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Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
Cost Accounting basics part 2: Costing Methods
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11:24:10 AM, 18th June, 2019
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
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    Depending on the industry and production process, companies employ various methods for costing.

    To understand different types of costing methods, it is worthwhile to understand different types of production processes first. There are four major types of production processes

    1. Job Production:

    This type of production involves a process where each deliverable (output of the process) is unique. This can be service jobs such as automobile repair, custom house construction or small manufacturers who supply custom parts to larger manufacturers.

    2. Batch Production:

    This type of production is used where each deliverable is not unique but there are a large variety of similar deliverables. For example, an electronics manufacturer who offer different options in their products. The products can be produced using the same facilities but some parts used and the production process may vary by product. So, the produce the items in batches with batch size decided by the demand for each product.

    3. Mass Production:

    Also known as Flow Production, this production process is employed in the assembly line where each workstation does only a single or very few jobs but repeatedly. This production process is mainly employed in the automobile industry. The deliverables produced by this type of production process are identical to each other.

    4. Continuous Production:

    Also knows as Process production, this is used for the production of commodities such as in oil refineries, cement production, chemicals etc. Generally, there is least human involvement in this kind of production process.



    COSTING METHODS

    1. Job Costing

    As the name suggests, this type of costing is used for job production processes where each item is unique. This means that the cost for each item is to be calculated separately. This also means that the costing process involves more time and is expensive.

    2. Contract Costing

    While job costing deals with a specific deliverable, contract costing deals with a specific client contract. This costing is used in large scale construction contracts.

    3. Batch Costing

    As the name suggests, this kind of costing method is used in batch production. A batch can be regarded as a single job and accordingly the cost for each batch be calculated. This cost for the batch can be used to calculate per unit cost.

    4. Process Costing

    As the name suggests, process costing is used for process production processes. As it is practically impossible (or very expensive) to track the cost of each deliverable (or by volume or weight in case of commodities) in process production, process costing involves understanding the cost of each stage in the production process.

    5. Operation Costing

    This costing method combines job costing and process costing to ascertain the cost of products which are similar but can have some differences. For example, a company producing laptops with the same enchasing, screen and keyboard etc. but with a different processor, RAM and Hard Disk will use this costing process to determine different costs for laptops with different specifications.

    6. Operating Costing

    Operating costing is used in case of services such as transportation and consumable supplier companies etc. Cost for a period is tracked then divided by units of service to calculate cost per unit of service.

    7. Unit Costing

    Also known as Output Costing, this costing method is used in a continuous production process to calculated cost per unit produced. The cost for the whole production run is tracked and per unit, the cost is calculated by dividing the total cost with a number of units produced.

    8. Composite Costing

    Sometimes a single costing method is not sufficient. It can happen for complex products which require various production techniques to produce. For such products, various different methods are used to calculate different types of cost and then added to get the cost of production.

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