Discuss the four different methods of costing along with their applicability to manufacturing industry.
I am not aware of any classification of costing system which classifies all the possible costing systems in just four different methods. The costing systems or methods may be classified in many different ways depending on different criteria like nature of product, nature of activity or operation, classification of costs, and ways o ascertaining, apportioning and analysing costs. However, I am giving below several different costing methods that are traditionally used in manufacturing industries.
This is a product related classification of costing system. The cost is ascertained for each job or work order processed. This systems is used where most of the manufacturing activities are planned and carried out for distinct jobs or customers. The utility of this method increases when there is great variability in nature of jobs or work orders processed.
Batch Costing :
This method determines the cost associated with each batch pf products manufactured. This differs from job or work order costing in the variability of the production batches. In this case the production batches consist of mostly standard products or components. What varies is mostly the size of batches and the timing of their processing.
In this method of costing the costs are determined for various different manufacturing activities or processes. These costs are the assigned to different products on the basis of some criteria like quantity processed or the time taken for processing. This method of costing is suitable for manufacturing units that use continuous processes or mass production techniques. This method is particularly suitable where there are many different products and process routes, where output of one process becomes input for another.
This method is similar to the process costing. However the products manufactured have limited variation. For example a cement plant may use this method.
Most of the organizations use a combination of different costing method rather than just one method. Multiple costing refers to such combinations of different methods.