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III.) Methods of costing

1. Job CostingJob Costing involves the calculation of costs involved in a construction "job" or the manufacturing

of goods done in discrete batches. These costs are recorded in ledger accounts throughout the life

of the job or batch and are then summarized in the final trial balance before the preparing of the

job cost or batch manufacturing statement.

In a job costing system, costs may be accumulated either by job or by batch. For a typical job,

direct material, labor, subcontract costs, equipment, and other direct costs are tracked at their

actual values. These are accrued until the job or batch is completed. Overhead or "burden" may be

applied either by using a rate based on direct labor hours or by using some other Activity Based

Costing (ABC) cost driver. In either case, once overhead/burden is added, the total cost for the job

can be determined. If the accountant is using a general ledger accounting system, which lacks true

job costing functionality, the costs must be manually transferred out of Work in Process to

Finished Goods (Cost of Goods Sold for service industries).

2. Batch Costing:The identification and assignment of costs related to producing a set amount of goods. This

includes all fixed and variable costs for producing the batch. The unit cost of a batch of goods can

be calculated by dividing the batch cost by the number of units produced.

Batch costing is used for calculating total cost of each batch. Batch is small group of units which is

produced for production purposes. We also identify batch of units in our production. All raw

materials are supplied on batch basis and other expenses are also paid on the basis of each batch.

For instance, in the drugs industry, producer will make the batch of tablets instead of producingsingle tablet. This will be easy to sell that batch in market. So, calculating cost of each batch, we

will calculate material cost per batch, labor cost per batch and other expenses per batch. If we

want to calculate cost per unit, we have to divide total batch cost with total batch units.

3. Contract CostingA way ofproviding a quotation for especially large and long term projects that will usually be

performed over a number ofaccounting periods. For example, large civil engineering projects will

often involve a business using contract costing when estimating the cost ofparticipating in the

project.Some firms such as builders, construction contractors, civil engineering firms, construction and

mechanical engineering firms are engaged in construction works such as construction of buildings,

bridges, roads and so on. A firm engaged in the construction works requires to know the total cost

of the construction work done. The total costs of the work help to find out the profit earned from

these works. The cost information about construction works helps to monitor and evaluate the

performance of contract work and to determine the total contract cost. Such information is

provided by a costing method known as contract costing.

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4. Process CostingProcess costing is an accounting methodology that traces and accumulates direct costs, and

allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a

large batch, which might include an entire month's production. Eventually, costs have to be

allocated to individual units of product. It assigns average costs to each unit, and is the opposite

extreme ofJob costing which attempts to measure individual costs of production of each unit.

Process costing is usually a significant chapter.

Process costing is a type of operation costing which is used to ascertain the cost of a product at

each process or stage of manufacture. CIMA defines process costing as "The costing method

applicable where goods or services result from a sequence of continuous or repetitive operations or

processes. Costs are averaged over the units produced during the period". Process costing is

suitable for industries producing homogeneous products and where production is a continuous

flow. A process can be referred to as the sub-unit of an organization specifically defined for cost

collection purpose.

5. Operating CostingIt is a method of costing applied by undertakings which provide service rather than production of

commodities. Like unit costing and process costing, operating costing is thus a form of operation

costing. The emphasis under operating costing is on the ascertainment of cost of rendering services

rather than on the cost of manufacturing a product. It is applied by transport companies, gas and

water works, electricity supply companies, canteens, hospitals, theatres, school etc. Within an

organisation itself certain departments too are known as service departments which provide

ancillary services to the production departments. For example, maintenance department; power

house; boiler house; canteen; hospital; internal transport.

Expenses associated with administering a business on a day to day basis. Operating costs include

both fixed costs and variable costs. Fixed costs, such as overhead, remain the same regardless of

the number of products produced; variable costs, such as materials, can vary according to how

much product is produced.

6. Operation costingOperation costing system is used in situations where products have some common characteristics

and also some individual characteristics. Shoes, for example, have some common characteristics in

that all styles involve cutting and sewing that can be done on a repetitive basis, using the same

equipment and following the same basic procedure. Shoes also have individual characteristics.

Some are made of expensive leathers and others may be made using inexpensive syntheticmaterials. In a situation such as this, where products have some common characteristics but also

must be handled individually to some extent, operation costing may be used to determine product

costs.

Products are typically handled in batches when operation costing is in use, with each batch charged

for its own specific materials. In this sense, operation costing is similar to job order costing.

However, labor and overhead costs are accumulated by operation or by department, and these costs

are assigned to units as in process costing.

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