Let's focus on the
literal meaning of the costing system. The very term is suggesting that there is
a specific system in relation to the
costing. The subsequent question will be like costing of what? Costing systems
are particularly used by the manufacturing
concerns. They are the economic units that are engaged in the economic activity of the production. They produce and
they cost what they produce. Therefore, costing systems are such systems that
are used by the production organizations in relation to the costing of their
products or alternatively the services.
Types
of Costing Systems
With
the passage of time, there has been an evolution in relation to many costing systems.
Each new costing system tries to redress
the limitations, demerits of the previous system. The principle and traditional
costing systems were processed costing
and job order costing. However, now the list has expanded and it includes many
other costing systems such as standard costing, target costing, ABC costing.
Objectives
of the Costing Systems
Primarily, they are
programs that let the organizations identify what their output is costing per
unit and thus they can add to it their margin and then quote the price to the
prospective customers.
Secondly,
they serve as the controls as well. They assist the organization in controlling
the costs that would be eventually incurred and in this way the eventual prices
of the products and services stay within the reach of the customer and this
assist the organization in the achievement
of its central goal of profitability.
Finally,
using the costing systems, the organizations can assess the estimated margins
and the profits that could be earned and this helps in budgeting other cash
flows.
Example
of the Job Order Costing System
One
of my friends is engaged in the Business
of constructing apartments. Now, each apartment may be customized at the customer's request. In such circumstances, it
is easy and logical to cost that individual apartment. The job order costing
system is such costing system that assists
in the costing of the individual products such as apartments in the
aforementioned example.
Example
of the Process Costing System
Process
costing system is applicable when your organization is principally engaged in
the production of those goods that are similar in features. Widgets could be an
example for our understanding. All the widgets are usually same in terms of
weight, color, size and the organization can engage in the mass production of
the same. All the costs in relation to the inputs are assessed and then charged
to each of the units eventually produced
depending upon the total output. This is the essence of the process costing.
One of my friend who is an auditor has audited an organization that used to
manufacture Air conditions. Air conditions of particular technology and tonnage
are produced in many numbers which are eventually costed using process costing
system.
Conclusion
Costing
systems are such systems that are used by the production organizations in
relation to the costing of their products or alternatively the services. They
are programs that let the organizations identify what their output is costing
per unit and thus they can add to it their margin and then quote the price to
the prospective customers. They serve as the controls as well.
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