Businesses or industries are different from each other according to their nature of operation and characteristics of finished products produced or service rendered by them. It is evident that the job of building a house is quite different from running a motor vehicle for a kilometer.
Though, in all cases, the basic principles and procedure of costing remain the same, different industries follow different methods and techniques to ascertain cost of their products or services.
Methods of costing for ascertainment of actual cost may be identified in many names according to the variation of procedure adopted to determine cost for different types of product. Broadly there are two group of costing methods: (a) Specific order, costing (or job / Terminal costing) and (b) Operation costing (or process or Period costing)
Specific order or job costing is applicable for specific jobs, batches or contracts each of which is undertaken by specific order or contract job costing. Batch costing and Contract costing are included in this group.
Operation costing or process costing is applicable for standardized products produced or service rendered continuously in a repetitive manner. In this method, costs are first charged to the operation and then averaged over units produced or service rendered during the period. It is also called Period costing. All methods of costing are briefly discussed as under:
Costing technique used to ascertain cost of a job or work-order is called job costing. Sometimes, it is also called “terminal” costing and it includes contract costing. Generally, this method is used by industries those produce goods against orders or specification of the customers. It is suitable for industries like printing, repairs, painting and decoration. Under this method, cost is collected separately for each job in their respective job order cost sheet.
This method is also known as terminal costing. It is a variant of job costing. It is used in case of large job described as ‘contract’, that usually involves heavy expenditure stretched over a long period of time and is undertaken at different sites. Each contract is treated as a separate unit for cost control and ascertainment. It is most suited to industries like shipbuilding, construction of buildings, bridges and roads. !
Costing method used for goods identical in nature and design and produced in groups, is called batch costing. Each batch is treated separately as an independent unit
for cost purpose. The batch cost is then used to determine the unit cost of article produced. It is suitable for industries like bakery, toy manufacturing, readymade garments, etc.
This method is used to ascertain cost where the production process is continuous and product can be expressed in identical quantitative unit. This method is also called ‘output’ or ‘single output costing’. This method is suited to industries like brick making, mining, cement, flourmill, etc.
Some products are to pass through different stages of production before their completion. The different stages of production are called ‘process’ and each process is distinct and well defends. Output of one process is used as raw material for the next process.
It may be in a saleable state. It is necessary to ascertain total cost of each of such processes and cost per unit at each process. So a separate account for each process is maintained and that method of maintaining record and ascertaining cost of production is known as process costing. Sometimes, it is also referred as ‘average’ costing. It is used in case of textile, chemical, paints, food product, paper, sugar, etc.
This method of costing is applicable to ascertain cost of operating a service, such as bus, railways, water supply, nursing home, etc. In such organisations, the unit of cost is a service unit, e.g., passenger-kilometer in case of bus, ton-kilometer in case of truck, kilowatt- hour for electric power and patient-day in case of nursing home, etc. This is also called ‘service costing’.
Where more than one costing method is used to ascertain the cost of a product, it is known as multiple costing. This method is applied where a product comprises of variety of components separately produced and subsequently assembled. This involves use of different methods of costing for different components. It is also known as ‘composite costing’. This is applied to industries like, motor car, television, radio, refrigerator, etc.
This is not a separate method of ascertaining cost. It is only a common system j of costing method used by number of firms in the same industry. This basically helps in making inter-firm comparison.