The needs of every business organisation is not same. So for different types of needs, different methods of costing have been developed so far. Every industry because of its different nature and different types of products and services calculate cost of production in a different manner. Costing methods are used to determine cost per unit of output for inventory valuation According to CIMA, official terminology, basically there are two methods of costing. Methods of costing are given below:
Specific Order Costing
The basic costing method is applicable where the work consists of separate contracts, jobs or batches, each of which is authorised by a special order or contract.
(1) Contract Costing : Contract Costing are undertaken in those industries where the work is done according to the customer’s particular specifications. It is taken generally for long duration which may extend even more than one accounting period. A contract taking firm can run more than one contract at the same time because the site where these contracts are to be executed are different and are located outside the contractor’s premises. Therefore each contract is considered as a separate unit for the purpose of calculation of cost. The examples of industries using contract costing are civil engineering works, ship building, building construction and aircraft manufacturing etc.
(2) Job Costing : It is normally regarded as a contract of small size. The job costing is taken by the industries that produce made-to-order products or services. Each job is of a different nature Jobs are done within the factory premises. These are normally of small value and small duration. The examples of job costing are stitching of cloth, printing, painting, software making, research projects etc. In this system first of all the quantity to be produced is estimated and then an estimation is made for the required expenditure which is to be incurred for completing the job and so the cost is determined
(3) Batch Costing : Batch Costing system is applied in those industries where the products are produced in batches or in groups. The batch maintains its identity throughout one or more stages of production. Costs are collected and analysed according to batch numbers and the batchwise costs are ascertained. The example of industries using batch costing are medicines or pharmaceutical industries, confectionary industries etc.
(4) Target Costing : In target costing, the opinion of experts is taken to fix the cost price of big contracts. This is done before the actual work is started. The price so fixed is called target cost The tenders are filled for the contracts and the contractor who bids the lowest price gets the contract.
The basic costing method applicable where goods or services result from a sequence of continuous or respective operations or processes to which costs are charged before being averaged over the units produced during the period are known as operation costing.
(1) Process Costing : When any item is processed through different processes or different stages of production to reach up to the point of finished product and every process can be separated then the producer has the curiosity to know profit at every stage or process. For this purpose process costing method is utilized. This system is applied by chemical industries, sugar industries and paint industries etc. In this system costs are accumulated for each process. Accumulated costs are then averaged over the units produced during the period.
(2) Unit Costing : This system of accounting is utilized generally in those concerns where all the units of the goods produced are of same standard for example Collieries, Cement Factories Brick Kilns, Paper Mills, Factory of Breweries, Milk Dairies, Quarries etc. This system may provide per unit cost.
(3) Service or Operating Costing : This system of costing is applied in those industries which provide services rather than producing same kind of product. For example Railway, Motor Car Operating Co., Airways, Hospitals, Insurance & Banking etc. This method is used to know the cost of service rendered like Transport company uses this system to know the bus fare to be charged from passengers and cost of operating per km.
(4) Departmental Costing : When in a factory the works are distributed department wise then departmental costing system is applied. Under this system, total cost of department is divided by total unit produced in order to calculate the per unit cost so that costs of various departments can be compared.
(5) Multiple Costing : This type of cost system is applied in those industries where different small parts are assembled to get one new finished product for example Lock Industries, Cycle Industries, T.V., Watch Industries etc. For calculating separate cost of each item more than one costing methods are used. That’s why it is known as multiple costing system.
(6) Farm Costing : This method of costing is used for calculating the cost of various activities covered under farming which include agriculture, horticulture, poultry farming, animal husbandry, pisciculture (rearing of fish ) and sericulture (silk work breeding ) etc. It helps to improve the farming practices to reduce the cost of production and to each farming activity. ascertain the profit of each farming activity.