Question

Identify three products (include companies) for each costing method. Make sure to include your reasoning behind costing methods.

Answer 1

Answer:-

Methods of Costing:

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

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

1. 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

2.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:

.A) Unit costing:

It is also called the single output costing. It is used in costing of products that are expressed in identical units and suitable for products that are manufactured by continuous activity.

Example: 1. Steel/Cement manufacturing ( Lafarge Cements), 2. Dairy ( Amul ), 3. Steel Manufacturers (VISA Steels )etc., They follow unit costing as there is a continous production activity involved and will provide a better understanding of cost per unit of products manufactured.

B) Job costing:

Under this method, costs are ascertained for each work order separately as each has its own specification and scope. Tailor made products also get covered by this type of costing.

Example: Repair of buildings, Painting, Organizing Events etc, in White Collar Businesses, Film Studios/Retail including law firms, accounting businesses and private investment companies, can utilize job order costing to manage individual client accounts. For example, accounting firms can consider each individual client a job. Companies

C) Contract costing:

In this method costing is done for jobs that involve heavy expenditure and stretches over long period and across different sites. It is also called as terminal costing.

Example: Construction of roads and bridges, buildings etc like Bechtel Corp., Fluor Corp. Kiewit, these construction companies follows contract costing method for acertaining actual cost incurred upto to the date of construction and estimated profit calculations.

D) Batch costing:

Through this method the costing is done for units that are produced in batches that are uniform in nature and design.

Examples of products that are best accounted for cost through batch costing include:

• Production of engineering components
• Radios/television sets
• Medicine
• Footwear
• Clothing manufacturer,

?as all these type of products are manufactured in the batch of units as per capacity of plant and requires cost to be allocated on the basis of no of batch processed .

E) Process costing:

It is used for the products which go through different processes. Like in the process of manufacturing cloth, different processes are involved namely spinning, weaving and finished product. Each process gives an output that is a finished product in itself and can be sold. That is why; process costing is used to ascertain the cost of each stage of production.,

Examples of companies that use process costing include Chevron Corporation (petroleum products), the Wrigley Company (chewing gum), and Pittsburgh Paints (paint), as all of them have a similar feature in their products as all of them requires a certain stage by stage processing and so it is effective to use process costing as a method for cost ascertainment.

F) Service or operating costing:

It is the method used for the costing of operating a service such as Public Bus, Railways, Nursing home. It is used to ascertain the cost of a particular service.

Examples :- Transport Cos ( UBER ), Hotel Cos ( DU PONT , TAJ Hotel ), Schools/ Colleges ( OXFORD University), as they provides some kind of services to the customers so operationg costing will able to determine what costs they are incurring on providing services and allocating such costs into per unit of Rides ( KM/hours, ) per Customer ( Per Day room charges ). , Per student Respectiviely

G) Multiple costing:

When the output comprises different assembled parts like in televisions, cars or electronic gadgets, cost has to be ascertained for the component as well as the finished product. Such costing may involve different / multiple methods of costing.

Depending upon requirments and situation the above mentioned companies can follow multiple method of costing

H) Product Costing:

Product costing methods are used to assign cost to a manufactured product. The main costing methods available are process costing, job costing and direct costing. Each of these methods apply to different production and decision environments.

The main product costing methods are:

• Job costing:This is the assignment of costs to a specific manufacturing job. This method is used when individual products or batches of products are unique, and especially when jobs are being billed directly to customers or are likely to be audited by customers.

• Process costing:This is the accumulation of labor, material and overhead costs across departments or entities, with the total production cost then being allocated to individual units. Process costing is used when large quantities of the same product are manufactured, usually in long production runs.

I) Inventory Costing:

Different inventory costing methods are best suited to different situations and financial goals.

• First In, First Out

  Under the First In, First Out (FIFO) method, the oldest costs are assigned to inventory items sold, regardless of whether the sold items were actually purchased at that cost. When the number of inventory items purchased at the oldest cost is sold, the next oldest cost is assigned to sales.

• Last In, First Out

  The last in, first out method (LIFO) is the exact opposite of the FIFO method, assigning the most recent inventory costs to items sold

• Average Cost Method

  The average cost method assigns inventory costs by calculating a moving average of all inventory purchase costs.

• Specific Identification Method

  The specific identification method perfectly matches inventory costs with units sold, assigning the exact cost of each sold inventory item when the specific item is sold.

COSTING METHODS FOR MANUFACTURING:

TRADITIONAL METHODS: PROCESS AND JOB-ORDER COSTING:

There are two conventional costing approaches used in manufacturing, namely process and job order costing. Process costing method analyzes the net cost of a manufacturing process. Since most manufacturing processes involve more than one step, calculation is made for each step to arrive at a unit cost average for the entire production system.

The second major costing method, job-order costing, involves costing based on an individual product basis. This is useful where each unit of production is customized or where there are very few units produced. Under this method, the exact costs incurred in the production of a particular unit are calculated and are not necessarily averaged with those of any other unit, since every unit may be different.

ACTIVITY-BASED COSTING:

Activity-based costing (ABC) is a secondary / somewhat complementary method to the two traditional costing techniques.

While traditional methods classify costs into categories like direct materials, labor and other overheads, ABC considers all the costs associated with a single manufacturing task, regardless of whether they fall under the headings of labor or materials or something else.
The benefit of this method is that management can keep track of tasks that cost the most versus which add the most value; indicating any disproportionate amount of money being spent on low-value activities, thereby indicating the need for process change.

Steps for Performing ABC:

1. Analyze the Activities
2. Gather all the Costs
3. Trace Costs to the Activities
4. Set up Output Measures
5. Analyze the Costs

Features of ABC:

• Indicates High Cost activities
• Helps in establishing and monitoring performance measures
• Is useful for forecasting financial baselines
• Captures the current cost of performing any activity

Conclusion:

With the increasing changes in the industries and complexities of businesses, costing becomes important for managements to take appropriate decisions, planning and control and having effective cost management measures in place.