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Types of costs and costing methods

Costs are the money or resources associated with the production and/or distribution of products or services. Depending on the industry in which your organization operates, you might need a specific costing method to meet your needs.

The costing method you choose has a direct impact on the level of detail of said costs. The higher the level of detail you require, the more complex the costing method of choice and the more data you need.

Categories of costing methods

So, we’ve established that the industry in which you operate determines the type of costing method suitable for your organization. There are two basic types of costing methods: process costing and job costing. Process costing refers to the continuous production of (usually) identical products, where job costing translates to manufacturing products or providing services based on the customers’ needs. The five costing methods below are extensions or combinations of these two:

  1. Contract costing
  2. Batch costing
  3. Unit costing 
  4. Operating costing
  5. Operation costing

Hypothetically, this could be an endless list of slightly different variations, based on the specific industry, or improvements or combinations of the above-mentioned costing methods.

Types of costs associated with costing methods

So what types of costs are relevant for costing methods? Again, it depends on your needs and your industry. The costs mentioned below are the most common types of costs.

  • Fixed costs

These are not dependent on changes in output. But keep in mind: fixed costs could change over time.

  • Variable costs

Variable cost relies on the level of generated output. 

  • Total costs

Total costs are the sum of the above-mentioned costs. 

  • Direct costs

As the name suggests: direct costs are directly linked to the production of your service or product. 

  • Indirect or overhead costs

Costs that are not directly related to the product or service, like gas or electricity. 

  • Incremental costs

The additional costs involved with producing one extra unit. It’s not the same as long-run incremental costing, on which we’ve already written a blog. 

  • Opportunity costs

The (potential) costs of a missed opportunity or the costs of the loss of the alternatives that were not chosen.

  • Sunk costs

Sunk costs (or retrospective costs) are the costs that are already made, are incurred and can’t be recovered.

Costing methods in CostPerform

With CostPerform, you either use the available predefined cost methods ór build your own costing method from scratch. Our predefined costing methods are based on the costing methods that are commonly used in for example healthcare, logistics, telecom or manufacturing. These are: direct costing, activity-based costing, rate-based activity-based costing and time-driven activity-based costing.

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