Costing Types: Accounting Strategies for Managing Cost

Costing types define how costs are viewed, grouped, and analysed from an accounting perspective. These strategies are helpful for financial reporting, pricing decisions, budget control, and business analysis. Unlike costing methods (which focus on assigning costs to jobs or batches), costing types help determine which costs to include and how they're treated in your financial decision-making.

Here are the five most common costing types manufacturers should understand:

1. Product Costing

• Definition: A general approach to calculating all costs directly or indirectly associated with producing a product.
• Best For: Any business that wants to understand true unit cost and profitability.
• Benefit: Establishes a baseline for setting prices and calculating gross margin.
• Use Case: A precision engineering firm uses product costing to ensure each CNC part includes materials and labour and allocated indirect overhead.

2. Standard Costing

• Definition: Uses predetermined (budgeted) costs for materials, labour, and overhead, then compares them to actual costs to calculate variances.
• Best For: Manufacturers looking to monitor performance and control costs.
• Benefit: Helps identify operational inefficiencies and support budgeting.
• Use Case: A metal fabrication shop sets a standard cost for welding time. Monthly reviews reveal a recurring variance, helping identify a training gap.

3. Marginal Costing (Variable Costing)

• Definition: Includes only variable production costs (e.g., raw materials and direct labour); fixed costs are excluded from product costs.
• Best For: Short-term decision-making like pricing, make-or-buy, or break-even analysis.
• Benefit: Highlights contribution margin and profitability from additional units.
• Use Case: A packaging manufacturer is considering taking on a sizeable one-off order at reduced pricing. Marginal costing shows the job still contributes profit once variable costs are covered.

4. Absorption Costing (Full Costing)

• Definition: Allocates all fixed and variable manufacturing costs to units of production.
• Best For: Financial reporting (required under UK GAAP and IFRS).
• Benefit: Ensures full recovery of costs and compliance with accounting standards.
• Use Case: A furniture maker producing in batches uses absorption costing to ensure each table's cost reflects raw materials, assembly wages, and a portion of factory rent.

5. Throughput Costing

• Definition: Only considers direct material costs as variable, treating all other costs as fixed operating expenses.
• Best For: Lean, high-volume environments focused on bottleneck efficiency.
• Benefit: Simplifies cost tracking and sharpens focus on flow and efficiency.
• Use Case: A bottling line tracks throughput per machine shift to monitor profitability since all costs beyond raw bottles and labels are fixed.

‍

Types of Manufacturing Costs in Job Costing

Understanding costs is the starting point of accurate costing. Manufacturing costs broadly fall into two categories:

Direct Costs:

These are costs you can directly trace to a specific product.

• Raw Materials: For example, wood for furniture, and steel for automotive parts.
• Direct Labour: This includes assembly line workers or machinists who are directly involved in production.

Indirect Costs (Manufacturing Overheads):

Essential expenses indirectly linked to product manufacturing:

• Factory rent
• Utilities (electricity, water)
• Machinery maintenance and depreciation
• Insurance
• Indirect labour (supervisors, quality inspectors)

‍

Cost Allocation Techniques for Manufacturing Businesses

Proper allocation of indirect costs ensures every product carries its fair share of overheads. Key allocation techniques include:

• Direct Allocation: Assigns costs traceable directly to products.
• Activity-Based Costing (ABC): Costs allocated based on actual activities (e.g., setups, inspections).
• Machine/Labour Hour Rate: Allocating costs based on equipment or labour usage.
• Square Footage: Allocating factory overheads based on space used.
• Units Produced: Costs are distributed evenly across the total units produced.

‍

Job Costing Methods Explained for Manufacturing

Different manufacturing processes call for different costing methods. Let's look at three main methods clearly:

Job Costing:

Best suited for custom, bespoke, or specialised manufacturing jobs.

Want to test this method? Try our Job Costing Calculator online.

Process Costing:

Ideal for mass-produced, homogeneous products.

Want to test this method? Try our Job Costing Calculator online.

Activity-Based Costing (ABC):

Precise costing for complex products or varying resource usage.

Want to test this method? Try our Job Costing Calculator online.

‍

Costing Methods vs Costing Types

It's important not to confuse costing types with costing methods.

