Various methods and Types of Costing
Table of Contents
Methods or Types of Costing
Basically, costing is divided into two methods. They are job costing and process costing. Even though, two more costing methods are generally used by some manufacturing concerns. They are composite or multiple costing and farm costing.
The basic principles underlying all these methods or types are the same. The principles are collecting and analyzing the expenditure according to the elements of cost and determine the cost for various cost centre and cost unit.
A. Job costing
The cost unit under this method is very small. Job costing system is used when there is a need to find out the cost of a job or a specific order of finished goods. Finally, profit or loss of such job is also found out. Printers, machine tool manufacturers, notebook manufacturer. painters. etc follow Job costing. Job costing includes Batch Costing, Contract Costing and Departmental Costing.
1. Batch Costing
The cost of group of products is ascertained under this method. The reason is that the cost of single unit or product is not able to find out. Hence a group of products are taken into account for calculation. The group of products is having homogeneous character. Thus, hatch costing is used by engineering factories producing components or spare parts. pharmaceutical industry. textile industry, toys and biscuits manufacturing companies and the like.
2. Contract Costing
It is otherwise called Terminal Costing. Here, contract is the cost unit under this method of costing. The completion of a contract requires more than one year. Even though, profit from such a contract is also find out. Building, Road and Bridge contractors are following contract costing.
3. Departmental Costing
If the company is decided to ascertain the cost of the output of each department separately, departmental costing is used. But, the application of departmental costing requires uniform performance of all the departments. A departmental rate per unit of output i» fixed. If any job or product or unit passing through such a department, the rate is added with passing product or unit.
B. Process Costing
Process costing is used whenever a unit lose its identify in manufacturing process and passing two or more processes for completion. This system is used in continuous and mass production industries. The output of one process is the input of next process. Moreover, the same amount of material, labour and overhead is chargeable to each unit in processing.
The conditions for using process costing system are
- Continuous mass production
- Loss of identify of individual items or lots and
- Complete standardization of products and processes.
Process costing includes single output or unit costing, operating co»ting and operation costing.
1. Single Output or Unit Costing
This method is used where uniform products or units are produced in large number and able to find out cost per unit or product. The expenses are recorded in stage wise production of units or products. The number of units produced to get unit or single output cost divides the total production cost. Marble quarrying, mining and steel working industry are using generally single output or unit costing.
2. Operating Costing
This method is used when the services are rendered to produce a product. Production is not possible without such service. Expenses are incurred to generate and render service to the production process. Composite cost units may be used such as tone miles, passenger miles, kilowatt/hours and the like. Transport industries, Hotel and Hospital industries are generally using operating costing system.
3. Operation Costing
In certain organization, there is a simultaneous manufacture of many parts through combinations of many operations. Therefore, each operation is considered as cost centre. In this way, the costing of each operation is determined in order to find out the cost of finished product. This system is used when large quantities of standard units are produced under repetitive conditions.
C. Composite or Multiple Costing
In certain manufacturing concern, it is difficult to use either job costing or process costing. For example: Manufacture of aeroplane, which involves many operations and processes. Hence, it is advisable to use more than one method of costing i.e. multiple or composite costing. Other such manufacturing industries are motorcars, cycles, radios, computers, television and the like.
D. Farm Costing
The agricultural firm differ from other manufacturing concerns in many aspects. Manufacturing concerns are giving standard output. But, the agricultural firm cannot do so. Plant of firm also differ from one place to another since the soil condition is varies.
The farm production is highly influenced by nature of seeds used, climate, rainfall, irrigation, and nature of maturing, quantity of fertilizers and pesticides used and nature of labour employed at different stages from sowing to harvesting. But, in the manufacturing concerns, products are not influenced by these factors.
The one year output of farm is used as seed i.e., input in the succeeding year. Paddy, potato, onions, etc. are preserved for one year for using them as seed in the next year. Thus, a new costing method has been applied to farm so as to suit their purpose and is known as farm costing.
India is a agriculture country and its economy is fully based on the agricultural produce. If a farm produce only one crop, the period cost is being decided by the number of units produced. Sometimes, a farm produce more than one crop, if so, cost is ascertained after proper allocation of expenses to different crops.
