It is a framework used by the organizations to estimate the cost of their product or service for the use of profitability analysis, inventory valuation and cost control. Cost is a major part of any product or service, thus it becomes absolutely important for the firms to estimate the cost accurately for profitable operations. The firm must see whether the product is profitable or not. And it can only be ascertained when the accurate cost will be taken into account. Further, a product costing system helps in estimating the closing value of materials inventory, work-in-progress and finished goods inventory for the purpose of financial statement preparation.
Job Order Costing– This type of costing system accumulates manufacturing costs separately for each job. It is more useful to the firms which are into manufacturing unique products and special orders.
Process Costing– This type of costing system accumulates manufacturing costs separately for each process. It is appropriate for products whose production is a process involving different departments and costs flow from one department to another.