What is a costing system? It is a manner of monitoring expenditures of a business entity. Costing systems are part of a broader system of accounting deployed in a business environment. These are used for structuring and pricing a product, or for naming the price for a service that is rendered by the business. Costing systems help in monitoring input costs, raw material costs, labor costs, taxes, levies and other costs involved in the production cycle of a product, thereby rendering a base-cost for the product. These techniques are also useful in determining input costs for rendering services in a service industry.
What is said above could possibly pass off as a layman explanation of costing systems. However, the techniques involved in costing systems are not as simple. Major volatility in business and trade environments, cost-cutting and innovative marketing and sales techniques all make modern day business a complicated beast. There are various techniques in costing systems and new ones are being developed. These not only help control the costs of production, but also help reduce wastage, optimize utilization of space and real estate without compromising ready stock for keeping the production cycle going in a planned manner.
Some of the better known techniques in costing systems are discussed below…
This technique takes into account the cost at which a product is manufactured, the costs for sales and marketing the product and values the finished goods in inventory. It is helpful in determining the variable and fixed overhead costs of the manufactured products. Intelligent planning and adoption of just-in-time supply methods will help contain overhead costs, thereby optimizing cost of production.
This method enables calculation of the cost for materials and labor for each job order. The producer could assign a pre-determined overhead cost for each job-order and factor that into the final bill to the customer. This method allows allocation of cost for each specific job and thereby helps achieve accuracy in recovering cost of production. It will certainly help to strictly apply a job-order costing technique for each and every batch of production towards controlling excess production and curtailing losses. In the service sector this method could be called the process-costing technique.
In this technique, the cost accountant takes into account the cost of each of the activities [also known as cost drivers] in calculation of product cost. This method is known to be advanced over the labor cost based system. Further, activity-based costing technique is based on the premise that it is the activity of producing that consumes the resources and not the product itself. In this method costs are not allocated separately to production, marketing, selling and so on. Instead it considers the activity such as processing and order, after-sales service, customer complaint redress and so on as components of costing. This method is known to help management know where monies are being spent and which of the activities bears a potential for cost reduction.
Do note that these are just some of the various methods that are popular. Choose the right one depending on the nature of the business activity.