Different industries follow different methods to establish the cost of your product. This varies according to the nature and specificities of each business. There are different principles and procedures for carrying out costing. However, the basic principles and procedures for costing remain the same. Some of the methods are mentioned below:
• Unit costs
• Cost of employment
• Contract costs
• Batch costing
• Operating costs
• Cost of processes
• Multiple cost calculation
• Uniform costs
Different Methods of Calculating Costs
The following is a breakdown of each costing method:
• Unit costs:
This method is also known as "single cost of production". This costing method is used for products that can be expressed in identical quantitative units. The calculation of unit costs is suitable for products manufactured by the continuous manufacturing activity: for example, brick making, mining, cement manufacturing, dairy operations or flour mills. Costs are calculated for suitable production units.
• Calculation of the cost of the work:
With this method, the costs for each work order are determined separately as each work has its own specifications and scope. The calculation of the cost of labor is used, for example, in painting, car repair, decoration and repair of buildings.
• Contract cost:
The cost of the contract is made for large jobs involving heavy expenses, long periods of time and often different job sites. Each contract is treated as a separate unit for costing. This is also known as terminal costing. Projects requiring contract costs include the construction of bridges, roads and buildings.
• Costs per Lot:
This costing method is used when units produced in a lot are of uniform nature and design. In order to calculate costs, each lot is treated as an individual job or separate unit. Industries such as bakeries and pharmaceuticals usually use the batch cost method.
• Cost of operation or cost of service:
The cost of operation or service is used to determine the cost of specific units oriented to services, such as nursing homes, buses or railways. Each particular service is treated as a separate unit in the calculation of operating costs. In the case of a nursing home, a unit is treated as the cost of a bed per day, while for buses the operating cost per kilometer is treated as one unit.
• Calculation of process costs:
This type of costing is used for products that go through different processes. For example, the manufacture of clothing involves several processes. The first process is to rotate. The production of this yarn spinning process is a finished product that can be sold on the market to weavers or used as a raw material for a weaving process in the same manufacturing unit. To find out the cost of the yarn, you need to determine the cost of the spinning process. In the second step, the output of the fabric, fabric process, can also be sold as a finished product on the market. In this case, the cost of the fabric should be evaluated. The third process is to turn the cloth into a finished product, for example a shirt or a pair of pants. Each process that can result in a finished good or raw material for the next process should be evaluated separately. In such multi-process industries, the costing process is used to determine the cost at each stage of production.
• Multiple cost or composite calculation:
When production is composed of many assembled parts or components, such as television, automobiles or electronics, the costs of each component as well as the finished product must be determined. Such costing may involve different costing methods for different components. Therefore, this type of costing is known as compound costing or multiple costing.
• Uniform costs:
This is not a separate costing method, but a system in which several companies in the same industry use the same method of costing, using agreed principles and standard accounting practices. This helps to establish the price of the product and in the comparisons between companies.