Origin of Costing Methods

There are 04 types of costing methods that can be identified namely

1. Job Costing
2. Batch Costing
3. Contract Costing
4. Process Costing

These types of costing methods are based on the production method that is used and when the production method differs there was a need for customization in the costing method used. These costing methods and respective production method are explained below:

Job Costing

Job costing was originated through production method “job production” and since job production had unique characteristics a unique costing system was required. Job production is production method where a firm produces customized products based on customer requirement in quantity of one within a year. Typical examples of job production would be hair dressing and tailoring of cloth at a tailor shop. Characteristics of job production are:

• Involves customization of product based on customer requirement.
• Production quantity of a specific job is always one.
• Production duration is less than 1 year.
• When a certain job is completed producer accepts job offers for different types of jobs.

Due to these reason conventional costing was not adequate and pricing a job required the cost of a job. As a result job costing was originated to find and record cost of a specific job.

Batch Costing

Batch costing was originated as a result of “Batch Production” and batch production is where a firm undertakes to produce a specific lot of  good from a given type of customized product. Batch production can be seen as an extension of job production where only the number of units differ from job production. A typical example of batch production would be apparel manufacturing. Characteristics of batch production are:

• Involves customization of product based on customer requirement.
• Production quantity of a specific batch is always more than one.
• Production duration is less than 1 year.
• When a certain job is completed producer accepts batch offers for different types of batches.

When costing for a different batches conventional costing  or job costing was not sufficient due to its unique characteristics. As a result managers had to find a different way of costing which is batch costing to identify cost of a specific batch and cost of a unit to price its products.

Contract Costing

Contract costing was originated as a result of contract productions which involved producing a customized product for more than one year. Contract production also can be seen an extension of job production where only the time of production differs from job production which is more than a year. A typical example of contact production would be constructing a bridge which takes more than a year. Characteristics of contract production are:

• Involves customization of product based on customer requirement.
• Production quantity of a specific contract is always one.
• Production duration is more than 1 year.
• When a certain contract is completed producer accepts contract offers for different types of contracts.
• Involves progress payment from the customer at the end of each year/specified time period to make the cash cycle of the producer easy.

Since contract production has different characteristics such as progress payments at the end of each year, producer is obliged to adopt a different costing method to calculate the cost of work completed at end of each year. Calculating the cost of work completed at each year has resulted in a different costing method named contract costing.

Process Costing

Process costing is originated as result of the production method “Process production”. Process production is a production type where when raw materials are added to process which will give more than one output after production and the cycle of adding raw material and extracting output continues to happen. Typical example of process production would be oil refinery process where the crude oil is added to process to refine LPG gas, Petrol, Diesel and so on. Characteristics of process production are:

• One or more raw material is added to the process.
• There are more than one expected output of the process which are of high value.
• There can be normal losses, abnormal losses and abnormal gains during the production process.
• There can be by products as output which was not intended to be produced out of the process and these are sold at low value/scrap.
• The cycle of production (adding raw material and extracting output) continues to happen.

When there were by products, normal losses, abnormal losses, abnormal gains and working progress in a process a customized costing system was required for valuation and as a result process costing was originated.

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