Costing Techniques

Table of Content

A. Work Study..............................................................................................................................2

1. Objective of work study.........................................................................................................2

2. Types of Work Study..............................................................................................................2

3. Benefits of work study............................................................................................................2

B. Material Control......................................................................................................................3

1. Objective of Material Control................................................................................................3

2. Benefits of Material Control...................................................................................................3

C. Standard Costing....................................................................................................................3

1. Objective of Standard Costing...............................................................................................3

2. Benefits of Standard Costing.................................................................................................4

D. Budgetary Control..................................................................................................................4

1. Objective of Budgetary Control............................................................................................4

2. Benefits of Budgetary Control...............................................................................................4

E. Difference between Standard Costing and Budgetary Control.........................................5

F. The Techniques of Costing....................................................................................................5

G. Difference between Job Costing and Process Costing........................................................6

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 Costing Techniques
A. Costing

Costing is an important process that many companies engage in to keep track of where their
money is being spent in the production and distribution processes

B. Work Study
Work study is defined as that body of knowledge concerned with the analysis of the work
methods and the equipments used in performing a job, the design of an optimum work
method and the standardisation of proposed work methods.
1. Objective of work study

i. To analyse and simplify the work

ii. To improve operational efficiency and increase productivity
iii. To eliminate wasteful efforts, to develop efficient work methods and establish the
standard of performance
iv. To measure and standardise the work content of the job

2. Types of Work Study

These two are distinct approaches, yet they are interdependent. The outcome of both,
method-study and work-measurement, thus results in higher productivity.

i. Method study
a. Method-study results in a more effective use of material, plant, equipment
and manpower.
b. It employs a systematic approach involving: Select-Record-Examine-Develop-
Install-Maintain.
ii. Work Measurement
a. Work-measurement results in making possible an improved planning and
control (manning), and providing a basis for sound incentive scheme.
b. It employs a systematic approach involving: Select-Define-Break jobs into
elements-Measure-Establish work unit value.

3. Benefits of work study

i. Increased productivity
ii. Improved work flow
iii. Fair wages to employees
iv. Better working condition to employees
v. Reduced material handling cost
vi. Reduced manufacturing cost

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 C. Material Control

It is a systematic control over the purchasing, storing, and using of materials so as to have
the minimum possible cost of material.

1. Objective of Material Control

i. Availability of material
ii. No excessive investment in materials
iii. Reasonable price
iv. Minimum wastage
v. No risk of spoilage and obsolescence
vi. Ready information about availability of materials
vii. Adoption of internal check system
viii. Misappropriation of materials
ix. Right amount of payment to suppliers

4. Benefits of Material Control

i. Regular supply of material

ii. No possibility of overstocking and under stocking
iii. Proper material management
iv. Minimum materials losses
v. Getting material at reasonable prices
vi. Availability of up-to-date information

D. Standard Costing

It is the preparation of standard costs and applying them to measure variations from actual
costs and analyzing the causes of variations with a view to maintain maximum efficiency in
production. It is a technique which uses standards for costs and revenues for the purpose of
control through variance analysis.

1. Objective of Standard Costing

i. effective and efficient use of resources

ii. Set scientific standards
iii. Cost comparison
iv. Variance analysis
v. Corrective actions

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 vi. to simplify the accounting system
vii. to plan labour, material and overhead requirements
5. Benefits of Standard Costing

i. Facilitate Management Planning

ii. Promote greater economy by making employees more “cost-conscious”
iii. Useful in setting selling prices
iv. Contribute to management control by providing basis for evaluation of cost control
v. Useful in highlighting variances in management by exception
vi. Simplify costing of inventories and reduce clerical costs

E. Budgetary Control

Budgetary Control is the establishment of Budgets relating to the responsibilities of Budgets

relating to the responsibilities of executives of a policy and the continuous of executives of a
policy and the continuous comparison of the actual with the budgeted comparison of the
actual with the budgeted results, either to secure by individual action results, either to
secure by individual action the objective of the policy or to provide the objective of the
policy or to provide basis for its revision basis for its revision.

