Costings

Costings refer to the systematic determination of the costs associated with producing goods or delivering services. It involves identifying, measuring, and assigning costs to cost objects such as products, services, projects, or departments, with the aim of informing pricing, budgeting, and financial reporting.

Several costing methods are used in practice. Job costing traces costs to specific jobs or orders, making it suitable for customized work. Process costing averages costs over large numbers of identical units, common in continuous production. Activity-based costing allocates overheads based on activities that drive costs, offering more precise cost attribution. Standard costing uses predetermined costs to compare with actual results and highlight variances. Target costing starts with a desired price and profit and works back to allowable costs.

Costs are typically divided into direct and indirect components. Direct costs, such as raw materials and direct labor, are traced to a cost object. Indirect costs, or overheads, cover items like utilities, supervision, and depreciation and are allocated to objects using bases such as machine hours or labor hours. Overhead allocation methods include absorption costing and activity-based costing, chosen to reflect how resources are consumed.

Costings are used for pricing decisions, tendering, budgeting and forecasting, profitability analysis by product line or customer, and cost control. They support decision making on make-or-buy choices, product mix, and capital investments. Challenges include fluctuating input prices, allocation biases, data quality, and changes in production volume, which can affect cost accuracy and decision usefulness.