How many types of costing methods

Under the First In, First Out FIFO method, the oldest costs are assigned to inventory items sold, regardless of whether the sold items were actually purchased at that cost. When the number of inventory items purchased at the oldest cost is sold, the next oldest cost is assigned to sales.

The average cost method assigns inventory costs by calculating a moving average of all inventory purchase costs. The specific identification method perfectly matches inventory costs with units sold, assigning the exact cost of each sold inventory item when the specific item is sold.

There are two conventional costing approaches used in manufacturing, namely process and job order costing. Process costing method analyzes the net cost of a manufacturing process. Since most manufacturing processes involve more than one step, calculation is made for each step to arrive at a unit cost average for the entire production system. The second major costing method, job-order costing, involves costing based on an individual product basis.

This is useful where each unit of production is customized or where there are very few units produced. Under this method, the exact costs incurred in the production of a particular unit are calculated and are not necessarily averaged with those of any other unit, since every unit may be different. While traditional methods classify costs into categories like direct materials, labor and other overheads, ABC considers all the costs associated with a single manufacturing task, regardless of whether they fall under the headings of labor or materials or something else.

The benefit of this method is that management can keep track of tasks that cost the most versus which add the most value; indicating any disproportionate amount of money being spent on low-value activities, thereby indicating the need for process change. Costing is a topic majorly covered in courses related to accounting. There are specific specialized courses in costing and management accounting that covers the topic in depth.

These courses train the candidate on the industry-relevant skills imparting the required and in-demand skills and knowledge used on the job. US CPA is another course that provides global recognition to the candidates.

The course covers overall accounting topics apart from cost. Chartered Accountant course is offered by the Indian Institute and provides you recognition within the country only since it covers the Indian Accounting Standards rather than the International Accounting Standards. EduPristine provides free career counseling to students who want to pursue a career in accounting and finance. To learn more about the various courses, book an appointment now.

With the increasing changes in the industries and complexities of businesses, costing becomes important for managements to take appropriate decisions, planning and control and having effective cost management measures in place. Investing in the right company.

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Just drop in your details and start downloading material just created for you. For example — a motor workshop accepts different jobs. In industries like transport, banks or insurance, the whole activity centres around certain service operations.

Similarly, many other industries may undertake production of only one product. Since the very nature of production processes and the methods of work differ from industry to industry, it becomes imperative to use different methods of costing. All other methods of costing are either a variation, improvement, extension or combination of these two basic methods:.

Single costing is adopted in concerns where production is continuous and where only one product or a few types of similar products, which vary only in size, shape and quality and whose output can be measured by a common unit, are produced. Under this method, the cost per unit of output, such as per ton, per barrel, per kilogram, per metre, per quintal, per bag, etc. The industries where this method of costing is applied are mines quarries, collieries, breweries, oil drilling companies, steel works, cement factories, paper mills, flour mills, textile mills, etc.

It may be noted that this method is called single costing, as only a single product is costed under this method. It is also called output costing as cost is ascertained for the total output of a product. It is also known as unit costing, as not only the cost of the total output, but also the cost per unit of output is ascertained under this method.

Job costing is adopted in concerns where the work done is analysed into different jobs, each job being considered as separate unit of cost. Under this method the cost of each job and the profit or loss made on each job under- taken is found out separately. A separate account is opened for each job to which all expenses incurred on that job, from the date of commencement till the date of completion, are debited.

This will enable the concern to know the cost of each job. By comparing the cost of each job against the price charged for each job, the profit or loss made on each job is ascertained. The concerns where this method of costing is applied are printing process, motor workshop, watch repair works, etc. 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.

Where small components of the same kind are required to be manufactured in large quantities, the method of costing used is called batch costing. Under this method a batch of similar products is treated as a job and the costs are accumulated in respect of a batch. In a bicycle producing factory, if rims are produced in batches of 5, each, cost will be determined in relation to a batch of 5, rims.

In industries where a continuous process of production is carried and the product is homogeneous, the method of ascertaining the cost of the product is called Process Costing. As distinct from job costing, in these industries the cost of each process is determined for a given period of time. Products lose their individual identity as they are manufactured in a continuous flow.

Production Process is usually standardised and quite stable. Therefore, control is comparatively easier. To determine the cost per unit, the total cost of production is divided by the total output produced during the period.

This method of costing is extensively used in steel, sugar, textiles, chemicals, soap, vanaspati, paper and paint manufacturing organisations. Operation costing is a more detailed application of Process Costing. 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. Toy making units, engineering, industries, timber works, leather tanneries etc. The method of costing, which is used in service rendering undertakings is called operating costing.

For example — transport, water supply, electric undertakings, telephone services, hospitals, nursing homes, etc. A special feature of operating costing is that the unit of cost is generally a compound unit. For example the unit of cost in electricity supply is kilowatt hour. When various undertakings, under the same or under different managements in the same industry, use the same principles or practices of costing, they are said to be using the method of uniform costing.

In such a situation all costing information is dealt within a similar manner. The use of uniform costing facilitates inter-firm comparison. This system is applicable to undertakings where a variety of articles are produced, each article differing from other as to prices, material used process of manufacture etc.