1. Objective of Budgetary Control

i. Establishment of Budgets
ii. Analysis Of Variation
iii. Taking Remedial Action
iv. Revision Of Budgets

6. Benefits of Budgetary Control

i. Compels management to think about the future, to look ahead, to set out detailed
plans, to anticipate and give the organisation purpose and direction.
ii. Promotes coordination and communication.
iii. Clearly defines areas of responsibility.
iv. Provides a basis for performance appraisal (variance analysis).
v. Enables remedial action to be taken as variances emerge.
vi. Motivates employees by participating in the setting of budgets.
vii. Improves the allocation of scarce resources.
viii. Economises management time by using the management by exception principle.

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 F. Difference between Standard Costing and Budgetary Control

Standard Costing Budgetary Control

Standards are based on technical Budgets are based on past actual adjusted
assessments to future trends

Is applied to manufacturing of a product, Deals with the operations of a department

process or providing service. of business as a whole
intensive extensive
Variances are analysed in detail according
variances are not revealed through the
to their originating causes. Thus standard
accounts
costing reveals variances through
but are revealed in total
different accounts.

Both standard costing and budgetary control are complimentary to each other and for
maximum efficiency both should be used simultaneously. Both may prove more effective if
they are used in conjunction to each other.

G. The Techniques of Costing

Following are the main types or techniques of costing for ascertaining costs:

 Uniform Costing: It is the use of same costing principles and practices by several
undertakings for common control or comparison of costs.

 Marginal Costing: It is the ascertainment of marginal cost by differentiating between

fixed and variable cost. It is used to ascertain the effect of changes in volume or type
of output on profit.

 Standard Costing: A comparison is made of the actual cost with a pre-arranged

standard cost and the cost of any deviation (called variances) is analyzed by causes.
This permits the management to investigate the reasons for these variances and to
take suitable corrective action.

 Historical Costing: It is ascertainment of costs after they have been incurred. It aims
at ascertaining costs actually incurred on work done in the past. It has a limited
utility, though comparisons of costs over different periods may yield good results.

 Direct Costing: It is the practice of charging all direct costs, variable and some fixed
costs relating to operations, processes or products leaving all other costs to be written
off against profits in which they arise.

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  Activity-based costing is generally used as an internal decision-making tool. This
method assigns costs to products and services based on the amount of resources they
consume.

 Absorption Costing: It is the practice of charging all costs, both variable and fixed to
operations, processes or products. This differs from marginal costing where fixed
costs are excluded.

Common costing techniques are absorption costing (there are two versions of this: job
costing and process costing) and activity-based costing (ABC)

Job costing is used by companies that manufacture or sell more than a few different types of
products or services. Costs such as materials, labor, and overhead are charged to specific
jobs. Examples of companies that would use job costing are Boeing, Toyota, and service
businesses like lawyers. If costs can be traced to a specific product like a plane, a car, or a
legal case, then it makes sense to attach these costs to that product or service.

Process costing is used by companies that produce many units of essentially the same
product, like Coca-Cola Co. or Scott's paper towels. The costs incurred in producing such
homogeneous products are pretty much the same for every unit produced.

Job and process costing are generally used in preparing external financial reports.

H. Difference between Job Costing and Process Costing

Job Costing Process Costing

Environment Suitable in a Batch production Suitable in a MASS production

Materials needed are same for every

Materials required for job varies
Materials order leading to bulk purchases
from order to order
opportunity

Unskilled workers who carry out

Skilled labor varies according to specific tasks repeatedly which
Direct Labor
changing specification form small part of the production
process.

Each production run is relatively

Big quantities are produced leading
Production runs short as the production is carried
to longer production runs
out for specific orders.

