We have seen that the cost systems based on the historical cost are broadly classified into two – Job costing and Process costing. But in practice, the cost systems of many firms do not exactly fit in the category of either job crossing or process costing. Some important variants from these two basic systems are as under:
Batch Costing: In many firms like pharmaceutical, engineering etc the production of certain identical units is continued up to certain quantity which is popularly known as a batch. After the completion of a particular batch production, the machines are reset according to the specifications of another batch production. Such production system falls somewhere between the job production a continuous production. The total cost of each batch is averaged out on the basis of batch production to find out the cost per unit.
The Multiple Costing is applied to a production system where the finished product is obtained through the assembling of the parts and components. The cost of each part or component is ascertained individually either on job costing, process costing or on some other costing method and the individual cost of each part or component is summed up to certain to ascertain the cost of the finished products.
Operating Costing: The output of some of the manufacturing activities is a service rather than the physical product like transportation, electricity, gas etc. The operating costing which is also known as the service costing, is applied to describe he system which is used to ascertain the cost if performing the service by each servicing unit.
Contract Costing: The contract costing is a special type of job costing which is applied in the building and construction business. The cost is ascertained for each item of construction nits completion e.g. cost of house, dam, bridge, etc. It is also known as terminal costing.
The historical costing attempts to ascertain he cost per unit on the basis of the historical (i.e. actual) costs those have been incurred during the manufacturing activity. It breaks up the total cost into various elements of cost like materials, labor and overhead. Such break up does provide some valuable information for a managerial decision making but it des not focus any light on the desirability of particular cost which is the basis for the cost control. It simply tells how much costs have been incurred but speaks nothing about how much costs should have been incurred for the production of a particular item.
The standard costing system attempts to prescribe the standards for each element of cost which are predetermined on scientific bases. Standard cost accounting makes uses of predetermined standard cost relating to each element of cost – material, labor and overhead –for each line of product manufactured or service provided. The actual costs are compared with such predetermined standard cost and the differences between the two, which are described as variances are find out. The variances are further analyzed into favorable and unfavorable. The unfavorable variance is again analyzed into controllable and uncontrollable. The favorable variances are also analyzed to verify whether they are arising out of any leniency in prescribing that the appropriate action of either elimination of inefficiency or revision of standard may be taken as early as possible. It should be noted that the standard costing can be applied to any type of production activity, either job order production or continuous mass production. In fact, it is considered as a complementary system to the ordinary costing system lie job costing and process costing. The crux of this system is that it sets the standards for each elements of cost – material, labor and overhead and such predetermined standards are considered as the yard sticks for measuring the efficiency or otherwise of the actual performance. The most strategic art of the standard costing is the prescription of standard or each element of cost. The material cist is prescribed in terms of quantity, ideal material mix, standard price etc. The standard of the labor cost are prescribed in terms of standard time, standard mix of labor, standard efficiency standard wage arte etc. In case of the prescription of standards for overheads here is a possibility of the subjective opinions of the policy makers. However, attempts are made to ascertain the costs for the given stated condition. Generally, the standards are prescribed on the basis of past performance test runs use of certain tested formulae technical estimates etc.