What are the most common cost accounting methods for manufacturing companies?

1 Job costing

Job costing is a method of cost accounting that assigns costs to individual units or batches of products based on the specific resources and activities used for each job. Job costing is suitable for manufacturing companies that produce customized or unique products, such as furniture, jewelry, or construction projects. Job costing allows for accurate tracking and pricing of each product, as well as identifying the profitability of each job. However, job costing can also be complex and time-consuming, as it requires detailed records and calculations for each job.

2 Process costing

Process costing is a method of cost accounting that assigns costs to products based on the average costs of the processes or departments involved in their production. Process costing is suitable for manufacturing companies that produce homogeneous or standardized products, such as chemicals, paper, or oil. Process costing allows for simplifying and streamlining the cost accounting system, as it reduces the number of cost objects and calculations. However, process costing can also be inaccurate and misleading, as it assumes that all products have the same cost structure and ignores the variations and inefficiencies within each process.

3 Activity-based costing

Activity-based costing is a method of cost accounting that assigns costs to products based on the activities and drivers that cause them. Activity-based costing is suitable for manufacturing companies that produce diverse or complex products, such as electronics, automobiles, or aerospace. Activity-based costing allows for more accurate and relevant cost information, as it reflects the actual consumption of resources and the value-added activities for each product. However, activity-based costing can also be costly and complicated, as it requires identifying and measuring the multiple activities and drivers for each product.

4 Standard costing

Standard costing is a method of cost accounting that assigns costs to products based on predetermined or estimated standards of inputs and outputs. Standard costing is suitable for manufacturing companies that have stable and predictable production processes and costs, such as textiles, food, or plastics. Standard costing allows for easy and consistent cost reporting and control, as it enables comparing the actual costs with the budgeted or expected costs. However, standard costing can also be unrealistic and outdated, as it ignores the market and operational changes and the variances between the actual and standard costs.

5 Throughput costing

Throughput costing is a method of cost accounting that assigns costs to products based on the direct materials used and the contribution margin generated by each product. Throughput costing is suitable for manufacturing companies that follow the theory of constraints, which focuses on maximizing the throughput or sales revenue of the production system. Throughput costing allows for optimizing the production decisions and profitability, as it considers the impact of each product on the bottleneck or the limiting factor of the system. However, throughput costing can also be risky and short-sighted, as it disregards the fixed costs and the long-term effects of each product.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?