Cost Per unit Varies from order to order Remains the same for all orders

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This article discusses the two important costing techniques used in the manufacturing
environment for product costing which are Job and Process Costing.

Let’s start with Job costing:

 Which deals with the cost determination of orders or jobs?

 It is suitable in a production environment where each new order is different from the
earlier or succeeding order.

Examples are

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  shoe manufacturing-“ requires different specification
 garment manufacturing-“ orders differs significantly
vehicle repair shops-” each repairs requires different parts replacement and labor hours

Process costing:

 
 determines the cost per unit of product in an environment where IDENTICAL
product is produced for all customers;
 Examples:
 Automobile assembly line-all cars coming out are identical
 Electronic assembly line where all products is identical
 Biscuit manufacturing though has more than one product line, each line is a separate,
continuous process producing identical products.
Tabulated below is the contrast between Job and Process Costing
 

http://anffm.blogspot.com/2009/05/costing-techniques-how-these-are-useful.html

http://www.ican-ngr.org/documents/cqt.pdf

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http://www.referenceforbusiness.com/encyclopedia/Cos-Des/Costing-Methods-
Manufacturing.html

Costing Techniques , how these are useful in decision making?

Discuss the Costing Techniques that are being used in your organization or any other
organization of your choice and also write in brief as to how these are useful in decision
making?

Costing Techniques
1. Uniform Costing
2. Marginal Costing
3. Standard Costing
4. Historical Costing
5. Direct Costing.
6. Absorption Costing

I am familiar with Parle products. Today, Parle enjoys a 40% share of the total biscuit market
and a 15% share of the total confectionary market, in India. Parle Products has one factory at
Mumbai that manufactures biscuits & confectioneries while another factory at Bahadurgarh,
in Haryana manufactures biscuits. Apart from this, Parle has manufacturing facilities at
Neemrana, in Rajasthan and at Bangalore in Karnataka.

Marginal Costing is being used in our organization.

Marginal costing is not a system of costing like job costing, process costing, operating
costing, etc. but a special technique used for managerial decision making. The technique of
marginal costing is used to provide a basis for the interpretation of cost data to measure the
profitability of different products, processes and cost centres in the course of decision
making. It can, therefore, be used in conjunction with the different methods of costing such
as job costing, process costing, etc. or even with other techniques such as standard costing or
budgetary control.

In marginal costing, cost ascertainment is made on the basis of the nature of cost. It gives
consideration to behaviour of costs. In other words, the technique has developed from a
particular conception and expression of the nature and behaviour of costs and their effect
upon the profitability of an understanding.

Theory of Marginal costing:

The theory of marginal costing may therefore be explained in three steps:
(i) The volume of output increases, the cost per unit will, in the normal circumstances, be
reduced. Conversely, if the output is reduced the cost per unit will go up. If the factory
produces 1,000 units at a total cost of Rs. 3, 000 and if by increasing the output by one unit

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the cost goes upto Rs. 3,002, therefore the marginal cost of the additional output is Rs. 2.
(ii) If the increase in output is more than one, the total increase in cost divided by the total
increase in output will give the average marginal cost per unit. If, for example, the output is
increased to 1,020 units and the total cost to produce these units is Rs. 1,045 the average
marginal cost per unit is Rs. 2.25 per unit as under:
Additional cost = Rs. 45 = Rs 2.25
Additional units 20
(iii) The ascertainment of marginal cost is based on the classification and segregation of costs
into fixed and variable costs.

