Costing Methods

Definition; Costing method is the approach or style or tactic adopted by an organization to collect cost data in a more appropriate manner. There are several methodologies utilized by different organizations, which is determined by the nature of products being manufactured.

Under Cost Accounting, costing methods are categorized into two groups; namely;

  1. Job Costing
  2. Operation Costing

Detailed Explanation

Job Costing

Definition; Job Costing is the approach or style or tactic adopted by an organization to collect cost data where cost units (job) can be identified separately and assigned cost individually. The reason why this approach is possible is that the job size is big enough to be a standalone assignment. Job costing is also referred to as specific order costing.

Types of job costing;

Contract costing

  1. Factory job costing
  2. Batch costing

Explanation

Contract Costing

Definition; This is job costing where the nature of the assignment is a contract. Each contract is taken in isolation and all costs associated to it to its completion are charged to such a contract. Each contract is given a specific number for identification purposes and of course distinguishing one job from the other. The difference between the total cost and the contract price is the profit associated to that job. Examples of a contract are construction projects such as buildings, bridges, roads and dams

Factory Job Costing

Definition; These are jobs undertaken in a factory or workshop guided by customer’s specifications or preferences. Just like in the case of contract costing, the factory job is allocated a specific job number.

All costs associated to a particular factory job is charged therein. Examples of such jobs are printing works, and repair of motor vehicles.

Batch costing

Definition; These are jobs or cost unit which entails a group of identical items. This identity remains all through production process stages. One thing you need to note is that, the group of the identical items are given only one identification number. The total cost associated to that particular batch is placed on all those identical items. Example of such jobs is a batch of 10,000 pair of shoes produced. The cost thereof is further spread amongst those pairs.

Operation Costing

Definition; Operation costing is a methodology of collecting cost data which is more appropriate when it comes to production of goods or services involving continuous production process or operation. All cost associated to a certain process is charged therein before further spreading the total cost to the items produced thereof.

NB: That, this production process is characterized by;

-Continuous process

-Output, which is identical

-The total cost for a whole process is divided amongst all the products produced to get the cost per unit

Operation costing is also referred to as unit costing method. Examples of operation costing are;

  1. Service costing
  2. Output costing
  3. Process costing
  4. Joint product costing
  5. By-product costing

Explanation

Service Costing

Definition; it is a method of collecting cost data suitable for firms which are service providers such as transport, railway and air transport.

Output costing

Definition; it is a method of collecting cost data where there is only one product being produced. Examples of such products are; cement manufacturing, and mining etc

Determination of cost per unit is as follows;

Cost per unit= Total Cost for the Whole Period of Production/ Number of units produced in the period given

Process Costing

Definition; Definition; it is a method of collecting cost data where cost units pass through clearly defined processes before the final product is realized.

This method is characterized by the output of one stage of a process becoming the input of the next process stage unless the stage is the final one.

This methodology of cost data collection is common in cases such as industrial production like manufacture of chemicals, detergents, paint and oil products

Joint Product Costing

Definition; this is a method of cost data collection which is appropriate where the process of production entails output of two or more products of essentially equal monetary value.

Examples of joint products are;

Oil refinery such as petroleum products and

Dairy cattle products such as milk and cream products

By-Products

Definition; this is a method of cost data collection which is appropriate where the process of production entails output of two products where by one of the product is essentially more valuable as compared to the other one.

Examples of by-products are; steel production where by the steel is the main product while ash of coal is the by-product.