WINNEBA

SCHOOL OF BUSINESS
DEPARTMENT OF
ACCOUNTING
COST ACCOUNTING LECTURE
SLIDES
Topic: Costing Methods
Instructor: I.A.Ahmed
Introduction
• In today’s business environment, different businesses need different costing
systems to meet their individual requirement.
• Regardless of the type of organization therefore, costs are associated with the
products produced.
• How to determine the cost of these products depends on the production process
or method adopted by the entity.
• Costing methods or product costing methods or costing systems are essentially
used both internally and externally.
• Internally, they help management in decision making.
• Externally, it helps to value inventory of products and to determine gross profit
on sales.
Definition
• They are the procedures used to accumulate, track and assign costs to
final products.
• That is, the process of assigning costs to the goods produced and the
services rendered by organizations.
• It can also be defined as a method of costing which suits the manner
in which goods are processed or manufactured or the way services
are provided or rendered by entities.
Types of costing systems
• There are two types of costing systems
• These are
1. Specific order costing
2. Continuous operation costing
Specific Order Costing
• This is used when work or services are separately identifiable.
• Meaning, products and services are distinct from each other.
• It is mostly used in the construction industry, specific order painting
industry among others.
• Its variations include:
1. Job costing
2. Batch costing
3. Contract costing
Continuous Operation Costing
• It is applicable in situations where homogenous or standardized products
are produced from a sequence of repetitive and continuous operation.
• The costs are averaged over the units produced during the period
• That is, being initially charged to the process or operation.
• It is used in the chemical industry, breweries, oil refinery industries etc.
• Its variations are:
1. Process costing (including joint and By-products)
2. Service costing
JOB COSTING
• This method of costing is used in Job Order Industries where the
production is as per the requirements of the customer.
• In Job Order industries, the production is not on continuous basis.
• Work is done only when orders are received from customers.
• Jobs are also done as per the specifications of the customers.
• Consequently, each job can be different from the other one.
• The objective of this method of costing is to work out the cost of each
job by preparing the Job Cost Sheet.
Job costing (contd)
• A job may be a product, unit, batch, sales order, project, contract,
service, specific program or any other cost objective that is
distinguishable clearly and unique in terms of materials and other
services used.
• The cost of completed job will be the materials used for the job, the
direct labor employed for same and the production overheads and
other overheads if any, which are charged to the job.
• In job costing, each job is assigned a number called the job number or
job-order number or work order number.
• This allows for easy identification.
Features
• It is a type of specific order costing method
• The job or work is done to meet the specific requirements of the order or
customer
• Job costing enables a business to ascertain the cost of a job on the basis of which
quotation for the job may be given.
• Direct costs are charged to the job directly as they are traceable to the job.
• Indirect expenses i.e. overheads are charged to the job on some suitable basis.
• Each job completed may be different from other jobs and hence it is difficult to
have standardization of controls and therefore more detailed supervision and
control is necessary.
• At the end of the accounting period, work in progress may or may not exist.
Advantages
• It helps management to detect which jobs are profitable and which are not. Estimates of cost
for similar work in the future may be conveniently made on the basis of accurate record of
job costs. This assists in the prompt furnishing of price quotations for specific jobs;
• The cost of materials, labor and overhead for every job or product in a department is
available regularly and periodically, enabling management to know the trend of cost. This
will allow for suitable comparison to help control the efficiency of operations, materials and
machines;
• The adoption of predetermined overhead rates in job costing necessitates the application of
a system of budgetary control of overheads with all the advantages;
• Spoilage and defective work can be easily identified with specific jobs or products so that
responsibility may be fixed on departments or individuals.
• Job costing is particularly suitable for cost plus and such other contracts where selling price
is determined directly on the basis of costs.
Advantages
• The adoption of predetermined overhead rates in job costing
necessitates the application of a system of budgetary control of
overheads with all the advantages;
• Spoilage and defective work can be easily identified with specific jobs
or products so that responsibility may be fixed on departments or
individuals.
• Job costing is particularly suitable for cost plus and such other
contracts where selling price is determined directly on the basis of
costs.
Limitations
• It is considered as being too time consuming and requires detailed
record keeping. This makes the method more expensive.

• Record keeping for different jobs may prove complicated.

• Inefficiencies of the organization may be charged to a job though it

may not be responsible for the same.
Batch Costing
• This costing method is applied in situations where quantity of products
are identical and are produced in batches.
• A batch is a single group of similar items which maintain their identity
throughout the production- whether a single production process or
more and are treated as a cost unit.
• The procedure for costing batches are similar to job costing.
• This is because, a batch is treated as a job during production.
• Batch costing even though may have the semblance of a continuous
operation costing because of the stages of production, it is not one of
such costing method.
Batch costing
• This costing system produces to keep in inventory awaiting future use
but job costing is done to meet the demand or specific requirements
of the customer.
• Material requisitions are prepared batch-wise, the direct labor is
engaged batch-wise and the overheads are also recovered batch-wise.
• Cost of each component in the batch is then determined by dividing
the total cost by the number of articles manufactured.
• This costing method is common in the clothing, footwear and printing
industries.
Features
• Batch costing is applied in industries where identical products are produced.
• A batch is a cost unit which consists of a separate, readily identifiable group of
product units which maintains its separate identity throughout the production
process.
• The output of the batch consists of a number of units and it is not economical to
ascertain cost of every unit of output independently
• The procedure is very similar to job costing:
• Each batch is treated a job and costs are calculated for total batch.
• On completion of production, cost per unit is determined as below: Cost
per unit = Total cost of batch
Units produced
Activity
• What are similarities and differences between batch costing and job
costing
End of slides
• Refer to chapter 8 of main text for illustrations