Describe different method of costing.

Costing methods are techniques used by businesses to assign costs to products, services, or activities for the purpose of pricing, decision-making, and financial reporting. Several methods of costing are commonly used, each with its own advantages and applicability:

1. Job Costing: Job costing is used for projects or customized products/services where costs can be easily traced to specific jobs or orders. Costs are accumulated by job or order, allowing for precise cost allocation and pricing.

2. Process Costing: Process costing is used for mass-produced, homogeneous products manufactured through a continuous or repetitive process. Costs are averaged over all units produced during a specific period, making it suitable for industries such as chemicals, food processing, and textiles.

3. Activity-Based Costing (ABC): ABC allocates costs based on the activities that consume resources, providing more accurate cost information than traditional costing methods. It identifies cost drivers and allocates indirect costs to products/services based on their usage of resources, offering insights into cost-efficiency and process improvement opportunities.

4. Standard Costing: Standard costing sets predetermined costs for materials, labor, and overhead, which serve as benchmarks for evaluating actual performance. Variances between standard and actual costs are analyzed to identify inefficiencies, deviations, or areas for improvement.

5. Marginal Costing: Marginal costing focuses on variable costs incurred to produce each additional unit of output. Fixed costs are treated as period costs and are not allocated to products/services. Marginal costing helps in pricing decisions, contribution analysis, and assessing short-term profitability.

6. Absorption Costing: Absorption costing allocates both variable and fixed manufacturing overhead costs to products/services. It complies with generally accepted accounting principles (GAAP) and is used for external financial reporting. However, absorption costing may distort product costs in fluctuating production volumes.

7. Life Cycle Costing: Life cycle costing considers all costs associated with a product or service over its entire life cycle, including design, production, distribution, usage, and disposal. It provides a comprehensive view of costs and helps in evaluating long-term profitability and sustainability.

By understanding the characteristics and applications of different costing methods, businesses can make informed decisions regarding pricing, resource allocation, performance evaluation, and strategic planning. Each costing method offers unique insights into cost behavior, helping businesses optimize operations and enhance profitability.