FACULTY OF BUSINESS

ACCOUNTING SCHOOL

Costing and Cost Methods

COURSE:

ADVANCED COST ACCOUNTING

AUTHOR:

Orellano Lizana, Yhordano Xavier

TEACHER:

García Vera, Waldemar Ramon

Sede - Perú

(2023)
INDEX:

- I INTRODUCTION:............................................................................................................3
- II DEVELOPMENT:...........................................................................................................4
- II. I COSTING:................................................................................................................4
- II. II COSTING METHODS.......................................................................................4
- ABSORPTION COSTING.........................................................................................4
- CHARACTERISTICS OF ADSORPTION COSTING............................................5
- ADVANTAGES OF THE ADSORPTIVE COSTING SYSTEM............................5
- II. III DIRECT COSTING METHOD....................................................................5
- PURPOSE OF DIRECT COSTING.........................................................................6
- CHARACTERISTICS OF DIRECT COSTING......................................................6
- ADVANTAGES OF DIRECT COSTING.................................................................6
 - I INTRODUCTION:

Nowadays in the business world is how to be able to value the inventories of

finished products, that is to say what would be the exact form of how we should
assign to a quantity or to say it to a produced unit that is ready for sale. We can
also say that all the elements of the cost that have been used in the production
area of the products must be incorporated, which can be direct or indirect and
also variable or fixed. But I ask myself, is it necessary to incorporate all these
direct and indirect cost elements? According to many specialists, as well as
Mondragon, (2018), tells us that the costs of the production area must be taken
to the period costs, but when taking them to the period cost we would be facing
the income obtained by the company and that is why the costing methods such
as the adsorptive costing and direct costing come into play.

The present investigation will deal with what is a system of costing which are its
methods, which would help us in the accounting of a company as well as in a
business, in addition the present report seeks to find clear definitions that allow
the reader to understand and analyze what really is a costing and which are its
methods to use and how to use it in the labor practice, also this report will have
its objectives, having as general objective: Determine what is the importance of
using costing methods, likewise we also have as specific objectives: Analyze
each of the costing methods and what is its importance in business accounting.

Likewise, Mondragón, (2018). In his research he mentions that the most used
costing method at the beginning of the 20th century was the total costing or now
called adsorption costing, because the usual form of accounting treatment was
dedicated to safeguarding the assets used, to later help in administrative
decision making, which is why variable costing was born as an alternative
solution to adsorption costing.

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 - II DEVELOPMENT:

- II. I COSTING:

It is an instrument that shows of factors of a company, as a means of

techniques and determination of costs, as Martinez, R., et al., (2020). In his
present research tells us that costing is a definition that addresses dimensions
of techniques and process and from that way allows us to apply the costing
which can be deduced as a systematic process that allows us to know the unit
cost of the product produced or the service provided, then we can say that the
costing allows us to analyze, identify and observe the expenses that are
incurred by the company either in the manufacture of a product or the provision
of a service, allowing the information received by the manager of a company or
organization to know not only the total costs of production but also all its
components.

- II. II COSTING METHODS

In the business world of accounting there are two costing methods that allow
the identification and analysis of the financial information of a company or
organization, which are the adsorption costing method and the direct or variable
costing method.

- ABSORPTION COSTING:

The adsorption costing is considered as if it were a product cost the cost of

material, labor cost and indirect manufacturing costs which are fixed or variable,
where fixed costs are those that have a constant cost at any level of production
or sale. On the other hand, variable costs are those costs that vary according to
production or sales (Sánchez, 2023).

2
 - CHARACTERISTICS OF ADSORPTION COSTING

The adsorption method is notable for the number of varieties is its

characteristics, which are as follows:

- Coherent selling price: It is the price at which the product produced will
be sold, which must be coherent and realistic.
- Heterogeneity in the costing: These are those that are excluded from all
types of costs at the moment of giving value to a good or a service,
clearly these can be of direct or indirect character.
- Adaptability: This is where companies seek to use the cost valuation
system, clearly depending on their own conditions and nature.

- ADVANTAGES OF THE ADSORPTIVE COSTING SYSTEM

- It shows and reflects which fixed costs of production were incurred

during a set period.

- Allows to set prices on the basis of production costs and operating costs.

- It is used and applied in times of inflation, devaluation and price

increases.

- II. III DIRECT COSTING METHOD

According to Benites, (2019). In his present research he tells us that for more
than 40 years the definition of what is really direct or variable costing has been
debated, since it has been very difficult to agree on what is the purpose of direct
costing, since some consider direct costing as a management tool to help in the
analysis of relationship, cost, volume and profit. But for other researchers they
consider it as not a generally accepted accounting principle.

3
So we can say that direct costing is the one that analyzes only the variable
costs but not the fixed costs, this costing helps us in making short and long term
decisions.

- PURPOSE OF DIRECT COSTING

Benites, (2019). He tells us that this method has two very important purposes
which are the planning and administrative control and the valuation of
inventories to determine the income.

- CHARACTERISTICS OF DIRECT COSTING

According to Benites, (2019). He reveals that the main characteristics of this

method are the following:

- This costing separates general expenses into fixed and variable.

- It is mostly given in fixed expenses, such as, for example: rent,
depreciation and salary.
- - It provides much more accurate information that helps in
decision making.

- ADVANTAGES OF DIRECT COSTING

 It facilitates the granting of the break-even point, since the data are
directly aligned to the elements, of course without resorting to ask for
help.
 It is useful for decision making and the choice of short-term profit
planning measures and allows for comparisons to units and period
values.

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REFERENCES

Parra Acosta, J. F., Mondragón Hernández, S. A., and Peña González, Y. C.

(2018). Variable Costing vs. Absorption costing. Resuming an old
form of his teaching. Active Magazine, 12(22), 111–136.
https://doi.org/10.15332/s0124-5805.2014.0022.04

Martinez, R., et al., (2020). Sustainable Cost Management through Activity-

Based Costing. [Graduation Thesis]. 21st Century University.
https://repositorio.uesiglo21.edu.ar/handle/ues21/26870

Gonzales Luzardo, A. I., et al., (2019). absorption costs and profitability in the
company style's technology s.a. stylestech. [Graduation Thesis]. Secular
Vicente Rocafuerte University of Guayaquil.
https://www.eumed.net/rev/oel/2019/05/costos-rentabilidad-
stylestech.html

Sánchez Galán, J. (February 5, 2023).Absorption costing. Economipedia.com.

https://economipedia.com/definiciones/costeo-por-absorcion.html

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Benítez Salinas, O.V. (2019). direct cost vs. absorbent costing. [Graduation
Thesis]. Salvadoran University Alberto Masferrer.
http://repositorio.usam.ac.cr/xmlui/bitstream/handle/11506/1031/LEC
%20CONT%200013%202019.pdf?sequence=1