The following points highlight the top two methods of costing. The methods are: 1. Specific Order Costing 2. Continuous Operation Costing.
Method # 1. Specific Order Costing:
CIMA defines specific order costing us “the basic costing method applicable where the work consists of separate contracts, jobs or batches, each of which is authorized by a special order or contract.”
Specific order costing methods are used by business organizations which involve in make/ assemble/construct jobs or products to individual customers’ specific orders.
The specific order costing is further classified into the following:
It is applicable where work is undertaken to customer’s special requirements and each order is of comparatively short duration. Job costing method is applied in manufacturing concerns where production is carried on demand or order of customers such as machine tool manufacture, printing, general engineering etc.
It is applicable where there is an agreement between contractor and contracted for accomplishment of work or job, which refers to construct work, such as construction of building, bridge, road etc.
The construction work is accepted to meet the special requirements of each individual customer and the work is expected to be continued for a long period. Another important feature is that, construction work is commenced on site and not at the premises of the contractor.
This method is suited in cases where a customer orders certain quantity of identical items or a batch of identical parts or products produced within a concern for replenishing stocks.
Method # 2. Continuous Operation Costing:
CIMA defines continuous operation costing as “the basic costing method applicable where goods or services result from a series of continuous or repetitive operations or processes to which costs are charged before being averaged over the units produced during the period”.
Where organizations which involve in mass production of products, through continuous operations, which will then be sold from stock and will not be produced to the specific requirements of the customers. The important feature of continuous operation costing is that, the process involves in production of identical units of output and total costs are divided by number of units produced to give the average cost per unit.
The continuous operation costing is classified into the following:
i. Process Costing:
It is used to ascertain the cost of each stage of manufacture where material is passed through various operations to obtain a final product or result with by-products in many cases at different stages. This method is applicable to industries like chemicals, dairy, textiles, paper, sugar etc.
ii. Operation Costing:
This method is applicable where there is mass and repetitive production conducted through different operations. A manufacturing process may sometimes be subdivided into number of operations. Each production process is considered as a separate cost centre.
iii. Unit Costing:
This method is also called as ‘single costing’ or ‘output costing’. It is applicable to the concerns where there is a production of single article on a large scale by a continuous process of manufacture and all the units produced are identical and homogeneous or only a few grades of similar articles. This method is adopted in industries like cement, steel, breweries, TV., radio etc.
iv. Service Costing:
Service oriented undertakings uses service costing for determining the unit and total cost of service provided. Service costing is applicable to the industries like, hotels, hospitals, transport undertakings, power generation concerns, canteens etc.
The major difference between specific order costing and continuous operation costing is that in specific order costing, materials and labour cost are able to directly charge to cost unit and overheads are allocated/apportioned to a cost centre before sharing the costs over cost units.
Whereas, in case of continuous operation costing, all costs like materials, labour and overheads are allocated or apportioned to cost centres from which these costs are averaged over the cost units produced.