Methods of Costing and Types of Costing

Methods of Costing
As per the nature and peculiarities of the business, different Industries follow different methods to find out the cost of their product. There are different principles and procedure for doing the costing. However the basic principle and procedure of costing remain the same. Some of the methods are mentioned below: 1. Unit Costing 2. Job Costing 3. Contract Costing 4. Batch Costing 5. Operating Costing 6. Process Costing. 7. Multiple Costing 8. Uniform Costing.

Different Methods of Costing

Unit Costing: This method also called 'Single output Costing'. This method of costing is used for products which can be expressed in identical quantitative units and is suitable for products which are manufactured by continuous manufacturing activity. Costs are ascertained for convenient units of output. Examples: Brick making, mining, cement manufacturing, dairy, flour mills etc. Job Costing: Under this method costs are ascertained for each work order separately as each job has its own specifications and scope. Examples: Painting, Car repair, Decoration, Repair of building etc. Contract Costing: Under this method costing is done for big jobs which involves heavy expenditure and stretches over a long period and often it is undertaken at different sites. Each contract is treated as a separate unit for costing. This is also known as Terminal Costing. Construction of bridges, roads, buildings, etc. comes under contract costing. Batch Costing: This methods of costing is used where the units produced in a batch are uniform in nature and design. For the purpose of costing each batch is treated as a job or separate unit. Industries like Bakery, Pharmaceuticals etc. usually use batch costing method. Operating Costing or Service Costing: Where the cost of operating a service such as nursing home, Bus, railway or chartered bus etc. this method of costing is used to ascertain the cost of such particular service. Each particular service is treated as separate units in operating costing. In the case of a Nursing Home, a unit is treated as the cost of a bed per day and for buses operating cost for a kilometer is treated as a unit. Process Costing: This kind of costing is used for the products which go through different processes. For example, manufacturing cloths goes through different process. Fist process is spinning. The out put of spinning is yarn. It is a finished product which can be sold in the market to the weavers as well as use as a raw material for weaving in the same manufacturing unit. For the purpose of finding out the cost of yarn, the cost of spinning process is to be ascertained. The second step is the weaving process. The out put of weaving process is cloth which also can be sold as a finished product in the market. In such case, the cost of cloth needs to be evaluated. The third process is converting cloth in to finished product such as shirt or trouser etc. Each process is to be evaluated separately as the out put of each process can be treated as a finished good as well as consumed as a

raw material for the next process. In such industries process costing is used to ascertaining the cost at each stage of production. Multiple Costing: When the output comprises many assembled parts or components such as in television, motor Car or electronics gadgets, costs have to be ascertained or each component as well as the finished product. Such costing may involve different methods of costing for different components. Therefore this type of costing is known as composite costing or multiple costing. Uniform Costing: This is not a separate method of costing. This is a system of using the same method of costing by a number of firms in the same industry. It is treated as a common system of using agreed principles and standard accounting practices in the identical firms or industry. This helps in fixation of price of the product and inter-firm comparisons.

Types of Costing
There are different types or techniques of costings are used in cost accounting. Different types of costing is used in different industries to analyze and presenting costs for the purposes of control and managerial decisions. The generally used types of costing are as follows: Marginal Costing: In Marginal Costing, it allocates only variable costs i.e. direct materials, direct labour and other direct expenses and variable overheads to the production. It does not take into account the fixed cost of production. This type of costing emphasizes the distinction between fixed and variable costs. Absorption Costing: The technique of absorbing fixed and variable costs to production is called absorption costing. Under absorption costing full costs, i.e. fixed and variable costs are absorbed to the production. Standard Costing: When costs are determined in advance on certain predetermined standards under a given set of operating conditions, it is called standard costing. Standard costing is to be compared with the actual costs periodically to analyze the changes in the cost to revise the standards to avoid any loss due to outdated costing. Historical costing: When costs are determined in terms of actual costs and not in terms of predetermined standards cost is called Historical costing. In this system of cost accounting, costs are determined only after they have been incurred. Almost all organizations use historical costing system of accounting for costs.

