by Key differences between Contract Costing, Process Costing and Service Costing:
| Basis | Contract Costing | Process Costing | Service Costing |
|---|---|---|---|
| Meaning | Costing method used for large, specific contracts. | Costing method used for continuous production through different processes. | Costing method used to determine the cost of providing services. |
| Nature of Work | Work is performed according to a specific contract. | Production is continuous and repetitive. | Services are provided continuously or periodically. |
| Main Cost Unit | Each individual contract. | Each process or unit of production. | Unit of service, such as passenger kilometre or patient day. |
| Type of Output | Usually customised and different for each contract. | Generally homogeneous and standardised. | Intangible service output. |
| Production | Usually project based and may take several years. | Continuous and mass production. | Depends on the nature and demand for the service. |
| Cost Collection | Costs are collected separately for each contract. | Costs are accumulated separately for each process. | Costs are accumulated for the service operation. |
| Major Costs | Materials, wages, plant, subcontracting and direct expenses. | Materials, labour and process overheads. | Labour, fuel, maintenance, depreciation and overheads. |
| Profit Calculation | Profit is calculated for each contract. | Profit is generally determined after considering process and finished production costs. | Profit is determined by comparing service revenue with operating cost. |
| Incomplete Work | Incomplete contracts are common and profit is recognised carefully. | Work in progress may exist at the end of a period. | Service output is generally measured for a particular period. |
| Loss Treatment | Expected losses on contracts are considered appropriately. | Normal loss, abnormal loss and abnormal gain are separately treated. | Operating inefficiencies and idle capacity affect service cost. |
| Examples | Buildings, roads, bridges, dams and infrastructure projects. | Cement, sugar, chemicals, paper and textiles. | Transport, hospitals, hotels, electricity and water supply. |
| Main Objective | To determine the cost and profit of each contract. | To determine the cost of production at each process. | To determine the cost per unit of service and control operating costs. |
1. Contract Costing
Contract costing is a method of job costing used for large and long term projects undertaken according to specific customer contracts. Each contract is treated as a separate cost unit, and all costs relating to the contract are recorded separately. It is commonly used in construction projects such as buildings, roads, bridges, dams and infrastructure projects. Major costs include materials, wages, plant, direct expenses, subcontracting charges and allocated overheads. Since contracts may continue for several accounting periods, profit on incomplete contracts is recognised carefully based on the stage of completion. Contract costing helps determine the cost, profit or loss of individual contracts and provides information for controlling project costs.
2. Process Costing
Process costing is a method of costing used where production is continuous and products are homogeneous. Production passes through a number of processes, and costs are accumulated separately for each process. The output of one process generally becomes the input of the next process. It is commonly used in industries such as chemicals, cement, sugar, textiles, paper and oil. The cost of production is determined for each process and then divided among the units produced to calculate the average cost per unit. Process costing also considers normal loss, abnormal loss, abnormal gain and work in progress. It helps management determine production costs and control efficiency at each stage.
3. Service Costing
Service costing is a method used to determine the cost of providing services rather than producing physical goods. It is commonly applied in transport companies, hospitals, hotels, electricity supply, water supply and educational institutions. Since services are generally intangible, suitable cost units are selected to measure service output. Examples include passenger kilometre, tonne kilometre, patient day, room day and kilowatt hour. Costs such as wages, fuel, maintenance, depreciation, materials and overheads are accumulated and related to the service units provided. Service costing helps calculate the cost per unit of service, fix service charges, control operating expenses, measure efficiency and support managerial decision making.
