Various techniques are applied for ascertaining costs. These techniques may be used for special purposes of control and policy in any business irrespective of the method of costing being used there. These techniques are briefly explained below
1. Standard Costing: Standard Costing is a system, which seeks to determine beforehand what should be the cost and then actual cost is compared. The Standard Cost is pre-determined based on technical estimates of material, labour and overhead for a selected period of time and for a prescribed set of working conditions. This is a very valuable technique to control the cost as actual cost is measured against the standard cost. The differences between actual costs and standard costs are analyzed to know the reasons for the deviations. To correct the differences, remedial measures are then taken.
2. Absorption Costing: The practice of charging all costs, both variable and fixed costs to all operations, processes or products is defined as absorption costing.It is also known as traditional costing. In this method costs are ascertained after these have been incurred. Although until recently this was the only technique employed by cost accountants but now a days it is considered to have limited application as it doesn’t help in exercising control over costs. However it is useful in submitting tenders preparation of job estimates etc.
3. Marginal Costing: According to this technique only the variable costs are considered in calculating the cost of the product while the fixed cost is treated as period cost and no attempt is made to allocate or apportion this cost to individual cost centres or cost units. However fixed costs are charged against the revenue of the period. The revenue arising from the excess of sales over variable costs is technically known as contribution. The Marginal Cost includes direct material,direct wages, direct expenses and variable overheads. This technique helps to study the effect of changes in volume on profit and also take policy decisions such as product pricing in times of competition, whether to make or buy, selection of product mix.
4. Differential Costing: The concept of differential cost is based on the fact that in the real world, it is not practicable to employ ‘factors for each unit of output separately as inputs lack perfect divisibility unlike marginal costing.Differential cost is the difference in total cost between two alternatives.Differential costs arise due to the change in product lines, addition of new product or introduction of a ‘new product, replacement of worn out plant and machinery replacement of old technique of production with a new one.Differential costing considers all the revenue and cost differences amongst the alternative courses of action to assist management in arriving at an appropriate decision.
5. Uniform Costing: It is the use of same costing principles and or practices by several undertakings for common cost control or comparison of costs. Uniform costing provides reliable data for making inter firm comparison of cost performance. It facilitates comparison of the cost of production and the production efficiency between one unit and another. The working of a uniform costing depends on the co-operation of constituents of the industry.
1. Standard Costing: Standard Costing is a system, which seeks to determine beforehand what should be the cost and then actual cost is compared. The Standard Cost is pre-determined based on technical estimates of material, labour and overhead for a selected period of time and for a prescribed set of working conditions. This is a very valuable technique to control the cost as actual cost is measured against the standard cost. The differences between actual costs and standard costs are analyzed to know the reasons for the deviations. To correct the differences, remedial measures are then taken.
2. Absorption Costing: The practice of charging all costs, both variable and fixed costs to all operations, processes or products is defined as absorption costing.It is also known as traditional costing. In this method costs are ascertained after these have been incurred. Although until recently this was the only technique employed by cost accountants but now a days it is considered to have limited application as it doesn’t help in exercising control over costs. However it is useful in submitting tenders preparation of job estimates etc.
3. Marginal Costing: According to this technique only the variable costs are considered in calculating the cost of the product while the fixed cost is treated as period cost and no attempt is made to allocate or apportion this cost to individual cost centres or cost units. However fixed costs are charged against the revenue of the period. The revenue arising from the excess of sales over variable costs is technically known as contribution. The Marginal Cost includes direct material,direct wages, direct expenses and variable overheads. This technique helps to study the effect of changes in volume on profit and also take policy decisions such as product pricing in times of competition, whether to make or buy, selection of product mix.
4. Differential Costing: The concept of differential cost is based on the fact that in the real world, it is not practicable to employ ‘factors for each unit of output separately as inputs lack perfect divisibility unlike marginal costing.Differential cost is the difference in total cost between two alternatives.Differential costs arise due to the change in product lines, addition of new product or introduction of a ‘new product, replacement of worn out plant and machinery replacement of old technique of production with a new one.Differential costing considers all the revenue and cost differences amongst the alternative courses of action to assist management in arriving at an appropriate decision.
5. Uniform Costing: It is the use of same costing principles and or practices by several undertakings for common cost control or comparison of costs. Uniform costing provides reliable data for making inter firm comparison of cost performance. It facilitates comparison of the cost of production and the production efficiency between one unit and another. The working of a uniform costing depends on the co-operation of constituents of the industry.
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