Methods of Costing
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Cost Accounting is a branch of accounting which deals with the overall costs that are associated with conducting a business. Generally based on standard accounting practices, cost accounting is one of the tools that managers utilize to determine what type and how much of expenses are involved with maintaining the current business model. At the same time, the principles of cost accounting can be applied to project changes to costs in the event that specific changes are implemented.
Cost accounting is helpful in making a number of business decisions. By weighing the actual cost versus the anticipated benefit, cost accounting can help a company to avoid launching a product with no real market, prevent the purchases of unnecessary goods and services, or alter the current operational model in a manner that will decrease efficiency.
Different industries follow different methods for ascertaining cost of their products. The method to be adopted by business organization will depend on the nature of the production and the type of output.
The following are the methods of costing.
Job Costing: Job costing is concerned with finding the cost of each job or work order. This method is followed by concerns when work is carried on by the customer’s request. Examples are engineering works, etc. Under this system a job cost sheet is required to be prepared to find out profit and loss for each job or work order.
Contract Costing: Contract costing is applied where a contract work like construction of a dam or a building, etc is taking place. Each contract or job is treated as separate cost unit for cost ascertainment and control.
Batch Costing: A batch is a group of identical products. Under batch costing a batch of similar products is treated as a separate unit for the purpose of ascertaining the cost. The total cost of a batch is divided by the total number of units in a batch to arrive at the cost per unit. This type of costing is generally used in industries like confectionery and toy making.
Process Costing: This method is used in industries where production is carried on through different stages or processes before becoming a finished product. Costs are determined separately for each process. The main feature of process costing is that output of one process becomes the raw material of another process until the final product is obtained. This type of costing is generally used in industries like textile, chemical, paper, oil refining, etc.
Service (Operating) Costing: This method is used in those industries which render services instead of producing goods. Under this method, cost of providing a service is also determined. Its also called service costing. The organizations like water supply department, electricity department, telecom and broadband services also come under this category.
Operation Costing: This is suitable for industries where production is continuous and units are identical to each other. This method is applied in industries like mining or drilling, cement works, etc. Under this system cost sheet is prepared to find out cost per unit and profit or loss on production.
Multiple Costing: This method uses a combination of two or more of the above methods of costing. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components, different methods of costing may be used. It is also known as composite costing. This type of costing is applicable to industries producing motor vehicles, aero planes and electronic products.
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