Meaning of Costing Methods

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.

Under Cost Accounting, costing methods are categorized into two groups; namely;

• Job Costing
• Operation Costing

Various methods of costing are as under:

Unit Costing: If production is made in different grades, costs are ascertained grade wise. Per unit cost is calculated on the basis of units produced. This method is applicable to steel production bricks, mines and flour mills etc.

Job Costing: This method is applicable where work is undertaken to customers. This method is used in repair shops printing press and interior decoration etc.

Features:

1. Production is undertaken against customer’s order.
2. Each job is clearly distinguishable from the other, and hence requires a special treatment.
3. The cost is ascertained for each job, since there is no uniformity in the flow of production from department to department.
4. A separate cost sheet is maintained for each job. Each job is given a certain number by which it is identified. The cost sheet provides information regarding details of costs incurred, the data of commencement, completion of the job etc.

Advantages:

1. It helps in identifying profitable and unprofitable jobs.
2. It helps in the preparation of estimates will submitting quotations for similar jobs.
3. Cost data under job costing enable management in preparing budgets for future.
4. It enables management to control operational efficiency by comparing actual costs with estimated ones.
5. Spoilage and defective work can be identified with a specific job and responsibility for the same can be fixed on individuals easily.

Limitations:

1. It involves too much of clerical work (in estimating cost of material, labour and overheads chargeable to each job). As such it is expensive and laborious.
2. Being historical in nature, it has all the disadvantages of the historical costing. Hence, it cannot be used as a means of cost control unless it is used with techniques like standard costing.

Contract Costing: Unit cost in a contract is of a long duration and it may continue for more than a year. It is most suitable in roads, bridge, shop building etc.

Process Costing: The method is used in mass production industries. The raw material passes through a number of processes up to a completion stage. The finished product of one process passed through a number of process for the next process. This method is used in chemical works, sugar mills etc.

Service Costing: This method is used where services are provided such as hotels, cinemas, hospitals, transport, electricity companies etc.

Composite Costing: This method is used where a number of components are manufactured separately and then assembled in a final product such as in Scooters, Cars, Air Conditioners etc.

Batch Costing: The cost of a batch is ascertained and each batch is a cost unit. This method is used in readymade garments, shoes, tyres and tubes etc.

Operation Costing: This system is followed where number of operations are involved. It provides minute analysis of costs and ensures greater accuracy and better control.