What does Costing and Costing techniques mean?
Costing:
Costing is defined as the technique and process of ascertaining costs. The process of costing is the day-to-day routine of ascertaining costs. It involves systematically determining the total expenditure involved in various stages of business operations, from acquiring raw materials to delivering the final product or service.
Techniques of costing:
- Meaning: Standard costing is a cost accounting technique that involves establishing predetermined standards for various cost elements, such as materials, labor, and overhead. These standards serve as benchmarks against which actual costs are compared. And to identify variances and control expenses. Companies that use standard costing systems usually produce variance reports to show the differences between the standard and actual costs.
- Sectors where standard costing is frequently employed: Standard costing is a versatile technique and can be applied across various sectors. It’s commonly used in manufacturing industries where there’s a repetitive production process. Industries that produce standardized goods in large quantities, such as automotive, electronics, and consumer goods, often use standard costing to set benchmarks for costs.
- Example: Here is an example showing how a manufacturing company may calculate its standard costing:
Standard Cost and Standard Costing
Meaning: Standard costing is a cost accounting technique that involves establishing predetermined standards for various cost elements, such as materials, labor, and overhead. These standards serve as benchmarks against which actual costs are compared. And to identify variances and control expenses. Companies that use standard costing systems usually produce variance reports to show the differences between the standard and actual costs.
- Sectors where standard costing is frequently employed: Standard costing is a versatile technique and can be applied across various sectors. It’s commonly used in manufacturing industries where there’s a repetitive production process. Industries that produce standardized goods in large quantities, such as automotive, electronics, and consumer goods, often use standard costing to set benchmarks for costs.
- Example: Here is an example showing how a manufacturing company may calculate its standard costing:
Relax0 India Production manufactures running shoes. The management is conducting a meeting with team leaders, and they plan to manufacture 300 units of shoes in the coming year. They estimate the costs as follows.
- Direct labor: ₹200 per
- Raw material: ₹ 500 per unit
- Overhead: ₹700 per unit
Standard cost per unit = material + labor + overhead
= 500+ 200 +700
= 1,400 per unit
Standard cost of 300 unit = 1,400 x 300
= ₹4,20,000
Marginal Costing in Cost Accounting
- Meaning: Marginal costing, also known as variable costing, is a cost accounting technique that focuses on the variable costs associated with the production of inventory items. It treats fixed costs as period costs and only includes variable production costs in the cost of inventory. In marginal costing, you identify and isolate the variable production costs that are directly associated with the production of each inventory item. These variable costs typically include direct materials, direct labor, and variable manufacturing overhead. The inventory is valued at its marginal cost, which includes only the variable production costs. This results in a lower inventory cost compared to absorption costing, which includes both variable and fixed costs. Marginal costing
- Sectors where marginal costing is frequently employed: Marginal costing is a technique that is commonly used in various sectors, especially in industries like consulting firms, entertainment industry, software industry, Pharmaceutical Industry, Telecommunications industry etc.
- Example: Here is an example showing how a service company uses marginal costing:
- XYZ Ltd. provides consulting services to its clients.
- Service Revenue:
- XYZ Ltd provides consulting services.
- Fee charged per project: ₹10,00,000
- Number of projects completed: 5 projects.
Total Service Revenue: 10,00,000 * 5 = ₹50,00,000
- Variable Costs:
- Variable cost per project (including direct labor and other variable costs): 4,00,000
- Total Variable Costs: 4,00,000 * 5 = ₹20,00,000
- Contribution Margin:
- Contribution margin per project: Fee charged – Variable cost = 10,00,000 – 4,00,000 = ₹6,00,000
- Total Contribution Margin: 6,00,000 * 5 = ₹30,00,000
- Fixed Costs:
- Total fixed costs incurred = ₹10,00,000
- Profit/Loss:
- Net Profit/Loss: Contribution Margin – Fixed Costs = 30,00,000 – 10,00,000 = ₹20,00,000
In this service industry example, marginal costing helps XYZ Ltd assess the contribution margin of each project and determine which project has more impact on the overall profit.
Job Costing in Cost Accounting
- Meaning: Job costing is a cost accounting technique used primarily in industries where products or services are customized or produced in batches or distinct jobs. It’s commonly used for inventory valuation in businesses that manufacture unique or custom-made products, offer specialized services, or handle construction projects. The cost of goods associated with a specific job is considered the inventory value. This includes all direct and indirect costs accumulated for that job. Track and accumulate all direct and indirect costs associated with each job. These costs can include materials, labor, subcontractor expenses, equipment usage, and overhead. Assign these costs to the respective job as they are incurred. Job Costing
- Sectors where job costing is frequently employed: This approach is particularly common in industries where customized or unique products or services are produced. Here are some sectors where job costing is frequently employed – the Construction Industry, Custom Manufacturing, Advertising and Marketing Agencies, Architectural Firms, Healthcare, etc.
- Example: Here’s an example, suppose a construction company takes on a project to build a custom house.
- Direct Materials Cost: ₹50,00,000
- Direct Labor Cost: ₹30,00,000 (based on 10000 hours of labor at 300/hour)
- Overhead Rate: ₹50 per direct labor hour
- Number of Direct Labor Hours: 10000
- Overhead Cost = Number of labor hour * Overhead rate per hour
=10,000*50
= ₹5,00,000
- Total job cost = 50,00,000+30,00,000+5,00,000
= ₹ 85,00,000
Process Costing
- Meaning: process costing is a costing technique used to determine the cost of producing a large quantity of identical or similar products or units. This method is particularly suitable for industries where products go through a series of continuous, repetitive processes. In process costing, production is divided into distinct processes or stages. Each stage represents a phase in the production cycle where materials are added or transformed. The cost of each process is tracked separately.
- Sectors where process costing is frequently employed: process costing is a technique that is commonly used in various sectors, especially in industries like Food and Beverage Industry, Oil Refining, Textile Industry, Paper Manufacturing, Electronics Manufacturing, Steel Industry, Pharmaceutical Industry, etc.
- Example: Here’s an example where Process Costing is used by an electronics manufacturing company ABC Ltd:
- Assembly Department:
- Direct Materials Cost: ₹100,000
- Direct Labor Cost: ₹40,000
- Overhead Cost: ₹30,000
- Testing Department:
- Direct Materials Cost: ₹60,000
- Direct Labor Cost: ₹35,000
- Overhead Cost: ₹25,000
- Summarized total costs for each department
- Assembly department costs = ₹100,000 + ₹40,000 + ₹30,000 = ₹170,000
- Testing department costs = ₹60,000 + ₹35,000 + ₹25,000 = ₹120,000
- These represent the costs incurred in each department during the period.
Is there one costing technique that suits every need?
As we discussed the four major costing techniques used across various industries, it should be noted that there are a lot of other costing techniques like ABC costing, Uniform costing, Budgetary control costing etc. which are developed over time. Each company has to choose the technique that applies to their specific scenario and the one that helps the management in their decision-making with the least impact on the implementation costs.
