Costing: Meaning, Aims and Methods | Cost Accounting

After reading this article you will learn about:- 1. Meaning of Costing 2. Aims of Costing 3. Methods 4. Advantages.

Meaning of Costing:

Costing has been defined by the Institute of Cost and Works Accountants, England as: “The technique and process of ascertaining costs.”

Whereas, Wheldon has defined the costing as:

“Costing is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for presentation of suitably arranged data for the purposes of control, and guidance of management.”

Aims of Costing:

Main aims of costing are:

1. To determine the exact cost of each article.

2. To determine the cost incurred during each operation to keep control over workers’ wages.

3. To provide information to ascertain the selling price of the product.

4. To supply information for detection of wastage.

5. It helps in reducing the total cost of manufacture.

6. It suggests changes in design when the cost is higher.

7. To help in formulating the policies for charging the prices of the product.

8. To facilitate preparation of estimate for submitting the rates in tenders or quotations.

9. To compare the actual cost with the estimated cost of the component.

Costing Methods:

Costing method to be followed in a particular enterprise depends upon:

(i) Nature of Industry,

(ii) Class of products manufactured,

(iii) Quantity of goods produced, and

(iv) The way the workers are employed and paid.

Following may be considered to be the important methods of costing:

1. Multiple costs,

2. Job costs,

3. Departmental costing,

4. Unit costs,

5. Process costs, and 

6. Operating costs.

Each method is explained in short below:

1. Multiple Costs:

Concerns manufacturing a variety of standardised products, having no relation to one another in cost, and the types or process etc. such as type-writer, gramophones and cycles, use this costing method.

2. Job Costs:

This method is also known as “order costs” or “terminal costs”. In this method all the items are charged to a specific order. This method is also adopted by builders, contrac­tors etc., as it helps in showing the cost of each contract or job or order of a work.

Daily record of direct material, direct labour and estimated overhead cost for each order is recorded in production order or cost sheet and thus the total cost of the job is obtained from the cost sheet.

This method is useful when products produced are in distinguishable lots and it is also desirable to keep a separate record of each lot. It is also largely used for costing of batches of similar items such as screws, utensils, shoes, nuts and bolts but when there is an element of standardisation in the product, standard costing should be employed.

“Job order” costing is a basic costing procedure and this may be used in conjunction with costing systems. For example, a factory manufacturing machine tools according to customer requirements and in doing so use standard parts and sub-assemblies that can be pre-costed. Job order costing will then be neces­sary only for the non-standard parts and for the final assembly details.

The aim of “job order” costing is to determine the profit or loss earned on each job. This serves as a check on the accuracy of the estimates on which prices have been quoted.

3. Departmental Costing:

This method is adopted in estimating the cost of output of each department separately for the manufacture of standardised products. For example, in a steel mill there are three separate departments such as blast furnace, open hearth and rolling mill department. The cost of all the three is determined separately.

4. Unit Costs:

This method is adopted by the firms, which supply a uniform product rather than a variety of products such as mines, quarries etc.

5. Process Costs:

This method is applied to industries such as oil refining, chemical, paint and other similar industries, where the raw material passes through a number of processes or operations before it is converted into a final product. By-products should be taken into account while calculating the cost of each process of manufacture in this method of costing.

This method indicates the cost of a product at different stages as it passes through various processes or operations or departments and, therefore, a comparison of cost of various processes is also possible. This method is adopted for mass scale production. For example, in garment making, cutting and sewing are two different operations. In this system, the cost of the two operations is determined separately.

6. Operating Costs:

Firms providing utility services find this method useful. For ex­ample, in railway, transport service, water works, electricity boards etc., cost is determined on the basis of operating expenses and charges are made as tonne-km or passenger per km, per 1000 liters and kilowatt-hour respectively.

Advantages of Efficient Costing:

Efficient costing has got the following advantages:

(i) It helps in tracing wastage, leakage and spoiled material.

(ii) It gives information regarding profitable and unprofitable activities.

(iii) It provides an effective check on wage systems.

(iv) Actual causes of reduction in profits can be easily found.

(v) It gives information, regarding component parts, whether it is profitable to manufac­ture them in the factory or to purchase from outside market.

(vi) It also helps in the settlement of wage rates with trade unions at the time of dispute.

(vii) It provides data for comparison between actual cost and estimated cost of an article.

(viii) It provides data for overhead charges etc. to assist in the preparation of estimates for future work.

(ix) It helps the management in forming the policies of price determination.

(x) It provides information of detailed expenditure, so that it can be checked when it is tending to exceed.

(xi) It keeps control over selling price.

(xii) The main advantages of costing is to compare the output of the persons of same trade and working on same type of machines.

(xiii) It helps in determining the efficiency of administrative and operative functions and decides the weak point, where wastage and expenses need check.

(xiv) It helps the planning department in deciding about the quantity of material required and the sequence of operations on the job.