Methods of Costing

Costing refers to the technique used to determine the cost of products or services. The method used depends on:
→ Nature of the product

→ Scale of production

→ Type of industry

✨ Classification of Costing Methods

Costing methods are broadly divided into:

1. Specific Order Costing
   ↳ Job Costing
   ↳ Contract Costing
   ↳ Batch Costing

2. Continuous Operation Costing
   ↳ Process Costing
   ↳ Unit/Single Costing
   ↳ Operating Costing
   ↳ Multiple/Composite Costing
   ↳ Operation Costing
   ↳ Activity-Based Costing (ABC)

🔹 1. Job Costing 🌟(Expanded)

Used when work is done as per specific customer order and every job is unique.

✅ Industries: Road construction, automobile repair, custom furniture

🔑 Key Features:
→ Each job is treated as a separate cost unit

→ Costs are collected individually for every job

→ Labour, material & overhead tracked per job

→ Helps in finding the profit/loss for each job

🛠️ Example:

A customer orders a custom wardrobe. The cost of wood, labour, polish, and design are tracked only for that order.

📊 Advantages:
→ Accurate costing per client

→ Useful in pricing and profit analysis

→ Avoids over/under costing

🔹 2. Process Costing 🌟(Expanded)

Used in industries with continuous production of homogeneous products.

✅ Industries: Cement, textiles, sugar, paper

🔑 Key Features:
→ Production passes through multiple processes/stages

→ Costs are assigned to each process

→ Final cost = Sum of costs from all processes

→ Unit cost is found by dividing total process cost by output quantity

🔄 Example:

In sugar manufacturing:

• Process 1: Crushing sugarcane

• Process 2: Filtering juice

• Process 3: Crystallisation
  
  → Costs calculated at every stage.

📊 Advantages:
→ Helps track cost at each level

→ Suitable for mass production

→ Easy to compute per-unit cost

🔹 3. Activity-Based Costing (ABC) 🌟(Expanded)

A modern method that assigns overheads based on actual activities performed.

✅ Industries: IT firms, telecom, product design, complex manufacturing

🔑 Key Features:
→ Identifies activities (e.g., designing, testing, packing)

→ Costs are assigned to products based on activity usage

→ More accurate than traditional costing

⚙️ Example:

Product A requires:

• 3 hours of testing

• 1 hour of packing
  
  → Testing is more costly than packing. ABC assigns more cost to testing.

📊 Advantages:
→ Accurate cost of complex products

→ Helps eliminate non-value activities

→ Improves pricing and budgeting decisions

🔸 Other Costing Methods (Summarised)

🔹 Contract Costing

→ Large-scale version of job costing

→ Long-term, site-based jobs like buildings, bridges

→ Cost centre = Each contract

🔹 Batch Costing

→ Costing is done per batch of identical items

→ Common in pharma, garments

→ Unit cost = Total cost ÷ number of items in batch

🔹 Unit/Single Costing

→ Suitable for uniform, mass production (e.g., bricks, oil)

→ Cost is calculated per unit

🔹 Operating Costing

→ For services like transport, hotels, cinemas

→ Cost unit = Passenger km, room night, etc.

🔹 Multiple/Composite Costing

→ Used when a product involves multiple components/processes

→ Example: Cars, electronics, watches

🔹 Operation Costing

→ Combination of job & process costing

→ Cost is calculated per operation, not per process

→ Common in assembly line products