What are the different costing methods?

There are a number of different costing methods that can be used by companies to analyze and evaluate the costs of producing products compared to the value of those products. Two of the most common approaches to cost analysis are process costing and work order costing, which are concerned with comparing the expenses involved in manufacturing with the profits of a product. Activity-based costing is often used in addition to these other methods to analyze individual aspects of the manufacturing process. These types of costing methods can also include an average cost analysis that analyzes the cost of goods against the number of goods produced.

Cost methods are the means by which a company, usually a manufacturer, can analyze the expenses associated with manufacturing a product and compare those costs with the value realized in selling those products. One of the most common costing methods used by companies is often called process costing. This method uses the expense of a given procedure, such as packaging a product, against the time it takes to complete the procedure and the value of that time. Process costing can be used to compare multiple steps in a manufacturing process and assess overall costs by combining the steps.

While process costing can be effective for many manufacturers, some companies may require more specific forms of costing methods. Work order costing is often used by manufacturers that produce fewer products overall but charge more for those products, such as aircraft manufacturers. This costing method is typically used for individual jobs or orders, with each process often kept separate rather than combined to create an average, which is often done in process costing. Each of these costing methods can also be used together to evaluate different parts of a large manufacturing process and provide the most relevant information possible for each step.

In addition to these costing methods, activity-based costing can also be used. This is a form of cost analysis in which individual activities that are part of larger procedures, such as the time spent transporting goods on a forklift, are isolated and analyzed to determine the total cost. Activity-based costing allows companies to more clearly see spending related to the individual activities that are part of the construction to ensure that time is used as productively as possible.

These different types of costing methods can also use average costing to analyze production-related expenses. This type of cost analysis involves the overall costs of a manufacturing process, in relation to how many units are produced during that process, to establish the average cost per unit. Using average cost analysis allows companies to more easily compare the costs of production units before and after efforts to improve efficiency and reduce expenses.

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