Top 3 Methods of Costing

Under this costing, the cost per unit is determined by dividing the total expenditure incurred during a period by the no.of units produced during that period. Product costing methods are used to assign a cost to a manufactured product. The main costing methods available are process costing, job costing, direct costing, and throughput costing.

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product. This is the type of costing methods used in which the standardized goods and service are in repetitive and more less continuous operation or cost are charged before being over aged over units produced during the periods. In this type of costing method include Service costing, unit/output costing, operation costing, process costing etc.

How to calculate the cost of goods manufactured

This type of costing is used in industries where a number of component part are separately produced and then assembled into a final product. Contract costing is adopted where a job is very big and takes a long time to complete. Under this method of costing the cost of each contract is ascertained separately. It is suitable for those firms which are engaged in the construction of bridges, roads, buildings, factories etc. on a contract basis. The purpose of contract costing is to ascertain the cost incurred on each contract separately. This method is used by firms engaged in ship building, construction of buildings, bridges, dams and roads.

For example, steel manufacturing, Brick making, Cement Industry, etc. All the units in a particular batch are uniform in nature and size. Hence each batch is treated as a cost unit and costed separately. The total cost of a batch is ascertained and it is divided by the number of units in the batch to determine the cost per unit.

Costing methods: definition; classification; characteristics; difference and advantages

Process costing helps to calculate the cost of production at each stage. In job costing, the costing of each job undertaken and executed is calculated. This method is adapted in production units that do not involve highly repetitive work. When things are sold that contain various other processed parts, multiple costing, also known as composite costing, is an accounting method used when these parts cost differently. Each of the elements made by other processes, like the ultimate product, has a cost connected with it. Each industry has a costing method that depends on the nature of the work.

• Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation, utilities, or salaries—traceable to certain activities.
• Since more than one method of costing have been applied, the method in such a case is known by the name composite or multiple costing method.
• That layer is the “average cost” of all the items currently in existence in the inventory pool.
• A cost pool is a group of related costs that are incurred when performing a particular activity.

Under this method, the cost of each distinct operation of a process, instead of the cost of the process as a whole, is ascertained. This method provides minute analysis of costs and ensures greater accuracy and better control of costs. It is adopted in concerns where the manufacturing process consists of a number of distinct operations.

Costing methods and the importance of choosing the correct one

This method is used in a variety of industries such as – chemicals, oil refining, paper making, flour milling, cement manufacturing, sugar, rubber, textiles, soap, glass, food processing 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. Service Costing – This method is used where services are provided such as hotels, cinemas, hospitals, transport, electricity companies etc.

This helps the government to ensure that fairness prevails to avoid over or under taxation. The main objective 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. Under marginal costing, costs are classified as fixed or variable.

Step 4: Determine non-personnel, fixed resources, and their associated expenses

Batch costing is adopted by manufacturers of biscuits, ready-made garments, spare parts medicines etc. This https://turbo-tax.org/uber-taps-wageworks-to-let-commuters-pay-for/ is applied where production is continuous and uniform and the industry is engaged in the production of a single product or a few grades of the same product. Business concerns which undertake the production of components or parts in batches adopt batch costing. Under this system, the cost of each batch is ascertained separately. (Batch means of group of similar products/ identical products).

Let’s take a minute to look at the costing for each of these two areas. It is a technique of ascertainment of marginal cost by differentiating between fixed and” variable cost. It is used to determine the effect of changes in volume on profit. The construction work is accepted to meet the special requirements of each individual customer and the work is expected to be continued for a long period.