific Order Costing

Among two types of costing method-specific costing is one of the 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.

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  1. 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 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.

  1. 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 for completion.

The features of Contract costing:

  • Contract costing is a large-scale costing method.

  • Contract consumes a lot of time.

  • Contraction works a site works.

  1. 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.

2. Continuous Operation Costing

This type of method of costing is suitable for the organizations which 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:

This method is the first type of costing method present in 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 centre of the cost.

This method is mainly used for producing gas, cement, sugar, textile, etc.

Its features are:

  1. They have standardized units.

  2. It occurs via the continuous process and carried out by the stock.

  3. 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:

  1. The outputs are natural and identical.

  2. The process is continuous.

  3. 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, aeroplanes, automobiles engines, cycles, etc.

  • Operation Costing:

This 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.

FAQ (Frequently Asked Questions)

1. Why are the Methods of Cost Important?

Ans: Costing methods are methods that are used to ascertain costs for specific products. They are important because they are the main tools to find and know about expenses for the business such as for the production of products or manufacturing of products.

Costing methods have various types of methods which are used according to the nature of the business. It’s the main ingredient for the methods of pricing.

Method of costing plays a big role in methods of pricing. Its costing techniques are helpful to manage the inventory cost and the expenses as the requirement. Without proper costing methods, it's impossible to run a business company or any industry.

2. What are the Benefits of Costing Methods?

Ans: The benefits of costing methods are:

  • It helps to manage the efficiency of the production.

  • Costing methods help in profitably running industries and companies.

  • Methods of costing help in the fixation of prices.

  • It helps to handle the expenses in an orderly organized manner.

  • Every stage of processing has its nature and time for completion of products’ production and the costing method helps to identify the cost unit at every stage and it plays a big factor to make workers work.

  • It is a way of identifying how the prices of products should be given as per their nature.