Costing Methods and Techniques

Manufacturers have the challenging task of setting the pricing of the product. With increasing competition in the market, the manufacturers cannot set the pricing to be too high. If the price is high, they will probably lose the customers to the competitors. And if the pricing of the product is set too low, the business will be at a loss. To solve this issue, an effective costing method is required. It is important for the business to strike a balance by providing the best value to the customers and simultaneously ensuring financial stability. In this blog, let us learn more about the costing methods in detail—

What are Costing Methods?

Costing methods are the process of determining the costs of a product or service. With this concept, several methods are developed, to ascertain the pricing. These techniques analyse various cost components such as raw materials, labour, overhead expenses and many other significant factors. It helps in calculating the total cost per unit or service accurately.

There are different methods of costing, but depending on the nature of the business, the costing method is selected. Each costing method has its own advantages and processes. Costing methods are vital for the business to make the right pricing decisions as they impact the profit margins and financial performance of the business. The right costing method is a boon for the business to achieve optimal cost control and it helps in making significant pricing strategies.

What are the different Methods of Costing?

Now we know the purpose of the costing method, let’s learn in detail about its different types of costing :

1. Job Costing

Job costing is a type of accounting where the cost of each job is taken into account and calculated. This method is applied to the production units that don’t involve more repetitive tasks.

The manufacturing units where the jobs are performed must be able to segregate each job or lot depending on the executed number of orders. Job costing is applied in commercial foundries, drop forging shops, and specialized industry equipment manufacturers.

2. Contract Costing

Based on the underlying principles job costing and contract costing are similar. However, the difference is that the contrast costing task is big and the job costing is comparatively small. Both the costing methods are referred to as terminal costing.

3. Cost-plus Costing

This method is one component of contract costing. Cost-plus costing is implemented when, in a contract, the contractor receives both the predetermined contract price and an additional mutually agreed-upon amount.

4. Batch Costing

Batch costing is the practice of grouping orders or tasks into distinct batches, considering the efficient production of items as a primary factor. Here, the cost is determined based on the group of products.

This costing method is applicable for companies such as businesses producing general engineering goods where the components are arranged in appropriate economic batches. In addition, batch costing is best utilised in pharmaceutical companies to determine the cost of goods effectively.

5. Process Costing

Process costing is applicable when a product undergoes various sequential phases, each of which is clearly defined, distinguishable, and easily separable from the others. In addition, process costing is beneficial to calculate the cost at each stage in the production process.

Process Costing is best suited for extractive industries and businesses such as chemicals, paints, food, soaps etc. All these companies find this method beneficial and effective.

6. Single Costing

Single costing involves determining the cost per unit of output or production. This costing method is also known as output costing or unit costing. Every component comprising this cost is individually calculated. Single costing method is suitable for industries such as paper mills, brick-making and flour mills.

7. Operating Costing

Operating costs are applicable to companies that provide bus, electricity and transport services. It helps in calculating the costs incurred in providing those services.

8. Multiple costing

In multiple costing, the costs incurred from multiple sections are combined after determining the expenses of each manufactured component. This costing method is very useful for the automotive industry and industries dealing with the production of assembly parts.

9. Departmental Costing

The main objective of departmental costing is to determine the cost of outputs separately for each department. If any company has multiple departments, departmental costing is the best solution to calculate and ascertain costs.

10. Operation Costing

Operation costing is an enhanced version of process costing. It is best applicable when a repetitive or mass production process is carried out. It is also used if the components are in a semi-finished stage.

Also Read :?Inventory Valuation with Multiple Costing Methods?

Click here to know more about Types, Advantages of Cost Accounting.