Sometimes, students are confused about the exact meanings of the terms costing, estimating, and pricing. All of these terms are used in connection with cost accounts, but they each have different meanings.
Costing means ascertaining the actual cost. Specifically, it can be defined as working out the actual cost of an article that has already been produced or a service that has already been rendered.
Estimating, in contrast to costing, refers to ascertaining—in advance—the probable cost of manufacturing an article, completing a contract, or executing a process in the near future. Estimating is based on past (recorded) experience.
Estimating necessarily involves some guesswork, but guesses should be guided by facts to the greatest possible extent.
One of the advantages of the cost accounting system is that it provides reliable data on the basis of which estimates or tenders for future work can be prepared much more accurately than would otherwise be possible.
In this way, the margin of error in estimating a cost is reduced, which enables organizations to provide quotes to clients at a competitive price.
When estimating cost on the basis of past cost data, the anticipated changes in relevant costs must be taken into account; otherwise, the estimates may not be correct.
Pricing means fixing the selling price of an article. The pricing of an article already produced should be preceded by and based on costing, but other factors are also taken into account (e.g., price of competitive articles, price trends, etc.).
In cases where the pricing of an article has to be done before its actual production, it is preceded by estimating rather than costing, and it has to be based on the outcome.
However, in such cases, the process of estimating the figure itself must be based on actual cost data, adjusted to anticipated changes in the relevant items of cost.