Cost Accounting
Cost accounting is the art and science of recording, classifying, summarizing, and analyzing costs to help management make prudent business decisions.
Costing is the technique and process of ascertaining cost.
Methods of costing
Methods of costing helps to determine the cost of the final product. Method of costing is varying according to the company requirement. Even every company has the different needs like the production process kinds of products used and lot more. Basically, there are two methods of cost accounting that are
- Specific order costing method
- Continuous operation costing method.
Specific order costing method
This type of method is used in those companies where the work is done by the specific order, jobs, target or batches. It is divided into 4 other types of cost
- Job costing – when production is not highly repetitive and in addition consist of distinct jobs or lots so that material and labour cost can be identified by order number, the method of job costing is used. It is a type of costing in which the cost is non comparable, non repetitive and occurs for the short periods of time. Under this type of costing, costs are calculated for each activity, job or work separately. For example plant making specialized equipment like sanitary, press printing, electrician, plumping etc.
- Contract costing – a contract is a big job while a job is a small contract. This method is used where at different sites large scale contract are carried out. The job is of big level occurs for the long periods of time. For example, ship, builders, printers, building contractors, highway, dam etc. contract costing does not in principles differ from job costing. Job or contract costing is also termed as “Terminal Costing”
- Cost plus costing – In contract where besides ‘cost’ an agreed sum or percentage to cover overheads and profit is paid to contractor, the method is termed as cost plus costing. Generally used in case where government happens to the Contractee. It works on an equation of Cost + Sum (%). It is a type of costing method where the total cost is determined before starting the work process by giving the bid price. This type of costing is used in big tender projects where the contractors give the target cost.
- Batch Costing – Where order or jobs are arranged in different batches after taking into account the convince of producing articles, batch costing is employed. Cost of group of products is ascertained. This type of costing is used in those companies where the work is done in the small process orders like pharmaceutical companies, biscuit companies and lot more. Unit of cost is a batch or group of identical products instead of a single job order or contract.
Continuous operation costing method
This type of method is used in those companies where the goods are manufactured in large volume process. In this type of costing, goods are produced according by passing the multiple process. This type of costing method is divided in various costing methods mentioned below.
Process Costing – this costing method is used to calculated the cost of different process to produce the product. in this the cost of each process is ascertained. So, product passes through different stages each distinct and well defined it is desired to know the cost of production at each stage. In order to ascertain the same process costing is employed under which separate account is opened for each process. This type of costing suitable and used in chemical manufacture, paints, food, soap making companies.
Operational Costing – This type of costing is used where the production is continuous for the long time. In this type of costing method, the costs are calculated for each operation in the process of high volume. For example – cement companies etc.
Single Output Costing – It also known as Unit Costing. In this method cost per unit of output or production is ascertained and the amount of each element constituting such cost is determined. In this costing, the cost of single product is ascertained which firm produces by calculating the total overall cost of the product. Where the products can be expressed in identical quantitative units and where manufacture is continuous this type of costing is applied. For example, suitable in industries, brick making, paper mill, cement manufacturing etc.
Operating Costing – This method is employed where expenses are incurred for providing service such as those rendered by bus companies, electricity companies or railway companies. Total expenses regarding operation are divided by units as may be appropriate. In simple terminology operating cost is used in those companies which produces more than one product or service. In this, the cost of each product or service is ascertained to know the cost of all products and services. For example bus company adopted this method, total number of passenger kilometer.
Departmental Costing – Ascertainment of cost of output of each department separately is the objective of department costing. Where a factory is divided into a number of departments this method is adopted. In layman language in this type of costing the cost are ascertained for each department like sales department, production department etc. to know the better costs insights for each department.
Multiple Costing – In this type of costing method, different types of costing methods are used for the same product. It comprises of the different components to produce the same product that are not same. For example – Trains, Airplanes
Techniques of Costing
Costing techniques are used by management only for controlling costs and making some important managerial decisions.
- Historical costing – this type of costing is the old costing technique, in this type of costing costs are ascertained after incurring the expenses. It records the past costs which is already incurred.
- Standard costing – in this costing technique we firstly setup the standard for the production. After setting up the standard the production is started and the cost is calculated. After this type of costing, organization compares the actual and standard costs. Then find out the profitability.
Marginal Costing
It is technique of costing in which allocation of expenditure to production is restricted to those cost which arise as a result of production. i.e., cost which vary with production. Fixed cost is excluded. In this type of costing the additional output is added to see the overall change in the production. It works on an equation of Marginal Costing = Sale – Contribution. It useful for manufacturing industries with varying level of output. For example – free toothbrush with the toothpaste.
Direct Costing
The practice of charging all direct costs to operations, processes of products, leaving all indirect costs to be written off against profits in period in which they arise is termed as direct costing. In simple term, those costs are included which are directly associated with the production, expenses, labour etc.
Absorption Costing
It is also known as full costing. The practice of charging all cost both variable and fixed to operation, products or process is termed as absorption costing. This type of costing comprises of the contradiction of direct, indirect costs, fixed and variable costs, products or process.
Uniform costing
A technique where standardized principles and methods of cost accounting are employed by a number of different companies and firm is termed as uniform costing. This system thus facilitates inter firm comparisons, establishment of realistic pricing policies etc.
Difference between costing method and costing techniques
|
Basic
of difference |
Costing
methods |
Costing
techniques |
|
Meaning |
Costing
method are used to ascertain the costs of different needs of companies
whether for job, batch, process et. |
Costing techniques
are used to ascertain and control the cost |
|
Includes |
Specific order
costing method, continuous operation costing method |
Uniform costing,
absorption costing, standard costing, marginal costing |
|
Purpose |
To provide
the calculation method of costing according to the needs of company. |
Provide the
way or technique to calculate the costing whether direct costing, uniform
costing etc. |
|
Focus |
It answers
the question: "How do we accumulate and assign costs?" |
It answers
the question: "How do we analyze and interpret the cost data?" |
FAQ's
What is cost accounting?
Cost accounting is the process of recording, analyzing, and managing costs associated with producing goods or services. It helps businesses determine the true cost of production and supports decision-making, budgeting, and cost control.
What are costing methods?
Costing methods are systems used to accumulate and assign production costs to products or services. They help determine the cost per unit or job.
What are costing techniques?
Costing techniques are approaches or strategies used to analyze, interpret, and present cost data to support planning, control, and decision-making.
Can a company use both a costing method and a technique together?
Yes. In fact, this is common. For Example: A company may use job costing to track project costs and apply standard costing to compare actual vs. expected expenses.
Which costing technique is best for decision-making?
Marginal costing is often preferred for short-term decision-making, as it highlights the impact of variable costs and contribution margins.
