Question

Describe different methods of costing and state the particular industries to which the can be applied .

Answer 1

Answer:

Methods to be 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.

Basically, there are two methods of costing (as per CIMA Terminology) viz.:

(i) Specific Order Costing (or Job/Terminal Costing) and

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(ii) Operation Costing (or Process or Period Costing.)

Specific Order Costing is the category of basic costing methods applicable where the work consists of separate jobs, batches or contracts each of which is authorised by a specific order or contract. Job costing, batch costing and contract costing are included in this category.

Operation Costing is the category of basic costing methods applicable where standardized goods or services result from a sequence of repetitive and more or less continuous operations or process to which costs are charged before being averaged over units produced during the period.

All these methods are discussed briefly as under:

1. Job Costing:Under this method, costs are collected and accumulated for each job, work order or project separately. Each job can be separately identified; so it becomes essential to analyse the cost according to each job. A job card is prepared for each job for cost accumulation. This method is applicable to printers, machine tool manufacturers, foundries and general engineering workshops.

2. Contract Costing:

When the job is big and spread over long periods of time, the method of contract costing is used. A separate account is kept for each individual contract. This method is used by builders, civil engineering contractors, constructional and mechanical engineering firms etc.

3. Batch Costing:

This is an extension of job costing. A batch may represent a number of small orders passed through the factory in batch. Each hatch is treated as a unit of cost and separately costed. The cost per unit is determined by dividing the cost of the batch by the number of units produced in a batch. This method is mainly applied in biscuits manufacture, garments manufacture and spare parts and components manufacture.

4. 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 by­products are produced simultaneously at the same process and products produced during a particular process are exactly identical.

Explanation: