Costing and Estimating (M402)

Topic 1.1

Even Term Academic Year 2023-24

R. R. Dendge, GIPT Mumbai

 Topic 1.0 Costing Subtopic 1.1

• Cost: The monetary value which a company spends to produce

something is referred to as cost. In business, the amount of money is
expressed in terms of cost which is spent on the production of a
particular product. The expenditure as incurred during the production
of a particular goods or service is also termed as cost.
• Costing: Costing is simply the method for finding out the cost of
goods and services and works.
• Costing is essentially a technique, and as with any other process, it
follows a certain procedure and several rules and regulations.
 Topic 1.0 Costing Subtopic 1.1

• Costing
• The technique of ascertaining of the cost is referred to as the costing.
• Costing is defined as a systematic process that is used to determine the
unit cost of the output product or the service which is being rendered.
• It is a system that helps a company to determine its cost of production.
Historical costing and standard costing are some methods followed in
costing.
• While variable costs are assigned to the various activities according to
the performance, it is termed as direct costing. Fixed costs, when
assigned to activities irrespectively, it is termed as absorption costing.
 Topic 1.0 Costing Subtopic 1.1
• Variable Costs
• Variable costs are associated with the number of goods or services it
produces.
• A company's variable costs increase and decrease with its production
volume. When production volume goes up, the variable costs increase.
• As noted above, examples of variable costs generally include: Labor,
commission, packaging, utility expenses and raw materials for
production
• Variable costs apply to the production process. They are direct costs.
 Topic 1.0 Costing Subtopic 1.1

• Fixed Costs
• Fixed Costs remain the same regardless of whether goods or services are
produced or not.
• A company cannot avoid fixed costs.
• As such, a company's fixed costs don't vary with the volume of
production and are indirect.
• Fixed costs generally don't apply to the production process.
• The most common examples of fixed costs include lease and rent
payments, property tax, certain salaries, insurance, depreciation,
and interest payments.
 Topic 1.0 Costing Subtopic 1.1

• Unit Cost
• A unit cost is the total expenditure incurred by a company to produce,
store, and sell one unit of a particular product or service.
• It includes all of the fixed and variable costs associated with the
production of a good or service.
• It is a crucial cost measure in the operational analysis of a company.
• Unit costs is a quick indicator to check if a company is producing
a product efficiently.
 Topic 1.0 Costing Subtopic 1.1

• Different Techniques of Costing

• Marginal Costing – Divides all costs into fixed and variable costs.
Fixed costs are unrelated to production levels and remain constant
regardless of manufacturing volume. Variable costs change according
to production levels. In marginal costing, we take variable costs into
account when determining production costs.
• Standard Costing - Standard costing is a process of comparing the
expenses incurred for the manufacture of goods to the expenditures
that should have been incurred. It is a comparison of actual costs vs.
conventional expenses.
 Topic 1.0 Costing Subtopic 1.1

• Different Techniques of Costing

• Historical Costing - Historical costing is the process of determining
and recording costs after they have occurred. It serves as a record of
what has occurred and, as a result, is a postmortem of the actual costs.
• Direct Costing - All direct expenses are charged to operations,
processes, or products, whereas all indirect costs are written off
against profits in the period in which they occur.
• Absorption Costing - There is no distinction between fixed and
variable costs in absorption costing. In addition, all costs, whether
fixed or variable, are taken into account when calculating the cost of
production. Full costing is another name for absorption costing.
 Topic 1.0 Costing Subtopic 1.1

• Different Techniques of Costing

• Budget and Budgetary Control
• A budget is a quantitative statement prepared in the form of goods or
monetary amount prior to the defined period in order to help achieve
objectives of the firm.
• For example, a production budget will deal in quantities of goods to
be produced and a marketing budget will be a monetary statement.
• A budget is that it is prepared ahead of time i.e. for the next quarter
or the next year or any such predetermined period.
 Topic 1.0 Costing Subtopic 1.1

• Different Techniques of Costing

• Budget and Budgetary Control
• A budget will lay down the objectives of this period, and the firm’s
methods to achieve them.
• Budgetary control is the preparation of budgets and analysis of the
actual performance of the firm in comparison to the
budgeted numbers.
• If there is a lot of variation from the budget the firm can take
corrective action. This is how budgetary control works.
 Topic 1.0 Costing Subtopic 1.1

• Cost control
• Is the process of managing and reducing expenses within an
organization to achieve profitability and improve efficiency.
• Cost control helps organizations to optimize their operations, reduce
waste, increase efficiency, and improve profitability.
• Cost control Techniques
• There are several methods of cost control techniques.
• Budgeting: Creating a budget can help organizations to plan their
expenses and ensure that they are in line with their revenue.
 Topic 1.0 Costing Subtopic 1.1

• Standard costing: This technique involves setting a standard cost for

a product or service and comparing the actual cost against this
standard to identify variances.
• Activity-based costing: This technique involves identifying the
activities that drive costs and allocating those costs to products or
services based on the resources used.
• Inventory management: Managing inventory levels can help
organizations to reduce waste and avoid stockouts.
• Process improvement: Analyzing and improving business processes
can help organizations to reduce waste and increase efficiency.
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• Negotiation: Negotiating with suppliers and vendors can help

organizations to reduce costs and improve their bottom.
• Outsourcing: Outsourcing non-core functions can help organizations
to reduce costs and focus on their core competencies.