Techniques of Costing
Besides the above methods of costing, the following techniques of costing are used by management only for controlling costs and making some important managerial decisions. As a matter of fact they are not independent methods of cost findings such as job or process costing but are basically costing techniques which can be used with advantage with any of the methods.
Marginal costing
It is a technique of costing in which allocation of expenditure to production is restricted to those expenses which arise as a result of production, i.e. direct materials, direct labour, direct expenses, and variable overheads. Fixed overheads are excluded on the ground that in cases where production varies, the inclusion of fixed overheads may give misleading results.
This technique is useful in manufacturing industries with varying levels of output.
Direct costing
The practice of charging all direct costs to operation, process or products leaving all indirect costs to be written off against profits in the period in which they arise, is termed as direct costing.
Absorption costing
The practice of charging all costs both variable and fixed to operation, products or processes is termed as absorption costing.
The institute of cost and works accountants defines absorption costing as “a method of costing by which all direct costs and applicable overheads are charged to products or cost centres for finding out the total cost of production. Absorbed cost includes production cost as well as administrative and other costs”.
Uniform costing
A technique, where standardized principles and methods of cost accounting are employed by a number of different companies and firms, is termed as uniform costing. Standardization may extend to method of costing, accounting, classification including codes, methods of defining costs and charging depreciation, methods of allocating or apportioning overheads to cost centres or cost units. The techniques thus facilitate interfirm comparisons, establishment of realistic pricing policies etc.
Activity based costing
It is a recent technique basically used for apportionment of overhead costs in an organisation having products that differ in volume and complexity of production. Under this technique, the overhead costs of the organisation are identified with each activity which is acting as the cost driver i.e. the cause for incurrence of overhead cost. Such cost drivers may be purchase orders issued, quality inspections, maintenance requests, material receipts, inventory movements, power consumed, machine time, etc. Having identified the overhead costs with each cost centre, cost per unit of cost driver can be ascertained. The overhead costs can now be assigned to jobs on the basis of the number of activities required for their completion.
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