Name and Explain Costing Methods

Different industries follow different methods for ascertaining cost of their products. The method
to be adopted by business organisation will depend on the nature of the production and the type
of out put.
The following are the important methods of costing.

Job Costing:

Job costing is concerned with the finding of the cost of each job or work order. This method is
followed by these concerns when work is carried on by the customers request, such as printer
general engineering work shop etc. under this system a job cost sheet is required to be prepared
find out profit or losses for each job or work order.

Contract Costing:

Contract costing is applied for contract work like construction of dam building civil engineering
contract etc. each contract or job is treated as separate cost unit for the cost ascertainment and
control.

Batch Costing:

A batch is a group of identical products. Under batch costing a batch of similar products is
treated as a separate unit for the purpose of ascertaining cost. The total costs of a batch is divided
by the total number of units in a batch to arrive at the costs per unit. This type of costing is
generally used in industries like bakery, toy manufacturing etc.

Process Costing:

This method is used in industries where production is carried on through different stages or
processes before becoming a finished product. Costs are determined separately for each process.
The main feature of process costing is that output of one process becomes the raw materials of
another process until final product is obtained. This type of costing is generally used in industries
like textile, chemical paper, oil refining etc.

Service (Operating) Costing:

This method is used in those industries which rendered services instead of producing goods.
Under this method cost of providing a service is also determined. It is also called service costing.
The organisation like water supply department, electricity department etc. are the examples of
using operating costing.

Operation Costing:

This is suitable for industries where production is continuous and units are exactly identical to
each other. This method is applied in industries like mines or drilling, cement works etc. Under
this system cost sheet is prepared to find out cost per unit and profits or loss on production.

Multiple Costing:

It means combination of two or more of the above methods of costing. Where a product
comprises many assembled parts or components (as in case of motor car) costs have to be
ascertained for each component as well as for the finished product for different components,
different methods of costing may be used. It is also known as composite costing. This type of
costing is applicable to industries producing motor vehicle, aeroplane radio, T.V. etc.
Discuss Marginal Costing and Marginal Revenue
Marginal costing may be defined as the technique of presenting cost data wherein variable costs
and fixed costs are shown separately for managerial decision-making. It should be clearly
understood that marginal costing is not a method of costing like process costing or job costing.
Rather it is simply a method or technique of the analysis of cost information for the guidance of
management which tries to find out an effect on profit due to changes in the volume of output.
The marginal cost of a product is its variable cost. This is normally taken to be; direct labour,
direct material, direct expenses and the variable part of overheads.
MARGINAL COST
+

VARIABLE COST DIRECT LABOUR + DIRECT MATERIAL

DIRECT EXPENSE + VARIABLE OVERHEADS

The change in total revenue resulting from a change in the quantity of output sold. Marginal
revenue indicates how much extra revenue a firm receives for selling an extra unit of output. It is
found by dividing the change in total revenue by the change in the quantity of output. Marginal
revenue is the slope of the total revenue curve and is one of two revenue concepts derived from
total revenue. The other is average revenue. To maximize profit, a firm equates marginal revenue
and marginal cost.
Factors affecting Pricing Decision
i.

Organizational Objectives:

Affect the pricing decisions to a great extent. The marketers should set the prices as per the
organizational goals. For instance, an organization has set a goal to produce quality products,
thus, the prices will be set according to the quality of products. Similarly, if the organization has
a goal to increase sales by 18% every year, then the reasonable prices have to be set to increase
the demand of the product.

ii.

Costs:

Influence the price setting decisions of an organization. The organization may sell products at
prices less than that of the competitors even if it is incurring high costs. By following this
strategy, the organization can increase sales volumes in the short run but cannot survive in the
long run.Thus, the marketers analyze the costs before setting the prices to minimize losses. Costs
include cost of raw materials, selling and distribution overheads, cost of advertisement and sales
promotion and office and administration overheads.
iii.

