Costing Methods and Techniques: 10 Methods of Costing

In such industries finished product of one process becomes raw material for the next process. The methods or types of costing refer to the techniques and processes employed in the ascertainment of costs. The breast cancer to be used in a particular concern depends upon the type of manufacturing and nature of industry. In fact, uniformity should be with regard to (i) size of the various units; (ii) production methods, type of products and (iii) accounting methods, principles and procedures used. It makes inter-unit and inter-firm comparison easy and helps the firms to submit reliable cost data to price fixing bodies to ascertain the average cost and fix the fair selling prices of various products. It helps to derive the benefit of anyone’s better experience and performance.

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Under variable costing, fixed factory overhead costs are expensed in the period in which they are incurred, regardless of whether the product is sold yet. Under absorption costing, fixed factory overhead costs are expensed only when the product is sold. Cost ascertainment refers to the methods used and process of finding costs. It is concerned with computation of actual costs after cost has been incurred.

Departmental Costing

These costing approaches specify how inventory is valued and costed each time it is added to a pool of inventory. A supply chain’s proper inventory management lowers overall inventory costs and aids in deciding how much of a product a company should hold. All of this data aids businesses in determining the necessary margins to allocate to each product or product category. Or, to put it another way, over time, increasing inputs of variable costs will result in progressively fewer units of output. Long-term rate of increase in variable costs with increasing output will be progressively greater if fixed costs are not changed. A manufacturing company’s raw material and packaging costs, or a retail business’ credit card transaction fees or shipping costs, which increase or decrease with sales, are examples of variable costs.

What Is Activity-Based Costing (ABC)?

It can come in handy if you’d like to choose between two or more assets, understand the benefits of an asset and budget more accurately. In both of the above examples, we are assuming that the company produced and sold 2,900 books using a Just-in-Time inventory management system, and therefore, operating income for both statements is $1,530.00. To work out the cost of a contract undertaken we employ contract costing.

• This method is followed where the final product consists of a number of separate parts, e.g., radio set, motor car, bicycle etc.
• The basic feature of functional departments is that they tend to include a series of different activities causing different costs that behave in different ways.
• It eliminates unnecessary transactions and systems, reducing time, costs and waste.
• Cost accounting focuses on providing detailed cost information to help internal management make informed operational decisions and improve efficiency.

What Are the Different Types of Cost Accounting?

Another influencing factor is the cooperation that the costing department can receive from other departments in the organization. For example, the use of cost data can guide the introduction of a new product line, lead to the identification of unused capacity, or highlight expansion opportunities. Thus, the management periodically collects cost data, which is used as the basis for determining the selling price. Therefore, costing, as a technique, is the body of principles and rules used to ascertain cost. That is to say, costing involves analyzing the expenditure incurred in manufacturing an item or rendering a service.

Operating Costs

We will take a closer look at three important cost items namely material costs, personnel costs, and machine costs. Individually assessing a company’s cost structure allows management to improve the way it runs its business and therefore improve the value of the firm. Uses various costing methods like FIFO, LIFO, or weighted average to accurately allocate costs to inventory and assess profitability. Cost accounting provides detailed cost data that allows a business to arrive at an accurate scheme of budgeting. It also helps in monitoring actual expenses against the budget, allowing for adjustments to be made in time. Financial and cost accounting systems can be differentiated based on their target audiences.

Since ABC considers all manufacturing activities, it provides a very accurate picture of the unit cost. Target costing is a method used to ensure that products are designed and priced to meet customer needs. Having a clear overview of your processes and related costs is vital for any business.

The cost can be found out only by finding out the cost per tonne of total oil produced and then multiplying it by ten. Under absorption costing, no distinction is made between fixed costs and variable costs. Furthermore, all costs, whether fixed or variable, are considered to determine the cost of production.

In the end, most manufacturers either directly or indirectly try to foresee what will happen and how that would affect the bottom line. Manufacturers producing biscuits, ready-to-wear clothing, spare parts, pharmaceuticals, etc. use batch costing. This strategy is used to cost items that are manufactured in batches with consistent nature and design. Keeping this level of particular cost detail in inventory is unnecessary. There aren’t any items with high price tags or distinctive cost structures. A new «per unit output price» is calculated each time an additional layer of inventory is added.

Activity based costing refers to the technique of determining the cost of activities and the cost of output that those activities produce. This method is followed in industries with a continuous flow of work, producing articles of a standard nature, and which pass through several distinct operations in a sequence to completion. Since this method provides for a minute analysis of costs, it ensures greater accuracy and better control of costs.