The Methods of Cost Accounting

1. Methods of Ascertaining Actual costs

From the two types of cost accounting methods, eight methods of ascertaining actual cost may be identified. These methods have emerged because peculiarities of certain kinds of production have resulted in the adoption of variations in procedure. They are briefly defined below;

(a) Job costing

[blur color=blue]This is sometimes referred to as terminal costing; it also includes contract costing. This method is used to cost jobs or contracts that are kept separate during manufacture or construction. It is applicable, for instance, to job order work in factories and work by contractors, builders, constructional engineers, shipbuilders, printers, municipal engineers, garages, film studies etc. The unit of cost is the job, order, or contract, and the accounts show the cost of each order.[/blur]

(b) Batch Costing

[blur color=green]This is a form of job costing, a convenient batch of production being treated as a job. Each batch is separately costed from which unit costs are determined for the units produced. It is useful for biscuit factories, bakeries e.t.c[/blur]

(c) Unit Costing

[blur color=yellow]This was formerly known as output or single costing. It is a method of costing by unit of production where manufacture is continuous and the units are identical, or may be made so by means of ratios. It may be employed in conjunction with batch, operation, or process costing, and is suitable for such undertakings as collieries, quarries, flour-mills, steelworks, paper-mills, breweries etc. in all of which there is a standard or natural unit of production. It is also used in municipal costing.[/blur]

Examples of suggested units of cost in certain industries are as follows:

(d) Operating Costing

[blur color=purple]This is unit costing as applied to the costing of services, such as those afforded by railways, motor-coaches, carriers, electricity supply and water undertakings. For example, in the case of the transport services mentioned, it may be desired to know the cost per kilometre, per tonne, per passenger, or the cost per tonne/km, per passenger/km, per parcel/km etc.[/blur]

(e) Operating Costing

[blur color=blue]This is method of unit costing by operations in connection with mass production and repetitive production. It is particularly useful where the production is put in large quantities of standardized units, as is usually necessary to ensure working at minimum cost. There is usually an uninterrupted flow of production, and the work is dividend up into as many operations as are convenient, thus obtaining the fullest advantage of division of labour to ensure maximum output at each operation. In this method, the cost per unit is found for each operation and at also for the finished unit. It is used in industries such as motor cars, radio and aero planes.[/blur]

(f) Process Costing

This is sometimes referred to as continuous or average costing. This is a method of costing production by processes in which:

(a) The product of the process becomes the material of a subsequent process;

(b) The different products and by-product (if any, are produced simultaneously at the same process;

(c) The products, differing only in shape or form on completion, are not separately distinguishable from one another during one or more process of manufacture.

(g). Multiple costing

This is sometimes referred to as composite costing. It is used when there are a variety of component parts separately produced.

(h). Departmental Costing

[blur color=purple]This is a method of ascertaining the cost of operating a department or cost centre. This is frequently necessary because of the need of control of expenditure in a department, e.g. the cost of running a research department, or because of the desire to allocate the costs of a department to another department or cost unit, e.g. the allocation of the inspection department costs to production departments or the allocation of costs the stores to various contracts.[/blur]

2. Special Systems

[blur color=blue]The nature of the product will determine which of the eight methods will be adopted in any business. However, in addition to these methods, mention should be made of three other systems which are not alternatives to those discussed already, but are techniques which may be adopted for special purposes of control and policy.[/blur]

a. Uniform Costing

[blur color=purple]This term refers to the use of a common method of costing for different undertakings or producers in the same industry. When used in a number of factories operated under a central control, detailed costs can be compared and considered with the assurance that the figures under each heading have been built up on the same basis. A uniform system may also be adopted by an association or federation of manufacturers in an industry, not usually for purposes of cost comparisons, but for guidance of the members and sometimes for joint action for the benefit of the industry.[/blur]

b. Marginal Costing

[blur color=blue]This is concerned particularly with the effect which fixed overhead has on the running of a business. It is a method interpreting costs of a product at given volumes of output. It will be apparent that certain items of cost are, within limits, fixed or constant for each unit produced, whatever the quantity, but other costs vary according to the output quantity. A marginal cost is the amount of change in aggregate cost resulting from an increase or decrease in the volume of output by one unit of production.[/blur]

c. Standard Costing

[blur color=yellow]This includes the term predetermined costing. Under this method the actual performance is compared with the predetermined performance, thus revealing any variance between the two. These variance can then be investigated, so that, where necessary, management can take the required action.[/blur]

3. Cost plus Costing

[blur color=purple]This is a form of costing in connection with contracts placed with manufacturers or builders on the basis of cost plus an agreed percentage of profits. The cost refers to direct material, direct labour, and admissible direct expenses, such as plant hire, transport of plant and materials, etc. To the cost is added an agreed sum or percentage to cover overhead expenses and profit. The method was much used before and during the First World War and to a lesser extent during the Second World War. When the method is used, the accounts are scrutinized by accountants appointed by the authority which placed the contracts.[/blur]

The reason for avoiding the use of this system whenever possible will be obvious after considering the following points.

(a) It is in the contractor‟s interest to run the cost as high as possible, so that the percentage profit which is calculated on the total cost will be high.

(b) There is a great possibility of collusion between the contractors and any sub- contractors or merchants supplying materials or services.

(c) Inefficiency may be encouraged, resulting in overtime being necessary to complete the contract in time.