Define about The Costing Methods Analysis.
Costing Method is the name of a ‘tool box’, which is used by the authorities, decision makers of the organizations. In this box, there are various types of methods by which cost accounting is prepared. Different industries in the economy follow different kinds of ways to obtain their cost. The choice of technique from the 'tool box' depends on the nature and particulars of business. It also varies with the type of the product and the market structure. The production process plays a huge role in selecting the method of costing, from eight general methods of costing. The chosen method then involves the process of accumulating, thoroughly examining different parameters of costing, summarizing the results, and assessing several alternative courses of activity which includes costs and guiding the administration on the most suitable route of operation based on the cost efficiency and the management's capacity of an organization.
A. Unit costing:
In this process, all the costs are gathered and compiled for every “job or work order or project” individually. Every job can be distinguished easily and thus becomes necessary to interpret the costs according to the jobs. “The production consists of distinct jobs or lots so that order number can determine costs.” A job card is allocated for each task for cost accumulation. “This method is suitable for Printers, Machine tool manufacturers, and general engineering workshops.” (Shrestha, Sansom and Farnham 2012)
It makes each and every job easy to differentiate. The process makes the whole mechanism transparent. Tracking back every unit is easy in this process.
This method makes the overall process lengthy. Without the batch number it is almost impossible to track down the details of a product.
B. Job costing:
This method states that costs are determined for individual “work order” independently, as “each job has its terms and range; 'Job costing' is used in many cases.” Examples can be given as, in painting, car repairing, designing, and building repair (Wiles and Watts 2014).
It is helpful for following the precise cost of unique commodities and is the only accurate method for gathering costs for "cost-plus contractual arrangements." it also can produce particular outcomes of the open-ended costs of a present job. So, it is useful for monitoring purposes.
To get the correct view, it requires an enormous quantity of specific data collection and data entry, which is costly. It also has a risk of incorporating some incorrect data, making the system control process more expensive. There is a notable allocation of "overhead costs" for every job, clumsily implemented (Mitra 2016).
C. Contract costing:
For big jobs which include massive expenditures, lengthy time periods, and usually separated working sites. Each and every contract is handled as different units of costing. This is why it is has another name, “terminal costing.” Projects, which require “contract costing” includes bridge construction, construction of roads and buildings (Syrotyuk 2013).
In this method, the consumer has peace of mind and does not have to bother about unforeseen costs. The contractor understands that the customer has agreed to, and is okay with the level of price, so avoidances with wages are less likely to happen.
If there are any faults in the actions of the service provider, there comes a high chance of calamity in the service the consumer will receive. The consumer has no authority over the services he will get.
D. Batch costing:
The batch costing method is used in those places, where the units presented in the consignment are “uniform in nature and composition.” For the need of costing, every batch is managed as a unique job or divided job. Bakery industry and pharmaceutical industry generally use the “batch costing method.”
Distinguishing paying jobs from the unprofitable jobs is easier in this method. In this process, it is simpler to prepare the estimation and production planning. Cost data helps in adjusting budgets, as, spoilage & defective work can be discovered. This process helps the authority in settling SP of special orders. It is beneficial for statistical design in preparing the trends of jobs.
This process requires costly production material and labor. It involves a lot of clerical work making the process laborious. The cost of detailing often results in incorrect outcomes. Two results cannot be compared in this process increasing the probability of mistakes. So, this method cannot be used for the purpose of control (Saaty and Vargas 2013).
E. Operating costing:
“Operating or service costing” is needed to determine the value of distinct “service-oriented units,” for example, clinics, railways, and buses. Each and every other service is administered as an unrelated factor in “operating costing.” In the example of a clinic, “a unit is treated as the cost of bed for each day.” On the other hand for “busses, operating cost per kilometer is interpreted as one unit” (Briciu, CÄƒpuÅŸneanu and Topor 2012).
Service costing makes the pricing attributes easy for the industry. The units of the products and services sold are not homogeneous in most of the cases making the process foolproof. The cost structure is easy to understand (Page et al. 2013).
No uniform price is charged for this type of costing. It makes the structure less predictable, which can be problematic for the end users. Miscalculation or any kind of wrong in the process will result in shut down of the process, leaving the open end users without options.
F. Process costing:
"Process costing is used for those products which go through different sets of operations." For example, several methods are involved in cloth manufacturing industry. "The first process is spinning. The output of that spinning method, yarn, is a final product which can be sold on the market to weavers or used as an input element for the weaving process in the same manufacturing unit." Putting the value of the thread, one can determine the total-cost of the “spinning process.” In next step the final good of the “weaving process can also be marketed as a final product in the market.” Here, the expense of material has to be estimated. In the 3rd step, the raw material is converted to a complete product. As an instance, a shirt or a trousers' pair can be considered. All the processes, which have the characteristics to be either a final or an intermediate good, can be evaluated individually (Drury 2013).
The advantages of the process costing are, it is easy and straightforward for accounting. It is a direct method of cost ascertainment which can collect the overall costs from every individual section and overlooks the costs which are related to particular jobs within the section. This decreases the size of the data, making a collection of data accessible and fast. The analysis is straightforward and does not expect any functional abilities other than standard accounting skills (Kaplan and Anderson 2013).
This way of costing is specifically suited for the goods which are homogeneous and cannot produce an exact estimate of commodity costs when a singular process provides multiple items or various versions of the same piece. It fits only for large process works but not for customized requests. Division of costs which are joint to distinct goods may lead to unreasonable pricing conclusions in these cases (Weygandt et al. 2015).
G. Multiple costing:
This method is also called 'composite costing.' In cases where the output is composed of many collected parts or elements, as in the event of televisions, motor vehicles, and electronic goods, costs have to be determined for each of the elements. The same goes for the final product. This kind of cost process may require diverse techniques of costing for various elements. For this reason, this costing type is identified as multiple costing or, composite costing (Della and Keating 2016).
This method of costing requires some usage of logical means for designating costs to outputs. There is no apparent attributable cost for this process. This approach is fundamentally used for accounting inventory for the purpose of external reporting.
Using this information for any administration goal might result fatally, as settlements based on allocated costs, with the purpose of altering those costs, fails. Except for inventory valuation, "by-product" and "joint product cost" is not approved.
H. Uniform costing:
This is a method in which some firms of that sector only use exact strategy of costing, using principles which are “agreed-on” and conventional accounting exercises. “This process helps in fixing the price of the commodity and in inter-firm comparisons.” This method is utilized in transport undertakings, gas companies, water works, services provided by municipalities, nursing homes, hospitality industries, etc. (Markantonis, Meyer and Schwarze 2012).
Using this process gives the ability to compare data inter-firm. Various markets and sectors can be inter-linked with the help of this method. It gives a logical view of the change of price and makes it easy to understand the mechanism.
Uniform costing creates opportunities for unwise people to behave improperly in the sector. One person can easily try to manipulate in this costing method by tampering over the data. This characteristic makes the method not trust-worthy in front of the eyes of common people.
Costing method is a tool used by different companies for estimating their cost. There are eight methods for costing. Different technologies are used in the tool box depending on the type of business, product and the market structure. “Unit costing, also known as single output costing is suitable for those products which are constructed by continuous production activity.” In Job costing method, each cost is calculated separately depending on the terms and range. The contrast costing method is used for big jobs with high expenditure. In batch costing method, each unit is unique in nature. In the operating costing method, the costs of distinct service-oriented units are measured. The process costing method is used for the products with multiple set of operations. The “multiple costing method” is used where output is formed by many parts. The uniform costing method is used when some firms uses the same strategy.
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