Methods of Costing

The method of costing to be adopted depends on the nature of manufacturing activity. There are various methods of costing. They are: 1) Standard costing 2) Marginal Costing 3) Job costing 4) Batch costing 5) Contract or Terminal costing 6) Single or output costing 7) Process costing 8) Operation costing 9) Departmental costing 10) Multiple costing 11i) Historical costing 1) Standard Costing: Under this technique, standard costs are established even before the actual expenditures are incurred. Then the actual costs incurred are compared with the standard costs and the differences between the two are calculated. 2) Marginal Costing: The purpose of this type of costing is to study the relationship between cost, volume and profit. It is also called as variable costing or differential costing. 3) Job Costing: Under this method, work is performed against the individual orders accepted from the customers. A distinct Job number is given for each order accepted. 4) Batch Costing: Where small parts are manufactured in lots, it would be convenient to ascertain the cost of each batch of articles so manufactured. Such type of costing is known as batch costing. 5) Contract or Terminal Costing: This is a method of costing applicable to contractors job. 6) Single or Output costing: Where there is only one product, output costing is adopted. A cost sheet or a production account is drawn, to show the cost of production of the product. 7) Process costing: If a product passes through different stages of manufacture or processes, the method of costing suitable is process costing. The special feature of this

method is the product at the end of a process becomes the raw material for the next process till it reaches the last process. 8) Operation costing: Under this method, the cost of each operation is calculated. This is suitable for industries in which producing a product requires stages of operation. 9) Departmental costing: With the help of this method of costing, the cost for each department or section is ascertained. 10) Multiple costing: As the name implies, this is a combination of more than one method of costing. 11) Historical costing: Just like financial accounting, the costs are ascertained after they are incurred and only the actual costs are taken into account wherever possible.

Techniques of costing
1) Activity-based costing Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. In an ABC system, the total cost of a product equals the cost of the raw materials plus the sum of the cost of all value adding activities to produce it Each product requires a number of activities such as design, engineering, purchasing, production and quality control. Each activity consumes resources of different categories such as the working time of the manager. labor hours, hours of equipment time, number of orders received. In traditional cost accounting systems, direct materials and labor are the only costs that can be traced directly to the product. By using the ABC system, activities can be classified as value-added and non-value-added activities. In order to improve the performance of the system, non-value-added can be eliminated. Despite the advantages of providing accurate costs, it requires additional effort and expense in obtaining the information needed for the analysis

2) Marginal cost In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. 3) Absorption Costing Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting. 4) Direct costing Direct costing is the method in which the cost of a product or operation is determined by allocating to it an appropriate portion of the variable (direct) costs. Direct costing treats fixed costs (overheads such as administrative and selling costs) as period costs (associated with time and not output).