When it comes to product costing, you have a whole variety of different methods, and which method you apply depends on the way how you manufacture your goods. There are different manufacturing systems, and those determine which type of costing system to apply. Just to give you an overview over these different ways how you can manufactured. For example, you can have an individual production, a tanker, a large-scale plant or tailor-made clothing. These all are examples for individual production. Individual production is done by companies like movie company. Each movie is produced on an individual basis. All those individual produced goods require what we call chop costing as the way how to do the cost accounting. Chop costing is important for individual production, but it is also important for a batch production. In batch production, you have a certain number of similar products, business cards being an important example, but also the manufacturing of cars. You have a lot of similar products, not exactly the same, but very similar, and here you apply chop costing as well. If you have a highly autonomous production environment, then you would apply what we call a machine hour costing procedure, because you would assign the costs to an individual machine that in turn produces one single unit of a car. Besides individual and batch production, we also have variety production, and mass production. Mass production could be electricity or cement. Whole amount of very similar, the same product, ultimately. Electricity being produced by wind or solar power plants. The kilowatt hour is very similar. Cannot be distinguished. It is a mass production. Here you apply a costing method that is called process costing, when it comes to mass production. In variety production where you might have small deviations from your single products. Here you could also apply what we call the equivalence number method. You see there is a relationship between the way you produce the products, and the costing method that you apply. If we stick to individual, and serious batch production for a moment. If we apply chop costing, then the unit cost are calculated extremely simple. You simply take the whole costs for the chop, and you divide it by the order volume, and then you're done. You have the costs for the individual product. If you have variety or mass production, then you have large quantities, and largely homogeneous products. Here, unit costs are the sum of the costs per production department, and you divide that by the production quantity. Slightly different calculation procedure. What you also should know is that if you produce tangible goods as opposed to intangible goods, you have to take into account changes in inventory value. Why is that important? If you have tangible goods, not all goods are produced in one month or one year. So you'll have some products that are unfinished products, and you have to deal with them, the inventory value changes and this change in inventory value has to be recorded in order to have the correct costs of each individual product. This is much more easy with intangible products, such as software, there you do not have any change in inventory value. Here, the calculation is much easier.
