Methods of Costing

Different industries make different kinds of things — some produce identical units continuously, others carry out separate jobs to individual customer orders. Because the manner of production differs, the manner of ascertaining cost must differ too. The method of costing is the way in which cost is ascertained, and the choice of method depends chiefly on the nature of the product and the way it is produced. The two broad families of methods are job costing (where production is by specific jobs/orders) and process costing (where production is a continuous flow), and the common methods are the following.

1. Job costing. Cost is ascertained separately for each job or work order, which is treated as a distinct cost unit. Used where work is carried out to a customer's specific order — printing presses, repair workshops, made-to-order furniture.
2. Batch costing. A variant of job costing in which a batch of identical items is treated as one cost unit, and the cost per item is found by dividing the batch cost by the number in the batch. Used in the manufacture of, for example, medicines, biscuits, ready-made garments or components made in batches.
3. Contract (or terminal) costing. A form of job costing used for large, long-duration jobs carried out at a site away from the factory, such as building construction, roads, bridges and dams — each contract is a separate cost unit.
4. Process costing. Used where a product passes through several continuous processes, the output of one process becoming the input of the next; cost is ascertained process by process, and the cost per unit is the total process cost divided by output. Used in chemicals, sugar, paper, textiles and refineries.
5. Operation / operating (service) costing. Used to ascertain the cost of rendering a service rather than making a product — transport, electricity supply, hospitals, hotels; the cost unit is a service unit such as a passenger-kilometre or a kWh.
6. Unit (or output/single) costing. Used where a single, uniform product is produced continuously, so that cost per unit is found simply by dividing total cost by total output — mining, brick-making, cement, dairy. The cost sheet studied in this chapter is the typical statement used under this method. …