1.9 METHODS OF COSTINGVarious methods of ascertaining costs are available to suit the business need. But the basicprinciples are the same in every method. The choice of a particular method of costing dependson the nature of business of the concern.There are two basic methods of costing viz. – (a) Specific order or job costing (b) Continuousoperation or process costingAll other methods are either variation of job or process costing or are just techniques used forparticular purpose under specific conditions. Brief description of each of the methods are asfollows:Job CostingJob costing is the basic costing method applicable to those industries where the work consistof separate contracts, jobs, or batches, each of which is authorised by a specific order orcontract. The most important feature is that each job or order can be identified at each stageof production and therefore, costs which can be directly identified with a job or order ischarged to that job or order. A share of indirect expenses is also charged to the same. Variationof job costing are contracts costing and batch costing.— Contract costing is the form of specific order costing, generally applicable where workis undertaken to customer’s special requirements and each order is of long duration,such as building construction, ship building, structurals for bridge, civil construction,etc. The work is usually done outside the factory.— Batch costing is that form of specific order costing which applies where similar articlesare manufactured in batches either for sale or for use within the undertaking. Costs arecollected according to batch order number and total costs are divided by total numbersin a batch to arrive at unit cost of each job. The method is applicable in aircraft, toymaking, printing industries, etc.Operation Costing – Process and ServicesProcess costing method is applicable where goods or services result from a sequenceof continuous or repetitive operations or processes and products are identical and cannotbe segregated. Costs are charged to processes and averaged over the units produced duringthe period. Examples are food processing, chemical, dairies, paints, flour, biscuit making,etc. Variations of process costing are found in single or output costing, operationcosting, departmental costing as explained below:— Single or output costing is used when the production is uniform and identical and asingle article is produced. The total production cost is divided by the number of unitsproduced to get unit or output cost. Examples are mining, breweries, brick making, etc.— Operation costing refers to the methods where each operation in each stage of productionor process is separately costed. Thereafter, the cost of finished unit is determined. Thisis suitable to industries dealing with mass production of repetitive nature — for example,motor cars, cycles, toys, etc.Basics of Cost Accounting— Departmental costing refers to the method of ascertaining the cost of operating adepartment or cost centre. Total cost of each department is ascertained and divided bytotal units produced in that department to arrive at unit cost. If one product passesthrough a number of departments for completion, cost of each department will bepicked up and the total unit cost will be the aggregate of unit cost of the departmentsthrough which the product passes.Service or Operating CostingOperating costing is applicable to service organisation that do not make or sell tangible goodsbut render services. Examples are transportation companies, hotels, hospitals, schools, electricand gas generation and distribution, etc. Cost of providing and operating a service is ascertainedand unit cost is found out by dividing total cost of units of services rendered. Composite units,such as tonne-mile, passenger-kilometre, KWH, etc. are generally used.

Composite or multiple costing: The manufacture of certain products involve a lot ofcomplexities and therefore, any one of the basic methods of job or process costing cannot beused for collecting and presenting product cost. In fact, industries making complex productssuch as cycles, automobiles, aeroplanes, radios, etc. use combination of various costingmethods and the methods are known as composite or multiple costing.