Note on Methods of Costing

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METHODS OF COSTING

Depending upon the product’s nature, its production method and some specific business conditions, business enterprises use different costing methods. Over the years, many costing methods have come out on display but all the methods always have the basic principles which are related to the collection, allocation, analysis, apportionment and absorption.

The costing methods can be further classified into 2 types as specific order costing and continuous operation costing.

Source: onlineaccountreading.blogspot.com

Source: onlineaccountreading.blogspot.com

1. Specific Order Costing

This is the type of costing method whose main users are those type of business enterprises that are involved in a construct (make/assemble) jobs or products. This method is further sub divided into 3 types. They are:

i. Job order costing:

Source: slideplayer.info
Source: slideplayer.info

This costing method is used in ascertaining the cost of each job or work order separately. As each job and product have its own distinct nature, all of the relevant cost is charged considering it as a cost unit.
Under this method, firstthe production and its requirement are identified, followed by the ascertaining of the expenses relating to it. This method is mostly suitable for the construction of road, furniture, automobile works, repair shops, etc. Some of its features are:

  • Under this method, production is carried out against customer’s order by the manufacturer.
  • Each work or job is different in nature.
  • The works are usually executed in the factory premises or in workshops and repair shops.
  • The unit of costing is the job or work order.


ii. Contract costing:

Source: www.slideshare.net
Source: www.slideshare.net

A contract is a job of large size. Thus, in that manner, contract costing method is not so different than job costing method. Contract costing is mostly used for large scale contracts. This method is used in such building and constructing works which take a long period of time to be completed such as hydropower plant, road & bridge construction, ship building, etc. Its features are:

  • Contracts are jobs in large size.
  • Contracts take a long period of time to complete.
  • Generally, contract works are performed out in a site, outside of factory premises.
  • The contracts are executed in thorough specifications of the contractee.




Differences between Job order costing and Contract costing:

Job order costing

Contract costing

The time period to complete a job is comparatively less.

It takes quite a long time to complete a contract.

The work under this method is small in size.

Here, the contract’s size is much larger than job order.

Preliminary investment in assets is low.

Preliminary investment in assets is comparatively high.

Price payment for the job is usually paid after the job completion.

Generally, price payment for contracts is done gradually in installments, before work completion.

The profit & loss amount earned is entirely transferred to profit & loss account.

After transferring the profit to reserve, on the basis of work in progress, only the remaining amount of profit is transferred to profit & loss account.

Product manufacturing is done within the factory area.

Contract work is usually carried outside of factory premises, in site.

Expenses incurred can be both direct and indirect in nature.

The expenses incurred are usually direct expenses.



iii. Batch costing: Abatch is a group of similar products or orders in a specified number passed through a factory. Under this method, each batch is a unit whose cost is ascertained separately. Batch costing is mostly useful in the industries of readymade garments, biscuit manufacture, canned products, etc.


2. Continuous operation costing

This method of costing is generally used by such organizations which are involved in the mass production of products through continuous operations. These products are then sold from stock and are not produced to customers’ specific requirements. This method is sub-divided into five parts. They are:

i. Process costing:
This is the costing method that is used to ascertain the cost of a product in each and every stage of a process. This method is most applicable in the manufacturing of such products which are to produce through different stages or processes, where each process is considered a separate cost center. This method is suitable for the use of industries producing gas, oil, cement, textiles, sugar, etc. Its features include:

  • The manufactured units are standardized.
  • The production process is continuous that are carried on for own stock.
  • Before completion, the products have to go through several processes, each being separately well defined.
  • The output of a process becomes the next process’s input and passes through various processes till they become final products.


ii. Service costing:
This is the method of costing for determining the cost of providing a service. Industries rendering services are likely the major users of this method. This method is appropriate for hospitals, hotels, power supply companies, transport undertakings, municipal services, etc.

iii. Unit or single costing:
Also known as output costing, this method is most applicable for those manufacturers that produce a single product or a few grades of similar products. This costing method ascertains the cost per unit of output. Industries producing coal, bricks, oil drilling, etc. are the major users of this costing method. Its features are:

  • The units of output are identical and natural.
  • The production process is continuous.
  • This method ascertains the cost per unit of output like per meter, per ton, etc.


iv. Multiple costing:
This is the type of costing method is used where two or more than two costing methods are combined and applied to ascertain the cost of the product or service. Also known as composite costing, this method is appropriate where number of component or parts of a product is separately produced and then assembled into a final product subsequently. This costing method is used in factories manufacturing radios, airplanes, automobile engines, cycles, etc.
(Khanal & Dulal, 2073)

v. Operation costing:
This method is a further refined method of process costing. The procedure for cost ascertainment in operating costing is so far the same as in the process costing, except that the cost unit is not a process but an operation.
This costing method is used mainly in such industries where production is repetitive or in mass or where the components have to be stocked in a semi-finished state, to execute special orders or issue convenience or later operations. For example: the manufacturing of handles for bikes involves series of operations like cutting steel sheets into proper strips, then molding, machining and finally polishing. Each of these operations is ascertained with separate costs.

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu



Types of Specific Order Costing 

  1. Job costing
  2. Contract costing
  3. Batch costing

Types of Continuous Operation Costing 

  1. Process costing
  2. Unit costing
  3. Service socting
  4. Multiple costing
  5. Opertaion costing

 

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