Ministry of Higher Education, Science and Innovation Tashkent State University of Economics

 
 
 
 
 
 
 
 
 
 
 

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Costing in Product Work Services 
There are two main methods of costing, standard costing and actual costing, 
that businesses use to analyze and measure product cost. Each method has its 
advantages and disadvantages, and their applicability depends on the type of 
business, the production process, and the business requirements. Here is a discussion 
of the circumstances in which each costing method is the most appropriate. 
Standard costing - Standard costing is a predicted or pre-determined costing 
method that relies on cost estimates and standard rates of production factors such as 
labor, material, and overheads. Standard costing is applicable in the following 
circumstances: Stable Production Process
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: When the production process is the same 
with regular outputs manufactured, standard costing is the best method to use. Since 
processes are stable, estimates of material, labor, and overhead can be calculated to 
a high degree of accuracy. Management by Exception: Standard costing is ideal 
when it is necessary to monitor variances (deviation from expected outcomes), 
which could highlight inefficiencies within a business. During such analysis, 
accurate costing figures would assist management to identify which areas require 
improvement to remain profitable. Budgeting: For businesses that need to create 
budgets for future expenses, standard costing is appropriate. Since standard costing 
relies on cost estimates, it is possible for businesses to set financial goals and 
budgets.
Actual costing - Actual costing, as the name suggests, involves calculating the 
actual expenses incurred by the production process. This method, therefore, requires 
meticulous record-keeping and documentation of all expenditures. Actual costing is 
applicable in the following circumstances: Industries with volatile costs: For 
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businesses that face rapidly increasing raw material, labor, and overheads costs or 
fluctuating exchange rates. In such cases, relying on historical costings would be 
impracticable, and actual costing is the appropriate method to use. Customizable 
Production Processes: Actual costing is ideal when a business involves customized 
products, complex production processes, or when it is challenging to forecast the 
precise cost of production. It requires calculating actual expenses that arise through 
the production process. Increasing competition: Businesses that operate in industries 
with competition need a firmer grasp on accurate costs to remain competitive. Such 
businesses may, therefore, require actual costing to make pricing decisions with 
better margins. In conclusion, the choice between actual costing and standard costing 
depends on the business's requirements and circumstances, and bothmethods of 
costing have their advantages and disadvantages. Businesses need to consider the 
expected shape of their business and production processes, as well as the 
circumstances impacting cost fluctuations, among other factors, to determine the 
most appropriate costing method for their bottom line. 
Different approaches to costing in product work services include job costing, 
process costing, and activity-based costing. Each approach provides a unique way 
to analyze and measure product and service costs. Job Costing - Job costing is a 
method of costing in which costs are assigned to individual products or service jobs. 
This technique calculates product costs by identifying the specific labor, materials, 
and overhead costs that were directly associated with the product or service. Job 
costing is appropriate for businesses that produce custom goods, such as construction 
companies, legal firms, or creative agencies. This approach is also appropriate when 
the production process is labor-intensive, and materials vary by job. Process Costing 
- In process costing, a product is continuously produced in large quantities, and costs 
are applied to each unit of production. This approach involves averaging the cost of 

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materials and labor to calculate costs. This approach is used in industries producing 
similar products in large volumes, from chemical manufacturers to car factories. 
Process costing provides a better understanding of the exact cost per unit, which can 
be beneficial in decision-making regarding the pricing of each unit. Activity-Based 
Costing - Activity-Based Costing
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(ABC) is a method of costing that focuses on the 
activities of the business rather than the product or service type. It identifies all 
activities that incur costs, including indirect costs, and allocates these costs to the 
product or service being produced. This approach accounts for the cost of activities 
that are not directly incurred during production, such as administrative activities. 
Activity-based costing is useful in businesses where activities contribute differently 
to the overall cost of production. For instance, when customized products require 
more activities, they naturally cost more than off-the-shelf products. In conclusion, 
the selection of the appropriate costing approach by a business depends on several 
factors, including the production method, the stage of production, and the nature of 
the products or services. Job costing is best suited for custom production, process 
costing is suited for mass production, and activity-based costing is most useful in a 
situation where activities contribute significantly to the production of the product or 
service being produced. Therefore, the most Ideal approach to costing depends on 
the business's specific needs and production processes. 
Costing product work services involves determining the cost of producing 
goods or providing services so that management can make informed decisions about 
pricing and profitability. However, there are numerous challenges associated with 
the cost of product work, which can vary from industry to industry. Here are some 
of the challenges: 
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Determining Accurate Material Costs - The cost of raw materials is a crucial 
factor when calculating the cost of producing goods or services. However, 
determining the exact cost of materials can pose a challenge due to fluctuations in 
prices, changes in suppliers, and variations in quality. To determine the correct 
material costs, businesses must conduct thorough price audits on their suppliers and 
frequently update their costing systems. 
Associated Overheads - Overheads are indirect expenses that contribute to the 
production of goods or provision of services, such as rent, utilities, and salaries. It is 
often challenging to accurately allocate these overhead costs to individual products. 
A sound costing system must allocate overhead costs to individual products based 
on a predetermined cost allocation method, such as activity-based costing. 
Labor Costs - Calculating the cost of labor requires a thorough understanding 
of the jobs and responsibilities associated with delivering the products or services. 
This can pose a challenge if labor is allocated to many different projects, and it can 
be time-consuming to track the actual hours spent on different jobs. Businesses must 
document employee time accurately and review regularly to ensure that their labor 
costs are aligned with their costing system. 
Complexity of the Production Process - The production process can be 
complex, particularly in industries such as construction, engineering, and software 
development. The complex production process can make it challenging to track all 
the expenses associated with a project. It is necessary to fully document each step of 
the production process to minimize any inconsistencies. 
Accuracy of Data - When calculating the cost of products or services, the accuracy 
of the data used is essential. Data entry errors can compromise the accuracy of the 
costing system, leading to incorrect decisions about pricing and profitability. 

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