Advantages and limitations of Marginal Costing:

Advantages:
1. The marginal cost remains constant per unit of output whereas the fixed cost remains
constant in total. Since marginal cost per unit is constant from period to period within a
short span of time firm decisions on pricing policy can be taken. If fixed cost is included, the
unit cost will change from day to day depending upon the volume of output. This will make
decisions making task difficult.
2. Overheads are recovered in marginal costing on the basis of pre-determined rates. If fixed
overheads are included on the basis of pre-determined rates, there will be under-recovery of
overheads if production is less or if overheads are more. There will be over-recovery of
overheads if production is more than the budget or actual expenses are less than the
estimate. This creates the problem of treatment of such under or over-recovery. Marginal
costing avoids such under or over-recovery of overheads.
3. Advocates of marginal costing argue that under the marginal costing technique, the stock
of finished goods and work in progress are carried on marginal cost basis and the fixed
expenses are written off to profit and loss account as period costs. This shows the true profit
of the period.
4. Marginal costing helps in carrying out break-even analysis that shows the effect of
increasing or decreasing production activity on the profitability of the company.
5. Segregation of expenses as fixed and variable helps the management that shows the effect
of increasing or decreasing production activity on the profitability of the company.
6. Managerial costing helps the management in taking a number of business decisions like
make or buy, discontinuance of a particular product, replacement of machines, etc.

Limitations:
1. It is difficult to classify costs exactly into fixed and variable. Most of the expenses are
neither totally variable nor wholly fixed.
2. Contribution itself is not guide unless it is linked with the key factor.
3. Sales staff may mistake marginal cost for total cost and sell at a price, which will result in
loss or low profits. Hence, sales staff should be cautioned while giving marginal cost.
4. Overheads of fixed nature cannot altogether be excluded particularly in large contracts
while valuing the work-in-progress. In order to show the correct position fixed over heads
should be included in work-in-progress.
5. Some of the assumptions regarding the behaviour of various costs, etc. are not necessarily
true in the realistic situation. For example, the assumption that fixed cost will remain static
throughout is not correct.

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UTILITY/USE OF MARGINAL COSTING IN DECISION MAKING
The technique of Marginal Costing is of immense use to the management in taking various
decisions, as explained below:
Helps in determining the volume of production: Marginal cost helps in determining the
level of output which is most profitable for a running concern. The production capacity,
therefore, therefore, can be utilized to the maximum possible extent. It helps in determining
the most profitable relationship between cost, price and volume in the business which helps
the management in fixing best selling price for its products. Thus, maximization of profit can
be achieved.
Helps in selecting production lines: The technique of Marginal Costing helps in determining
the most profitable production line by comparing line by comparing the profitability of
different products. Certain products or activities may turn out to be unprofitable with the
passage of time. Production of such products can be discontinued while production of those
products and work as a good guide for deciding the optimum mix of products keeping in
mind the available capacity and resources.
Helps in deciding whether to produce or procure: The decision whether a particular product
should be manufactured in the factory or procured from outside source can be taken by
comparing the price at which it can be had from outside. In case the procurement price is
lower than the marginal cost of production, it will be advisable to procure the product from
outside rather than manufacture it in the factory.
Helps in deciding method of manufacturing: In case a product can be manufactured by two
or more methods, ascertaining the marginal cost of manufacturing the product by each
method will be helpful in deciding as to which should be adopted.
Helps in deciding whether to shut down or continue: Marginal costing, particularly in
periods of trade depression, helps in deciding whether the production in the plant should be
suspended temporarily in spite of low demand for the firm’s products.
Posted by Capricorn at 9:44 AM
Labels: Costing Techniques, ms-04

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Costing

Costing is the process of estimating costs for items in a program. The result of costing is a budget for
the program.

Costing is defined the estimation of the cost of a process or product.

The process of calculating the cost involved in undertaking a project

An accounting system established to monitor a company's costs, providing management with

information on operations and performance.

Costing is an important process that many companies engage in to keep track of where their money is
being spent in the production and distribution processes.

Costing is defined as the techniques and process of ascertaining the costs.

Planning, decision-making & control are the three important functions of Costing.

What is Costing?

i. Formulating business strategy

ii. Planning and controlling activities
iii. Decision making
iv. Efficient resource usage
v. Performance improvement and value enhancement
vi. Safeguarding tangible and intangible assets
vii. Corporate governance and internal control

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