Methods of Costing
Costing has been defined as “the technique and process of ascertaining costs”.
The principles in every type of costing are the same but the methods of analyzing and presenting the costs differ with the nature of business.
Where production is not highly repetitive and, in addition, consists of distinct jobs or lots so that material and labour costs can be identified by order number, the system of job costing is used. This method of costing is very common in commercial foundries and in plants making specialized industrial equipments. In all these cases and account is opened for each job and all appropriate expenditure is charged thereto.
Contract costing does not differ in principle from job costing. A contract is a big job while a job is a small contract. The term is usually applied where at different sites large scale contracts are carried out. In case of ship-builders, printers, building contractors etc. this system of costing is used.
Cost plus costing
In contracts where besides ‘cost’ an agreed sum or percentage to cover overheads and profit is paid to the contractor, the system is termed as cost plus costing. The term ‘cost’ here includes material, labour and expenses incurred directly in the process of production. The system is used generally in cases where Government happens to be the contractee.
Where orders or jobs are arranged in different batches after taking into account the convenience of producing articles, batch costing is employed. Thus, in this method, the cost of a group of products is ascertained. The unit of cost is a batch of group of identical products, instead of a single job order or contract. The method is particularly suitable for general engineering factories which produce component in convenient economic batches and pharmaceutical industries.
If a product passes through different stages, each distinct and well-defined, it is desired to know the cost of production at each stage. In order to ascertain the same, process costing is employed under which separate account is opened for each process.
Operation costing is a further refinement of process costing. The system is employed in industries where mass or repetitive production is carried out or where articles or components have to be stocked in semi-finished stage, to facilitate the execution of special orders, or for convenience of issue for later operations. The procedure of costing is broadly the same as for process costing except that cost unit is an operation instead of a process. For example, the manufacturing of handles for bicycles involves a number of operations such as those of cutting steel sheets into proper strips, moulding, machinery and finally polishing. The cost of each one of these operations may be found out separately.
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