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Techniques of Costing

Last updated date: 16th May 2024
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What are Techniques of Costing?

For any business, the first step before selling the products is to calculate the cost. This helps in strategically planning the production and managing the finances. To do so, the companies follow several processes depending on the needs and methods. This leads to the facilitation of making managerial decisions for cost accounting. However, before knowing the techniques of costing and types of costing methods, it is essential to understand the definition of cost accounting and its components. Let us help you understand these concepts better. 

What is Cost Accounting? 

Cost accounting is defined as the process of taking into account all the costs involved in the production, processing and selling of any projects or products. Under this, a complete note is taken along with the analysis of the process. Cost accounting plays a key role in helping the company make cost-effective decisions. There are several methods and techniques of costing, followed by different types of organizations.

Difference Between Cost Accounting and Financial Accounting

Oftentimes, one can get confused between cost accounting and financial accounting. However, these are two different aspects. Here are some of the key differentiators. 

  • Traditional (financial) accounting is calculated by deducting the expenses from the total cost to calculate the profits. However, in the case of cost accounting, the complete process and production are made cost-effective by reducing the costs at every step and aspect. 

  • In traditional accounting, the organization is viewed as a whole, whereas in cost accounting, the organization is segregated on several bases, including production and process units. 

  • The techniques and methods of financial accounting are constant with all types of business. However, the methods and techniques of cost accounting vary depending on the types of businesses. 

Elements of Cost

For any business or production unit, the costs can be majorly divided on the following basis. These include:

  • Material costing

  • Labour costing

  • Other expenses

The further classification for these includes:

  • Direct costing

  • Indirect costing

Standards of Cost Accounting

The uniformity and guidance for costing are provided to the business by the Cost Accounting Standards Board (CASB) constituted by the Institute of Cost Accountants. 

What is Costing ?

The technique and practice of recognising input costs at each stage of manufacturing is referred to as 'costing.' The firm uses many procedures or methods in costing, which include basic concepts and a set of rules that must be followed in order to regulate the entire process and calculate the cost of a product or service.

Cost Accounting

Cost accounting is a type of managerial accounting that tries to capture a company's overall production cost by monitoring both variable and fixed costs, such as a leasing charge. Cost accounting is used by a company's internal management department to define both variable and fixed expenses connected with the manufacturing process.

Cost accounting includes several forms of costs like Fixed costs, Operating costs, Direct costs, Variable costs, Indirect costs

Different Techniques of Costing

  1. Marginal Costing - The premise of marginal costing is to divide all costs into fixed and variable costs.Fixed costs are unrelated to production levels. As the name implies, these costs stay constant regardless of manufacturing volume.Variable expenses fluctuate according to production levels. They are proportionate in every way. The variable cost per unit, on the other hand, remains constant.In marginal costing, we solely take these variable expenses into account when determining production costs.

  2. Standard Costing - Standard costing is a process in which a company compares the expenses incurred for the manufacture of goods to the expenditures that should have been incurred.In essence, it is a comparison of actual costs vs conventional expenses. Variances are the discrepancies between the two.

  3. Historical Costing - Historical costing is the process of determining and recording costs after they have occurred. It serves as a record of what has occurred and, as a result, is a postmortem of the actual costs.

  4. Direct Costing - All direct expenses are charged to operations, processes, or products, whereas all indirect costs are written off against profits in the period in which they occur.

  5. Absorption Costing - There is no distinction between fixed and variable costs in absorption costing. In addition, all costs, whether fixed or variable, are taken into account when calculating the cost of production. Full costing is another name for absorption costing.

  6. Uniform Accounting - Uniform costing, unlike marginal costing, is not a different approach to cost accounting. It is one of the most recent costing and cost control approaches. It refers to all or many units in the same industry accepting and adhering to the same costing concepts and methods by mutual agreement.

FAQs on Techniques of Costing

1. What Are the Types of Costs Which Help in Cost Accounting Implementation?

The various types of costs for better analysis and understanding of types of costs include:

  • Fixed Costs: Even after changes in the production, process and operations, these costs remain constant. For example, the salaries of the employees in a manufacturing unit do not vary depending on the production. 

  • Variable Cost: This type of cost varies with increment/decrement in production, process and operation. 

  • Opportunity Cost: When the organization selects one option over the other, the cost so incurred is called opportunity cost. 

  • Sunk Costs: The costs which cannot be recovered are called sunk costs. For example, the machinery cost incurred in the production of toys. These will not decrease or increase once the products are produced.

2. What are the Various Costing Methods?

The costing methods vary depending on the business and the industry. These include:

  • Job Costing: These are the costs which are incurred for a particular job. 

  • Contract Costing: It is just like job costing, the only difference being the duration. The duration of contract costing is longer. 

  • Unit Costing: These include the cost which occurs for a specific quantity. 

  • Batch Costing: These include the cost which occurs for a batch of products with a fixed number of units. 

  • Process Costing: Under this type of cost, one can easily distinguish the types of processes involved. 

  • Operation Costing: This costing includes cost incurred for the types of services rendered.

3. Write down the difference between Costing and Cost Accounting.?

The process of acknowledging the cost of a product, service, or activity incurred at various levels of production is known as costing. Cost Accounting, on the other hand, is a formal system for analyzing and classifying expenditure in order to calculate the entire cost of a product or service with a high degree of accuracy.

The tools and practise of determining the cost incurred in production are referred to as costing. Cost accounting, on the other hand, refers to the sort of accounting that encompasses costing, cost control measures, and profit computation.

4. What are the key differences between price and cost?

Price refers to the amount you pay for services or commodities; cost refers to the number of inputs used to create the firm's product.

For all consumers or customers, the pricing will remain the same. All consumers or customers pay the same price. The cost varies only for the company that prepares it.

Price is estimated using a policy that has been drawn up for the purpose. Cost, on the other hand, refers to the actual costs associated with producing a product.

5. What exactly do you mean when you say "costing"?

Costing is defined as "the classification, recording, and appropriate allocation of expenditure for the purposes of determining the costs of products or services, as well as the display of suitably ordered data for the purposes of control and management direction."

The main goals of costs are:

  1.  Calculate the precise cost of each item.

  2. To keep control of workers' pay, determine the costs incurred throughout each operation.

  3. To supply information in order to determine the product's selling price.

  4. To provide information to aid in the discovery of waste.

6. What is Cost Accounting's primary goal?

The following are the primary goals of cost accounting:

  • Calculation of the price.

  • Cost-cutting and cost-controlling are two terms that are often used interchangeably.

  • Policy-making is aided by this information.

  • It is beneficial in making decisions.

  • supplying all price information.

  • Provide information on profit or loss.

  • Helpful in decision making and policy farming.

  • Helpful in the determination of tender price.

  • Control over selling prices expenses.

  • Measurement of the efficiency of the sales department and salesman.

7. What are the demerits of Cost Accounting?

Following are the demerits of cost accounting:-

  • It was costly since it necessitated the hiring of a cost accountant and other support workers.

  • It's pointless because simply using cost accounting does not guarantee cost management.

  • An unnecessarily high workload.

  • Because estimations are utilized and some elements of income and spending are not accounted for, the data is incomplete and unreliable.

  • Useless in determining selling price since, in this competitive environment, selling price is not dependent on cost.

  • Small businesses, agricultural areas, and other similar areas are not suited.