Methods of costing used for the ascertainment of cost of production differ from industry to industry. It primarily depends on the manufacturing process and also on the methods of measuring the departmental output and finished products.
The following are the important methods:
1. Job Costing:
It refers to a system of costing in which costs are ascertained in terms of specific jobs or orders. This is also known as terminal or contract costing. The unit of a cost is the job,order,or contract,and the accounts show the cost of each order.It is suitable for contractors,builders,constructional engineers,painters,film studios,furniture manufactures etc.
It is applied to ascertain the costs incurred on each contract and profit earned or loss incurred on each such-contract. This system is suitable for all types of contracts and ship builders.
3. Batch costing:
It is a form of job costing in which a batch of identical products constitutes the cost unit. Each batch is separately costed,from which unit costs are determined for the units produced. It is useful for biscuit factories,bakeries,medicines,hardware etc,
4. Unit cost (Output or single):
It is a method by the unit of production where manufacture is continuous and the units are identical. When all the units produced are identical,the cost per unit is ascertained by dividing the total expenditure with the number of units produced in a given period. This method is suitable for collieries,quarries,flour-mills,paper mills etc.
5. Operating Cost:
The method of costing applied in the costing of service rendered like transport companies,power supply undertaking,hospitals,hostels,railways etc. Is called operating costing.
6. Operation Cost:
Multiple operation method of manufacture consists of a number of distinct operations. It refers to conversion cost i.e., cost of converting the raw materials into finished goods. This method takes into consideration the rejections in each operation for calculating input units and cost. The different operations in machine screw are—stamps, knurl, thread and trim. The cost per unit is determined with reference to final output.
7. Process Costing:
This is suitable for industries where production is continuous, manufacturing is carried on by distinct and well defined processes, the finished products of one process becomes the raw material of the subsequent process, different products with or without by products are produced simultaneously at the same process and products produced during a particular process are exactly identical.
8. Multiple Cost:
This is sometimes referred to as composite costing. It represents the application of more than one method of costing in respect of the same product. This is suitable for industries where a number of component parts are separately produced and subsequently assembled into a final product. In such industries each component differs from the others as to price, material used and process of manufacture undergone. So it will be necessary to ascertain the cost of each component.This method is used in factories manufacturing cycles, automobiles, engines, radios, typewriters, aeroplanes and other complex products.
9. Departmental Cost:
This is a method of ascertaining the cost of operating a department or cost centre. This is frequently necessary because of the need of control of expenditure in a department.