SLC | S21W3 | Costs for entrepreneurs - Costing methods.

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Hello teacher

What are costing methods and what is their importance?

Costing methods are simply the various procedures or systems used for the calculation of the total cost of production of a product or products or even service rendered.

These calculations involves making estimation, analyzing and recording operations involved when a particular product was made.

Some costing methods used by companies and entrepreneurs includes the following

Process Costing

This is a costing method used for tracking expenses made directly on products during the manufacturing process.

Batch Costing

This is another method of costing used to collect cost paid when items or service is manufactured in groups.

Contract Costing

This is a costing method just as the name implies contract. It is used to collect cost online with contract done with a customer.

Job Costing

This costing method involves the calculation of costs in projects and jobs done by individuals. Direct and indirect costs are inclusive when calculating job costing.

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Importance of Costing Methods

• Pricing

It is no longer news that the concept of pricing is very crucial for any business. Costing Method is important in the area of pricing because it helps business owners set accurate price for their goods and services, making sure loss is not made after their cost is calculated.

• Budget management

The use of cost methods helps in making sure that budgets of companies and entrepreneurs are managed properly ensuring that they make realistic financial plans.

• The Right Decision making

Using the right costing method in business helps us make decisions by producing the required data needed like the kind of market the business owners should enter into, the rate of production and if the business owner should stop producing a product after finding out that profit wasn't made.

• Analyzing

One more importance of using costing method is that it helps business owners check their income comparing it with their expenses made by so doing, business owners can be able to identify the areas they did well like making profit and the areas they didn't do well like making losses and making adjustments.

Explain the difference between the job order and process costing methods

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Job order	Process Costing
Used by business owners who provide services or produce service based on specified order issued by customers like wedding cake	used for the mass production of products like ice cream production
It is used to cost individual products	used to cost products in bulk
Gives an accurate costing result for products that are heterogenous	Process Costing gives accurate costing result for homogeneous products.
Cash flows directly to jobs allocated	Cash flows through several process before it is allocated
The end product of inventory is valued at actual cost	End product of inventory is valued at average cost per unit.
Labour hour is tracked per job	labour is tracked by department

Research and explain, to the best of your understanding, two costing methods different from those explained in this class

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Standing Costing Method

Standard costing method is used by business owners to make estimation of production cost make plans for their budgets and keep he cost in check. Usually,direct materials, labour and overhead manufacturing are compared to the actual cost.

Types of standard costing method
There are three types of standard costing method and they include

• Basic standard costing method
• Ideal standard costing method
• Currently attainable standard costing method

Benefits of Standard costing method

• It is very easy for business owners to manage their financial records with the use of standard costing method.
• Business owners can now make budgets that are more accurate with the use of standard costing method
• Standard costing method are used to calculate variance and check for anything that tries to hinder, slow or stops production.

To get standard costs of production, All estimated cost for direct materials, labour and overhead manufacturing are added.

Absorption Costing Method

Absorption Costing Method is used where all manufacturing cost of a product is calculated to its full cost. Absorption cost comprises of all direct cost and indirect cost which can include direct labour, materials , rent, insurance and manufacturing overhead.

It is majorly used to to understand the full cost of product.

Types of Absorption Costing Method

There are 2 types of Absorption Costing Method

• Full Absorption Costing Method
• Partial Absorption Costing Method

Benefits of Absorption Costing Method

• Absorption Costing Method gives a more detailed picture of total cost because its put into consideration both the direct and indirect cost

• Business owners can now have a clear understanding about full cost of each of their products and services

• Can be used to calculate Total actual cost of the goods sold and the cost of inventory on their balance sheet

• It's aids decision making like in case of giving an idea of what a selling price of a product will be.

To get the Absorption Cost of product, overhead cost is divided by the number of labour hours of production.

Perform the costing by work orders, according to what was explained for a cake manufacturing business

To calculate this I will put into consideration Direct cost of materials, Direct labour and over head manufacturing cost.

To find the Direct cost of materials I would list the materials needed for baking the cake and their prices. They include

Materials	cost
Flour	$25
Crate of eggs	$15
Baking soda	$7
Milk flavor	$5
Butter	$10
Vanilla mixture	$5
Total	$67

Next is to calculate Direct labour.
If hourly rate for labour is $5 and it took 6 hours to make the cake. Direct labour will be= 6×5=30
Direct labour=$30

Overhead manufacturing cost
This includes electricity used while producing the cake.
Let's say Monthly expenses for electricity= $150
Total cake made = 10

To calculate overhead cost for this cake = Total monthly expenses ÷ total cake made
150÷10=$15

Total production cost of cake = Total of Direct materials + Total of Direct labour + Overhead cost.

Cost	Amount
Total Direct materials	$67
Total Direct labour	$30
Total Overhead cost	$15
Total production cost	$380

Costing by work order for the cake manufacturing business= $380

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