Various Mehtods of Costing.

Different industries follow different methods for ascertaining cost of their products. The method to be
adopted by business organisation will depend on the nature of the production and the type of out put.

The following are the important methods of costing.

Job Costing: Job costing is concerned with the finding of the cost of each job or work order.
This method is followed by these concerns when work is carried on by the customers request, such as
printer general engineering work shop etc. under this system a job cost sheet is required to be prepared
find out profit or losses for each job or work order.
Contract Costing: Contract costing is applied for contract work like construction of dam
building civil engineering contract etc. each contract or job is treated as separate cost unit for the cost
ascertainment and control.
Batch Costing: A batch is a group of identical products. Under batch costing a batch of similar
products is treated as a separate unit for the purpose of ascertaining cost. The total costs of a batch is
divided by the total number of units in a batch to arrive at the costs per unit. This type of costing is
generally used in industries like bakery, toy manufacturing etc.
Process Costing: This method is used in industries where production is carried on through
different stages or processes before becoming a finished product. Costs are determined separately for
each process. The main feature of process costing is that output of one process becomes the raw
materials of another process until final product is obtained. This type of costing is generally used in
industries like textile, chemical paper, oil refining etc.
Service (Operating) Costing: This method is used in those industries which rendered
services instead of producing goods. Under this method cost of providing a service is also determined. It
is also called service costing. The organisation like water supply department, electricity department etc.
are the examples of using operating costing.
Operation Costing: This is suitable for industries where production is continuous and units
are exactly identical to each other. This method is applied in industries like mines or drilling, cement
works etc. Under this system cost sheet is prepared to find out cost per unit and profits or loss on
production.
Multiple Costing: It means combination of two or more of the above methods of costing.
Where a product comprises many assembled parts or components (as in case of motor car) costs have to
be ascertained for each component as well as for the finished product for different components,
different methods of costing may be used. It is also known as composite costing. This type of costing is
applicable to industries producing motor vehicle, aeroplane radio, T.V. etc.

The LIFO Method In Cost Accounting.

As against the First in First Out method the issues under this method are priced in the reverse order of
purchases i.e., the price of the latest available consignment is taken. LIFO method is sometimes known
as the replacement cost method because materials are issued at the current cost to jobs or work orders
except when purchases were made long ago. This method is suitable in times of rising prices because
material will be issued from the latest consignment at a price which is closely related to the current
price level. Valuing material issues at the price of the latest available consignment will help the
management in fixing the competitive selling prices of the products. LIFO method was first introduced
in the U.S.A. during the Second World War to get the advantages of rising prices.

The Meaning and Definition of FIFO Method. (Cost Accounting)

Under FIFO method material is first issued from the earliest consignment on hand and priced at the
cost at which that consignment was placed in the stores.In other words, materials received first are
issued first. The units in the opening stock of materials are treated as if they are issued first, the units
from the purchase issued next, and so on until the units left in the closing stock of materials are valued
at the cost of production according to their chronological order of receipts in the store.
 FIFO method is most suitable in times of falling prices because the issue price of materials to job or
works orders will be high (materials issued from the earliest consignments which were purchased at a
higher rate) while the cost of replacement of materials will be low. But in case of rising prices this
method is not suitable because the issue price of materials to production will be low while the cost of
replacement of materials will be high.

ABSORPTION OF OVERHEARDS:

Absorption refers to the charging of overhead expenses to the ultimate cost unit. It is the process of
distribution of overhead expenses over the unit produced in that department, by applying suitable
overhead rates.

Methods of absorbing manufacturing overheads:

Various methods of absorbing manufacturing overheads may be used for distribution of overheads.
These may be:

Direct material cost method.

Direct labor cost method.
Prime cost method.
Labor hour rate method.
Machine hour rate method.

The Meaning and Definition of Direct Materials. (Cost Accounting).

Direct materials are those materials which can be identified in the product and can be conveniently
measured and directly charged to the product. Thus, these materials directly enter the product and
form a part of the finished product. For example, timber in furniture making, cloth in dress making,
bricks in building a house. The following are normally classified as direct materials:

All raw materials like jute in the manufacture of gunny bags, pig iron in foundry and fruits in
canning industry.
Materials specifically purchased for a specific job, process or order like glue for book binding,
starch powder for dressing yarn.
Parts or components purchased or produced like batteries for transistor-radios and tyres for
cycles.
Primary packing materials like cartons, wrappings, card-board boxes etc.

However, in some cases, though the material is a part of the finished product yet it is not treated as
direct material; for example, sewing thread in dress making and nails in furniture making. This is
because they are used in comparatively small quantities and it would be futile elaboration to make an
analysis of them for the purpose of direct charge. Such materials are treated as indirect materials. Thus,
it can be concluded that the ease and the feasibility with which a material can be traced into the
composition of a finished product will determine what is to be treated as direct material.
 Accounting of Selling and Distribution overheads in
Cost Accounting
RK THAKUR
COST ACCOUNTING

Both in manufacturing and non-manufacturing concerns selling function is involved besides

manufacturing or purchase of goods. In order to perform this function efficiently selling and
distribution expenses are incurred in all the concerns. Most of these expenses are not identified with
products and that is why these are included indirect costs.

The sole aim of the business is to maximize profits but this is only possible by reducing the cost of
production or increasing the sales in the existing markets or through the entry in the new markets. No
doubt cost of production is reduced by increasing the production but increase in sales is a must to meet
the increase are undertaking sales promotion activities but they are required to face stiff competition
also. Under such circumstances it becomes necessary for a concern to incur selling and distribution
expenses and sometimes these are so heavy that these are even more than the manufacturing expenses.

In some concerns after sales services is provided for special products like radios, televisions,
refrigerators, washing machines, sewing machines and some special facilities and discounts are given to
the wholesalers and retailers. Accounting and control of selling and distribution expenses which are
generally incurred after the production of the goods (also called after-prodcution costs) has assumed an
increased importance in these days in order to determine the cost of sales and profitability of each job
and product, to control the selling and distribution costs, to fix prices and formulate sales price policy,
to fix optimum sales levels and to make decisions regarding sales i.e. selling under different conditions,
markets, regions and by different methods.

The accounting of selling and distribution overhead requires three types of analysis:

According to nature or object of expenditure.

By function or cost centre.
By products or cost units.