Techniques of Costing

A method of costing (job, process, unit, etc.) settles the way cost is collected for a particular kind of production. A technique of costing is different — it is the approach or device applied on top of any method to serve a particular purpose, chiefly cost control and decision-making. The same firm can use a costing method and a costing technique together (for example, unit costing with standard costing). The main techniques are the following.

1. Historical (actual) costing. Ascertaining cost after it has been incurred, from actual figures. It tells management what a thing did cost, but only after the event, so it is of limited use for control while work is still going on.
2. Standard costing. Predetermined standard costs are set for materials, labour and overheads; actual costs are then compared with these standards, and the differences (variances) are analysed to find and correct inefficiencies. A powerful technique of cost control.
3. Marginal costing. Only variable (marginal) costs are charged to products, while fixed costs are treated as a cost of the period and written off in full. By separating fixed from variable cost, marginal costing is invaluable for decisions on pricing, break-even analysis, make-or-buy, and accepting or rejecting a special order.
4. Absorption (total) costing. The opposite approach to marginal costing — both fixed and variable costs are charged to (absorbed by) the product. This is the basis of the ordinary cost sheet.
5. Budgetary control. Budgets (plans expressed in figures) are prepared for each function; actual performance is then compared with the budget, and action is taken on the differences. Like standard costing, it is essentially a technique of planning and control. …