II. THEORY OF
COSTING: METHODS AND TECHNIQUES
This study is concerned with the method of applying job
costing to the accounting procedures of SOPECAM. In the process of using job
costing, we shall take two approaches to the costing exercise, namely the
variable and absorption costing approaches. This simply means that we are
interested in studying a particular costing method and its use under two
costing techniques; we must therefore first of all understand what is meant by
costing methods and costing techniques and how they differ from each other.
A. COSTING METHODS
Lucey (1993) defines costing methods as the methods of costing
designed to suit the way goods are processed or manufactured or the way that
services are provided. It therefore refers to the various methods that can be
used to come out with the cost of an activity. It appears that the costing
method must suit the product or service to cost. This is the reason why we may
have two broad categories of costing methods, namely:
1. Specific order
costing:
This is a costing method applicable where the work consists of
separate jobs or batches. The main sub-divisions of specific order costing are:
job costing, contract costing and batch costing.
2. Continuous
operation or process costing:
This costing method applies where the goods or service
produced result from a sequence of conditions or repetitive operations or
processes to which costs are charged before being averaged over the units
produced during the period. Its main sub-divisions are: process costing
including joint product and by-product, and service/function costing.
a) Job costing
This is a traditional method of accounting for cost. This is a
method where the costs incurred are allocated, apportioned and absorbed by the
cost unit, which is the object to cost.
Here the company production is divided into jobs, which may be
of the same nature, but generally they are all different. The purpose here is
to determine the profit made on each job, as this will be helpful for future
planning.
b) Batch costing.
Being another type of specific order costing method, it is one
which applies when a quantity of identical items are manufactured as a batch.
It is very similar to job costing but the main feature of batch costing is that
the unit cost is the ratio of the total cost of the batch to the number of
units in the batch. This method is widely used in the footwear and clothing
industries where similar items are manufactured.
c) Process costing.
This is a costing method, which is used when the production
is essentially made of homogenous products, which are being produced on a
continuous basis. It is very close to job costing in that:
· They have the same basic purposes, the determination of
the unit cost.
· They use the same basic accounts
· The flow of costs through these accounts is quite the
same for the two methods.
The differences are due to two main factors:
· In process costing the flow of units is quite
continuous while job costing is concerned with separate and distinct
processes.
· Under process costing there is no need to try to
identify materials, labour or overhead costs with particular order since that
order is only part of the many that continuously flow.
Now that we know the different methods that can be used to
build a company costing system, we must now determine the techniques to be
employed depending on the destination of the output information.
| 