• Costing types (like marginal or absorption costing) are accounting strategies—they determine which costs are included in your financial reports and decision-making.
• Costing methods (like job costing, process costing, and activity-based costing) are operational strategies—they determine how those costs are assigned to products or jobs during production.

By using the correct costing method and type together, manufacturers can ensure accuracy in both job-level pricing and big-picture financial reporting.

‍

‍

Matching Cost Allocation Techniques to Job Costing Methods

‍

‍

Selecting the appropriate allocation method can streamline costing accuracy:

• Job Costing: Direct Allocation, Labour Hour Rate, Machine Hour Rate, ABC
• Process Costing: Units Produced, Machine Hours, Percentage of Cost
• ABC: Activity Rates, Weighted Allocation

‍

Typical Gross Profit Margins by Manufacturing Type

Common profit margins vary based on manufacturing type and complexity:

• Custom, Bespoke, or Specialized Manufacturing (Job Costing): Typically 25% - 50%+ due to specialisation and customisation.
• Mass-Produced, Homogeneous Products (Process Costing): Typically 10% - 30% because of competitive pricing and economies of scale.
• Complex Products or Products with Varying Resource Usage (ABC): Typically 20% - 40%, benefiting from precise cost allocation and niche market positioning.

Industry Benchmarks for Manufacturing Profit Margins

According to industry benchmarks, average gross profit margins vary significantly across manufacturing sectors. For example:

• Apparel: 53.04% gross margin, 7.06% net margin
• Auto Manufacturing: 14.25% gross margin, 3.96% net margin
• Electrical Equipment: 33.53% gross margin, 7.26% net margin
• Construction Supplies: 25.98% gross margin, 11.23% net margin

These figures provide helpful benchmarks to evaluate your company's performance. For a more detailed breakdown, you can visit Polymer Search's comprehensive industry analysis.

‍

Why Accurate Job Costing Matters for Pricing & Quoting

Accurate costing ensures realistic quotes, maintains healthy profit margins, and keeps pricing competitive. Without precise costing, your business risks either underselling (losing profit) or overpricing (losing customers).

‍

Using MRP Software to Improve Job Costing and Track Profit Margins

Modern Manufacturing Resource Planning (MRP) software isn't just a digital filing cabinet — it's the foundation for real-time, reliable cost control.

With Statii MRP, costing becomes a live process, not a retrospective calculation.

From quoting to final delivery, Statii integrates:

• Quoting: Add setup time, manufacturing time, materials, and overheads to calculate accurate job costs.
• Markup/Margin Control: Apply your desired markup or margin to generate a profitable sell price.
• Purchase Orders & Inventory: Automatically allocate costs as materials are received and consumed.
• Shop-Floor Data Capture (SFDC): Timestamp works orders to track real-time labour costs.

‍

🎥 Watch the Interactive Guide

‍

Actionable Steps to Implement Accurate Job Costing

Follow these clear steps to master product costing:

Step 1: Gather True Costs

Collect direct and indirect costs from invoices, payroll, and overhead bills.

Step 2: Select a Cost Allocation Method

Choose a suitable allocation technique based on your manufacturing process.

Step 3: Choose Your Costing Method

Decide between Job Costing, Process Costing, or ABC based on product complexity and production style.

Step 4: Calculate Target Gross Profit Margin

Gross Margin (%) = (Revenue – COGS) ÷ Revenue × 100. Set clear margin targets for consistent profit.

Step 5: Generate Accurate Quotes

Apply your target gross margin to calculated costs to price accurately and profitably.

Step 6: Monitor Real-Time Profits with MRP

Utilise Statii MRP to connect all aspects of your production cycle, ensuring real-time monitoring of job costs, profitability, and seamless cost management.

‍

Start Your Accurate Costing Journey Today

Ready to improve your costing accuracy and profitability? Download our free Excel costing template to begin capturing your direct and indirect costs clearly and accurately.

Want to explore the full potential of automated costing? Start your free 14-day Statii MRP trial today, or book a demo to see how it can transform your manufacturing profitability.

[Watch 4min Demo Video] | [Book a Statii Demo]

Heading 1

Heading 2

Heading 3

Heading 4

Heading 5

Heading 6

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur.

Block quote

Ordered list

1. Item 1
2. Item 2
3. Item 3

Unordered list

• Item A
• Item B
• Item C

Text link

Bold text

Emphasis

^Superscript

_Subscript