Costing applications

Businesses operate in two main ways: continuous operations, where identical products are mass-produced (like cans of soda), and specific order operations, where unique products or services are made for individual customers (like building a custom house). The type of operation determines the most suitable costing system. Continuous operations use methods like unit costing, while specific order operations use job or batch costing to track costs for each unique order.

Unit costing, also known as single costing, is the simplest method. It is used when a business produces a large number of identical units. The goal is to find the total cost to produce one single item. To do this, you first calculate the total cost of production (including all direct materials, direct labour, and production overheads) over a period, and then divide this total cost by the number of units produced in that period.

Job costing is used when work is undertaken according to a customer's specific requirements. Each 'job' is unique and treated as a separate cost unit. Costs for materials, labour, and overheads are collected for each individual job. This is often recorded on a 'Job Cost Card' or 'Job Cost Sheet'. This method is essential for businesses like builders, mechanics, or consultants to determine the cost and profitability of each individual project and to prepare quotations for new customers.

Batch costing is a middle ground between unit costing and job costing. It is used when a business produces items in groups, or 'batches', where each batch contains identical units, but different batches are for different products. For example, a bakery might bake a batch of 50 croissants, then a batch of 30 sausage rolls. The costing is similar to job costing, where the 'job' is the entire batch. The cost per unit can then be found by dividing the total batch cost by the number of units in that batch.

Costing principles are not just for manufacturing. Service businesses, like accounting firms, law firms, or hospitals, also need to know their costs. Instead of a physical product, the 'cost unit' is the service provided. For example, the cost unit for a law firm could be one hour of legal advice or a specific case. For a hospital, it could be a 'patient-day' or a specific surgical procedure. They use job or unit costing principles to track costs. Direct costs might include the salary of the professional providing the service (direct labour), while overheads include rent, administrative staff salaries, and utilities. These are then absorbed into the cost of the service provided.

Once a business has calculated the total cost of a job or batch, it can prepare a quotation (or 'quote') for the customer. A quotation is the price the business will charge. This price must be high enough to cover all the costs and generate a profit. A common method is 'cost-plus pricing', where a profit amount is added to the total cost. The profit can be either a fixed amount, a percentage of the cost (a 'markup'), or a percentage of the final selling price (a 'margin').