Costing methods and techniques
Costing is the technique and process of ascertaining costs. Keeping this definition in view various methods have been evolved to ascertain the costs. A few of the important methods of ascertaining the costs are as enumerated below:
1. Job Costing
2. Contract Costing
3. Cost plus Costing
4. Batch Costing
5. Process Costing
6. Single (unit or output) Costing
7. Operating Costing
8. Departmental Costing
9. Multiple or Composite Costing
10. Operation Costing.
Important Costing Methods
1. Job Costing
Job costing is one wherein the costing of each job undertaken and executed is computed. This method is adapted in those production units which are not highly repetitive. The production unit, where job costing is done, should be in a position to separate its each job or lot according to the number of order executed. In commercial foundries, drop forging shops, specialised industrial equipments, job costing method is generally used.
2. Contract Costing
Job costing and contract costing are the same so far as the principles of both methods are concerned. A contract is a big job whereas a job is too small a work but which can be separated easily because of its nature. Job or contract costing is also known as ‘Terminal costing.’
3. Cost plus costing
This is a part of the contract costing. When in a contract besides the price of the contract, i.e., agreed
sums a percentage of the contract cost or an agreed total sum is paid over and above the contract price to the contractor, it is known as cost plus costing.
4. Batch costing
Where the orders or jobs are arranged in different batches after taking into account the convenience of producing the articles, It is known as batch costing, Here, the cost of a group of products is ascertained. It is suitable for general engineering goods in which the components can be easily arranged in convenient economic batches. In pharmaceutical industries also batch costing is used advantageously and effectively.
5. Process Costing
Where a product passes through different stages, each of them is distinct, well-defined and easily separated, the costing method applied may be this one—process costing. Process costing helps in the computation of cost of production at each stage. Extractive industries, e.g., chemical, paints, foods, soap, etc may effectively and advantageously use process costing method.
6. Single Costing
It is also known as unit or output costing in which cost per unit of output or production is ascertained. Each element constituting such a cost is determined separately. This costing method is suitable in industries like brick-making, paper mills, flour mills etc.
7. Operating Costing
Where expenses are incurred for the provision of services such as those rendered by bus companies, transport-agencies, electricity companies, etc., the operating costing method is used with advantage.
8. Multiple Costing
This Costing method is one in which the cost of different sections of production, are combined after ascertaining the cost of each and every part manufactured. In motor car industries and other industries in which a product comprises many assembled parts method is used.
9. Departmental Costing
This method of costing is one wherein the ascertainment of the cost of output of each department separately is the main objective. Where an industry is divided into a number of departments this method is adopted.
10. Operation Costing
Operation costing is a refinement of Process costing. Where mass or repetitive production is carried out or where components have to be stocked in semi-finished stage, the operation costing is suitable and used with advantage.
Types/Techniques of Costing
Besides the above systems of costing, Types/techniques of costing refer to various systems used for ascertaining and analyzing costs. The various types/techniques of costing are as follows:
1. Historical Costing
The ascertainment and recording of costs after they have been incurred is known as historical costing. It provides the management with a record of what has happened and is thus a postmortem of the actual costs. Since, it is conventional in nature, it is known as ‘Conventional Costing’ or ‘Actual Costing’. Actual costs can be ascertained in two ways: (i) Post costing, and (ii) Concurrent or continuous costing.
(a). Post costing: Under this system, cost is ascertained after production is completed, by analyzing financial data in such a way as will disclose the cost of the units which have been produced. The main advantage of this procedure is that the figures analyzed are the actuals and hence the cost arrived at is correct. But the serious drawback of this procedure is that it is historical in nature since the information is obtained after the event has place. As such this procedure does not enable the manufacturer to take corrective action in time.
(b). Continuous costing: Under this system, cost is ascertained by recording expenditure and allocating it to production as and when the same is incurred, with the result that cost is ascertained as soon the job is completed or even when the job is in progress. This necessarily involves the use of estimates, especially in respect of overhead. Hence the figures of cost ascertained may not be exact. But since this method makes available the costing information promptly, it enables the management to take the necessary corrective action. But this system does not provide any standard for judging the efficiency of the current operations and does not disclose, what the cost of the job ought to have been.
2. Standard Costing
According to the Terminology of Cost Accountancy of the Institute of Cost and Management Accountants, ‘Standard Costing’ refers to “the preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence”. Under standard costing, costs are computed in advance on the basis of normal or probable expectation. The costs so computed are known as ‘standards’ or ‘standard costs’ and these are compared with actual costs, when incurred, so as to ascertain the variances or differences. These variances or differences are later on analyzed to their causes so as to enable the management to take corrective action where necessary.
3. Marginal Costing
Marginal Costing (also known as Variable Costing) refers to “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs”. Under marginal costing, all costs are segregated into fixed costs and variable costs. Fixed costs refer to costs which tend to remain fixed or constant in total with changes in the volume of output. Variable costs refer to costs which tend to vary or change in total directly in proportion to changes in the volume of output. The main object of marginal costing is to deal with the effects of changes in the volume or range of output on the costs or profit of a business concern.
4. Direct Costing
According to the ‘Terminology of Cost Accountancy’ of the Institute of Cost and Management Accountants, ‘direct costing’ means “the practice of charging of all direct costs to operations, processes or products, leaving all indirect costs to be written off against profits in the period in which they arise”. This differs from marginal costing in that some fixed costs could be considered to be direct costs in appropriate circumstances.
5. Absorption Costing
It has been defined by the Institute of Cost and Management Accountants as “the practice of charging all costs, both variable and fixed, to operations, processes or products.” Under absorption costing, no distinction is made between fixed costs and variable costs and all costs, whether fixed or variable, are taken into account for ascertaining the cost of production. Absorption costing is also known as ‘Full Costing’.
6. Uniform Costing
It has been defined by the Institute of Cost and Management Accountants as “the use by several undertakings of the same costing principles and/or practices”. Thus, when a number of undertakings, whether under the same management or otherwise, decide to adhere to one set of accepted costing principles particularly in matters where there can be two opinions, they are said to be following uniform costing. It attempts to establish uniform costing methods so that comparison of performances in various undertakings can be made to the common advantage of all the participating undertakings.