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. This method is also applicable if the materials used are the same but the process of manufacture produces commodities differing widely in shape, size and value.

This system is applicable where the cost of a department or a cost centre is required to be ascertained. This is similar to operating costing. This system is resorted to where the factory is divided into distinct departments and it is desired to ascertain the cost of production of each department rather than the cost of each article produced. This method is good for a comparative study of the identical costs of different departments.

Under this method, the cost of operating each department is ascertained by allocating the total expenses incurred by a concern to various departments, and the cost per unit of product produced in each department is ascertained by dividing the total cost of the department by the number of units produced in that department. This method is adopted by concerns producing hosiery goods, factories producing cosmetics, footwear manufacturing concerns, etc.

Where a businessman feels hesitant to quote for a work which is absolutely new to him and new to other persons or contractors and he is unable to estimate the cost of the works offered to him for execution, it is decided with the contractor that he would be paid the total cost of work whatever it be, plus his profit at a certain percent on the total cost.

Such type of work is called cost plus method. In big business houses the cost price of the work is ascertained by experts and experienced persons well in advance or even before the commencement of the work. At the time of production the goal of the concern is always kept in mind.

This system is mostly used in big contracts. This method of costing helps in calculation of total cost and per unit cost of various activities covered under farming. Farming activities cover agriculture, horticulture, animal husbandry, poultry farming, pisciculture, dairy farming, sericulture, etc. Farm costing helps to improve the farming practices to reduce the cost of production, to ascertain the profit on each line of farming activity which ensures better control by management and to obtain loans from banks and other financial institutions as they give loans on the basis of proper cost accounting records.

The methods to be used for cost ascertainment depend on nature of industry. Costs of production or service rendered differ from industry to industry. As per I. Terminology costing methods can be grouped into two categories, viz.

This method of costing is applicable where the work consists of specific orders or Jobs batches or contracts. Job costing, Batch costing and Contract costing come under this category. This method of costing is applicable where standardised goods or services result from a sequence of continuous operations. Process costing, unit costing, operating costing, operation costing fall under this category.

It is applicable in industries where goods are made against individual orders from customers. It is defined by the terminology of the definitions committee, I. In job costing direct costs are traced for specific jobs or orders. Each of the jobs involves different operations. Basic object of costing is to ascertain the cost of each job separately and any profit or loss thereon.

It is applied in concerns involved in construction work, like laying of roads, bridges and buildings, etc. For each of the contracts a separate account is opened and the total cost incurred is identified with it. The contracts may take a long time for completion. It is applied where orders for identical products are placed in convenient lots or batches.

Cost per unit is ascertained by dividing the total cost of the batch by number of units of the batch. This method of cost ascertainment is used where the input is processed through several distinct processes to be converted into a finished product. The processes are carried out in a continuous sequence where the raw material is introduced in the first process and the finished product of each process becomes raw material for the subsequent process until the last process where from the finished product is transferred to finished stock account.

In process costing a separate account is maintained for each process. This method is applicable to service industries where no product is produced but some service is rendered. This method is applicable where there is mass production and several processes are involved with different operations to be carried out to complete the process of production. It is similar to process costing but cost details are maintained for every minute operation and costs are more accurate.

This method is applicable where output is uniform in all respects and production is continuous. Under this method cost per unit is ascertained by dividing the cost by number of units produced.

This is a system where two or more methods of costing like job costing unit costing and operation costing are applied to find the cost of production. It is the application of combination of two or more methods to ascertain the cost of the work done. It is applied in industries where different parts are produced separately and assembled into a final product. ABC is an accounting methodology that assigns costs to activities rather than products and services.

Costs are initially assigned to activities based on their resources. Then the costs are absorbed by products and services based on their use of activities. The distinctive feature of ABC is its focus on activities as the fundamental cost objects.

The ABC approach is more expensive than traditional approach. ABC has the potential however, to provide managers with information they find more useful for costing purposes. Contract is an agreement enforceable by law. The contractor agrees to complete the work and to mention the price known as contract price. Contract costing is the technique of ascertaining the cost of a contract. A contract ledger book is kept in which a separate account is opened.

Work Certified — Work is certified by the contractee and advance is given to the contractor. Full payment is not made but money is retained known as retention money. Where the contract is incomplete and profit is to be ascertained on the basis of contract. Work done but not certified — Work done by the contractor but which is not certified by the contractee is known as work done but not certified.

Contract Price — It is the value of the contract agreed to be paid to the contractor on the satisfactory completion of the contract. As per accounting standard AS7 contract issued by the two methods are used to determine the profit on contract done by the contractor:. The excess of credit over the debit items in case of incomplete contract is not treated as true profit. A reserve has to be created for the unseen future until the contract is not completed. Cost Plus Contract :. When contractor and contractee are new in the trade, they may agree that the payment would be made as total cost of work plus a rate of percentage on total cost.

Such a contract is known as cost plus contract. As the contractor will get a rate percent on the total cost as his profit, he may feel interested in increasing the cost as much as possible. Related accounting tutorials and articles. Types of accounting degrees Doctoral degree in accounting: getting admitted in a PhD program Doctoral degree in accounting: life of an accounting doctoral student Doctoral degree in accounting: life of an accounting professor.

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