DIRECT COSTING

THROUGHPUT
STANDARD COSTING

SUBMITTED TO: SIR ABDUL RAZZAQ

SUBMITTED BY: ASFANDYAR

04151713006
BSBA-3A
 DIRECT COSTING

• Direct costing is the specialized form of cost analysis that only uses variable cost to
make decision . It does not consider fixed cost which are assumed to be associated
with the time period in which they were incurred.

• A cost that is directly linked to the change in production volume.

 DIRECT COSTING –ADVANTAGES

• Ideal approach to determine the lowest possible price at which the units should be
sold.
• Favorite methodology for the managers who have to face the incremental costing
strategies.
• It provides information about product costs.
• It allows management of an organization to assign overhead costs using simple ways
of assigning.
DISADVANTAGES

• Inaccurate results arises when used for long-term pricing.

• No distinction is shown b/w the fixed and variable expenses.
• No distinction is available for the skilled and unskilled labor.
 DIRECT COSTING—EXAMPLE

• The materials used to create some product is categorized as direct cost, whereas the
machines used to mold the raw material into the finished good or product is not a
direct cost.

• Some of the direct costs that are included in the production of any product are:

• Direct Materials
• Freight In and out
• Sales commission
 THROUGHPUT COSTING – DEFINITION

“ Variation on direct costing is throughput costing.”

• Throughput costing is the costing method which records only the direct materials as
inventory costs .
• The other manufacturing costs that includes the direct labor and variable FOH are
expensed as period costs.
• Selling and administrative costs are recorded as expensed as period costs.
 THROUGHPUT COSTING—ADVANTAGES

• It encourages managers to decrease operating cost such as direct labour and

variable overhead which are treated as period cost
• It reduces the incentives for management to create extra inventories to spread fix
management cost
 THROUGHPUT COSTING.. DISADVANTAGES

• It results in production mixes that delays the completion of jobs for some customers
• It is very costly.
• The system might require the retraining of the staff that makes it expensive.
 STANDARD COSTING – DEFINITION:

• An accounting way of identifying the differences b/w :

• The actual costs of produced goods.
• Expected Cost of goods

• The costs that should have occurred for the actual good output are known as standard
costing.
• With standard costing , the inventory and CGS account, contain the standard costs of
the inputs that might be used to make the actual good output.
• If the company spends more than the standard costs for the production of output in
terms of direct labor, direct materials and factory overhead, the company will face
problems and will not be able to produce its projected net income.
• In such condition, the standard cost has to be readjusted to cover up the variances.
 TYPES OF STANDARD COSTING

The two types of standard costing are:

a. Theoretical standard or ideal standard

b. Currently attainable standard or normal standard
 SETTING STANDARDS:

• Setting standard is both art and science.

• It normally requires the joint effort of accountants, engineers and other management
personals.
• It begins with analyzing past operations . However, standards are not just an
extension of past costs , and caution must be there while relying on past cost data.
THANKYOU.