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Friday, May 09, 2014

Techniques and Methods of Cost Accounting

Techniques of Costing
The types and techniques of costing are as follows:
1)      Historical Costing: ‘The ascertainment of costs after they have been incurred’ is called Historical costing. Such costs are, therefore, ‘postmortem’ costs as under this method all the expenses incurred on the production are first incurred and them the costs are ascertained.
2)      Standard Costing: ‘The preparation and use of standard costs, their comparison with actual costs and the analysis of variance to their causes and points of incidence’ is called standard costing.
3)      Here the standards are first set and then they are compared with actual performances. The difference between the standard and the actual is known as the variance. The variances are analyzed to find out their causes and also the points or locations at which they occur.
4)      Marginal Costing: Marginal Costing involves the ascertainment of marginal costs and of the effects on profit of changes in volumes or type of output by differentiating between fixed costs and variable costs’. The fixed costs are those which do not change but remain the same, with the increase or decrease in the quantum of production. The variables costs are those which do change proportionately with the change in quantum of production.

5)      The marginal costing takes into account only the variable costs to find out ‘marginal costs’. The difference between Sales and Marginal costs is known as ‘Contribution’ and contribution is an aggregate of Fixed costs and Profit/Loss. So the fixed costs are deducted from the contribution to find out the profits. Marginal costing is a technique to ascertain the effect on profits. Marginal costing is a technique to ascertain the effect on profit by the change in the volume of output or by the change in the type of output.
6)      Direct Costing: The practice of charging all direct cost to operations, process or products, leaving all the indirect costs to be written off against profits in the period in which they arise is called direct costing.
7)      Absorption Costing: It is the practice of charging all costs, both variables and fixed, to operations, processes or products. This is the traditional technique as opposed to Marginal or Direct costing techniques. Here both the fixed and variables cost are charged in the same manner.

Methods of Costing
The methods of costing are as follows:
1)      Job Costing: The job costing methods are applicable where the unit of manufacture is one and complete in itself. They include printers, job foundries, tool manufactures, and contractors, etc. the following methods are included in Job Costing:
2)      Contract Costing: This method if applied in undertakings erecting buildings or carrying out constructional works, e.g., House buildings, ship building, Civil Engineering contracts. Here the cost unit is one and completed in itself. The cost unit is a contract which may continue for over more than a year. It is also known as the Terminal Costing, since the works are to be completed within a specified period as per terms of contract or agreement executed by the contractor and contractee.
3)      Batch Costing: In this method, a batch of similar or identical products is treated as a job. Here the unit of cost is a batch of group of products, costs are collected and analyzed according to batch numbers and the costs are ascertained batch wise. This method is applied in pharmaceutical industries where medicines or injections are manufactures batch wise or in general engineering factories producing components in convenient batches.
4)      Process Costing: Process costing method is applicable to those industries manufacturing an number of units of output requiring processing. Here an article has to undergo two or more processes for reaching the stage of finished goods and succeeding process till completion.
5)      Unit costing: This method is also known as single or output costing. The objective of this method is to ascertain the total cost as well as the cost per unit. A cost sheet is prepared taking into account the cost of material, labour and overheads, Unit costing is applicable in the case of mines, oil drilling units, cement works, brick works and units manufacturing cycles, radios, washing machines etc.
6)      Operating costing: This method is followed by industries which render services. To ascertain the cost of such services, composite units like passenger kilometers and tone kilometers are used for ascertaining costs. For example, in the case of a bus company, operating costing indicates the cost of carrying a passenger per kilometer.
7)      Operation costing: This is a more detailed application of process costing. It involves costing by every operation. This method is used where there is mass production of repetitive nature involving a number of operations. The main purpose of this method is to ascertain the cost of each operation.

8)      Multiple Costing: It is also known as composite costing. It refers to a combination of two or more of the above methods of costing. It is adopted in industries where several parts are produced separately and assembled to a single product.