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  Technique of Costing

Introduction to Technique of Costing

As described above, costing methods are for calculation of the total cost of production/services offered through a firm. Alternatively, costing technique assists to represent the data in a specific format so that decision making becomes simple. Costing techniques also assist for controlling and reducing the costs.

The following are the techniques of costing:

I. Marginal Costing:-

This technique is relies on the assumption that the total cost of production can be categorized into fixed and variable. Fixed costs stay not change irrespective of the changes in the volume of production when the variable costs change with the level of production that is they will rise if the production get increases and get decrease if the production decreases. Variable cost per unit all the time stays the same. Only variable costs are taken into account when computing production cost in this technique. In the production units the fixed costs are not absorbed. They are written off to the Costing Profit and Loss Account. The reason of this is that the fixed costs are period costs and therefore should not be absorbed in the production.

Secondly they are variable on per unit basis and therefore there is no equitable basis for make charge them to the products. This technique is efficiently employed for decision making in the areas such as buy or makes decisions, key factor analysis, optimizing of product mix, accepting or rejecting an export offer, fixation of selling price and various other areas.

II. Standard Costing:-

The costs which are relating to material, labor and overheads are known as standard costs. Even though they are predetermined, they are carried out on scientific basis through conducting technical analysis. They are calculated for all elements of costs like material, labor and overheads. The major purpose of fixation of standard cost is to contain benchmark in opposition to which the actual performance can be compared. Meaning of this is that the actual costs are compared with the standards. The variation is termed as 'variance'. If actual costs are exceeds than the standard, the variance is 'adverse' when if actual costs are below the standard, the variance is termed as 'favorable'. The adverse variances are analyzed and causes for the same are found out. Favorable variances might also be analyzed to observe the reasons behind the same.

So standard costing is a significant technique for cost control and reduction.

III. Budgets and Budgetary Control:-

Budget is described as, 'a quantitative and/or a monetary statement ready to prior to a specified period of time for the policies throughout that period for the purpose of getting a specified objective.' After analyze this definition, it will be obvious that a budget is a statement that might be either in monetary form or quantitative form or both. For instance, a production budget can be ready in quantitative form that is showing the target production, it can also be getting ready in monetary terms depicting the supposed cost of production. Some budgets can be getting ready only in monetary terms, for example cash budget depicting the estimated receipts and payments in a specific period can be arranged in monetary terms only. Other feature of budget is that it is all the time prepared prior to a specified period of time that means that budget is all the time prepared for future and that is also a defined future.

For instance, a budget might be ready for next 12 months or 6 months or even for 1 month, but the time period must be fix and not vague. One of the significant aspects of budgeting is that it put down the purpose to be achieved throughout the specified period of time and for accomplishing the objectives, which ever policies are to be pursued are reflected in the budget. Budgetary control includes preparation of budgets and permanent comparison of actual with budgets that is why essential corrective action can be taken. For instance, while a production budget is ready, the production targets are laid down in similar for a specific period. After the period is ended, the final production is compared with the budget and the deviation is observed so that essential corrective action can be taken. Budget and Budgetary Control is one of the significant methods of costing employed for cost control and also for performance evaluation. The accomplishment of the technique relies upon various factors like support from top management, participation of employees and coordination in the organization.

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