Reconciliation of Cost and Financial Accounts

Cost accounts act as a check on financial accounts. To achieve this, we have to compare the profit/loss ascertained under the cost accounts with the profit/loss arrived under financial accounts. By preparing a reconciliation statement, we can find out the causes of difference in cost accounting and financial accounts. Double entry system of account is being used by large manufacturing firms and they adopt one of the following two methods:

1. Integral or integrated Accounting: When cost and financial transactions are unified, it is called the integral/integrated accounting. In integral or integrated accounting Cost and financial transactions are not kept separate, they are together recorded in one set of books of account. 2. Non-integral or Independent Accounting. When the cost and financial transactions are kept separate, the method followed is called "non-integral or Independent Accounting". A separate set of books are maintained under this system. Need of reconciliation of cost and financial accounts arises only when non-integral accounting method is followed. Integral Accounting: means the maintenance of cost and financial accounts in a single set of books. In other words the merger of financial and cost accounting by using a single set of books of accounts. This serve the purpose of both financial account and cost account. A cost ledger and three subsidiary ledgers i.e. Stores Ledger, Work-in-progress Ledger and Finished Stock Ledger are also maintained in addition to the General Ledger, Sales Bought Ledger and Sales Ledger.

Cost Ledger: It contains all the nominal accounts and known as principal ledger in cost accounting. Please note when the non-integral account is followed, cost ledger contains control account for each subsidiary ledger. Example: Work-in-progress Ledger Control Account, Finished Stock Ledger Control Account, Stores Ledger Control Account etc. It is also be noted that when the integral account method is followed these control accounts are maintained in the General Ledger. Work-in-progress ledger: It is a subsidiary ledger which contains an account for each process, job or operation which is pending on the shop floor. The cost of materials, overheads and labour is debited and the cost of goods transferred to Finished Stock Ledger is credited to the account as and when they are completed. Finished Stock Ledger: It is a subsidiary ledger which contains an account for each item of job completed or finished product manufactured. Each such completed job or product account is debited with the cost of production and credited with the cost of goods transferred to Cost of Sales Account. Stores Ledger: It is a subsidiary ledger where in all the items of stores and its movements are recorded. Purchase of materials debited to this account and issue of materials to jobs credited to this account.

Under this method, no costing profit and loss account is prepared since only one set of account is maintained. Therefore, There is no need for reconciliation of costing and financial profit or loss. Non-integral Accounting The subsidiary ledgers and the cost ledger are inter-locked through control accounts maintained in each ledger when independent cost accounts are maintained. This is practice (maintaining Control Accounts) is followed for the purpose of cross checking the accuracy of ledgers and also make each ledger self balance so that a separate trial balance may be prepared for each ledger without reference to the other ledgers. A general ledger Adjustment Account is opened in the cost ledger for all items of income and expenditure besides the control accounts. It is also known as "Cost Ledger Control Account". The cost ledger also contains control accounts such as Production Overheads Control Account, Wages Control Account, Administrative Overheads Control Account, Selling and Distribution Overheads Control Account etc. The double entry is completed through control accounts in the Non-integral accounting system. Therefore, it is also known as "Control Accounts System".

Costing Profit and Loss Account: A separate Costing Profit and Loss Account is prepared for determining the profit or loss of a particular period when cost accounts are maintained independent of financial accounts. This account is debited with the cost of sales and credited with the sales value. It is also debited with items like abnormal losses, under-absorption of overheads, loss or sale of special jobs etc., and credited with items like abnormal gains, over-absorption of overheads, profit on sale of special jobs, etc. The balance of this account will indicate the profit or loss as per cost records which should be reconciled with the profit or loss as per financial records. Need for reconciliation of Cost and Financial Accounts. When financial and cost accounts are maintained independently many a times the profit or loss disclosed by the two sets of books may differ from each other. This difference in profit/loss necessitates the preparation of a reconciliation statement. This statement will show the reason for the difference in figures in the two accounts i.e. cost account and financial account. It not only helps in checking the arithmetical accuracy of operating results shown by the financial accounts but also establish the accuracy of cost accounts.

Limitations and techniques of Cost accounting management Cost Accounting is not an exact science like other branches of accounting but is an art which has developed through theories and accounting practices based on common sense and reasoning.... Methods of Costing and Types of Costing As per the nature and peculiarities of the business, different Industries follow different methods to find out the cost of their product. There are different principles and procedure for doing the costing.... Costing and Cost Accounting Costing or cost accounting is a branch of accounting which deals with recording classifying and appropriate allocation of expenditure to determine the cost of product and services. After determining the cost one can fix the profit margin...