Ans. METHODS OF COSTING
Business
enterprises are not alike. They are different from another in some way or
other. The basic principles and procedures of costing remains the same in all
industries but the method of analysis and presentation of cost of their
products and services vary from industry to industry. Therefore, the choice of
a particular method of costing depends upon the nature and types of the product
or service provided by a business unit. The various methods of costing can be
summarized as follows :
Job Costing
Under
this method, costs are ascertained for each job or work order separately. The
job may consist of a single unit or it may consist of identical or similar
products under a single work order. This method applies where work is
undertaken against customers’ requirements. Job costing is suitable to
industries like printing, repairs, foundries, interior decorators, building
construction etc. Non profit organisations like rehabilitation or street repair
programmes also use job costing to ascertain cost of individual projects. It
can also be used in industries where different product lines are manufactured.
For example, a furniture manufacturer may produce a batch of similar chairs, a
batch of tables and so on. Each batch can be treated as a job for accounting
purposes. Job costing also found in service organisations like engineering,
consultancy and accounting firms. Job costing procedure is the same both in
manufacturing and service organisations, except that service units use no
direct material.
The
purpose of job costing is to ascertain the cost of production of each job for
fixing selling prices, bidding, controlling costs and evaluating performance.
It also provides information for negotiating price increase with the customers.
Contract Costing
This
method is used in case of big jobs and therefore, the principles of job costing
are applied to contract costing The contract work usually involves heavy
expenditure, spreads over a long period and is usually undertaken at different
sites. Hence, each contract is treated as a separate unit for the purpose of
cost ascertainment and control. Contract costing is also termed as terminal
costing as the cost can be terminated at some point and related to a particular
job. Contract costing is employed in business undertakings engaged in
construction of buildings, roads, bridges, ship building and other civil and
mechanical engineering works.
Batch Costing
This
method of costing is used in industries where the production is carried on in
batches. Each batch consist of identical products which maintains its identity
throughout one or more stages of production. Each batch cost is used to
determine the unit of cost of products. On completion of the batch the cost per
unit can be calculated by dividing the ‘total batch cost’ by the number of
units produced. This method of costing is suitable to industries where
production consists of repetitive production in nature and specified number of
products are produced in one batch. It is generally used in industries like
engineering component industry, pharmaceuticals, footwear, bakery, readymade
garments, toy manufacturing, bicycle parts etc.
Unit Costing
Unit Costing is a method of cost accounting
where costs are determined per unit of a single product. This method is also
called single or output costing. This method is suitable to industries where
production is continuous and uniform and engaging in the production of a single
product in two or three varieties. The cost per unit is found by dividing the
total cost by the total number of units produced. Where the product is produced
in different grades, costs are ascertained grad wise. It is suitable for
industries like collieries, quarries, brick works, flour mills, paper mills,
cement, textile mills, diaries etc.
Process Costing
Where
a product passes through different processes and each process is distinct and
well defined the method employed for ascertaining the cost at each stage of
production is called process costing. Process costing is used in those
industries where the production is continuous and the final product is the
result of sequence of operations or processes. The finished product of one
process will become the raw material of the next process and the output of the
last process will be the finished stock. The cost per unit at each process will
be calculated by dividing the total cost by the number of units produced at
each stage and the cost per unit of the final product is the average cost of
all the processes. During the course of processing of raw material, loss of
some raw material is unavoidable or it may give rise to the production of
several products called joint products or by products. Process costing is used
in case of chemicals, paints, textiles, bakeries, oil refining, food products,
etc. Standardization of processes helps the management to submit quotations in
time without any delay. As actual and budgeted costs are available in each
process it facilitates managerial control by evaluating the performance at each
process level.
Operating
Costing
Operating
Costing is also called as ‘service costing’ because this method is used in
those undertakings which provide services and are not engaging in manufacturing
tangible products. It is used for ascertaining the cost of operating a service
such as railways, roadways, airways, hotels, nursing homes, power supply, water
supply etc.
Multiple Costing
It
is an application of more than one method of costing in respect of the same
product. This method is suitable in industries where a number of components are
manufactured separately and then assembled into a finished product. In cases of
motor car, type writer, television, refrigerators, etc., costs are to be
ascertained for each component as well as for finished product. This involves
use of different methods of costing for different components and so it is known
as ‘multiple’ or ‘composite costingí.
Uniform Costing
The
practice of using a common method of costing by a number of firms in the same
industry is known as ‘uniform costing’. Thus it is not a separate method of
costing. It simply refers to a common system using agreed concepts, principles
and standard accounting practices. This helps in making inter-firm comparisons
and fixation of prices.
It
should be noted that there are two basic methods of costing. They are : (i) Job
costing, and (ii) Process costing. The other methods discussed above are simply
variants of these two methods.
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