Legal and Regulatory Issues:

Persuade marketers to change price decisions. The legal and regulatory laws set prices on various
products, such as insurance and dairy items. These laws may lead to the fixing, freezing, or
controlling of prices at minimum or maximum levels.
iv.

Product Characteristics:

Include the nature of the product, substitutes of the product, stage of life-cycle of the product,
and product diversification.
v.

Competition:

Affects prices significantly. The organization matches the prices with the competitors and adjusts
the prices more or less than the competitors. The organization also assesses that how the
competitors respond to changes in the prices.
vi.

Pricing Objectives:

Help an organization in determining price decisions. For instance, an organization has a pricing
objective to increase the market share through low pricing. Therefore, it needs to set the prices
less than the competitor prices to gain the market share. Giving rebates and discounts on
products is also a price objective that influences the customers decisions to buy a product.
vii.

Price Elasticity of Demand:

Refers to change in demand of a product due to change in price. There are three situations that
arise under it:
a. Products that have inelastic demand will be highly priced.
b. Products that have more than elastic demand will be priced low
c. Products that have elastic demand will be reasonably priced.\
viii.

Competitors pricing Policies:

Influence the pricing policies of the organizations. The price of a product should be determined
in such a way that it should easily face price competition.

ix.

Distribution Channels:

Implies a pathway through which the final products of manufacturers reach the end users. If the
distribution channel is large, price of the product will be high and if the distribution channel is
short, the price of the product will be low. Thus, these are the major factors that influence the
pricing decisions.

By use of a diagram, discuss product life cycle

A new product progresses through a sequence of stages from introduction to growth, maturity,
and decline. This sequence is known as the product life cycle and is associated with changes in
the marketing situation, thus impacting the marketing strategy and the marketing mix.
The product revenue and profits can be plotted as a function of the life-cycle stages as shown in
the graph below:

Product Life Cycle Diagram

Introduction Stage
In the introduction stage, the firm seeks to build product awareness and develop a market for the
product. The sales of the organization during this period are constant. In this stage, the pricing
policy depends upon the availability of dose substitutes. Moreover, in this stage, the prices are
either fixed higher to cover the production cost or low to attract customers.
Growth Stage
In the growth stage, the firm seeks to build brand preference and increase market share.
i.
ii.
iii.
iv.

Product quality is maintained and additional features and support services may be
added.
Pricing is maintained as the firm enjoys increasing demand with little competition.
Distribution channels are added as demand increases and customers accept the
product.
Promotion is aimed at a broader audience.

Maturity Stage
At maturity, the strong growth in sales diminishes. Competition may appear with similar
products. The primary objective at this point is to defend market share while maximizing profit.
In this stage, the organizations that loose the market share exit from the industry. In the maturity
stage, the promotion plays a great role in increasing the product sale. In such a situation,
organizations should try to explore the new uses of the product.
i.
ii.
iii.
iv.

Product features may be enhanced to differentiate the product from that of

competitors.
Pricing may be lower because of the new competition.
Distribution becomes more intensive and incentives may be offered to encourage
preference over competing products.
Promotion emphasizes product differentiation.

Decline Stage
Implies a stage in which the growth of the product in the market is declining at a fast pace. In
this stage, sales and profits of the organization decrease because of new products and
technologies are introduced in the market. A product produced by an organization may have
different stages in different countries at the same time. For example, a product may face growth
stage in one country and decline stage in another country. In such a situation, loses in one
country can be covered by the profits earned in another country.
As sales decline, the firm has several options:
i.
ii.
iii.

Maintain the product, possibly rejuvenating it by adding new features and finding
new uses.
Harvest the product - reduce costs and continue to offer it, possibly to a loyal niche
segment.
Discontinue the product, liquidating remaining inventory or selling it to another firm
that is willing to continue the product.

The marketing mix decisions in the decline phase will depend on the selected strategy. For
example, the product may be changed if it is being rejuvenated, or left unchanged if it is being
harvested or liquidated. The price may be maintained if the product is harvested, or reduced
drastically if liquidated.