Sometimes there may arise confusion as regards the exact meaning of the terms ‘Costing‘, ‘Estimating‘ and ‘Pricing‘, which are used in connection with cost accounts. The exact meaning of these terms should be understood at this stage.
Costing meanings and definition
‘Costing’ means ascertaining the actual cost. It can be defined as ascertaining the actual cost of an article that has already been produced or of a service that has already been rendered.
Estimating meanings and definition
‘Estimating‘, on the other hand, refers to ascertaining in advance of the probable cost of manufacturing an article or of completing a contract or of executing a process in near future. Estimating is based on past (recorded) experience.
Estimating necessarily involves some guess but such guess should be as close to facts as possible. One of the advantages of cost accounting system is that it provides reliable data on the basis of which estimates or tenders for future work can be prepared much more accurately than can be possible without them. In this way, the margin of error in estimating cost is reduced and the businessman can quote a competitive price. While estimating cost on the basis of past cost data, the anticipated changes in relevant costs must be taken into account otherwise the estimates may not be correct.
Pricing meanings and definition
‘Pricing‘ means fixing the selling price of an article. Pricing of an article already produced should be preceded by and based on costing though some other factors are also taken into account i.e., price of competitive articles, future trend of prices, etc. In cases where pricing of an article has to be done before its actual production, it is preceded by estimating rather than costing and has to be based on it. But in such cases, the estimating itself must be based on actual cost data adjusted to anticipated changes in the relevant items of cost.