Product Costing – Methods

One of the primary areas of management accounting is computing the cost of products manufactured / services provided.

The following are two broad methods used for product cost computation:

a) Job Costing
b) Process Costing

Job costing is used in industries which make products for customer specific orders. Each job is separate and independent with each other. This method determines costs for each job separately. It is suitable in garment manufacturing, printing companies.

Job costing procedure

The following table shows the sequence of activities in a job costing system:

Sl.No. Activity Department
1 Prepare suitable design for the product Production planning
2 Prepare material requirements i.e. Bill of materials (BOM) Production planning
3 Issue of job order Production planning
4 Provisioning and issue of materials Stores
5 Deploy men and resources for operations Operations / Production
6 Prepare job cost sheet Costing
7 Cost control Costing

A variant of job costing is Contract costing which is used in construction industry. This method is used when jobs taken up are customer specific and have a longer gestation period. As against contract costing, job costing is used for jobs with shorter gestation period.

Process costing is used in industries which are in mass production. This method determines the cost per unit of product manufactured where identical units of a product are manufactured for all the customers. It is suitable for manufacturing, mining, and oil refining industries. There are two broad categories of industries which use process costing.

i) Single products – Industries which through one or more processes make a single product. Example – Cement industries; Paper industries

ii) Multiple products – Plants which male more than one product using the same process or multiple simultaneous processes. Example – Flour mills; foundries

Process costing scenarios

Below are the different scenarios in process costing:

a) Process without stocks
b) Process with stock of completed units
c) Process with stock of partially complete units

Equivalent production

Equivalent production is a concept used when a process contains partially complete units (WIP) at the end of the period. Below is the procedure used in such cases:

 

product_costing

Process costing vs Job costing

The following table summarizes the major differences between process costing and job costing:

Category Process Costing Job Costing
Product type Identical products Customer specific products
Environment Continuous and mass production Jobs are separate and independent
Cost computation Cost per unit of product is computed Cost per job is computed
Frequency of cost computation Costs are computed periodically Cost computation is made after the completion of the jobs.

Operating costing or Service costing is used in the non-manufacturing industries involved in providing a service. It is suitable in industries like Transportation, Hotel, Power generation, Educational institutions etc.,

Comments

  1. Marcelo Ruiz says:

    I’m interested in learning detail procedures on Product Costing, is there a training book or training course that you would recommend for me to take??

  2. ECHEM EZEKIEL says:

    I,m interested in product costing. Could you please send to my mail generally accepted costing template for a products in plastics manifacturing industries

  3. Thanks. Interesting.

  4. MEHWISH SHAFQAT says:

    i want to read full detail method of costing by product.

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