Techniques Of Costing
In each of the costing methods, various techniques may be used to ascertain cost, depending on the management requirement. These techniques may be grouped as follows:
Absorption costing: It refers to the ascertainment of costs after they have been actually incurred. As per this system, fixed as well as variable costs are allotted to cost units and total overheads are absorbed by actual activity level. Absorption costing is termed as total costing, since total costs are ultimately allotted to cost units. It is also termed as historical or traditional costing. However, since costs are ascertained after they have been incurred, and substantial time-gap exists between occurrence of expenditure and reporting off cost information, it does not help to exercise cost control.
Marginal costing : It refers to a principle whereby variable costs are charged to cost units and the fixed costs attributable to the relevant period is written off in full against the contribution for that period. Contribution is the difference between sales and variable or marginal cost of sales. Marginal costing is also known as direct or variable costing. It is a valuable aid to management in taking important policy decisions, such as product pricing, choosing product mix, decision to make or to buy, etc.
Standard costing: It refers to the technique which uses standards for costs and revenues for the purpose of control through variance analysis. Standards are established for each cost element on a scientific basis for immediate future period, and actuals are compared against the standard. Variances from standards are analysed, reasons established and corrective action taken to stop recurrence of inefficient operation.
Differential costing: It is defined as a technique used in the preparation of adhoc information in which only costs and income differences between alternative courses of action are taken into consideration. It considers only the additional costs and additional revenues arising out of the decision regarding addition of a project. Similarly, incremental costing technique considers incremental costs and incremental revenue arising out of a decision to change the level of nature of activity.
Uniform costing: It refers to the use by several undertakings of the same costing system i.e. the same basic methods, principles and techniques. This is not a distinct method of costing. The system is applied by a number of units of the same undertaking or several undertakings within the same industry with a view to promote operating efficiency by comparing inter-unit or interfirm performance data. Trade associations and multinational companies often use this system.