Costing Estimation Methods
There different methods which different industries follow for ascertaining cost of their products or cost of production as the case may be. The costing method to be adopted by business organisations will depend on the nature of the production and the type of goods produced.
So we bring to you the important methods of costing which can be adopted by any business organisation:
1. JOB COSTING:
The objective of job costing is finding the cost of a specific job or work order. This method is followed by those concerns where work is carried on the customer’s request. Under this method, a job cost sheet is prepared to ascertain the profits or losses for each job or work order. The job will always have a short duration duration. Examples are: Printing job in a printing press, repair job in a garage etc.
2. CONTRACT COSTING:
Contract costing is applied by contracting firms for contract work like construction of dam, building civil engineering contract etc. Each contract is treated as separate cost unit for ascertainment of cost and control. Contract costing is also called “Terminal Costing”. Firms engaged in ship-building, civil engineering for roads, industrial estates and factory construction use this costing method.
3. BATCH COSTING:
A batch can be defined as a group of identical products. Under batch costing a batch of similar products is treated as a separate unit in order to ascertain the cost. You will divide the total costs of a batch by the total number of units in a batch to arrive at the costs per unit. This costing method is generally used in industries like bakery, toy manufacturing etc.
4. PROCESS COSTING:
This method of costing is used in industries where production is done through different stages or processes before it becomes a finished product. Costs are ascertained separately for each process or stage of production. The main characteristic of process costing is that output of one process or stage becomes the raw materials of another process until it becomes a finished product. This method of costing is generally used in industries like textile, chemicals, paper, oil refining etc where there are different stages of production.
5. SERVICE (OPERATING) COSTING:
This costing method is used in those industries which do not produce any goods but render services to customers. The main aim of service costing method is to ascertain the cost of providing a service. It is also called operating costing. This costing method is used in industries such as transport, electricity, gas, hospitals, educational institutions etc.
6. OPERATION COSTING:
This costing method is suitable for industries where production is continuous and units are identical to each other. Examples are: Mines or drilling, cement works, manufacture of bicycles, ceiling fans etc.
7. MULTIPLE COSTING:
This method refers to the combination of two or more of the methods of costing mentioned above. Where a product is made up of many assembled parts or components (like motor car) costs have to be determined for each component as well as for the finished product for different components for which different costing methods may be used.
Multiple costing is also known as composite costing. This type of costing is applicable to industries producing soft drinks, automobiles and similar products.
