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Cost estimation and cost accounting system is referred to as the costing method. The nature of industries, as well as the products and services they provide, differ. As a result, different industries have different costing strategies. For instance, a building contractor’s costing method differs from a transportation company’s. The two most common methods of costing are job costing and Process costing. Job costing is fit for industries that manufacture or perform work per customer specifications. Process costing is suitable for industries where continuous production and the units produced are all the same. All other approaches are variations, extensions, or enhancements of these fundamental techniques.
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What are the Different Methods of Costing?
The costing procedures are the cost estimation and cost accounting systems. Industries differ in terms of their nature and also the products and services they supply. As a result, many industries employ various costing methodologies. A building contractor’s costing method, for example, differs from that of a transportation firm. Job costing and process costing are the two most popular costing approaches.
Job costing is useful in industries that manufacture or perform work to customer specifications. Process costing is appropriate for industries where production is continuous and the units produced are uniform. All additional methods are modifications, extensions, or improvements on these basic principles. The following are examples of costing methods:
- Job Costing
Job costing is a type of accounting that monitors costs and revenues by “work” and allows for uniform profitability reporting by the job. An accounting system must allow job numbers to be allocated to specific expenses and revenues to support job costing.
- Contract Costing
Contract costing is the tracking of costs associated with a specific contract with a customer. For example, a company submits a bid for a large construction project with a possible customer. The two sides also agree in a contract that the company will be reimbursed in a specified method.
- Batch Costing
Batch cost is a collection of costs paid when a group of items or services is manufactured that cannot be traced back to individual products or services within the group. It may be essential to assign the batch cost to individual units within a batch for cost accounting reasons.
- Process Costing
Process costing is an accounting method for tracking and accumulating direct expenses in a manufacturing process and allocating indirect costs. Costs are given to items in huge batches, which can span a month’s worth of production.
- Unit Costing
A company’s unit cost is the cost of producing, storing, and selling one unit of a given product. All fixed and variable expenses in production are included in unit costs. A cost unit is a unit of measurement used to determine the volume of a service or product. Mines, oil drilling units, cement works, brickwork, or unit production cycles, such as radios and washing machines, all use unit costs.
- Operation Costing
Job costing and process costing are combined in operation costing. It may be employed when a product is made from various raw materials and then finished using a standardised procedure for a group of items. The main goal of this strategy is to figure out the cost of each procedure.
- Multiple Costing
When things are sold that contain various other processed parts, multiple costing, also known as composite costing, is an accounting method used when these parts cost differently. Each of the elements made by other processes, like the ultimate product, has a cost connected with it.
- Operating Costing
Operating costs, often known as operational expenses, are expenses connected to the running of a business or a product, component, piece of equipment, or facility. They seem to be the costs of resources used by a company just to stay in business. Airlines, trains, road transport companies (both products and passengers), hotels, cinema halls, power plants, and other businesses employ operating costs.
Conclusion
The method of estimating costs differs from industry to industry. When using a costing method, one should choose the right one. This is because the wrong method can significantly raise the production cost of a good or service. For example, a costing approach developed for incremental pricing decisions may not be appropriate for long-term decisions.
