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Cost Accounting

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Systems of costing

It has already been stated that there are two main methods used to determine costs:

1. The job cost method.

2. The process cost method.

It is possible to ascertain the costs under each of the above methods by two different systems:

1. Historical costing

Historical costing is the determination of cost by actual. It may be in the nature of (i) Post costing, or (ii) continuous costing.

(i) Post costing: It means ascertainment of cost after the production is completed. This is done by analyzing the financial accounts at the end of the period in such a way as to disclose the cost of the units which have been produced. For instance, if the cost of product A is to be calculated on the basis, one must wait till the materials are actually purchased and used, labour actually paid, and overhead expenditure actually incurred. This system is useful only for ascertaining the costs but not useful for exercising any control over cost, as one comes to know of things after they had taken place. It can serve as a guide for future production only when conditions in future continue to be the same.

(ii) Continuous costing: In case of this system, cost is ascertained as soon as the job is completed or even when the job is in progress. This is done usually by charging the job or product with actual expenditure on materials and wages and estimated share of overheads. Hence, the figure of cost ascertained in this case is not exact. But it has an advantage of providing cost information to the management promptly thereby enabling it to take the necessary corrective action in time. However, it neither provides any standard for judging current efficiency nor does it disclose what the cost of the job ought to have been.

2. Standard costing

Standard costing is a system under which the cost of the product is ascertained in advance on the basis of certain pre-determined standards. Taking the above example, the cost of product A can be calculated in advance if one is in a position to estimate in advance the material, labour and overhead costs that should be incurred over the product. All this requires an efficient system of cost accounting. However, this system will not be useful if a vigorous system of controlling cost and keeping it upto standard cost is not in force.