Fundamentals of Cost Accounting

Techniques of Costing

The purpose of cost accounting is to compute the total cost of the production of goods or the cost of providing services. But the presentation of this cost data depends on the techniques of costing employed. These various techniques of costing also help with cost control and cost reduction. Let us take a look.

Techniques of Costing

1] Marginal Costing

Techniques of Costing: marginal costing

Marginal costing is based on the principle of dividing all costs into fixed cost and variable cost.

Fixed costs are unrelated to the levels of production. As the name suggests these costs remain the same irrespective of the production quantities.

Variable costs change in relation to production levels. They are directly proportionate. The variable cost per unit, however, remains the same.

And in marginal costing, we only consider these variable costs while calculating the production costs.

Of all the available techniques of costing, marginal costing is most suitable for making decisions like how much material to buy, the correct product mix, fixing the selling price etc.

Understand the Meaning of Cost, Costing, and Cost Accounting here in detail.

2] Standard Costing

Standard costing is a technique where the firm compares the costs that were incurred for the production of the goods and the costs that should have been incurred for the same.

Essentially it is the comparison between actual costs and standard costs. The differences between the two are variances.

The standards costs we use for this comparison are pre-determined. Such standard costs of materials, labor, overheads are calculated with scientific and technical analysis. They help set the benchmark for the whole industry.

If the actual costs are greater than these standard costs, the variance is adverse. So we analyze the reason for this adverse variance and try and solve the root causes.

And if the standard costs are higher than the actual costs, the variance is favorable. Even favorable variances must be analyzed.

3] Budget and Budgetary Control

When we talk about the techniques of costing, budgetary control is an important technique. A budget is a quantitative statement prepared prior to the defined period in order to help achieve certain objectives of the firm.

This budget can be in the form of quantities or can be a monetary statement.

For example, a production budget will deal in quantities of goods to be produced. On the other hand, a marketing budget will be a monetary statement.

Another important feature of a budget is that it is prepared ahead of time. So the budget can be for the next quarter or the next year or any such predetermined period.

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.

Solved Question for You

Q: _____ is a forward-looking technique/techniques of costing

  1. standard
  2. budget
  3. both
  4. none of the above

Ans: The correct option is C. Both budgetary control and standard costing are forward-looking and predetermined techniques of costing. The common objective is to establish pre-determined targets.