Contract Costing and Unit Costing: Understanding the Difference

When it comes to managing costs in a business, there are different costing methods that can be used depending on the type of product or service being sold. Two common costing methods are contract costing and unit costing. In this article, we will look at the characteristics of each method and how they differ from one another.

What is Contract Costing?

Contract costing is a costing method that is commonly used in construction, engineering, and other project-based industries. It is used when a business is undertaking a project for a specific client and needs to allocate costs to that project. The aim is to determine the cost of each contract separately.

Characteristics of Contract Costing:

1. Each contract is treated as a separate cost unit. This means that the costs incurred during the project are allocated to that specific contract only.

2. All costs related to the contract are aggregated and allocated during the contract period.

3. The contract price is based on the cost incurred during the project plus a profit margin.

4. The costs are usually allocated based on the percentage of completion of the project.

What is Unit Costing?

Unit costing, on the other hand, is a costing method that is used to determine the cost of a unit of product or service. This method is commonly used in manufacturing and retail industries.

Characteristics of Unit Costing:

1. The total cost of the product is divided by the number of units produced to determine the cost per unit.

2. The cost of each component used in the product is taken into account.

3. The cost of labor and overhead are also included in the calculation of unit cost.

4. The unit cost is used to determine the selling price of the product or service.

Key Differences Between Contract Costing and Unit Costing:

1. Cost Units: Contract costing treats each contract as a separate cost unit, whereas unit costing treats each unit of product or service as a separate cost unit.

2. Time Period: Contract costing allocates costs during the contract period, whereas unit costing calculates the cost per unit produced.

3. Profit Margin: In contract costing, the contract price includes a profit margin, whereas in unit costing, the profit margin is added to the unit cost to determine the final selling price.

4. Industries: Contract costing is commonly used in project-based industries, whereas unit costing is used in manufacturing and retail industries.

In conclusion, both contract costing and unit costing are important costing methods used in business. While contract costing is used in project-based industries to determine the cost of each contract separately, unit costing is used in manufacturing and retail industries to determine the cost per unit of product or service. Understanding the characteristics and differences between these two methods can help businesses choose the most appropriate costing method for their particular industry or project.